Financial Management: Improved Reporting Needed for DOD Problem
Disbursements (Letter Report, 05/01/97, GAO/AIMD-97-59).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) reporting on the amount of its problem disbursements,
focusing on whether DOD's reporting is producing accurate and consistent
data needed to effectively measure its progress and manage the reduction
of its problem disbursements. GAO did not audit the validity of the
underlying disbursement data.

GAO noted that: (1) to ensure that problem disbursement reports are an
effective management tool, DOD's reports, at a minimum, need to
accurately identify the amount of problem disbursements; (2) however,
the reports by the Defense Finance and Accounting Service (DFAS) do not
provide this needed information; (3) GAO's testing of problem
disbursement amounts reported by DFAS as of May 31, 1996, shows that the
$18 billion total reported by DOD was understated by at least $25
billion; (4) accordingly, neither the Congress nor DOD management can
rely on DOD's reported amount to determine the extent of problem
disbursements or to monitor progress made in resolving them; (5)
furthermore, the underlying data for DFAS' reports are not sufficient to
ensure consistent reporting and do not provide basic information about
the sources and causes of problem disbursements; (6) additional data are
essential if DOD is to prioritize and focus reengineering efforts and
other corrective actions on those organizations, activities, and actions
that are the more significant contributors to disbursement problems and
to measure its success in addressing specific problems; (7) while
summary data would be acceptable for some analyses, the ability to
identify sources and causes of problem disbursements depends on the
availability of detailed data about transactions that result in problem
disbursements; (8) while DOD and DFAS have committed significant
resources to reducing problem disbursements, they have not taken the
steps needed to ensure accurate and consistent reporting and the
availability of underlying data that are needed to quantitatively
measure and manage reduction efforts; (9) although DFAS prepared its
first comprehensive reporting guidance in May 1996, the understatement
GAO identified resulted from the guidance not: (a) being followed
because DFAS did not establish adequate oversight and controls over the
reporting process; (b) offering detailed instructions for offsetting
transactions; and (c) appropriately identifying certain types of
transactions as problems; (10) DOD disagreed with GAO's findings and
stated that it no longer characterizes in-transit transactions as
problem disbursements; (11) GAO believes aged in-transits are problem
disbursements, and, until recently, they have been treated as such by
DOD; (12) DOD also stated that it officially reports in-transit disburs*

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

 REPORTNUM:  AIMD-97-59
     TITLE:  Financial Management: Improved Reporting Needed for DOD 
             Problem Disbursements
      DATE:  05/01/97
   SUBJECT:  Accounting procedures
             Federal agency accounting systems
             Data integrity
             Internal controls
             Budget obligations
             Financial records
             Budget outlays
             Reporting requirements
             Financial management
             Questionable payments

             
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Cover
================================================================ COVER


Report to Congressional Requesters

May 1997

FINANCIAL MANAGEMENT - IMPROVED
REPORTING NEEDED FOR DOD PROBLEM
DISBURSEMENTS

GAO/AIMD-97-59

DOD Problem Disbursements

(919050)


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

  ATM - automated teller machine
  CERPS - Centralized Expenditure and Reimbursement Processing System
  CFO - Chief Financial Officer
  DFAS - Defense Finance and Accounting Service
  DOD - Department of Defense
  FRS - Financial Reporting System
  IG - inspector general
  NULO - negative unliquidated obligations
  OMB - Office of Management and Budget
  OSD - Office of the Secretary of Defense
  SAMS - Suspense Aging Monitoring System
  TBO - Transactions by Others

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


B-276402

May 1, 1997

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

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

The Honorable Charles Grassley
United States Senate

As you requested, we reviewed Department of Defense (DOD) reporting
on the amount of its problem disbursements--an area that has been the
source of much concern for many years.  Problem disbursements are
specific disbursements that have not been matched with corresponding
obligations.  Such disbursements can increase the risks of (1)
fraudulent or erroneous payments being made without detection and (2)
cumulative amounts of disbursements exceeding appropriated amounts
and other legal spending limits.  As discussed in more detail in the
"Background" section of this report, problem disbursements consist of
aged in-transits, unmatched disbursements, and negative unliquidated
obligations. 

DOD has many initiatives under way to reduce problem disbursements
and, in March 1996, DOD stated in its annual report to the President
and the Congress that eliminating problem disbursements was one of
its key financial reform projects.  DOD reported $18 billion in
problem disbursements as of May 31, 1996, a reduction of $33 billion
from the $51 billion balance used as a baseline as of June 1993.  For
this report, we reviewed the accuracy of the problem disbursement
report as of May 31, 1996, the most recent data available at the
start of our review.  The objective of our review was to determine
whether DOD's reporting is producing accurate and consistent data
needed to effectively measure its progress and manage the reduction
of its problem disbursements. 


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

To ensure that problem disbursement reports are an effective
management tool, DOD's reports, at a minimum, need to accurately
identify the amount of problem disbursements.  However, the reports
by Defense Finance and Accounting Service (DFAS), which is
responsible for preparing DOD's reports on problem disbursements, do
not provide this needed information.  Our testing of problem
disbursement amounts reported by DFAS as of May 31, 1996, shows that
the $18 billion total reported by DOD was understated by at least $25
billion.  Accordingly, neither the Congress nor DOD management can
rely on DOD's reported amount to determine the extent of problem
disbursements or to monitor progress made in resolving them. 

Furthermore, the underlying data for DFAS' reports are not sufficient
to ensure consistent reporting and do not provide basic information
about the sources and causes of problem disbursements.  Additional
data are essential if DOD is to prioritize and focus reengineering
efforts and other corrective actions on those organizations,
activities, and actions that are the more significant contributors to
disbursement problems and to measure its success in addressing
specific problems.  While summary data would be acceptable for some
analyses, the ability to identify sources and causes of problem
disbursements depends on the availability of detailed data about
transactions that result in problem disbursements. 

While DOD and DFAS have committed significant resources to reducing
problem disbursements, they have not taken the steps needed to ensure
(1) accurate and consistent reporting and (2) the availability of
underlying data that are needed to quantitatively measure and manage
reduction efforts.  Although DFAS prepared its first comprehensive
reporting guidance in May 1996, the understatement we identified
resulted from the guidance (1) not being followed because DFAS did
not establish adequate oversight and controls over the reporting
process, (2) not offering detailed instructions for offsetting
transactions, and (3) not appropriately identifying certain types of
transactions as problems. 

In written comments on a draft of this report, DOD disagreed with our
findings and stated that it no longer characterizes one type of
transaction, known as in-transits, as problem disbursements.  We
believe aged in-transits, which represent disbursements that have not
been matched with related obligations within DOD's normal processing
time of 60 or 120 days, are problem disbursements, and, until
recently, they have been treated as such by DOD.  DOD also stated
that the Department officially reports in-transit disbursements on a
net basis--that is, by offsetting collections, reimbursements, or
adjustments against disbursement balances.  This statement is
inconsistent with the written policies of DOD and DFAS, which require
absolute amounts, and with numerous discussions we had with DOD and
DFAS officials throughout the course of our work.  To report these
balances on a net basis grossly understates and masks the magnitude
and seriousness of DOD's long-standing disbursing problems.  For
example, if DOD had an in-transit amount of $10 related to a
collection, DOD may not know the correct appropriation to credit.  In
addition, it may have a dibursement for $8 for which the correct
appropriation to charge is unknown.  DOD has two problems totaling
$18 which must be resolved.  To offset these amounts would show a
total problem of $2, severely understating the problem. 


