Financial Management: DOD Needs to Lower the Disbursement Prevalidation
Threshold (Letter Report, 06/11/96, GAO/AIMD-96-82).

Because of continuing problems with disbursements, the Defense
Department (DOD) is now required to match disbursements above a certain
amount with the appropriate obligation in its accounting records before
making the disbursement--a process known as disbursement prevalidation.
GAO found that prevalidation allowed DOD to spot errors and prevent
problem disbursements from being recorded in its accounting records.
However, unless the $5 million threshold is lowered at the Defense
Finance and Accounting Service's center in Columbus, Ohio, and the $1
million threshold is lowered at the other payment centers, tens of
billions of dollars in transactions will continue to bypass this
important control. Until a detailed plan is developed to ensure that all
payments are properly prevalidated before taxpayer dollars are
disbursed, the full benefits of prevalidations will not be realized.
More importantly, even at its best, prevalidation will not solve the
military's disbursement problems, as evidenced by nearly $22 billion
worth of new problem disbursements that surfaced between October 1995
and January 1996. Prevalidation seeks to impose quality near the end of
the disbursement process. As a result, it does not address the root
problems inherent in poor systems and processes, as well as failure to
use basic internal controls. DOD needs to (1) overcome weaknesses in
control procedures that enable problem disbursements to occur and (2)
improve its contract pay, disbursing, and accounting processes and
systems.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-82
     TITLE:  Financial Management: DOD Needs to Lower the Disbursement 
             Prevalidation Threshold
      DATE:  06/11/96
   SUBJECT:  Accounting procedures
             Budget obligations
             Defense procurement
             Federal agency accounting systems
             Financial management
             Statutory law
             Internal controls
             Budget outlays
             Contractor payments
             Erroneous payments
IDENTIFIER:  DOD Standard Procurement System
             DOD Defense Procurement Payment System
             DFAS Mechanization of Contract Administration Services 
             System
             Air Force Central Procurement Accounting System
             
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Cover
================================================================ COVER


Report to Congressional Requesters

June 1996

FINANCIAL MANAGEMENT - DOD NEEDS
TO LOWER THE DISBURSEMENT
PREVALIDATION THRESHOLD

GAO/AIMD-96-82

Disbursement Prevalidation

(511331)


Abbreviations
=============================================================== ABBREV

  CPAS - Central Procurement Accounting System
  DFAS - Defense Finance and Accounting Service
  DOD - Department of Defense
  DPPS - Defense Procurement Payment System
  IG - Inspector General
  MOCAS - Mechanization of Contract Administration Services
  SPS - Standard Procurement System

Letter
=============================================================== LETTER


B-261814

June 11, 1996

The Honorable C.  W.  Bill Young
Chairman, Subcommittee on National Security
Committee on Appropriations
House of Representatives

The Honorable Steve Horn
Chairman, Subcommittee on Government,
 Management, Information and Technology
Committee on Government Reform and Oversight
House of Representatives

The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

The Honorable Barbara Boxer
The Honorable Charles E.  Grassley
The Honorable William V.  Roth, Jr.
United States Senate

This report responds to your requests that we assess the Department
of Defense's (DOD) efforts to reduce problem disbursements and its
implementation of section 8137 of Public Law 103-335, Department of
Defense Appropriations Act, 1995, which required that each
disbursement exceeding $5 million be matched to the appropriate
obligations in DOD's official accounting records before the
disbursement is made. 

The Congress passed section 8137 (and its successor, section 8102 of
Public Law 104-61, Department of Defense Appropriations Act, 1996) to
help ensure that DOD prematch, or prevalidate, disbursements with
recorded obligations, which is an important control for ensuring that
agency funds are used as authorized by the Congress and the
Department.  Without such matching, there is a substantial risk that
(1) fraudulent or erroneous payments may be made without being
detected and (2) cumulative amounts of disbursements may exceed
appropriated amounts and other legal limits.  In reducing these
risks, the provisions of the act aim to strengthen accountability
over DOD's disbursement process, which has been plagued by
long-standing problems. 

This review was conducted jointly with Defense's Office of Inspector
General (IG), and the IG has issued a separate report on DOD's
implementation of the prevalidation program.\1 The IG recommended a
number of specific actions to improve the prevalidation program. 
These included correcting system weaknesses, providing additional
training to accounting and disbursing personnel working in the
prevalidation program, and developing useful performance indicators
for monitoring the progress of the program.  We agree with the
recommendations contained in the IG's report, and, likewise, the IG
agrees with the recommendations contained in this report. 


