CFO Act Financial Audits: Programmatic and Budgetary Implications of Navy
Financial Data Deficiencies (Letter Report, 03/16/98, GAO/AIMD-98-56).
Pursuant to a congressional request, GAO reported on the programmatic
and budgetary implications of the financial data deficiencies enumerated
by auditors' examination of the Department of the Navy's fiscal year
1996 financial statements.
GAO noted that: (1) the extent and nature of the Navy's financial
deficiencies identified by auditors, including those that relate to
supporting management systems, increase the risk of waste, fraud, and
misappropriation of Navy funds and can drain resources needed for
defense mission priorities; (2) critical weaknesses identified include
the following: (a) information on $7.8 billion in inventories on-board
ships was not included in Navy's year-end financial statements; (b)
failure to follow prescribed procedures for controlling Navy's cash
account with Treasury contributes to continuing disbursement accounting
problems; (c) until duplicate and erroneous vendor payments were
identified and collected as a result of financial audit, the Navy not
only paid too much for goods and services but, more importantly, was
unable to use these funds to meet other critical programmatic needs; and
(d) breakdowns in the controls relied on to prevent or detect material
financial errors mean that the Navy cannot tell if its business-type
support operations are operating on a break-even basis as intended; (3)
although the Navy's 1996 financial statements--its first effort to
prepare comprehensive financial statements--did not include all required
information and were not verifiable, they still provided data GAO could
use to identify several financial issues that may be of interest to
budget and program managers; (4) for example, footnote disclosures on
the Navy's accounts receivable and unexpended appropriations raise
questions about whether future budget resources may be needed or whether
there may be opportunities to reduce resource requirements; (5) when the
findings presented in the auditors' reports are corrected, the financial
statements themselves and related notes can become an excellent source
of information on the financial condition and operations of the Navy;
and (6) also, if properly implemented, new accounting standards that
require information such as data on asset disposal costs and deferred
maintenance will provide the Navy and the Defense Finance and Accounting
Service with an opportunity to improve the extent and usefulness of
information that is currently available to support program
decision-making and accountability in these areas.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-98-56
TITLE: CFO Act Financial Audits: Programmatic and Budgetary
Implications of Navy Financial Data Deficiencies
DATE: 03/16/98
SUBJECT: Audit oversight
Financial management systems
Internal controls
Data integrity
Federal agency accounting systems
Accounting errors
Financial statement audits
Accounting procedures
Military budgets
IDENTIFIER: Defense Business Operations Fund
DBOF
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Cover
================================================================ COVER
Report to the Chairman, Committee on the Budget, House of
Representatives
March 1998
CFO ACT FINANCIAL AUDITS -
PROGRAMMATIC AND BUDGETARY
IMPLICATIONS OF NAVY FINANCIAL
DATA DEFICIENCIES
GAO/AIMD-98-56
Navy Financial Data
(918928)
Abbreviations
=============================================================== ABBREV
CFO - Chief Financial Officer
DBOF - Defense Business Operations Fund
DFAS - Defense Finance and Accounting Service
DOD - Department of Defense
FASAB - Financial Accounting Standards Advisory Board
OMB - Office of Management and Budget
SFFAS - Statements of Federal Financial Accounting Standards
Letter
=============================================================== LETTER
B-279143
March 16, 1998
The Honorable John R. Kasich
Chairman, Committee on the Budget
House of Representatives
Dear Mr. Chairman:
One basic objective of the Chief Financial Officers (CFO) Act is to
improve the financial information available to agency managers and to
the Congress. The act called for the integration of the federal
government's accounting and budgeting systems and the preparation and
independent audit of financial statements. This link between
accounting and budgeting systems and the rigors of a financial audit
is intended to improve the accuracy of data used in budgeting and
help ensure that oversight officials have accurate and complete
information to assess whether agencies are spending their funds as
intended by the Congress.
This report responds to your request that we analyze the programmatic
and budgetary implications of the financial data deficiencies
enumerated by the auditors' examination of the Department of the
Navy's fiscal year 1996 financial statements.\1 In its first attempt
to audit the Navy's financial statements, the Naval Audit Service
reported in March 1997 that it was unable to render an opinion on the
fiscal year 1996 financial statements. This means that, despite
extensive audit efforts, the Navy's financial records were in such
poor condition that the auditors could not tell whether or not the
statements were accurate. The Naval Audit Service concluded that the
Navy did not have reliable information on "the value of assets and
liabilities, including the status of funds appropriated." In essence,
the Navy did not have adequate records to document what it had, what
it owed, or how much money it had spent. This is of particular
concern since the Navy is responsible for about one-third of the
Department of Defense's (DOD) gross budget authority, controls an
estimated one-half of the reported value of DOD assets, and employs
about 1 million military and civilian personnel.
It is vitally important that the Navy obtain accurate financial
information if it is to effectively manage the vast resources for
which it is accountable. Credible financial data are critical not
only for preparing auditable financial statements but also to provide
a reliable basis for Navy and DOD managers and congressional
officials to make difficult resource allocation and program
management decisions.
--------------------
\1 Your request also asked that we analyze the financial reporting
and associated auditors' reports detailing the implications of
financial deficiencies at the Forest Service and the Federal Aviation
Administration. As agreed with your office, we have reported to you
separately on these agencies. (See Financial Management: Federal
Aviation Administration Lacked Accountability for Major Assets
(GAO/AIMD-98-62, February 18, 1998) and Forest Service: Status of
Progress Toward Financial Accountability (GAO/AIMD-98-84, February
27, 1998).)
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The extent and nature of the Navy's financial deficiencies identified
by the auditors, including those that relate to supporting management
systems, increase the risk of waste, fraud, and misappropriation of
Navy funds and can drain resources needed for defense mission
priorities. Critical weaknesses identified by the auditors and their
implications include the following.