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

Federal agencies, including DOD, are responsible for ensuring that
appropriated funds are used only for the purposes, and within the
amounts and time frames, authorized by the Congress.  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.  Because
problem disbursements are not properly accounted for, DOD is unable
to ensure that it has complied with the Anti-Deficiency Act, which
requires that disbursements not exceed available funds. 

Problem disbursements not only affect reports prepared to monitor the
obligation and expenditure of budgetary resources but also DOD's
financial position and results of operations.  In enacting the Chief
Financial Officers Act, as expanded by the Government Management
Reform Act, the Congress called for annual audited financial
statements that provide the needed information for both monitoring
the effective allocation of budgetary resources as well as for
assessing management performance and stewardship.  The extent of
problem disbursements currently results in inaccuracies in DOD's
financial statements and will also impact financial statements
prepared pursuant to new reporting requirements that will be
implemented in fiscal year 1998, including the program costs reported
in the statement of net costs and the status of budgetary resources
in the statement of budgetary resources.\1

DFAS is responsible for reporting the status of problem disbursements
each month to the DOD Comptroller.  These reports are used to
determine the amount of problem disbursements and, by comparison with
prior months, to determine the effectiveness of DOD reduction
efforts.  In addition, DOD uses the reported amounts in its annual
reports to the President and the Congress to report on progress in
financial management reform.  The reporting process begins when DFAS
centers collect and compile problem disbursement balances for the
military services for which they are responsible.  Subsequently,
these centers submit compiled problem disbursement balances to DFAS
headquarters for consolidation. 

Both DOD and DFAS guidance provide the framework for reporting the
status of problem disbursements.  The most comprehensive DOD
guidance, which was issued in June 1995, establishes policies and
procedures for researching and resolving problem disbursements.  The
most comprehensive DFAS guidance, issued in May 1996, updated
previously issued guidance and provided instructions for reporting. 
Although not involving major changes to previous guidance, the May
1996 guidance was intended to improve the consistency of problem
disbursement information by formalizing the format for reporting
problem disbursements.  Under this guidance, DFAS headquarters
required its centers to report on the following categories of problem
disbursements. 

In-transit--Refers to disbursements and collections that have been
reported to Treasury but have either not been received by the
accounting station or have been received but not processed or posted
by the accounting station.\2 In-transit disbursements can be made by
an accounting station for its own transactions and for other
accounting stations that are responsible for recording these
disbursements into their accounting records.  These disbursements can
be for activities within the same military service or for different
military services.  Accounting stations that make disbursements for
others are required to forward supporting documentation to the
appropriate station to be matched to corresponding obligations.  For
the in-transit category, DFAS reports as problem disbursements
transactions it considers over-aged--specifically, those (1) over 60
days old if the disbursing and accounting stations are assigned to
the same DFAS center or (2) over 120 days old if the disbursing
station is assigned to one DFAS center and the accounting station is
assigned to another DFAS center, DOD component, or federal agency. 

Unmatched Disbursements--Refers to disbursements and collections that
have been received by the accounting station, attempted to be matched
to an obligation in the accounting system, but were not matched
because an obligation was not identified in the accounting system. 
For example, if one or more of the accounting line elements for each
transaction, such as appropriation, fiscal year, and program code, do
not match the information in the accounting records, then the
transaction is considered unmatched. 

Negative Unliquidated Obligations (NULO)--Refers to disbursements
that have been received and posted to specific obligations by the
accounting station, but recorded disbursements exceed recorded
obligations (i.e., more funds have been paid out than were
obligated). 

For illustrative purposes, one can draw analogies between these three
types of problem disbursements and three situations which could arise
with personal financial transactions.  For example, in-transits can
be likened, in a general sense, to a situation in which a couple
shares one checkbook and one check register.  If the wife has the
checkbook and is out of town on a business trip and the husband is at
home with the check register, the husband will not be able to record
any checks in the register until he receives documentation from his
wife as to the amount and nature of her expenditures.  The time lag
in recording the transactions could be several days, depending on
whether the wife phones, faxes, or mails the needed information to
her husband.  Because the wife does not have the check register and
is unaware of transactions that have been created by her husband, the
couple may be faced with an overdrawn account when all expenditures
are known.  This problem is compounded for DOD because it allows a
time lag (in-transit period), of up to 120 days as explained
previously. 

Unmatched disbursements can be compared to a situation in which a
person receives the bank statement for a checking account, which
lists all the checks that have cleared that month, including the date
of the check, the amount, and the recipient.  However, in attempting
to reconcile the bank statement with the check register, the person
finds several discrepancies.  These discrepancies could be due to
errors in entering checks in the register, including failure to enter
transactions at all, or bank errors.  The process of identifying and
correcting errors becomes even more complicated if we assume the
person has two checking accounts and sometimes records expenditures
in the wrong check register.  DOD's situation is far more complicated
because about 80 stations\3 post and match millions of disbursements
with obligations. 

Finally, negative unliquidated obligations can be likened to an
overdrawn checking account register.  The causes can include problems
in accurately recording checks and deposits in the correct account
register.  Similarly, at DOD, expenditures might exceed recorded
obligated amounts, as explained above. 

In a December 6, 1996, memorandum, the DOD Comptroller directed DFAS
to stop the reporting of in-transits with the unmatched disbursements
and negative unliquidated obligations and to develop a new
methodology for reporting in-transits.  The Director, DFAS,
implemented the Comptroller's change and segregated in-transit
problem disbursements beginning with the report for November 30, 1996
that was issued in January 1997. 

In a February 1997 letter,\4 we expressed our concerns about
excluding aged in-transits from problem disbursement reports, which
serve as the basis for communicating progress in reducing problem
disbursements to the President and the Congress.  In response, DOD
agreed to continue reporting in-transits with unmatched disbursements
and negative unliquidated obligations in external communications but
indicated that the three types of problems would not be aggregated
into one problem disbursement report. 


--------------------
\1 DOD is required to prepare audited financial statements for fiscal
years 1996 and beyond in the format prescribed by the Office of
Management and Budget.  Beginning in fiscal year 1998, the
information required will be much more extensive than now and will
include the statements noted above. 

\2 An activity responsible for maintaining accounting records of
assigned fundholders, i.e., accounting station. 

\3 DFAS is in the process of consolidating its accounting stations
from over 300 stations to not more than 21 stations.  As of March
1997, about 80 accounting stations were operational. 

\4 DOD Problem Disbursements (GAO/AIMD-97-36R, February 20, 1997). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To assess whether DFAS compiled and reported problem disbursement
balances in accordance with established guidance, and whether quality
controls for such reporting existed, we reviewed Comptroller and DFAS
guidance for problem disbursement reporting dated June 30, 1995, and
May 15, 1996, respectively.  We also reviewed the quality controls in
place to ensure accurate and consistent reporting and the problem
disbursement data used for the compilation of the reports.  We did
not audit the validity of the underlying data.  Instead, we reviewed
the compilation of reported amounts at DFAS centers.  The testing of
detailed transactional disbursement data, which should be done as a
part of the audit of DOD's consolidated financial statements, could
reveal further inaccuracies in reported problem disbursement
balances. 

Specifically, we reviewed how DFAS summarized and reported DOD's
problem disbursements as of May 31, 1996, and compared this reporting
to established guidance.  DFAS' May 15, 1996, guidance was in effect
for about 2 months before the May 1996 problem disbursement report
was issued in July 1996.  In addition, this guidance, which was to
help consolidate and clarify problem disbursement reporting
requirements, was essentially an update of guidance previously issued
in September 1995 and earlier. 