--------------------
\1 Implementation of the DOD Plan to Match Disbursements to
Obligations Prior to Payment (DOD IG Project No.  5FI-2031, draft
report). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD implemented the prevalidation program to confirm that it had
sufficient obligations to cover invoices exceeding $5 million before
payment, as Public Law 103-335 required.  This helped to identify
errors and fix problem disbursements earlier in the payment and
accounting process.  In addition, Defense has lowered the $5 million
threshold to $1 million at all disbursement locations, except for the
Defense Finance and Accounting Service's (DFAS) Columbus Center. 
Also, for eight primary contract accounting systems and its contract
paying system at the DFAS Columbus Center, DOD has automated the
prevalidation process to better handle the volume of transactions. 

Nevertheless, while these new prevalidation controls were in effect,
DOD's efforts to correct existing problem disbursements were
overshadowed by the inflow of new problematic transactions.  For
example, DOD reports show that during the period of October 1995
through January 1996, DOD corrected $19.5 billion of problematic
disbursements; however, it incurred an additional $21.8 billion of
new problem balances during the same period--a $2.3 billion net
increase.  This is chiefly the result of long-standing system
weaknesses throughout the disbursement process and failure to comply
with basic accounting procedures, both of which are offsetting gains
made by correcting existing balances in the latter stages of the
process. 

DOD's implementation of the prevalidation program is also limited in
its ability to resolve Defense's annual multibillion-dollar
disbursement problems because there currently is no plan to lower the
prevalidation threshold further at DFAS Columbus, which is
responsible for almost 40 percent of DOD's $160 billion annual
contractor and vendor payments.  Without lowering the threshold, tens
of billions of dollars in disbursement transactions will be processed
absent this important accounting control.  During the period July 1,
1995--the statutory date when DOD was to begin prevalidation
efforts--through January 31, 1996, the Center processed 521,262
disbursements totaling $37.1 billion.  Of these, only 1,157
disbursements, totaling $12.3 billion, or about one third of the
total dollar disbursements, exceeded $5 million and were
prevalidated. 

To effectively resolve disbursement problems, Defense management must
embark on short-term efforts to ensure that the prevalidation program
covers as many transactions as practical and basic accounting
procedures are followed until DOD has fully implemented its long-term
efforts to correct serious weaknesses in accounting and contracting
systems. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Federal agencies, including DOD, are responsible for ensuring that
they use appropriated funds only for purposes, and within the
amounts, authorized by the Congress.  DOD Directive 7200.1, May 4,
1995, states the policy that DOD organizations are to establish
positive control of, and maintain adequate systems of accounting for,
appropriations and other funds.  The Directive also states that
financial management systems are to provide a capability for DOD
officials to be assured of the availability of funds before incurring
an obligation or making a payment. 

To comply with legal and regulatory requirements, DOD organizations'
accounting and fund control systems must be able to accurately record
disbursements as expenditures of appropriations and as reductions of
previously recorded obligations.  Proper matching of disbursements
with related obligations ensures that the agency has reliable
information on the amount of funds available for obligation and
expenditure. 


      PROBLEMS IN DOD'S
      DISBURSEMENT PROCESS
---------------------------------------------------------- Letter :2.1

Problem disbursements occur when (1) the wrong appropriation account
or customer is charged when a payment is made, (2) information on an
obligation, payment, or collection transaction is inaccurately or
incompletely processed, or (3) a contractor is paid too much.  In
October 1994, we reported\2 that DOD's records included at least
$24.8 billion of such problem disbursements as of June 30, 1994, and
that long-standing systemic control weaknesses were keeping DOD from
solving its disbursement process problems.  We also pointed out that
persistent management emphasis was essential to resolving the
problem.  Specifically, we recommended that DOD management undertake
long-term efforts, such as correcting system weaknesses involving the
contract payment and accounting systems, and pursue short-term
efforts to improve the quality of information in its systems.  These
short-term actions could be as simple as complying with existing
guidance and procedural requirements for (1) recording obligations
prior to making contract payments, (2) detecting and correcting
errors in the disbursement process, and (3) posting accurate and
complete accounting information in systems that support the
disbursement processes. 

We also previously reported that since we did not audit the $24.8
billion problem disbursement figure, DOD's total problem
disbursements could be greater.  Acting on our recommendations, DOD
subsequently determined that its records contained at least $37.8
billion of problem disbursements as of June 30, 1994.  As of January
31, 1996, DOD reported that it had reduced the $37.8 billion of
problem disbursement balances to $25.4 billion. 


--------------------
\2 Financial Management:  Status of Defense Efforts to Correct
Disbursement Problems (GAO/AIMD-95-7, October 5, 1994). 