-- Information on $7.8 billion in inventories on board ships was
not included in Navy's year-end financial statements. This
information was omitted from the inventory data used for
inventory management, budgeting, and financial reporting. The
lack of Navy-wide visibility over inventories substantially
increases the risk that the Navy may request funds to obtain
additional inventories that are not needed because responsible
managers may not receive information that some of these
inventories may already be on hand in excess.
-- Failure to follow prescribed procedures for controlling Navy's
cash account with Treasury contributes to continuing
disbursement accounting problems that not only prevent reliable
financial statement reporting, but increase the risk of
overspending or overobligating Navy's appropriations. For
example, the auditors reported that the lack of controls over
the Navy's Fund Balance With Treasury may result in
Antideficiency Act violations.
-- Until duplicate and erroneous vendor payments were identified
and collected as a result of the financial audit, the Navy not
only paid too much for goods and services but, more importantly,
was unable to use these funds to meet other critical
programmatic needs. We recently reported\2 that for fiscal
years 1994 through 1996, contractors returned to DOD checks
totaling about $1 billion per year that related to payments from
the Navy, the other military services, and other DOD agencies.
-- Breakdowns in the controls relied on to prevent or detect
material financial errors mean that the Navy cannot tell if its
business-type support operations are operating on a break-even
basis as intended. For example, the auditors reported that
inventory records differed from quantities actually in storage
about 22 percent of the time. Inaccurate records could result
in decisions to buy the wrong quantity of an item, which could
result in either excess inventory or shortages.
Although the Navy's 1996 financial statements--its first effort to
prepare comprehensive financial statements\3 --did not include all
required information and were not verifiable, they still provided
data that could be used to identify several financial issues that may
be of interest to budget and program managers. For example, footnote
disclosures on the Navy's accounts receivable and unexpended
appropriations raise questions about whether future budget resources
may be needed or whether there may be opportunities to reduce
resource requirements. To illustrate, if accounts receivable are
overstated, the Navy may not receive amounts that it intended to use
to support its operations and may therefore need to obtain additional
funding. If the amount is understated, the Navy may lack the
visibility necessary to ensure that it is taking appropriate action
to collect all amounts due it. When the findings presented in the
auditors' reports are corrected, the financial statements themselves
and related notes can become an excellent source of information on
the financial condition and operations of the Navy.
Also, if properly implemented, new accounting standards that require
information such as data on asset disposal costs and deferred
maintenance will provide the Navy and the Defense Finance and
Accounting Service (DFAS)\4 with an opportunity to improve the extent
and usefulness of information that is currently available to support
program decision-making and accountability in these areas.
--------------------
\2 DOD Procurement: Funds Returned by Defense Contractors
(GAO/NSIAD-98-46R, October 28, 1997).
\3 The Navy, like all other federal entities, has been required to
prepare and submit a prescribed set of financial information to the
Treasury since 1950. However, fiscal year 1996 was the first year
the Navy's required financial reporting for its activities financed
using general funds included the more detailed descriptive
information called for under the CFO Act, as amended.
\4 DFAS, which provides accounting services for the military
services, was established in January 1991 to improve, standardize,
and consolidate DOD's finance and accounting policy, systems, and
operations.
BACKGROUND
------------------------------------------------------------ Letter :2
The CFO Act of 1990 requires DOD and other agencies covered by the
act to improve their financial management and reporting operations.
One of its specific requirements is that each agency CFO develop an
integrated agency accounting and financial management system,
including financial reporting and internal controls. Such systems
are required to comply with applicable principles and standards and
provide for complete, reliable, consistent, and timely information
needed to manage agency operations. Beginning with fiscal year 1991,
the CFO Act required agencies, including the Navy, to prepare
financial statements for their trust and revolving funds, and for
their commercial activities. The CFO Act also established a pilot
program under which the Army and Air Force, along with eight other
federal agencies or components, were to test whether agencywide
audited financial statements would yield additional benefits.
The Congress concluded that agencywide financial statements
contribute to cost-effective improvements in government operations.
Accordingly, the Government Management Reform Act of 1994 made the
CFO Act's requirements for annual audited financial statements
permanent and expanded it to include virtually the entire executive
branch. Under this legislative mandate, DOD is to annually prepare
and have audited DOD-wide and component financial statements
beginning with fiscal year 1996. The Office of Management and Budget
(OMB) has designated Navy and the other military services as
"components" that will be required to prepare financial statements
and have them audited. Because the Navy was not one of the pilot
agencies, fiscal year 1996 was the first year for which it was
required to prepare agencywide financial statements for its general
funds.
In October 1990, the Federal Accounting Standards Advisory Board
(FASAB) was established by the Secretary of the Treasury, the
Director of OMB, and the Comptroller General to consider and
recommend accounting standards to address the financial and budgetary
information needs of the Congress, executive agencies, and other
users of federal financial information. Using a due process and
consensus-building approach, the nine-member Board, which, since its
formation has included a member from DOD, recommends accounting
standards for the federal government. Once FASAB recommends
accounting standards, the Secretary of the Treasury, the Director of
OMB, and the Comptroller General decide whether to adopt the
recommended standards. If they are adopted, the standards are
published as Statements of Federal Financial Accounting Standards
(SFFAS) by OMB and by GAO. In addition, the Federal Financial
Management Improvement Act of 1996, as well as the Federal Managers'
Financial Integrity Act, requires federal agencies to implement and
maintain financial management systems that will permit the
preparation of financial statements that substantially comply with
applicable federal accounting standards.
NAVY FINANCIAL STATEMENT
PREPARATION AND AUDIT
RESPONSIBILITIES
---------------------------------------------------------- Letter :2.1
For fiscal year 1996, the Navy prepared two separate sets of
statements: one for its operations financed with general funds and
another for operations financed using funds provided through the
Defense Business Operations Fund (DBOF).\5
The Defense Finance and Accounting Service-Cleveland Center supported
the Navy in preparing the fiscal year 1996 financial statements for
activities financed by general funds and DBOF.