We performed our work at three DFAS centers--Cleveland, Denver, and
Indianapolis--that accounted for 95 percent of the reported problems;
the headquarters office in Washington, D.C., that consolidated the
data and finalized the monthly report; and selected accounting
stations.  We obtained the databases used to quantify problem
disbursement amounts and compared the amounts in these databases to
center reports and consolidated totals.  Where database totals did
not agree with the reported amounts, we discussed the nature and
causes of differences with center and headquarters officials.  In
addition, we assessed the controls in place at these locations to
ensure compliance with guidance and accurate reporting.  We also
compared DOD's May 31, 1996, report with prior and subsequent months'
reports to determine if significant changes or fluctuations had
occurred. 

We performed our work from May 1996 through December 1996 in
accordance with generally accepted government auditing standards.  We
requested written comments on a draft of this report from the
Secretary of Defense or his designee.  The Under Secretary of Defense
(Comptroller) provided written comments.  These comments are
discussed in the "Agency Comments and Our Evaluation" section and
throughout the report where appropriate.  DOD's comments are
reprinted in appendix II. 


   ACCURATE AND COMPLETE PROBLEM
   DISBURSEMENT DATA NOT ENSURED
   BY GUIDANCE AND OVERSIGHT
------------------------------------------------------------ Letter :4

DOD's problem disbursement reports did not show the full extent of
problem disbursements and, accordingly, did not provide a meaningful
indicator for monitoring DOD's reduction efforts.  Our testing of the
May 31, 1996, reported amounts showed that the balance was inaccurate
and that basic data needed to manage efforts to reduce problem
disbursements were not collected.  In addition, DFAS did not
establish adequate guidance and effective controls to ensure accurate
and consistent reporting of needed data. 


      PROBLEM DISBURSEMENT BALANCE
      IS INACCURATE
---------------------------------------------------------- Letter :4.1

DFAS' May 31, 1996, report significantly understated DOD's problem
disbursement balance.  Our analysis of the reported amount showed
that, in some instances, DFAS centers (1) excluded amounts from
reported balances, (2) misclassified amounts within reporting
categories, and (3) incorrectly aged transactions.  We estimated that
the DFAS reported total of $18 billion was understated by at least
$25 billion based on using available data, existing guidance, and our
adjustments for areas that the guidance did not address but we felt
were appropriate.  Appendix I summarizes these reporting problems,
which are also discussed in more detail in the following paragraphs. 


      EXCLUDED AMOUNTS
---------------------------------------------------------- Letter :4.2

As we and the DOD Inspector General (IG) previously reported in
1994,\5

activities can significantly understate problem disbursement balances
when problem disbursement amounts are excluded from reporting.  We
found that DFAS continues to exclude large problem disbursement
amounts when it (1) offsets positive and negative amounts that result
from disbursements, collections, reimbursements, or adjustments or
(2) omits amounts from problem disbursement totals.  In responding to
our previous report, DOD and DFAS agreed that problem transactions
that involve disbursements, collections, reimbursements, or
adjustments should not be offset.  In written comments on a draft of
this report, DOD stated that the Department officially reports
in-transit disbursements on a net basis--that is, by offsetting
collections, reimbursements, or adjustments against disbursement
balances.  This statement is inconsistent with the written policies
of DOD and DFAS, which require absolute amounts, and with the
numerous discussions we had with DOD and DFAS officials throughout
the course of our work.  Absolute or total reporting of problem
disbursement balances is necessary to present the full magnitude or
impact of the problems and ensure that all problem disbursements are
reported. 

In the May 31, 1996, balance, about $12.9 billion of the quantifiable
understatements represented instances where DFAS centers continued to
offset positive and negative amounts.  Specifically, DFAS Cleveland
offset amounts for all in-transit categories while DFAS Indianapolis
and Denver offset amounts for certain in-transit categories.  For
example, DFAS Cleveland reported a problem disbursement amount of
$409 million for transactions in a suspense account where the correct
appropriation to be charged or credited had not been identified. 
This balance represented disbursements, generally positive amounts,
of $1.04 billion and collection and reimbursements, generally
negative amounts, of $631 million.  Because the two amounts represent
different types of transactions, they should not have been used to
offset one another.  If DFAS guidance had been properly followed, a
problem disbursement amount of $1.7 billion, an over threefold
increase, would have been reported.  Thus, offsetting these two
amounts resulted in an understatement of $1.3 billion. 

In another instance, two of the three centers we reviewed
inappropriately offset problem disbursement transactions with
collections and reimbursement transactions.  At one center,
transactions were offset if they pertained to the same accounting
station.  At the other center, transactions were offset if they
related to the same fiscal station and activity total.  Therefore,
the reported balance was not based on individual transaction data. 
For example, DFAS Denver, for May 1996, offset disbursements,
collections, and reimbursements by accounting station and then
reported $1 billion as problem disbursements for one of its
in-transit categories.  DFAS Denver would have reported $1.2 billion
had it obtained a total for each problem disbursement transaction,
resulting in an understatement of about $200 million. 

As illustrated above, reporting problem disbursement amounts based on
detailed transaction data is generally preferable.  However,
reporting the total of all transactions as problem disbursements is
not appropriate in all cases.  For example, if a problem disbursement
was initially recorded at $100 and $55 had been entered as an
adjusting amount, representing a negative number, and both
transactions remain in the data file, the total problem disbursements
based on transactional detail would be $155, not the remaining
problem disbursement balance of $45.  We examined DFAS Cleveland's
files to identify relationships such as voucher number, accounting
line, or reversal indicator to determine which transactions had a
logical relationship and should offset one another.  Those problem
disbursements without these relationships should be reported in total
in accordance with DFAS guidance.  By using this process, we
determined that a more accurate problem disbursement amount for one
problem disbursement data file would be $3.6 billion, about $2.6
billion more than the $1 billion reported by DFAS Cleveland. 

In addition to offsetting unrelated transactions, DFAS centers
omitted about $9.5 billion from their May 31, 1996, problem
disbursement reports.  The identified understatement primarily
resulted from DFAS Indianapolis omitting problem disbursement amounts
for accounts not considered its responsibility and DFAS Cleveland
omitting transactions that we believe represent problem disbursements
although they were not specifically defined as problems by DFAS
policy. 

We noted two instances where DFAS Indianapolis omitted problem
disbursement amounts.  In the first instance, DFAS Indianapolis,
although responsible for reporting Army problem disbursements,
omitted $3.8 billion of such disbursements relating to charges made
by other military services against Army funds.  Specifically, DFAS
Indianapolis posted these charges in a suspense account because
supporting documentation, which would have allowed it to recognize
these charges as Army expenditures, remained outstanding for over a
year.  However, DFAS Indianapolis deleted the suspense amount from
its problem disbursement total. 

In the second instance, DFAS Indianapolis did not ensure that all
problem disbursements relating to the Office of the Secretary of
Defense (OSD) were reported.  We noted several instances where OSD
funds were not visible in any of DFAS' problem disbursement reports. 
According to DFAS Indianapolis officials, the Indianapolis center
responsibilities for OSD funds included reconciling related
disbursements to Treasury balances, reporting problem disbursements
for Army-managed OSD funds, and consolidating OSD problem
disbursements reported by Defense agencies.  The completeness and
accuracy of OSD problem disbursement reports were the responsibility
of submitting stations.  However, we found instances where problem
disbursements were omitted from DFAS reports for a number of OSD
accounts, such as OSD's budget clearing accounts.\6 DFAS guidance
identifies budget clearing accounts as a category of problem
disbursement.  DFAS Indianapolis did not include these accounts
because each DFAS center was concerned with reporting only the
portion of OSD funds for which it was responsible, and DFAS
Indianapolis did not have a means to ensure that problem
disbursements for all OSD funds were identified.  Although we did not
quantify the amount of problem disbursement understatements
associated with OSD funds for the May 1996 report, DFAS Indianapolis
identified about $400 million in December 1996 that it previously
omitted in its problem disbursement reports. 