      PREVALIDATION LEGISLATION
---------------------------------------------------------- Letter :2.2

Also concerned about DOD's problem disbursements, the Congress passed
section 8137 of Public Law 103-335, to improve accountability over
DOD disbursements.  The law directed the Secretary of Defense to
require that each disbursement in excess of $5 million be matched to
a particular obligation before the disbursement is made.  This
requirement had to be implemented by July 1, 1995. 

The legislation further required that the Secretary of Defense lower
the dollar threshold for matching disbursements and obligations to $1
million no later than October 1, 1995.  Subsequently, section 8102 of
Public Law 104-61, the Department of Defense Appropriations Act,
1996, superseded the earlier legislation and eliminated the
requirement that the threshold be lowered to $1 million.  However,
section 8102(d), like section 8137(e) of the earlier legislation,
provided that the Secretary of Defense could establish a threshold
lower than the statutory threshold. 

In addition, the legislation directed the Secretary to ensure that a
disbursement in excess of the threshold amounts not be divided into
multiple disbursements to avoid prematching requirements.  It also
required (1) DOD to develop and submit an implementation plan to the
Congress and (2) the DOD Inspector General to review the plan and
submit an independent assessment to the congressional defense
committees.  On February 28, 1995, DOD submitted its plan--which was
a general overview plan describing processes and milestones for
automating the prevalidation process and lowering the prevalidation
threshold to $1 million--to the Congress, and the DOD IG provided the
defense congressional committees with its independent assessment,
which generally agreed with the plan and DOD's overall approach for
implementation. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to (1) assess DOD's progress in reducing problem
disbursements and (2) review DOD's implementation of the requirement
in section 8137 of Public Law 103-335 and section 8102 of Public Law
104-61 that DOD match disbursements over $5 million with obligations
in the official accounting records prior to making payments. 

This review was a joint effort between the DOD IG and GAO.  The DOD
IG was generally responsible for completing the field work at Army
and Navy activities and supporting locations while GAO was generally
responsible for completing the field work at Air Force and Marine
Corps activities and supporting locations.  We combined our efforts
to complete work at other DOD locations visited during the review. 
In conducting our review, we focused primarily on the DFAS Columbus
Center because it is DOD's largest contract paying activity.  For
example, during fiscal year 1995, DOD paid contractors and vendors
$160 billion.  Of this amount, $61 billion, or 38 percent, was paid
by DFAS Columbus. 

We conducted our review between June 1995 and April 1996 in
accordance with generally accepted government auditing standards. 
Appendix I contains further details of our scope and methodology.  We
requested comments from the Secretary of Defense or his designee.  On
May 23, 1996, officials of the Office of the Secretary of Defense
(Comptroller) and DFAS, who are responsible for DOD disbursements,
provided us with oral comments.  Their comments have been
incorporated where appropriate and are discussed in the "Agency
Comments" section. 


   DOD PROBLEM DISBURSEMENTS
   PERSIST
------------------------------------------------------------ Letter :4

Using the June 1994 problem disbursement balance of $37.8 billion as
a baseline, DOD began to report reductions in problem disbursement
balances, reaching a low in September 1995 of $23.1 billion.\3
Between September 1995 and January 1996,\4 DOD's reported problem
disbursement balances fluctuated between $23.1 billion and $26.1
billion as shown in table 1. 



                                Table 1
                
                DOD Reported Problem Disbursements From
                 September 1995 Through January 1996 as
                        of the End of Each Month

                         (Dollars in billions)

Month                 Septembe   October  November  December   January
Year                    r 1995      1995      1995      1995      1996
--------------------  --------  --------  --------  --------  --------
Totals                   $23.1     $24.5     $24.6     $26.1     $25.4
----------------------------------------------------------------------
According to the leader of the DOD team established to address
problem disbursements, the problem disbursements have increased since
September 1995 because the inflow of new problem balances continues
to offset any gains made by correcting existing balances.  As table 2
shows, the inflow of problem disbursements between October 1995 and
January 1996 eclipsed the value of problem disbursements that were
resolved by $2.3 billion.  Although DOD did not have data readily
available to show how much of the $21.8 billion of the new problem
disbursements was caused by DFAS Columbus, DOD officials acknowledged
that tens of thousands of transactions, totaling billions of dollars,
were attributable to disbursements made by the Columbus Center.  The
team leader also told us that the inflow of new problem disbursements
has not slowed down because the same long-standing weaknesses
regarding system problems and failure to comply with basic accounting
procedures, which we previously reported in 1994, generally still
exist.  For example, he stated that the lack of integrated accounting
and disbursing systems was one of the primary causes of disbursement
problems.  The lack of integrated systems resulted in data entry
errors because the same data had to be manually entered into two or
more systems. 