The Navy's general fund financial statements encompassed those
operations financed through 24 general fund accounts.\6 These general
funds included moneys the Congress appropriated to the Navy to pay
for related authorized transactions for periods of 1 year,
multi-years, or on a "no-year" basis.\7 The Navy's DBOF business
activities are financed primarily through transfers from the Navy's
Operations and Maintenance appropriations, based on the costs of
goods and services to be provided. The Navy has historically
operated many supply and industrial facilities using a working
capital fund concept. In fiscal year 1996, the Navy's business
activities comprised the largest segment of DOD's support operations
financed through DBOF.
The DOD Inspector General delegated responsibility for auditing
Navy's fiscal year 1996 financial statements to the Naval Audit
Service. By agreement with the DOD Inspector General, the Naval
Audit Service's fiscal year 1996 audit encompassed two separate
efforts, both limited to the Navy's Statement of Financial Position
and related footnotes.\8 The audit resulted in one set of reports
focused on the Navy's financial statement reporting for its
operations financed using general funds and one overall report
summarizing the results of its review of the Navy's DBOF-financed
operations.\9 The set of general fund reports included an overall
auditor's opinion report, an overall report on internal controls and
compliance with laws and regulations, and eight other more detailed
supporting reports.
Appendix I shows the status of Navy entities' financial statement
audits in fiscal year 1996. Appendix II provides a complete listing
of the Naval Audit Service reports issued as a result of its fiscal
year 1996 financial statement audit efforts.
--------------------
\5 The Navy was responsible for directly managing the goods and
services provided through the Navy's business areas, although they
were financed through DBOF. Consistent with this management
practice, on December 11, 1996, the Under Secretary of Defense
(Comptroller) reorganized DBOF and created four working capital
funds: Army, Navy, Air Force, and Defense-wide.
\6 General Fund accounts are composed of federal money not allocated
to any other fund account.
\7 "No-year" appropriations remain available for obligation for their
original purposes until expended.
\8 The Statement of Financial Position is intended to show the value
of the Navy's assets and liabilities. The Navy's other fiscal year
1996 financial statements, which were not audited by the Naval Audit
Service, were the Statement of Operations and Changes in Net Position
and the Statement of Cash Flows.
\9 The Naval Audit Service was not responsible for offering a
separate opinion on the Navy's DBOF operations. Instead, the results
of the Naval Audit Service's review of Navy's DBOF operations were
provided to the Department of Defense Inspector General for inclusion
in its auditors' report on DOD for the Defense Business Operations
Fund Consolidating Financial Statements. That report disclaimed an
opinion because of significant accounting system deficiencies and
unsound control procedures. The auditors concluded that DOD's
financial statements for its DBOF-funded operations could not be
relied on for making decisions or assessing performance.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
The objectives of this report were to (1) analyze the extent to which
financial deficiencies detailed in the auditors' reports may
adversely impact the ability of Navy and DOD managers and
congressional officials to make informed programmatic and budgetary
decisions, (2) provide examples of other issues of interest to budget
and program decisionmakers that can be identified by reviewing the
financial statements, and (3) describe the additional financial data
that, if complete and accurate, could be used to support future
decision-making when the Navy implements accounting standards that
are effective beginning with fiscal years 1997 and 1998.
To accomplish these objectives, we obtained and analyzed the Naval
Audit Service's opinion report and other supporting reports resulting
from its examination of the Navy's fiscal year 1996 financial
statements to identify data deficiencies and determine their actual
or potential impact on Navy programmatic or budgetary
decision-making. To do this, we compared the Naval Audit Service's
audit results with the findings and related open recommendations in
our previous reports that discuss the implications of Navy's
financial deficiencies. We also obtained additional details on the
Naval Audit Service's findings through discussions with cognizant
Naval Audit personnel, and we discussed the status of our previous
findings and recommendations with cognizant Navy and DFAS personnel.
Further, we independently reviewed Navy's financial statements to
identify other issues of interest to budget and program
decisionmakers, particularly those areas that may indicate the need
for future budget resources or that may provide the opportunity to
reduce resource requirements. Finally, we analyzed recently adopted
federal accounting standards to identify areas where Navy program and
budget managers will have additional useful information available to
support decision-making, if the standards are effectively implemented
as required.
Our work was conducted from December 1997 through February 1998 in
accordance with generally accepted government auditing standards. We
requested comments on a draft of this report from the Secretary of
Defense or his designee. On March 9, 1998, the Principal Deputy
Under Secretary of Defense (Comptroller) provided us with written
comments, which are discussed in the "Agency Comments and Our
Evaluation" section and are reprinted in appendix III.
IMPLICATIONS OF PERVASIVE
FINANCIAL PROBLEMS IDENTIFIED
BY AUDITORS
------------------------------------------------------------ Letter :4
To an even greater extent than the other military services, the Navy
has been plagued for years by troublesome financial management
problems involving billions of dollars. For example, our 1989
report\10 on the results of our examination of Navy's fiscal year
1986 financial reporting detailed numerous problems, such as
understating the value of Navy's assets by $58 billion, that we
attributed to carelessness and the failure to perform required
rudimentary supervisory reviews and reconciliations.
Seven years later, we found that such problems persisted. In our
report\11 on the Navy's fiscal year 1994 financial reporting, we
reported that the Navy had not taken advantage of the 5 years that
had passed since the enactment of the CFO Act or the experiences of
its counterparts, the Army and the Air Force, in preparing financial
statements. Our report identified a minimum of $225 billion of
errors in the $506 billion in assets, $7 billion in liabilities, and
$87 billion in operating expenses reported to the Department of the
Treasury in the Navy's fiscal year 1994 consolidated financial
reports. Consequently, we concluded that the Navy and DFAS had to
play "catch up" if they were to successfully prepare reliable
financial statements on the Navy's operations.