In commenting on a draft of this report, DOD mistakenly combined
information from the two examples presented above.  As stated above,
the first example related to $3.8 billion in an Army suspense account
at DFAS Indianapolis.  In September 1996, after we pointed out this
problem, DFAS Indianapolis began to include the amounts in the Army
suspense account in its monthly problem disbursement report. 
However, DFAS Indianapolis reported an adjusted net amount of about
$214 million rather than the total (absolute) amount of $5 billion. 
Our second example related to OSD funds for which we were not able to
quantify the understatement.  DOD's representation of the $3.8
billion of transactions in the Army suspense account as managerial
information related to OSD funds (Department code 97) is inconsistent
with our analysis and DFAS Indianapolis' subsequent characterization
of these transactions as problem disbursements. 

DFAS Cleveland also omitted problem disbursement amounts because
certain transactions were considered recurring and routine, and
reporting guidance specifically required the omission of these
transactions from problem disbursement reports.  Routine and
recurring transactions, such as payroll disbursements made through
automated teller machines (ATMs), are recorded in temporary holding
suspense accounts by DFAS Cleveland and facilitate payroll
disbursements aboard Navy ships.  We agree that recurring and routine
transactions held in suspense accounts should not be reported as
problem disbursements.  However, when transactions held in such
accounts are neither routine nor temporary, the transactions should
be included as problem disbursements.  For example, after accounting
for appropriate offsetting transactions, we noted that about $4.5
billion of $17 billion in these accounts were related to closed or
invalid\7 offices and decommissioned ships.  In some cases, balances
remained outstanding for several years after offices were closed and
ships were decommissioned.  Over 60 percent of the dollar amount and
65 percent of the number of transactions were at least 2 years old,
with some balances originating as far back as January 1988. 
According to DOD disbursement regulations, such balances represent
irregularities which must be promptly investigated.  While the $4.5
billion representing closed or invalid offices and decommissioned
ships appear to be problems, a detailed analysis of transactions and
supporting documentation would be required to determine whether other
transactions in these accounts are problem disbursements. 

In commenting on a draft of this report, DOD stated that the net
outstanding balance for the ATM transactions in the suspense accounts
is about $10 million and only this amount would require corrective
action.  We disagree.  These accounts relate to hundreds of
disbursing offices and thousands of individual transactions.  To
simply offset all those ATM accounts with positive outstanding
balances against all those with negative outstanding balances
seriously understates the magnitude of this problem and the amount of
research needed to resolve these irregularities, as required by DOD
disbursement regulations. 


--------------------
\5 Financial Management:  Status of Defense Efforts to Correct
Disbursement Problems (GAO/AIMD-95-7, October 5, 1994) and Uncleared
Transactions By and For Others (DOD OIG 94-048, March 2, 1994). 

\6 Budget clearing accounts are Treasury accounts in which
transactions are to be temporarily recorded until sufficient data are
available to permit recording in the appropriate account. 

\7 Offices that were not coded as being open or closed. 


      MISCLASSIFICATION OF PROBLEM
      DISBURSEMENTS IN THE
      IN-TRANSIT CATEGORY
---------------------------------------------------------- Letter :4.3

As discussed previously, problem disbursements were reported in three
categories--NULOs, unmatched disbursements, and in-transit
disbursements.  NULOs and unmatched disbursements are considered
further along in the accounting cycle because an attempt has been
made to match disbursements to corresponding obligations.  Although
in-transit disbursements have yet to be matched against corresponding
obligations, they are viewed as an issue when an attempt to match has
not been made for an extended time period.  According to its May 1996
guidance, DFAS headquarters, when compiling data from the centers for
problem disbursement reporting, excludes amounts for in-transit
categories that are not more than 60 or 120 days old depending on the
type of disbursement.  As previously discussed, in-transit
transactions are transactions that have either not been received by
the accounting station or have been received but not processed or
posted by the accounting station.  DOD has determined that
transactions within this "normal" in-transit time are not considered
problem disbursements and therefore excludes these amounts from the
problem disbursement reports.\8

Although it could be argued that 60 or 120 days may be too long for a
transaction to remain unrecorded in the accounting systems, we are
not taking exception to this processing time in this report. 
However, we believe that certain transactions that are included in
the in-transit category are known problems and should not be granted
this "normal" processing time before being reported as problems.  For
example, DFAS Cleveland, in following DFAS headquarters guidance,
excluded from its report $2.2 billion for transactions that failed
edit checks but were less than 60 days old.  Edit checks are
performed by DFAS centers prior to sending transactions to accounting
stations for posting to accounting records and include checks to
verify that cited appropriations are valid.  Transactions that fail
edit checks because of invalid appropriations, program limits, or
other vital accounting data, are known problem disbursements.  Like
unmatched problem disbursements, they should be reported as problems
regardless of age.  While DFAS' May 1996 guidance allows edit
failures to be reported as in-transits, such reporting does not
appear to be in agreement with the DOD Comptroller guidance.  The DOD
Comptroller guidance defines disbursements in suspense accounts,
which contain these edit failures, separately from in-transit
disbursements.  Accordingly, the $2.2 billion for suspense
transactions less than 60 days old, including edit failures, should
have been reported as problem disbursements. 

In commenting on a draft of this report, DOD stated the Department
does not intend to impose a special new requirement to identify and
report all transactions that failed edit checks.  However, DOD
already has readily available information on these transactions.  For
example, DOD's May 1996 report included a footnote that stated that
$14 billion (which included the $2.2 billion of edit failures) was
not included in problem disbursement totals because of the 60- or
120-day exclusion criteria.  As stated above, those transactions
identified as edit failures should not be categorized as in-transits
and therefore should be reported immediately rather than waiting
until the 60- or 120-day "normal" processing period has elapsed. 

Another instance of underreporting occurred because DFAS Indianapolis
reported unmatched disbursements as in-transits.  Because DFAS
headquarters excludes certain in-transit balances less than 60 days
old from problem disbursement amounts, but reports all unmatched
transactions regardless of age, problem disbursements are understated
when unmatched balances are misreported as in-transits.  DFAS
Indianapolis officials said that their accounting system did not
distinguish between unmatched and in-transit problem disbursements
when the accounting and disbursing stations are different. 
Accordingly, data were not readily available to determine what
portion of the $3.5 billion reported as in-transit disbursements less
than 60 days old should have been reported as unmatched disbursements
and as problem disbursements.  Reporting of problem disbursements by
correct category is not only necessary for compiling accurate problem
disbursement reports but for also ensuring that management actions
needed to address the problems are appropriately focused.  Management
actions to resolve these problems would normally be different for
unmatched disbursements and for in-transit disbursements. 


--------------------
\8 DOD officials stated that DOD has reluctantly accepted, for the
present time, these time frames as the "normal" processing times due
to the limitations of existing systems.  They add that DFAS has been
tasked to reengineer the disbursement and collection reporting
processes. 