The DOD IG also pointed out in an August 1995 report\5 that Army and
Air Force accounting personnel were not complying with accounting
regulations and procedures for documenting, validating, reconciling,
and reporting transactions that affect obligations.  For example, the
IG noted that (1) accounting personnel were arbitrarily posting
payments to any available unliquidated contract obligation and (2)
much of the disbursement information received from the DFAS Columbus
Center was not accurate and did not include sufficient information to
record payments.  The IG noted that such failures to comply with
accounting policies and procedures resulted in disbursement problems
that, in turn, prevented auditors from rendering audit opinions,
other than disclaimers, on the Army's and Air Force's financial
statements. 



                                Table 2
                
                    DOD Reported Increase in Problem
                 Disbursements Between October 1995 and
                              January 1996

                         (Dollars in millions)

                                              Corrected
DOD                          New problem        problem       Increase
component                  disbursements  disbursements     (decrease)
-------------------------  -------------  -------------  -------------
Navy                              $8,465         $6,999         $1,466
Air Force                          5,642          5,368            274
Army                               1,804            985            819
Marine Corps                         631            696           (65)
Other DOD                          5,228          5,402          (174)
======================================================================
Total                            $21,770        $19,450         $2,320
----------------------------------------------------------------------
The DOD team leader also told us that DOD is starting to have
difficulties in reducing the older problem disbursement balances
already included in its accounting records.  For example, between
October 1995 and January 1996, DOD reports showed that problem
disbursements over 180 days old had increased from $12.9 billion to
$14.1 billion.  According to the team leader, over time, DOD
activities have selected the easier problem disbursement transactions
for review.  Consequently, the remaining older, unresolved problem
disbursements balances represent some of the more difficult balances
to reconcile.  We are currently reviewing DOD problem disbursements
to identify the specific root causes for problematic transactions. 


--------------------
\3 In accordance with May 5, 1995, DOD Comptroller guidance, DOD
removed about $4.1 billion of problem disbursements from its
September 1995 report.  The $4.1 billion of problem disbursements are
no longer being reported because DOD determined there was little or
no probability of ever resolving these balances. 

\4 Data for January 1996 was the most recent available. 

\5 DOD IG Major Deficiencies Preventing Auditors From Rendering Audit
Opinions on DOD General Fund Financial Statements (Report No. 
95-301, August 29, 1995). 


   PREVALIDATION USEFUL IN
   IDENTIFYING DISBURSEMENT ERRORS
------------------------------------------------------------ Letter :5

Fundamental accounting controls require that the proper funds
available for a payment are identified before the payment is made. 
Prevalidating disbursements to obligations helps to ensure that this
is done, but DOD has not followed this basic accounting procedure. 
To help ensure implementation of this control feature, the Congress
has included in DOD's appropriation acts for the past 2 fiscal years
a requirement that DOD prematch disbursements exceeding $5 million
with obligations in the official accounting records. 

The prevalidation process has demonstrated that it is a useful tool
to help identify and prevent errors from being recorded in the
official accounting records.  However, as discussed earlier, to
prevent errors from occurring in the first place, DOD must address
short-term and long-term efforts targeted at improving the quality of
information in its systems.  The cornerstone of DOD's long-term
effort is its ongoing development of the Standard Procurement System
(SPS) and the Defense Procurement Payment System (DPPS).\6 However,
DOD estimates that these systems will not be fully operational until
at least the year 2001. 

In discussing this with DOD officials, they said that in the interim,
DOD will concurrently pursue various short-term efforts to improve
the quality of information on the amount of funds obligated and
disbursed.  For example, DOD officials stated that they are in the
process of implementing automated interfaces between the contract
writing, disbursing, and accounting systems to eliminate data errors
generated during the manual entry of data.  DOD officials stated that
they plan to begin implementing the electronic exchange of data by
the end of calendar year 1996. 


--------------------
\6 The SPS and DPPS are two DOD long-term system development efforts
aimed at streamlining and standardizing contracting and disbursing
systems within DOD. 


      DESCRIPTION OF THE
      PREVALIDATION PROCESS
---------------------------------------------------------- Letter :5.1

DOD had automated prevalidation to electronically process certain
disbursement data between the DFAS Columbus Center's disbursing
system, known as the Mechanization of Contract Administration
Services (MOCAS), and eight DOD primary contract accounting systems. 
As of January 1996, 56 DOD locations were using the eight contract
accounting systems to prevalidate disbursements with MOCAS. 
Consistent with the authority contained in section 8137(e) of Public
Law 103-335 and section 8102(d) of Public Law 104-61, DOD required
all activities, except the DFAS Columbus Center, to lower the
prevalidation threshold from $5 million to $1 million, on October 1,
1995. 