Most recently, the Naval Audit Service's April 1997 report on the
results of its audit of the Navy's fiscal year 1996 financial
reporting disclosed that errors, misstatements, and internal control
weaknesses continued. A number of the financial data and control
deficiencies disclosed in the Naval Audit Service's reports not only
adversely affect the reliability and usefulness of the Navy's
financial reporting but also have significant programmatic or
budgetary implications. Our analysis of the auditors' reports, along
with additional examples from our own audit work, is provided in the
following sections.
--------------------
\10 Financial Reporting: Navy's 1986 Consolidated Report on
Financial Position Is Unreliable (GAO/AFMD-89-18, April 6, 1989).
\11 CFO Act Financial Audits: Increased Attention Must Be Given to
Preparing Navy's Financial Reports (GAO/AIMD-96-7, March 27, 1996).
BUDGET DEVELOPMENT IS
UNDERMINED BY LACK OF
ACCURATE INVENTORY DATA
---------------------------------------------------------- Letter :4.1
The Naval Audit Service report on the results of its financial audit
of the Navy's fiscal year 1996 financial statements disclosed
numerous problems with inventory data reported by the Navy, including
the following.
"The Department of the Navy did not report an estimated $7.8
billion in Operating Materials and Supplies items aboard ships
or with Marine Corps activities on the FY 1996 Statement of
Financial Position."
We previously reported that DOD has spent billions of dollars on
inventory that is not needed to support war reserve or current
operating requirements and burdened itself with managing and storing
the unneeded inventory.\12 The financial reporting error disclosed by
the Naval Audit Service has implications for the budget process
because the inventory data used both for the financial statements and
as the starting point for the Navy's process to develop budget
requests for additional inventory are incomplete. A Stratification
Report is used to prepare data on the quantity and value of the
Navy's inventories, such as operating materials and supplies,
included in the Navy's financial statements. It is also used as the
starting point to forecast budget requirements for inventories that
will be needed in supply warehouses. To determine Navy-wide
inventory requirements, responsible managers must also have accurate,
reliable information on the quantities of inventories on ships,
including any quantities in excess of needs.
However, the auditors found that information on $7.8 billion in
inventories, including those on board ships was not included in the
Navy's year-end financial statements. This lack of Navy-wide
visibility over inventories substantially increased the risk that
Navy may have requested funds to obtain additional unnecessary
inventories because responsible managers did not receive information
that excess inventories were already on hand in other locations.
This happened in the past, as discussed in our report\13 on financial
audit work we performed to help the Navy prepare for the fiscal year
1996 audit. We found that for fiscal year 1994, the Navy's inventory
item managers did not have adequate visibility over $5.7 billion in
operating materials and supplies on board ships and at 17
redistribution sites. Approximately $883 million of these
inventories were excess to current operating allowances or needs.
For the first half of fiscal year 1995, inventory item managers had
ordered or purchased items for some locations that had been
identified as excess at other locations and thus were already
available. As a result, we identified unnecessary spending of at
least $27 million. Further, a review of inventory item managers'
forecasted spending plans for the second half of fiscal year 1995 and
fiscal years 1996 and 1997 found planned purchases of items already
available in excess at other locations could result in the Navy
incurring approximately $38 million of unnecessary costs.
Our recent discussions with Navy officials confirmed that as of
December 1997, the process used to accumulate inventory status
information still did not provide inventory managers complete
information on operating material and supplies inventories,
particularly information on the quantities of Navy operating and
supply inventories on ships. As a result, the Navy's budget requests
for inventory may continue to not accurately reflect its needs.
--------------------
\12 High-Risk Series: Defense Inventory Management (GAO/HR-97-5,
February 1997).
\13 Navy Financial Management: Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, August 16, 1996).
NAVY COULD NOT ACCOUNT FOR
ITS CASH BALANCE WITH
TREASURY
---------------------------------------------------------- Letter :4.2
The Naval Audit Service's fiscal year 1996 audit report stated the
following.
"The Department of the Navy could not effectively account for
the balance in the Fund Balance with Treasury because Defense
Finance and Accounting Service - Cleveland Center had not
developed an adequate accounting system to do so. Consequently,
the Department of the Navy cannot provide reasonable assurance
that: (1) the $64.8 billion account balance reported on the FY
1996 Statement of Financial Position presents fairly its
financial position, or (2) transactions that could cause
Antideficiency Act violations would be detected as required by
Department of Defense guidance. Defense Finance and Accounting
Service principally used Department of the Treasury data in
reporting the Fund Balance with Treasury because the data was
considered more reliable than the data provided by the Navy's
accounting systems. Department of Defense guidance requires
that the Fund Balance with Treasury be supported by records of
the entity."
This situation is similar to an individual not being able to
reconcile his or her checkbook register to the monthly statement
received from the bank. Just as with an individual's checkbook,
reconciliations are necessary to ensure that any differences are
identified, the cause researched, and appropriate corrective action
taken. Such reconciliations allow the individual to identify not
only clerical errors but potential fraudulent misuse of his or her
account. For example, blank checks can be stolen and forged and the
amounts on otherwise legitimate checks can be altered. The potential
consequences of the lack of regular reconciliations is increased
dramatically for the Navy given that the agency reported $63 billion
in fiscal year 1996 general fund expenditures and also has had
continuing problems in properly recording billions of dollars of
transactions.
The lack of complete records for all disbursements and regular
reconciliations can also result in the Navy spending more funds than
it has available. Federal agencies are required to record
obligations as legal liabilities are incurred and make payments from
the associated appropriations within the limitations established by
the Congress. To the extent that the Navy does not properly record
all its disbursements, its ability to ensure that it will have enough
funding available to pay for its expenses will continue to be
adversely affected. This is similar to an individual not properly
maintaining his or her checkbook register by neglecting to record
checks written and, at the end of the month, finding that the account
is now overdrawn.