      INCORRECT AGING
---------------------------------------------------------- Letter :4.4

As discussed earlier, the number of days that an in-transit
transaction is in process can determine whether it is considered
"normal" or is counted as a problem disbursement.  For example,
disbursements for which the disbursing station and the accounting
station are different but both stations report to the same DFAS
center are not considered problem disbursements unless the processing
time exceeds 60 days.  DOD considers up to 60 days as the normal time
to process such transactions.  Accordingly, aging of transactions
(number of days since transaction originated) becomes critical in
determining which in-transit items are classified as problem
disbursements.  DFAS guidance on problem disbursements does not
clearly define what date should be used to age a disbursement. 
However, the Comptroller's June 1995 guidance, with which we agree,
clearly defines the date the disbursement was paid as the beginning
date. 

We found that certain DFAS centers inappropriately aged
disbursements.  DFAS Cleveland, for the most part, used the date paid
for aging disbursements.  However, Denver and Indianapolis used later
dates--generally the date the transaction was sent to the accounting
station or received by the DFAS center.  As a result, when DFAS
headquarters exclude from reporting in-transit amounts less than 60
or 120 days that are underaged by these centers, the problem
disbursement balance is understated.  Because these centers often did
not collect data necessary to properly age disbursements, we were
only able to determine and quantify the resulting understatements of
problem disbursement amounts where data were available.  As of May
31, 1996, we identified three instances of understatements related to
improper aging that we could quantify.  These three instances totaled
about $662 million and are discussed below. 

We identified one DFAS Indianapolis problem disbursement database
that required both disbursement and processed dates.  However, about
14 percent of the 108,000 transactions in the database either did not
contain the date paid or contained obviously invalid data.  For the
transactions where we could identify date paid in this file, problem
disbursements were understated by at least $258 million as of May 31,
1996, because transactions were incorrectly considered less than 60
days old and not reported as problem disbursements.  In some cases,
the transactions were incorrectly aged by at least 90 days.  We did
not perform similar analyses for DFAS Denver because problem
disbursement data files did not include date paid information. 

In addition, DFAS Indianapolis added an extra 30 days beyond the 60
days before certain in-transit transactions were reported as
problems.  DFAS Indianapolis misreported these in-transit
transactions by showing that they were from 0 to 60 days old when
they were actually up to 90 days old.  According to Indianapolis
officials, they added in this extra time to compensate for slow mail
handling of voucher information.  In this instance, if DFAS
Indianapolis had reported all in-transits older than 60 days, DOD's
May 31, 1996, balance would have been $250 million more. 

Likewise, in June 1, 1995, guidance to its fiscal stations, DFAS
Indianapolis stated that NULOs discovered on October 1, 1994, or
after were to be reported in the month after the month of discovery. 
Officials said that fiscal stations were to use this period to
resolve NULOs.  Determining the precise amount of understatement
because of this misreporting would be time-consuming because NULO
balances existed at a multitude of fiscal stations and May 1996 data
were no longer available.  However, we reviewed DFAS Indianapolis'
subsequent month NULO report and determined that, at a minimum, $154
million of NULOs were excluded by fiscal stations following
Indianapolis' instructions. 


      BASIC DATA ABOUT SOURCES AND
      CAUSES NOT COLLECTED
---------------------------------------------------------- Letter :4.5

In March 1996, DOD reported in its fiscal year 1996 report to the
President and the Congress that one of its financial reform projects
was to eliminate problem disbursements and that one critical
component of its financial management reform efforts was to
reengineer its business processes.  DOD has numerous initiatives
under way to make both short-term incremental improvements as well as
to develop long-term initiatives described by DOD as reengineering
entire processes.  However, in reengineering business processes to
eliminate problem disbursements, DOD needs additional basic data
about the sources and causes of problem disbursements to determine
the most efficient corrective actions.  In addition, baseline data on
the sources and causes of problem disbursements are necessary to
establish performance measures to determine whether the reengineered
processes are achieving desired results. 

In assessing the business case for reengineering, performance
measurements and benchmarking are key to making this determination
because they help an agency understand the nature and size of the gap
between current and desired performance levels.  In addition,
performance measures are to be used to (1) determine whether the new
process is achieving the desired results and (2) provide feedback on
problem areas that need further improvement.  Performance measures
can also be valuable in determining the cost/benefit of incremental
short-term initiatives. 

We noted during our review that DOD did not collect the basic data
necessary to develop and select improvement initiatives nor to
measure the success of its initiatives.  For example, in its report,
titled Eliminating Unmatched Disbursements, A Combined Approach,
dated June 1995, DOD stated that the precise reasons causing
contractor payments to become unmatched were difficult to pinpoint
because quantitative data were unavailable.  As a result, the
determination of root causes was based on observations and
experience.  Accordingly, the amount of problem disbursements that
related initiatives were to resolve was undeterminable. 

In addition, although DOD is working toward matching every
disbursement to an obligation prior to payment--referred to as
prevalidation--as a key initiative to prevent future problem
disbursements, it is unable to adequately measure whether the
initiative is achieving desired results.  For example, one of the
indicators used to measure progress in reducing problem disbursements
is the number of new problem disbursements.  However, DFAS collects
this performance measure inconsistently.  Specifically,

  -- DFAS Cleveland reports the actual number of problem disbursement
     transactions;

  -- DFAS Denver estimates its volume of transactions based on the
     average number of transactions typically sent to accounting
     stations for a month; and

  -- DFAS Indianapolis understates its volume of transactions by
     summarizing and reporting as one transaction multiple individual
     transactions with the same appropriation and accounting station. 

As a result of these inconsistent reporting methods, DOD cannot
quantify new problem disbursements. 

Compiling basic information necessary to perform a comprehensive
analysis on the causes of problem disbursements requires detailed
transactional data that underlie summary reporting.  The actual
number of problem disbursements, the total dollar amounts, type of
disbursements, date paid, funding stations, and disbursing offices
are examples of such data.  While some of these data are available at
some locations, they are not consistently collected, compiled, and
used in analyzing disbursement problems and determining progress
resulting from management initiatives.  For example, DFAS
Indianapolis was not able to determine the full scope of problem
disbursements because only summary data were available for reporting
problem disbursements.  DFAS Indianapolis did not have readily
available detailed transactional data.  Until detailed transactional
information is collected, consolidated, and analyzed, DFAS
Indianapolis will not be able to adequately identify the nature and
scope of problem disbursements and develop adequate performance
measures for related initiatives.  Collecting consistent data that
identify and quantify the nature of these problems would allow DOD to
better support management initiatives to reduce such problems. 

In a December 6, 1996, memorandum, the DOD Comptroller requested that
a new methodology be developed for reporting on in-transit
disbursements and that they be tracked by type of transaction and by
origination.  As discussed above, we agree that more detailed data
are needed to determine the scope and sources of the problems and
whether initiatives aimed at fixing the problems are effective. 


      EFFORTS NOT ADEQUATE TO
      ENSURE ACCURATE AND
      CONSISTENT REPORTING OF
      NEEDED DATA
---------------------------------------------------------- Letter :4.6

DFAS' efforts have not been adequate to ensure the accurate and
consistent reporting of problem disbursements.  Specifically,
although DFAS prepared its first consolidated guidance in May 1996,
our identified understatements resulted from the guidance (1) not
being followed, (2) not offering detailed instructions for offsetting
transactions, and (3) not appropriately identifying some transactions
as problems.  In addition, DFAS did not establish adequate oversight
and controls over the reporting process. 