The disbursement process starts when a contractor submits an invoice
or other formal request for payment to a disbursing office.  Prior to
starting the prevalidation process, the disbursing office is required
to determine if the contractor is entitled to the payment.  To do
this, the disbursing office must ensure that the (1) payments are
made only for goods and services authorized by purchase orders,
contracts, or other authorizing documents, (2) government received
and accepted the goods and services, and (3) payment amounts are
accurately computed.  They are also responsible for ensuring that
accounting data on payment supporting documents are complete and
accurate. 

After determining that the contractor is (1) entitled to the payment
and (2) the accounting data are complete and accurate, the disbursing
office initiates action to prevalidate the payment by matching the
disbursement with an obligation in the official accounting record. 
These procedures, as described below, are followed for both the
automated and manual prevalidating of disbursements.  For the
automated process, information needed to prevalidate a disbursement
is electronically sent from the disbursing system to the funding
station's accounting system.  For the manual process, information is
exchanged through the use of telephones, fax machines, and mail. 

First, the disbursing activity provides the accountable station, or
stations if the payment is for services or supplies related to two or
more DOD activities, with data showing how much it plans to pay and
how the payment is to be charged to the obligations in the
accountable station(s) records.  The accountable station compares
this data with its obligations and sends back a notice to the
disbursing activity either authorizing or rejecting\7 the payment. 
If the payment is authorized, the accountable activity is to reserve
an amount of unliquidated obligations to cover the amount of payment. 
After receiving authorization to make a payment, the disbursing
activity will make the payment and notify the accountable station
that the payment has been made.  Several days later, the disbursing
activity formally reports to the accountable station on the payment. 
This final report is currently not part of the automated process on
prevalidating disbursements. 

Figures 1 and 2 illustrate the additional role played by the
accounting station when disbursements are prevalidated. 

   Figure 1:  Disbursements
   Without Prevalidation

   (See figure in printed
   edition.)

   Figure 2:  Disbursements With
   Prevalidation

   (See figure in printed
   edition.)


--------------------
\7 In those instances where the accountable station notifies the
disbursing activity that it is rejecting a payment, a manual research
must be performed by either the disbursing or accounting activity to
identity and correct the problem causing the rejection of
authorization to pay.  Common reasons for negative responses include
insufficient funds in the accounting system to cover the amount of
the disbursement and incorrect cites of appropriations, including
charging the wrong appropriation. 


      DOD SUCCESSFULLY AUTOMATES
      PREVALIDATION PROCESS
      BETWEEN MAJOR CONTRACT
      PAYING AND ACCOUNTABLE
      ACTIVITIES
---------------------------------------------------------- Letter :5.2

Our review disclosed that DOD generally had successfully implemented
the automated prevalidation process.  However, we and DOD's IG did
find deficiencies in the DFAS automated programs used to prevalidate
disbursements related to Army and Air Force\8 funds that could result
in material weaknesses which would undermine the intent of
prevalidation if not promptly corrected.  The most significant
weakness was the lack of controls to ensure that Air Force and Army
obligations could not be used to cover more than one payment. 

For example, the Air Force's Central Procurement Accounting System
(CPAS) did not maintain the reservation of funds until the final
payment data were received from MOCAS.  As a result, the same
obligation balances could be used to prevalidate more than one
disbursement.  Our review of about $66 million of over $1.4 billion
problem disbursement balances at one DOD location that operated CPAS
found a $3.4 million payment that had been prevalidated but could not
be recorded in CPAS once the payment was made.  Our analysis
disclosed that another $107,000 payment had also been processed and
recorded against the same $3.4 million of CPAS obligation balances. 
Because the $107,000 payment reduced the available obligation balance
below the $3.4 million necessary to record the initial prevalidated
payment, there were not sufficient obligations in the CPAS accounting
system to cover the $3.4 million prevalidated payment.  DFAS
officials agreed with our analysis and were still reviewing the two
payment transactions to determine causes of the problem and necessary
corrective actions. 

We met with DFAS headquarters' officials to discuss the problems both
we and the DOD IG found during our review of the automated programs. 
The officials agreed that these were serious problems and have taken
actions or plan to take actions to correct the identified problems. 
For example, DFAS has approved a system change request to resolve the
problems we identified with CPAS and told us that it should be
corrected by June 1996.  However, the DFAS officials could not tell
us when this problem would be resolved for the Army.  The DOD IG has
made specific recommendations to address these problems in its report
on the prevalidation program. 