As noted by the auditors, the lack of controls over the Fund Balance
with Treasury may result in Antideficiency Act violations.\14 In
addition, in our March 1996 report,\15 we disclosed that problems in
keeping records on Navy's disbursements resulted in understating by
at least $4 billion the federal government's overall budget deficit
reported as of June 30, 1995. In the current environment, such
errors could make the difference between the federal government
reporting a budget deficit or surplus.
--------------------
\14 Under the Antideficiency Act, federal agency officials may not
"make or authorize an expenditure or obligation exceeding an amount
available in an appropriation or fund" (31 U.S.C. 1341).
\15 CFO Act Financial Audits: Increased Attention Must Be Given to
Preparing Navy's Financial Reports (GAO/AIMD-96-7, March 27, 1996).
ERRONEOUS AND DUPLICATE
PAYMENTS IDENTIFIED BY
AUDITORS AFFECT AMOUNT OF
FUNDS AVAILABLE
---------------------------------------------------------- Letter :4.3
The extensive problems identified in the Navy's disbursement process
also resulted in erroneous and duplicate payments to vendors, as
stated in the auditors' report.
"Defense Finance and Accounting Service Operating Locations
processed 110 duplicate or erroneous vendor payments for the
Department of the Navy. Of these, 62, valued at $2.5 million,
had not been previously identified for collection....The
improper payments were the result of input errors, failure to
conduct reviews, ambiguous reports, and improper processing of
invoices....The $2.5 million in duplicate or erroneous payments
we identified and the Operating Locations collected represent
funds that can be put to better use."
The auditors' findings were based on a limited judgmental sample of
about 400 payments out of a universe of about 1.2 million payments
Navy made during fiscal year 1996. DOD officials informed us that
subsequent investigation showed that not all of the $2.5 million were
actually duplicate or erroneous payments that could be put to better
use. However, the Naval Audit Service has not yet validated these
results.
Nonetheless, the control weaknesses identified, along with our
previous work on DOD's long-standing problems with overpayments to
contractors and vendors, suggest that significant additional,
undetected erroneous payments likely exist. Most recently, we
reported\16 that for fiscal years 1994 through 1996, contractors
returned checks to DFAS totaling about $1 billion a year. These
related to payments from the Navy, the other military services, and
other Defense agencies. For the first 7 months of fiscal year 1997,
DFAS's Columbus Center received checks returned by contractors
totaling about $559 million. DOD's reliance on contractors to
identify these overpayments substantially increases the risk that it
is incurring unnecessary and erroneous costs. Because of our
continuing concerns with control breakdowns in the contract payment
area across the department, we have continued to monitor this area as
one of the high-risk federal areas most vulnerable to waste, fraud,
abuse, and mismanagement.\17
--------------------
\16 DOD Procurement: Funds Returned by Defense Contractors
(GAO/NSIAD-98-46R, October 28, 1997).
\17 High-Risk Series: Defense Contract Management (GAO/HR-97-4,
February 1997).
LACK OF RELIABLE FINANCIAL
INFORMATION IMPAIRS
MANAGEMENT OF NAVY'S
BUSINESSLIKE OPERATIONS
---------------------------------------------------------- Letter :4.4
By establishing DBOF in 1991, the Department of Defense intended to
focus management attention on the total costs of its businesslike
support organizations to help manage these costs more effectively.
DBOF was modeled after businesslike operations in that it was to
maintain a buyer-seller relationship with its military customers,
primarily the Navy and the other military services. DBOF-funded
operations were to operate on a break-even basis by recovering the
current costs incurred in conducting its operations, primarily from
operations and maintenance funding provided by its customers.
The Naval Audit Service reported a number of serious financial
deficiencies in its fiscal year 1996 review of Navy's DBOF
activities.
"[I]nternal controls were not adequate to detect or prevent
errors. For example, inventory records were inaccurate; fixed
assets were not capitalized or depreciated properly;
depreciation on fixed assets at closing activities was not
included on financial statements; payables were not always
processed accurately or timely; accruals were inaccurate because
of lack of reconciliations; liabilities were inaccurate because
of untimely processing and bookkeeping errors; and Military
Sealift Command financial accounting information was inaccurate
due to inadequate general ledger and subsidiary ledger controls
and accounting records."
The following examples of data deficiencies, when considered along
with the Naval Audit Service's overall assessment of material
weaknesses in the Navy's DBOF operations, have an adverse effect on
the Navy's ability to reliably determine DBOF's net operating
results. These financial deficiencies adversely affect not only the
Navy's DBOF financial reporting but also its ability to achieve the
goal of operating on a break-even basis. Reliable information on the
DBOF's net operating results is a key factor in setting the prices
DBOF charges its customers. As a result of the problems pointed out
by the Naval auditors, neither DOD nor congressional officials can be
certain (1) of actual DBOF operating results and (2) if the prices
DBOF charges its customers are reasonable for the goods and services
provided.
Our recent reporting demonstrates the Navy's continuing problems in
achieving the goal of operating its businesslike activities on a
break-even basis. For example, in March 1997, we reported\18 that
DBOF management's inability to stem continuing losses occurred as a
result of, among other factors, inaccurate accounting information
concerning the Fund's overhead costs. More recently, in an October
1997 report,\19 we determined that because one of the Navy's DBOF
business areas did not require its customers to pay for all storage
services provided its customers--as is the common practice in most
businesslike operations--customers had no incentive to either
relocate or dispose of unneeded ammunition and thereby reduce their
costs. To the extent that the Navy's DBOF operations incur losses,
future appropriations may be required to cover those losses. DOD
officials informed us that they used these financial statements and
related audit report findings in their efforts to reduce costs and
streamline the Navy's ordnance business area.
Specific examples of problems identified by Naval Audit Service
auditors in its fiscal year 1996 financial review of the Navy DBOF
included the following.