As previously stated in this report, the DFAS centers we reviewed
significantly understated problem disbursement balances.  Although
guidance was established by DFAS headquarters for reporting problem
disbursements, DFAS headquarters did not establish enforcement
mechanisms to ensure that its centers followed it.  For example, the
duties of two staff at DFAS headquarters assigned to problem
disbursements primarily consisted of consolidating center balances
into final reports.  They did not view their responsibilities as
ensuring that data submitted by center personnel were accurate or
that DFAS and DOD guidance were followed.  Moreover, one of the two
staff positions is rotated annually, resulting in a loss of
institutional knowledge and a "learning curve" situation every time a
new person is assigned. 

We also found that the DFAS guidance was not consistent with the DOD
Comptroller guidance in reporting certain problem disbursements. 
DFAS guidance treated edit failures the same as in-transits--they
were not reported as problems until the processing time exceeded 60
or 120 days.  The DOD Comptroller guidance recognized edit failures
as problems from the date they occurred.  Further, we found instances
where unrelated transactions were offset against one another and
where dates used to age problem disbursements were later than the
disbursement date.  These instances occurred because DFAS guidance
did not expand on certain requirements for reporting problem
disbursements.  For example, DFAS guidance required problem
disbursement reports to be presented in total, without offsetting, by
aging category but provided no other guidance.  When adjustments or
other offsetting transactions are included in problem disbursement
data files, DFAS guidance did not specify how to treat them in
compiling problem disbursement reports.  Likewise, DFAS guidance did
not specify how to age problem disbursements when processing does not
capture disbursement dates. 

Lastly, we found that control procedures for ensuring accurate
problem disbursement reporting were often not documented at DFAS
centers and at headquarters.  Although ad hoc procedures existed in
some cases, the errors we identified indicate that this approach was
not effective in ensuring that DOD's problem disbursement reports
were as accurate as possible.  For example, DFAS Cleveland maintained
a checklist for ensuring the completeness of problem disbursement
data files.  However, it relied solely on the submitting accounting
stations to provide reliable problem disbursement data.  Although we
did not test the validity of data file transactions, DFAS Cleveland
noted two instances where data files did not agree with hard copy
totals, and it used the hard copy totals without researching the
reasons for the differences and reconciling the data.  Because of the
general lack of controls over reporting, DFAS cannot ensure the
credibility of DOD's problem disbursement reports. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

The reporting issues we identified raise doubt about whether DOD has
the appropriate tools necessary to design and evaluate efforts to
reduce problem disbursements.  Because DOD has not successfully
identified the scope of its problem disbursements, related reports do
not provide a basis to measure reduction efforts.  In addition,
because the basic data underlying DOD's reports are often not
sufficient to identify specific causes of problems, DOD does not have
management information necessary to effectively manage the reduction
of these problems.  In order to effectively manage the reduction of
its problem disbursements, DOD needs to be able to identify the root
causes of its problems, prioritize them, perform corrective actions,
and measure its success in resolving problem disbursements. 
Furthermore, until DOD reduces its problem disbursements to
acceptable levels, DOD will not be able to accurately report on its
operating costs and budget execution in required financial
statements. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretary of Defense ensure that the Under
Secretary of Defense (Comptroller) take the following steps to
provide for accurate and consistent reporting of DOD's problem
disbursements. 

(1) Revise DFAS reporting guidance to include: 

  -- reporting problem disbursements from detailed transactional data
     at the DFAS center level, which would allow DOD to maintain a
     source of management data necessary to identify, quantify, and
     resolve its problems and would provide for more meaningful
     calculations of amounts;

  -- detailed instructions addressing the offsetting of positive and
     negative transactions and the logical relationships, such as
     voucher number, accounting line, or reversal indicator, of these
     transactions;

  -- reporting all transactions that are rejected by edit routines as
     problems regardless of age, consistent with current DOD
     Comptroller guidance; and

  -- reporting additional problems such as recurring and routine
     suspense transactions citing closed or invalid disbursing
     offices and decommissioned ships. 

(2) Establish adequate quality controls over the collection,
compilation, and reporting of problem disbursements at DFAS to
enhance the credibility of problem disbursement reports.  Such
measures, if properly developed and executed, should not be costly to
implement and would establish reporting credibility.  At a minimum,
these controls should: 

  -- include documentation of the process, procedures, and sources of
     data used for preparing problem disbursement reports at all
     reporting centers and headquarters; and

  -- establish an accountability process to include reviewing and
     approving the compilation of the reported amounts at all
     reporting levels, enforcing existing guidance for classifying
     and aging transactions, and reporting total problem disbursement
     amounts. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In written comments on a draft of this report, DOD did not concur
with our findings, conclusions, and recommendations and stated that
the report was totally misleading and, in part, incorrect.  DOD based
its position on two major assertions:  (1) DOD no longer considers
in-transits to be problem disbursements and the understatements we
identified almost exclusively relate to in-transit transactions and
(2) the underreporting we identified is really a definitional issue
related to the use of absolute or net numbers for reporting purposes. 

We disagree with DOD's position.  First, DOD's comments ignore the
fact that as of May 1996 (the date of the DOD problem disbursement
report that we reviewed), DOD's policies and procedures clearly
defined aged in-transits as problem disbursements, and they were
included in DOD's problem disbursement reports.  Our report defines
the three types of problem disbursements that were included in DOD's
May 1996 comprehensive reporting guidance:  in-transits, unmatched
disbursements, and negative unliquidated obligations.  DOD began
including in-transits in its problem disbursement reports in response
to our recommendation in an October 1994 report.\9 DOD's official
response to that report, a letter dated April 17, 1995, from the
Deputy Chief Financial Officer, clearly states:  "The Department
agrees that in-transit transactions over 60 days old are disbursing
problems."

As stated in the "Background" section of our report, it was not until
December 1996, after we had completed our field work and briefed DOD
officials on our findings, that the Under Secretary of Defense
directed that in-transits be excluded from DOD's monthly reporting. 
We issued an interim report in February 1997\10 to discuss our
position that eliminating these transactions from the reports would
adversely affect the reports' accuracy, completeness, and usefulness
as an oversight tool.  In that report, we stated that any transaction
that has not been matched with an obligation within DOD's "normal"
processing time of 60 or 120 days is clearly a problem disbursement
that should be reported, researched, and resolved.  Moreover, DOD's
aging information on the $7.7 billion of aged in-transits included in
its problem disbursement total as of May 31, 1996, showed that over
$1.4 billion had been in the "in-transit" category for over 2 years. 
Clearly, such aged in-transits are problem transactions that should
be identified and monitored just as unmatched disbursements and NULOs
are.  In his February 1997 comments on our interim report, the Under
Secretary of Defense (Comptroller) stated that DOD would continue to
report in-transits along with problem disbursements in external
communications. 

In our evaluation of DOD's comments on our interim report, we agreed
that as long as DOD's monthly reporting mechanism provides accurate
and consistent information on all types of problem disbursements, we
would consider DOD's actions responsive to our recommendation that
in-transits continue to be reported.  At that time, we believed that
DOD's intent was to report in-transits separately from unmatched
disbursements and NULOs, but that they would, nonetheless, be
reported and tracked.  However, we are concerned about DOD's
assertion in its comments that the Department no longer views
in-transits as problem disbursements.  We continue to believe that
any discussion of problem disbursements is incomplete without a
discussion of in-transits and that they should continue to be
reported externally. 

Regarding the second major issue--offsetting reimbursements,
collections, or adjustments against disbursements (referred to as
net) versus total (or absolute) reporting--DOD's statement that it
officially reports in-transits on a net basis is not consistent with
the written policies of DOD and DFAS and with the numerous interviews
and discussions we had with DOD and DFAS officials throughout the
course of our work.  As stated in the report, in response to DOD IG
and GAO reports issued in 1994, DOD agreed that problem disbursement
transactions should not be offset.  Since that time, the Department's
official policy for reporting problem disbursements has been on a
total or absolute basis, as stated in DFAS' May 1996 guidance. 