--------------------
\8 We and the DOD IG did not find any significant weaknesses with the
DFAS programs for payments related to Navy and Marine Corps funds. 


   PREVALIDATION THRESHOLD NEEDS
   TO BE LOWERED
------------------------------------------------------------ Letter :6

Although section 8102 of DOD's Appropriations Act for Fiscal Year
1996 required DOD to prevalidate only disbursements in excess of $5
million, on October 1, 1995, DOD lowered the prevalidation threshold
to $1 million at all activities except the DFAS Columbus Center. 
DFAS officials told us that the threshold was not lowered to $1
million at the DFAS Columbus Center because of concerns that the
Columbus Center could not absorb the increase in the volume of
payments that would have to be prevalidated at the $1 million level. 
For example, they estimated that the number of invoices they would
have to prevalidate annually would increase from about 1,800 at the
$5 million level to about 11,200 at the $1 million level.  The $1
million threshold level would still only cover about 50 percent of
the dollar value of payments at DFAS Columbus.  According to the
officials, since the DFAS Columbus Center administers some of the
most complex contracts in DOD, it requires more time to process and
prevalidate payments than it does at the other DOD activities which
have much simpler contracts. 

DFAS officials told us that it is not uncommon for a voucher examiner
at the DFAS Columbus Center to allocate a payment across 30 or 40
appropriation fund cites in order to record the payment.  Conversely,
other DOD activities generally only have to allocate a payment
against one or two appropriation fund cites.  Our analysis of about
1,400 disbursements prevalidated at the DFAS Columbus Center
confirmed what the officials told us about the complexity of
processing and prevalidating payments.  We found hundreds of payments
that were spread across multiple appropriation fund cites ranging
from two to over 100 appropriation fund cites.  For example, one $6
million payment had been spread across 107 appropriation fund cites,
all of which had to be approved before payment could be made. 

However, since prevalidation at DFAS Columbus is made only for
payments exceeding $5 million, large numbers of transactions,
amounting to tens of billions of dollars, are excluded from this
important accounting control.  Our review of the DFAS Columbus
Center's disbursement data between
July 1, 1995, and January 31, 1996, disclosed that the Columbus
Center made 521,262 disbursements totaling $37.1 billion.  Of these,
only 1,157 disbursements totaling $12.3 billion were prevalidated. 
This is less than one-fourth of one percent of the total payments and
only about one-third of the total dollars.  Our analysis of calendar
year 1995 disbursement data disclosed that the DFAS Columbus Center
paid about 1.2 million invoices totaling at least $55 billion.  As
shown in table 3, if DFAS Columbus had been prevalidating
disbursements for the entire year, only about 1,800 payments totaling
$15.1 billion would have been subject to prevalidation at the $5
million level. 



                                Table 3
                
                   DFAS Columbus Center Payments for
                           Calendar Year 1995

                         (Dollars in billions)

                              Cumulative     Cumulative     Cumulative
                                  number   dollar value     percent of
Dollar ranges                of payments    of payments        dollars
-------------------------  -------------  -------------  -------------
Over $ 5 million                   1,791          $15.1             27
Over $4 million                    2,348           16.6             30
Over $3 million                    3,367           18.8             34
Over $2 million                    5,442           22.0             40
Over $1 million                   11,236           27.6             50
Over $0                        1,156,936           55.1            100
----------------------------------------------------------------------
Source:  DFAS Columbus Center. 

DFAS Columbus officials acknowledged that they were not prevalidating
many payments by doing only those above the $5 million level and that
errors were still occurring at levels below that threshold.  The
officials acknowledged that lowering the threshold would help prevent
additional errors from being passed on to the accountable stations. 
Although, the DFAS Columbus Center had planned to lower the threshold
to $4 million on February 26, 1996, the DOD Comptroller directed the
Center not to lower the threshold.  In discussing this matter with
the DFAS Director, he informed us that DOD was in compliance with the
prevalidation legislation and that DOD made a policy decision to keep
the $5 million threshold at DFAS Columbus.  He noted, however, that
one factor considered when deciding not to lower the threshold was
that DFAS Columbus was not currently meeting DOD's payment
performance goals for progress payments and cost vouchers.\9

For example, as of December 1995, DFAS Columbus reported that it was
taking an average of 16 days to pay a progress payment and 15 days to
pay a cost voucher.  He said that when DFAS Columbus reduces the
overall number of days it takes to pay progress payments and cost
vouchers, DOD would consider lowering the threshold.  However, he
told us that DOD did not have a plan that specified the exact payment
period the Columbus Center needed to reach before the prevalidation
threshold could be lowered.  In discussing a draft of this report
with DOD officials, they agreed that they should begin reducing the
threshold at the DFAS Columbus Center.  They stated that they will
start by reducing the threshold to $4 million but had not yet decided
when this would take place.  They also stated that they intend to
develop a plan to continuously lower the threshold. 