-- A sample comparison of inventory records and on-hand stock
revealed that quantities actually in storage differed from
inventory records about 22 percent of the time. The auditors
reported that management took action to correct the data
deficiencies it reported and that action was underway to correct
the systemic causes for the discrepancies indentified. In
discussing the possible implications of its findings, the Navy
auditors reported that "Inaccurate inventory records distort
financial records and financial reports used by senior managers.
This, in turn, can result in decisions to buy wrong quantities,
which could cause excesses or critical shortages of material."
-- Depreciation expenses associated with fixed assets at one
location were understated by a net amount of about $5 million.
This occurred primarily because of a misinterpretation of
guidance on reporting depreciation expenses incurred during the
year on assets that were to be transferred from that location
before the end of the fiscal year. While it did not quantify
the extent of depreciation expense understatements, the Naval
Audit Service also reported that additional reviews revealed
that at least eight other locations also misinterpreted the
guidance. In reporting on the implications of this deficiency,
the Naval Audit Service stated, "Failure to report depreciation
at closing activities understates current year costs and prior
year losses that could be eligible for recoupment from Operation
and Maintenance, Navy funds . . . . Ultimately, costs that
are not recouped will have a direct effect on the cash position
of the Department of the Navy Defense Business Operations Fund."
This means that to the extent that the Navy was undercharged as
a result of the depreciation understatement, the Navy would have
more Operation and Maintenance funds available than it should.
-- The Navy's DBOF maintained over 2,300 flatracks (containers used
to transport Army cargo on Navy ships) solely for the benefit of
the Army but did not recover the related estimated costs. The
auditors reported that the costs to maintain these flatracks
"should have been funded by Operation and Maintenance, Army
funds. As a result of the failure to collect reimbursement, the
Department of Navy used Operation and Maintenance, Navy funds to
support the Army requirements. The funds used were estimated to
be $640,000 for Fiscal Year 1997, and taking corrective action
could result in the Department of the Navy putting $4.1 million
to better use over a 6-year period." Although this situation did
not affect the federal government's overall financial position,
this means that the Navy augmented Army budgetary resources by
paying for a service that should have been paid with Army funds.
-- The Navy's DBOF accounting records included at least $5.8
million in invalid "Other Non-Federal (Governmental)
Liabilities." The auditors reported that "Invalid liabilities
cause funds to be unnecessarily set aside either to pay invoices
already paid or to plan for costs not yet incurred. Therefore,
this $5,793,496 represents potential funds that can be put to
better use." This means that the Navy's operation and
maintenance appropriation requirements are less than previously
recognized because the Navy will not be required to pay these
"invalid liabilities."
--------------------
\18 Navy Ordnance: Analysis of Business Area Price Increases and
Financial Losses (GAO/AIMD/NSIAD-97-74, March 14, 1997).
\19 Navy Ordnance: Analysis of Business Area Efforts to Streamline
Operations and Reduce Costs (GAO/AIMD/NSIAD-98-24, October 15, 1997).
IMPLICATIONS OF FINANCIAL
STATEMENT DISCLOSURES
------------------------------------------------------------ Letter :5
Despite the shortcomings in the Navy's financial statements, we were
able to identify several financial issues that may be of interest to
budget and program managers. Specifically, even with the
acknowledged deficiencies in the Navy's financial data, some areas
raise questions about whether future budget resources may be needed
or whether there may be opportunities to reduce resource
requirements.
The following are examples of footnote disclosures and the kind of
information that can be gleaned from them.
Figure 1: Excerpts From "Note
5. Accounts Receivable, Net"
(See figure in printed
edition.)
Figure 1 provides excerpts from the note intended to explain how the
accounts receivable balance presented on the Statement of Financial
Position was calculated. Accounts receivable, which represents
amounts owed the Navy, is significant to program managers and budget
officials. If the amount is overstated, the Navy may not receive
amounts that it intended to use to support its operations and may
therefore need to obtain additional funding. If the amount is
understated, the Navy may lack the visibility necessary to ensure
that it is taking appropriate action to collect all amounts due it.
For example, the table shows a 14.5 percent allowance for
appropriation 1453 (military personnel). This means that nearly 15
percent of the funds Navy personnel owed the Navy were not likely to
be collected. In some cases, better and more timely collection of
these types of receivables may result in the recovery of amounts that
could be used to reduce the Navy's request for funds to support its
military personnel or provide funds to meet other critical resource
needs.
The note also refers to negative governmental non-entity receivables
of $26.7 million. A negative receivable is an unusual disclosure,
indicating that the Navy does not know the source of almost $27
million it collected. These funds cannot be used until the source of
the collection is determined. If these collections are owed the
Navy, recording them improperly and not taking timely action to
collect these amounts may have resulted in requests for budgetary
resources when these collections could have been used to meet those
requirements.
Figure 2: Excerpts From "Note
31. Other Disclosures"
(See figure in printed
edition.)
Figure 2 shows excerpts from the note that provides information on
over $4 billion of cancelled appropriations that the Navy reopened in
fiscal year 1996. The note does not clearly indicate how much or for
what purpose the cancelled accounts were used.
The Congress has long-standing concerns with agencies' use of funds
after their expiration. In 1990, the Congress determined DOD was
expending funds from expired accounts without sufficient assurance
that authority for such expenditures existed or in ways that the
Congress did not intend. To end these abuses, the Congress enacted
account closing provisions in the fiscal year 1991 National Defense
Authorization Act. The act closes appropriations 5 years after the
expiration of their availability for obligation. Once closed, the
appropriations are not available for obligation or expenditure for
any purpose. In a series of decisions,\20 the Comptroller General
has stated, however, that agencies may adjust their accounting
records for closed appropriations to record transactions that
occurred but were not recorded before closure and to correct obvious
clerical mistakes within a reasonable period of time after closure.
For example, if an agency discovers, after an appropriation closes,
that it had failed to record a disbursement that it had properly made
from an appropriation before closure, the agency is expected to
adjust its accounting records to reflect that disbursement.