Reporting the total or absolute amount of problem disbursements helps
ensure that accurate baseline data are available to focus attention
on the resolution of problem disbursements and measure progress
towards that goal.  To illustrate, if DOD has an in-transit amount of
$10 related to a collection or reimbursement, DOD may not know the
correct appropriation to which it should be credited nor whether it
has the authority to spend it.  Meanwhile, it may also have an
in-transit disbursement amount of $8 for which the correct
appropriation to charge is not known.  Thus, DOD has two problems
that must be resolved--one for $10 and one for $8--for a total of
$18.  To offset these amounts and indicate a total problem amount of
$2, as DOD advocates, would be inaccurate and misleading. 

Our report explains that offsetting unrelated transactions is
generally not appropriate.  However, in cases where a proper
relationship can be demonstrated, it may be appropriate.  In arriving
at the estimated $25 billion understatement of problem disbursements,
we offset transactions when we could identify a relationship between
transactions.  DOD's apparent confusion over its own reporting policy
is further support for our recommendation that its reporting guidance
be revised to include detailed instructions addressing the offsetting
of positive and negative transactions. 

In addition to its two major points, DOD took issue with our report
on a number of other factual and conceptual areas.  We address these
points in our detailed comments in appendix II.  We continue to
believe that DOD is significantly understating the magnitude of its
disbursement problems.  Without basic underlying problem disbursement
data that are collected consistently by a credible process, the
Department cannot accurately measure the extent of its disbursement
problems, much less progress made in reducing such balances.  The $25
billion understatement we were able to quantify demonstrates our
point that DOD's reporting process over all its disbursing problems
needs to be improved. 


--------------------
\9 Financial Management:  Status of Defense Efforts to Correct
Disbursement Problems (GAO/AIMD-95-7, October 5, 1994). 

\10 DOD Problem Disbursements (GAO/AIMD-97-36R). 


---------------------------------------------------------- Letter :7.1

As agreed with your offices, unless you publicly announce the
contents of this report earlier, we will not distribute it until 30
days from the date of this letter.  At that time, we will send copies
to the Chairman of the Senate Committee on Governmental Affairs; the
Chairmen and Ranking Minority Members of the Senate Committee on
Armed Services, the House Committee on National Security, and the
House Committee on Government Reform and Oversight; the Ranking
Minority Member of the Subcommittee on Government Management,
Information and Technology, House Committee on Government Reform and
Oversight; and the Director of the Office of Management and Budget. 
We will also send copies to the Secretary of Defense, the Under
Secretary of Defense (Comptroller), and the Director of the Defense
Finance and Accounting Service.  Copies will be made available to
others upon request. 

Please contact me at (202) 512-9095 if you or your staffs have any
questions on this report.  Major contributors to this report are
listed in appendix III. 

Lisa G.  Jacobson
Director, Defense Audits


TOTAL QUANTIFIABLE UNDERSTATEMENTS
AS OF MAY 31, 1996
=========================================================== Appendix I

                              (Dollars in millions)

                                                                GAO
                                                            minimum
                                                     DFAS  reportab
                 Category/Sub-   Reporting         amount        le  Understatem
DFAS location    category        issue           reported    amount          ent
---------------  --------------  --------------  --------  --------  -----------
Excluded amounts by offsetting of transactions
--------------------------------------------------------------------------------
Cleveland        In-transit/     Offsetting        $1,846    $4,315       $2,469
                 Interfund\a     positive and
                                 negative
                                 balances

Cleveland        In-transit/     Offsetting           632     5,007        4,375
                 Cross           positive and
                 disbursing\b    negative
                                 balances

Cleveland        In-transit/     Offsetting           409     1,672        1,263
                 CERPS\d         positive and
                                 negative
                                 balances

Cleveland        In-transit/     Offsetting           968     3,572        2,604
                 SAMS\d          positive and
                                 negative
                                 balances
                                 without
                                 establishing
                                 relationships

Cleveland        In-transit/     Offsetting           373     1,496        1,123
                 FRS\d           positive and
                                 negative
                                 balances

Denver           In-transit/     Offsetting         1,024     1,225          201
                 Intra           positive and
                 service\c/      negative
                 Cross           balances
                 disbursing\b

Denver           In-transit/     Offsetting           464     1,115          651
                 Suspense        positive and
                                 negative
                                 balances

Indianapolis     In-transit/     Derived from         N/A   Unknown      Unknown
                 Unprocessed     summary data
                 TBOs            which
                                 "offsets"
                                 disbursement
                                 detail with
                                 collection
                                 detail when
                                 total amounts
                                 required

                                 Offsetting           273       539          266
                                 positive and
                                 negative
                                 balances

================================================================================
Subtotal                                           $5,989   $18,941      $12,952


Excluded amounts by omission
--------------------------------------------------------------------------------
Indianapolis     In-transit/     Deletions             $0    $3,833       $3,833
                 Unsupported     relating to
                 cross           Army suspense
                 disbursing\b    accounts not
                                 reported

Indianapolis     In-transit/     OSD                    0         0      Unknown
                 Unsupported     appropriations
                 cross           not fully
                 disbursing\b    visible in
                                 problem
                                 disbursement
                                 reports

Cleveland        In-transit/     Transactions           0     4,525        4,525
                 SAMS hold\d     held in
                                 suspense not
                                 reported as
                                 problems. Some
                                 transactions
                                 are old, cite
                                 closed and
                                 invalid
                                 offices

Denver           In-transit/     Normal                 0     1,155        1,155
                 Intra           processing
                 service\c/      time not
                 Cross           applicable
                 disbursing\b

================================================================================
Subtotal                                               $0    $9,513       $9,513


Misclassification of disbursements
--------------------------------------------------------------------------------
Cleveland        In-transit/     First 60 days         $0      $264         $264
                 CERPS\d         not reported
                                 for
                                 transactions
                                 rejected by
                                 edit routines

Cleveland        In-transit/     First 60 days          0       179          179
                 SAMS\d          not reported
                                 for
                                 transactions
                                 rejected by
                                 edit routines

Cleveland        In-transit/     First 60 days          0     1,746        1,746
                 FRS\d           not reported
                                 for
                                 transactions
                                 rejected by
                                 edit routines

Cleveland                                                                 $2,189
subtotal for
misclassificati
ons

Denver           In-transit/     First 60 days         $0      $103         $103
                 Suspense        not reported
                                 by DFAS
                                 headquarters
                                 for
                                 transactions
                                 rejected by
                                 edit routines

                                 Out of balance             Unknown    A portion
                                 conditions and                          of $1.3
                                 disbursements                           billion
                                 not yet                                would be
                                 validated                            reportable

Indianapolis     In-transit/     Unmatched            N/A   Unknown    A portion
                 Unprocessed     transactions                            of $3.5
                 TBOs            included in                             billion
                                 this category                          would be
                                 when required                        reportable
                                 to be reported
                                 separately by
                                 category

================================================================================
Subtotal                                               $0    $2,292       $2,292

Incorrect aging

Indianapolis     In-transit/     Transaction           $0      $258         $258
                 Unprocessed     aged based on
                 TBOs            date received
                                 rather than
                                 date paid

                                 30 days not            0       250          250
                                 reported

Indianapolis     NULO            First 30 days          0       154          154
                                 not counted
                                 when all NULOs
                                 should be
                                 reported

Denver           All             Transactions     Unknown   Unknown      Unknown
                                 aged based on                         however a
                                 date received                        portion of
                                 by Denver                                  $5.3
                                 rather than                             billion
                                 date paid as                           would be
                                 required by                          reportable
                                 DOD guidance
                                 for obligating
                                 problem
                                 disbursement
                                 amounts

================================================================================
Subtotal                                               $0      $662         $662

================================================================================
Total (Minimum                                     $5,989   $31,408      $25,419
Understatement)
--------------------------------------------------------------------------------
\a Interfund transactions are paid through a billing process used by
DOD to purchase materials from within the Department or other
government entities; generally reimbursement transactions. 