Our review of the prevalidation process at DFAS Columbus showed that
prevalidation did add time to the overall payment process.  For
example, we found that under the best of circumstances, when no
errors or rejections occurred, prevalidation took about 3 days.  Our
analysis of 586 DFAS Columbus payments (progress and cost vouchers
which were prevalidated as of March 1996) showed that, when errors
and rejections are included, prevalidation took an average of 5 to 6
days overall.  DOD could not provide comparable data, as of December
1995, for transactions before prevalidation for us to determine
whether DOD was taking longer to pay an invoice as a result of
prevalidation or if payment delays were due to problems other than
those that occurred during the prevalidation process.  However, DFAS
Columbus reports on payments overall show that, between September
1995 and February 1996, it had reduced the payment period for
progress payments from about 14 days to about 11 days and for cost
vouchers from 17 to about 16 days.  In addition, our analysis of DFAS
Columbus payment data disclosed that

  -- as of May 1, 1996, there were only four invoices, totaling $46
     million, ranging from about 30 days to 118 days old that had
     either been rejected or were awaiting further confirmation from
     the accounting station and

  -- lowering the threshold to $4 million would result in the
     prevalidation of only 557 more payments annually--or about two
     additional invoices a day--totaling $1.5 billion. 

Columbus officials told us that with the recent automation of the
prevalidation process, they believe that they could now handle the
workload at the $4 million threshold level.  According to the
officials, they had reassigned 25 people in February 1996 to work on
the prevalidation program at the Columbus Center to assist with (1)
managing the program, (2) reconciling, researching, tracking, and
following up on rejected transactions, and (3) reporting to DFAS
headquarters on program results.  We agree that Columbus could handle
the additional workload at the $4 million level.  However, as
previously shown in table 3, this would only increase the percentage
of the dollar amount of disbursements that are prevalidated from 27
percent to 30 percent. 


--------------------
\9 Progress payments and cost vouchers are two forms of contract
financing payments.  The Defense Federal Acquisition Regulation
Supplement sets a goal of paying progress payments within 7 days and
cost vouchers within 14 days. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

The prevalidation program allowed DOD to identify errors and prevent
problem disbursements from being recorded in DOD's official
accounting records.  However, unless the $5 million threshold is
lowered at DFAS Columbus, and the $1 million threshold is lowered at
the other payment centers, tens of billions of dollars in
transactions will continue to bypass this important control.  Until a
detailed plan is developed to ensure that all payments are properly
prevalidated before taxpayer funds are disbursed, the full benefits
of prevalidation will not be realized. 

More importantly, even at its best, prevalidation will not solve
Defense's disbursement problems as evidenced by $21.8 billion of new
problem disbursements that surfaced between October 1995 and January
1996.  Because prevalidation is an effort to impose quality near the
end of the disbursement process, it does not address the root
problems inherent in poor systems and processes as well as failure to
follow fundamental internal controls.  DOD's problems with accounting
for and reporting on disbursements will not be resolved until (1)
weaknesses in control procedures that allow problem disbursements to
occur are corrected and (2) improvements are made to DOD's contract
pay, disbursing, and accounting processes and systems. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

Prevalidating all disbursements is important, especially in the short
term, to protect the integrity of DOD's disbursement process while
long-term improvements are made to DOD's contract pay, disbursing,
and accounting processes and systems.  Accordingly, we recommend that
the Secretary of Defense direct the DOD Comptroller to develop a plan
to meet this target.  As a first step, the Comptroller should reduce
the threshold at the DFAS Columbus Center to $4 million and
continuously lower the threshold in accordance with the plan.  We
also recommend that the Secretary of Defense direct the Comptroller
to develop similar plans for prevalidating all disbursements at all
the other DOD disbursing activities.  These plans should incorporate
the DOD IG's recommendations. 

Further, we recommend that the Secretary of Defense direct the
Comptroller to ensure that existing accounting policies and
procedures are followed in recording obligations, detecting and
correcting errors, and posting complete and accurate accounting
information in systems supporting the disbursement process. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :9

On May 23, 1996, we discussed a draft of this report with officials
of the Secretary of Defense (Comptroller) and DFAS who are
responsible for DOD disbursements and have incorporated their views
where appropriate.  In general, these officials agreed with the
report's findings, conclusions, and recommendations.  Regarding the
recommendations, they stated that DOD plans to reduce the threshold
at the DFAS Columbus Center to $4 million and that they intend to
develop a plan to continuously lower the threshold at both the
Columbus Center and other DOD disbursing activities. 