Further details would be necessary to assess the implications of the
Navy's note regarding the "reopening" of $4 billion in cancelled
appropriations. This information may be related to the Navy's
continuing problems in accounting for its disbursements and may
indicate a weakening in the mechanism put in place by the Congress to
ensure control over cancelled appropriations.
Figure 3: Note 20. Net
Position
(See figure in printed
edition.)
Navy's fiscal year 1996 Statement of Financial Position includes
about $61 billion in "Unexpended Appropriations." Note 1R of the
financial statements defines unexpended appropriations as "amounts of
authority which are unobligated and have not been rescinded or
withdrawn and amounts obligated but for which neither legal
liabilities for payments have been incurred nor actual payments
made." Note 20, as shown in figure 3, disclosed that at the end of
fiscal year 1996, Navy had an unobligated balance available of about
$13 billion and about $45 billion in undelivered orders, which
represent amounts obligated but not expensed. These amounts, along
with the $3 billion in unavailable unobligated appropriations
included in the note, tie back to the $61 billion reported in the
financial statements.
This type of information, along with other required disclosures,
could serve as a key indicator of how well the Navy is managing the
funds provided by the Congress. A portion of the amounts identified
as unexpended appropriations relate to funding provided through
procurement or other appropriations that are available for obligation
for more than 1 year to fund Navy activities. However, this
information, along with other required disclosures, can be used to
monitor the Navy's long-standing problems in fully utilizing its
resources. For example, OMB requires that agencies disclose the
amount of unexpended cancelled appropriations in the note on
contingent liabilities. Although the Navy's fiscal year 1996
financial statement reporting did not include this information, the
Navy's year-end reports to the Treasury state that the Navy cancelled
$1.8 billion and $1.5 billion in unexpended appropriations for fiscal
years 1996 and 1997, respectively. Also, the Naval Audit Service has
issued several reports that highlighted the Navy's ongoing problems
in promptly deobligating unneeded funds that could be better utilized
for critical Navy mission needs. In addition, beginning in fiscal
year 1998, the Navy will be required to prepare a Statement of
Budgetary Resources, which will provide decisionmakers with added
information on the status of the Navy's use of its resources.
--------------------
\20 See Comptroller General Decisions 72 Comp. Gen. 343 (1993), 72
Comp. Gen. 347 (1994), and 73 Comp. Gen. 338 (1994) and
B-251287.3, November 1, 1995.
IMPROVED FINANCIAL
STATEMENTS WILL ENHANCE
THEIR USEFULNESS AS A
MANAGEMENT TOOL
---------------------------------------------------------- Letter :5.1
Although Navy officials represented their fiscal year 1996 financial
statements--the first-ever attempt to prepare comprehensive financial
statements for the Navy--to be based on the best information
available, the usefulness of Navy's financial statement disclosures
is limited at best due to the previously discussed problems with
accuracy, reliability, and completeness.
The footnotes to the Navy's financial statements, which should serve
as an excellent source of relevant, detailed information on its
operations, are lacking in detail and present abnormal information.
For example, the statements included a number of footnotes that
provided only summary charts or tables or grossly abnormal balances,
such as large negative balances in what would normally be expected to
be accounts with positive balances, without any accompanying detail
or explanation. In addition, because fiscal year 1996 was a
first-year effort, the Navy's general fund financial statements do
not offer the benefit of comparative data on the prior year, which
can provide useful analysis on trends and changes from year to year.
As the Navy and DFAS improve on their first-year efforts to develop
reliable financial statements for the Navy, and when the problems
identified in the auditors' reports are corrected, knowledgeable
users of the Navy's financial statements will be better able to
identify key issues that may be of interest to budget and program
managers.
EFFECTIVE IMPLEMENTATION OF NEW
ACCOUNTING STANDARDS WOULD
PROVIDE USEFUL FINANCIAL DATA
------------------------------------------------------------ Letter :6
Recently adopted federal accounting standards are intended to enhance
federal financial statements by requiring that government agencies
show the complete financial results of their operations and provide
relevant information on agencies' true financial status. In addition
to the new requirement for the Statement of Budgetary Resources
previously mentioned, two other recently adopted accounting standards
are particularly significant in terms of the additional information
that could be made available to Navy budget and program managers in
the future, if the standards are implemented effectively.
Specifically, the standards call for reporting on the Navy's costs
associated with (1) the disposal of various types of assets,
including environmental clean-up costs, and (2) deferred maintenance.
Issued in December 1995 and effective beginning with fiscal year
1997, Statement of Federal Financial Accounting Standard (SFFAS) No.
5, Accounting for Liabilities of the Federal Government, requires the
recognition of a liability for any probable and measurable future
outflow of resources arising from past transactions. The statement
defines probable as that which is likely to occur based on current
facts and circumstances. It also states that a future outflow is
measurable if it can be reasonably estimated. Because disposal costs
are both probable and measurable, they are to be reported under SFFAS
No. 5. The Congress has recognized the importance of accumulating
and considering disposal cost information. In the National Defense
Authorization Act for Fiscal Year 1995, the Congress required DOD to
develop life-cycle environmental costs, including demilitarization
and disposal costs, for major defense acquisition programs. This
means that the Navy is required to estimate and report, as part of
the information presented in its financial statements, the estimated
cost to dispose of its major weapon systems and the cost to clean up
the environmental hazards found on its land and facilities.
In our recent report\21 on DOD's efforts to implement the new
reporting requirements as they relate to the disposal of nuclear
submarines and ships, we stated that this reported liability could be
made more meaningful to decisionmakers if it was presented by
approximate time periods when the disposals are expected to occur.
Such information could provide important context for congressional
and other budget decisionmakers on the total liability by showing the
annual impact of disposals that have already occurred or are expected
to occur during the budget period. Furthermore, if the time periods
used to present these data were consistent with the timing of when
funding was being requested for disposal costs as reflected in budget
justification documents, such as DOD's Future Years Defense Program,
this type of disclosure would provide a link between budgetary and
accounting information, one of the key objectives of the CFO Act.