\b Cross disbursing transactions are those transactions where the
disbursement is being made on the behalf of one service for another
service or the State Department. 

\c Intra service transactions are where the disbursing station and
the accounting station differ but both are operating on the behalf of
the same service. 

\d The CERPS, SAMS, and FRS suspense files includes data from
specific systems used to process disbursements.  CERPS-Central
Expenditure and Reimbursement Processing System, SAMS - Suspense Aged
Monitoring System, and FRS-Financial Reporting System.  SAMS
transactions are classified as being either in a "process"
(in-transit) or "hold" status. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of Defense's
letter dated April 9, 1997. 

GAO COMMENTS

1.  We address DOD's characterization of our report in the "Agency
Comments and Our Evaluation" section. 

2.  Our report clearly distinguishes between the categories of
unmatched disbursements, negative unliquidated obligations, and
in-transit disbursements.  The "Background" section defines each and
includes analogies that relate these types of problems to personal
financial situations. 

3.  As discussed in the "Agency Comments and Our Evaluation" section,
we disagree with DOD's decision to no longer characterize in-transits
as problem disbursements.  This matter is discussed in detail in our
interim report, DOD Problem Disbursements (GAO/AIMD-97-36R, February
20, 1997). 

4.  Our report does not ignore the reduced amount of problem
disbursements reported by DOD.  Page 1 states that DOD reported a $33
billion reduction in problem disbursements.  However, the concerns
discussed in this report about the basis for those amounts preclude
us from relying on gross dollar changes in DOD's reported problem
disbursements as a true indicator of progress in resolving
disbursement issues. 

5.  Our report demonstrates that DFAS' efforts have not been
sufficient to quantify and correct the causes of in-transit
disbursements.  Furthermore, in a December 6, 1996, memorandum to the
DFAS Director, the DOD Comptroller stated that DOD had "failed to
come to grips with the underlying causes and potential solutions to
the in-transit problem."

6.  In addition to the $25 billion of understatements we identified
that relate primarily to in-transits, we reported other issues that
resulted in unquantifiable amounts of understatements pertaining to
unmatched disbursements and NULOs.  Moreover, the control weaknesses
we identified relate to the compilation and reporting of all problem
disbursement data. 

7.  We have modified the report to include DOD's comment that its
official policy is to report problem disbursement data on a net
basis.  This matter is discussed in detail in the "Agency Comments
and Our Evaluation" section. 

8.  Our report fully discusses the reporting of net (offset) amounts
versus absolute (full or total) amounts and presents our position
that when offset amounts are reported, problem disbursement totals,
and hence the significance of the issues, are minimized.  The report
also recognizes the need for DOD to establish logical transactional
relationships before absolute amounts are calculated. 

9.  DOD's example of using net amounts for revenue and payments is
not analogous to offsetting in-transits that involve collections or
reimbursements and disbursements because these transactions are not
necessarily related.  See the "Agency Comments and Our Evaluation"
section for our overall discussion on the net versus absolute issue
and an example that illustrates our position that the use of absolute
amounts is generally the accurate and appropriate method for
reporting problem disbursement data. 

10.  DOD's characterization of financial statement presentation is
misleading.  DOD's scenario would be analogous to a Statement of
Operations presenting one bottom-line number for net income or net
loss.  In fact, financial statements show the details, such as
specific kinds of revenues and expenses, that allow users to see how
the bottom-line number was determined.  These critical details allow
users to assess the condition of an entity and determine whether any
changes are needed to improve performance in specific areas. 

11.  Financial statements prepared pursuant to the CFO Act and
submitted to the Office of Management and Budget are to be prepared
in accordance with standard accounting and reporting conventions,
such as accumulating and reporting the total of like transactions. 
DOD's netting of potentially unrelated transactions, such as
collections and various types of disbursements, could result in
information that is misleading or of marginal utility in managing
operations. 

12.  We agree that in-transits, unmatched disbursements, and negative
unliquidated obligations are different types of problems and that
different management actions are needed to address each type of
problem.  Our point is that only by identifying, reporting, and
tracking all disbursing problems can management determine appropriate
corrective actions and ultimately resolve these problems. 

13.  Our report recognizes the complexity of determining an accurate
measure of problem disbursements.  Although absolute amounts will
generally provide the most accurate calculation, as explained in the
"Agency Comments and Our Evaluation" section, we used net amounts
where we could establish transactional relationships.  Any difficulty
we encountered in determining the full extent of DOD's problem
disbursements was the result of the lack of clear and consistent DOD
reporting guidance that was adhered to by all locations. 

14.  The second paragraph of page 2 of DOD's comments states that the
Department does report in-transit transactions on both a net and an
absolute basis, when appropriate, on internal monthly reports.  This
supports our position that in-transits reported in absolute terms on
a month-to-month basis would result in a consistent and meaningful
measure of these transactions. 

15.  After DFAS Denver provided us with additional information in
April 1997, we determined that the $1.4 billion included (1) edit
failures which could be quantified and (2) out-of-balance conditions
and disbursements awaiting supporting documentation/verification,
both still problems that could not be readily separated and
quantified.  In addition, because disbursements awaiting
documentation were redated and reclassified as another in-transit
category, the 60- or 120-day processing time for these type of
transactions does not apply.  According to a DFAS Denver official,
these disbursements could be posted to accounting records and matched
to an obligation in no more than 30 days.  Accordingly, we modified
the report to recognize these changes in category, but they do not
affect the $25 billion in quantifiable understatements we reported. 

16.  Our audits, and those of the Inspector General and audit
services, have identified material internal control weaknesses in
areas such as general electronic data processing, basic
reconciliations, and supervisory reviews.  DOD's inability to match
over $40 billion (the DFAS-reported amount and our quantified
understatements) of disbursements with recorded obligations,
including disbursements that cite closed bases and decommissioned
ships, is also indicative of major control weaknesses.  All of these
weaknesses would contribute to making DOD's payment processes
vulnerable to fraudulent payments and diminish the Department's
ability to detect fraudulent and other improper payments that occur. 
Operation Mongoose, referred to in DOD's response, was initiated as a
post-payment audit process to counter the effects of the lack of
internal controls.  Also, it is focused on certain vendor and payroll
payments and does not address contractor payments, which are
generally the subject of this report. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

David Childress, Assistant Director
Miguel Castillo, Project Manager
Francine DelVecchio, Communications Analyst
James Loschiavo, Social Science Analyst
James Ungvarsky, Computer Specialist

KANSAS CITY FIELD OFFICE

Cecelia Ball, Senior Evaluator
Edwin Boothe, Senior Evaluator
Shirley Klaudt, Staff Evaluator
Marshall Picow, Senior Evaluator

ATLANTA FIELD OFFICE

Pat Sevon, Computer Specialist

OFFICE OF THE GENERAL COUNSEL

Thomas Armstrong, Assistant General Counsel
Amy Shimamura, Senior Attorney


*** End of document. ***