We are sending copies of this report to the Ranking Minority Members
of the Subcommittee on National Security, House Committee on
Appropriations, and the Subcommittee on Government, Management,
Information and Technology, House Committee on Government Reform and
Oversight; the Chairman of the Senate Committee on Governmental
Affairs; the Secretary of Defense; the Director of the Office of
Management and Budget, and other interested parties.  We will make
copies available to others upon request. 

Please contact me at (202) 512-6240 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix I. 

Jack L.  Brock Jr.
Director, Defense Information and Financial
 Management Systems


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Our objectives were to (1) assess DOD's progress in reducing problem
disbursements and (2) review DOD's implementation of the requirements
in section 8137 of Public Law 103-335 and section 8102 of Public Law
104-61, for DOD to match disbursements over $5 million with
obligations in the official accounting records prior to making
payments. 

This review was a joint effort between the DOD IG and GAO.  The DOD
IG was generally responsible for completing the field work at Army
and Navy activities and supporting locations while GAO was generally
responsible for completing the field work at Air Force and Marine
Corps activities and supporting locations.  Discussions related to
Army and Navy prevalidation issues are based primarily on the DOD
IG's work.  To satisfy ourselves as to the sufficiency, relevance,
and competence, of the IG's work at Army and Navy, we reviewed the
IG's audit program, workpapers, and draft report.  We also combined
our efforts with the IG to complete work at other DOD locations
visited during the review. 

To assess DOD's progress in resolving problem disbursements, we met
with the DFAS officials responsible for managing problem
disbursements to discuss and assess their various initiatives aimed
at reducing problem disbursement balances.  We (1) analyzed various
DOD reports on problem disbursements to identify and document any
changes in problem disbursement balances, (2) spoke with DFAS
officials to identify systemic problems hindering DOD's ability to
reduce problem disbursement balances, and (3) reviewed internal DOD
audit reports and the Secretary of Defense's fiscal year 1995 Annual
Statement of Assurance under the Federal Manager's Financial
Integrity Act.  To assess the DOD progress in addressing these
weaknesses, we spoke with DFAS officials at DFAS centers and
headquarters and reviewed various progress reports and other internal
documents of disbursement problems and corrective actions taken or
planned.  The dollar values of disbursements discussed in this report
were obtained from agency reports or compiled from agency records. 
We did not verify the accuracy of disbursement data included in
agency reports or records because the data consisted of hundreds of
thousands of disbursement transactions.  Consequently, we cannot
provide any assurance that the $25.4 billion of problem disbursements
that had not been properly matched to obligations as of January 31,
1996, are correct. 

To determine if DOD's implementation of the prevalidation program
complied with legislative requirements, we reviewed DOD's
implementation plan and other DOD policies and procedures for
implementing the program.  We also visited various activities and
observed their prevalidation processes.  At these locations, we
judgmentally selected large dollar transactions for detailed
analysis.  Our analysis included reviewing the official accounting
records to determine if the payment had been properly validated and
correctly posted to the accounting records.  We met with responsible
DFAS and military service officials to discuss and resolve identified
discrepancies. 

Our work and that of the DOD IG was performed at the offices of the
DOD Comptroller, Washington, D.C.; Assistant Secretary of the Army
(Financial Management and Comptroller), Washington, D.C.; DFAS
Headquarters, Arlington, Virginia, and the following DFAS Centers: 
DFAS Columbus, Columbus, Ohio; DFAS Cleveland, Cleveland, Ohio; DFAS
Indianapolis, Indianapolis, Indiana; DFAS Kansas City, Kansas City,
Missouri; and DFAS Denver, Denver, Colorado.  We also performed work
at the Air Force Materiel Command and DFAS Dayton Operating Location,
Dayton, Ohio; DFAS Operating Location, Charleston, South Carolina;
DFAS Operating Location, Norfolk, Virginia; DFAS Operating Location
and Defense Megacenter, St.  Louis, Missouri; Defense Accounting
Office, U.  S.  Army Missile Command and Defense Megacenter,
Huntsville, Alabama; Assistant Secretary of the Navy (Financial
Management and Comptroller), Washington, D.C.; Navy Strategic Systems
Program Office, Arlington, Virginia; Navy International Logistics
Command, Philadelphia, Pennsylvania; Quantico Marine Base, Quantico,
Virginia; and Camp Lejune Marine Base, Jacksonville, North Carolina. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II