In addition, SFFAS No. 6, Accounting for Property, Plant, and
Equipment, issued November 30, 1995, and effective beginning with
fiscal year 1998, requires recognition of deferred maintenance
amounts by major class of asset along with disclosure of the method
used to measure the extent of deferred maintenance needed for each
asset class. In our recent report\22 on DOD's efforts to implement
this standard as it relates to Navy ships, we stated that accurate
reporting of deferred maintenance is important for key decisionmakers
such as the Congress, DOD, and Navy managers and can be an important
performance indicator of mission asset condition, which is a key
readiness factor. While the existence of deferred maintenance may
indicate a need for additional resources for maintenance, such
resources may already be available within the current funding of the
military services.
As Navy and DFAS move to put in place the systems and procedures
required to comply with these new accounting standards, they will not
only be better able to prepare a more useful set of Navy financial
statements but also to better support more informed programmatic and
budgetary decision-making in these areas.
--------------------
\21 Financial Management: Factors to Consider in Estimating
Environmental Liabilities for Removing Hazardous Materials in Nuclear
Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997).
\22 Financial Management: Issues to Be Considered by DOD in
Developing Guidance for Disclosing Deferred Maintenance on Ships
(GAO/AIMD-98-46, February 6, 1998).
CONCLUSIONS
------------------------------------------------------------ Letter :7
Currently, the Navy is unable to produce accurate financial
information needed to support either its financial statements or
operations and budgetary decision-making. However, through the
impetus provided by the CFO Act, it has an opportunity to better
integrate financial information into budget and operational
management decisions. To seize this opportunity, the Navy and DFAS
must establish a greater linkage between financial statement
preparation and reporting processes, and resource allocation and
oversight decisions. However, such a linkage will yield the benefits
envisioned by the CFO Act only if the Navy's financial information is
dramatically improved to the point where it is generated by a
systematic process and its accuracy can be verified. Auditable
financial statements produced by this type of disciplined process
provide the Congress and managers with assurance that the information
being used to support the statements is accurate and can therefore be
used with confidence for day-to-day decision-making.
In this context, efforts to produce auditable financial statements on
an annual basis should be viewed not as an end in itself but as the
capstone of a vigorous financial management program supported by
effective information systems that produce accurate, complete, and
timely information for decisionmakers throughout the year. Achieving
the far-reaching financial management goals established by the CFO
Act, particularly in light of the serious and widespread nature of
the Navy's long-standing financial problems, will only be possible
with the sustained, demonstrated commitment of top leaders in DOD,
the Navy, and DFAS.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :8
In commenting on a draft of this report, DOD stated that it is firmly
committed to providing taxpayers and the Congress with accurate
financial statements that can pass rigorous audit tests. DOD also
said that for some time it has acknowledged that significant
improvements are required in its financial management systems and
reporting, and that many of the problems found during the audits of
the Navy's fiscal year 1996 financial statements remain. It also
stated that financial management is a high priority in DOD and that
it is working to improve the basic financial procedures and systems
used to collect, categorize, and report financial transactions.
DOD expressed concern with what it termed the report's implication
that the Navy's budget is overstated or could be reduced because its
financial statements omitted a line, excluded a footnote, or were
otherwise deficient. DOD stated that such an implication is grossly
misleading and undermines the rigorous planning, programming, and
budgeting process within both DOD and the Navy. In addition, DOD
maintained that the report leaves the erroneous impression that there
have been no significant improvements in the Navy's financial
operations since our review of the Navy's fiscal year 1986 financial
reports. Furthermore, DOD stated that the report makes broad
assertions that deficiencies in the Navy's financial statements
adversely impact the ability to make informed programmatic and
budgetary decisions. In this regard, DOD contended that the report
did not acknowledge that many of the deficiencies cited, including
those from audit reports, are reviewed as part of the Navy's
day-to-day management and internal budget review processes, and again
by the Office of the Secretary of Defense.
We disagree that our report implies that the Navy's budget is
overstated or could be reduced merely because data were omitted from
the Navy's financial statements or because the statements were
deficient in some other way. Our report focuses on deficiencies in
the management systems and processes that are used to support not
only the Navy's financial statement preparation, but its budgetary
and program decision-making. As a result, the deficiencies discussed
in our report focus on those errors or omissions in the Navy's
financial reporting that also raise serious questions about whether
decisionmakers had sufficiently reliable information available to
make informed budgetary resource allocation decisions.
With respect to DOD's assertion that our report provides a misleading
impression that there have been no significant improvements in Navy's
financial operations, our finding that the Navy has been plagued with
troublesome financial management problems for many years is
warranted. We have not seen the level of expected improvement in the
years that have passed since our report on the Navy's fiscal year
1986 financial reporting. While we are encouraged with DOD's stated
high priority commitment to reforming its financial operations,
significant errors, omissions, and misstatements remain uncorrected,
as evidenced by the extent and nature of the deficiencies pointed out
in auditors' reports on their examination of the Navy's fiscal year
1996 financial statements. Efforts to reform DOD's financial
operations, however well-intentioned, have not as yet resulted in the
level of improvements needed to put in place a disciplined financial
operation that will not only yield accurate, reliable information for
the Navy's financial statements, but also support its program and
budget decision-making. It is for this reason that DOD financial
management is on our list of high-risk government programs.\23
Lastly, we are encouraged that the Navy auditors' findings have been
used and that the Navy has found them helpful in developing budget
estimates. In addition, while the Navy's planning, programming, and
budgeting process was not the focus of the review requested for this
report, we recognize that it has been in place for many years and is
intended to provide a thorough review of all pertinent information,
including the implications of auditors' findings, in determining Navy
budget estimates. However, the Navy should not be forced to rely on
such alternative data development and validation procedures as a
proxy for a systematic, disciplined financial management and
reporting process. Such a process would provide accurate and
reliable financial data to support the development of the Navy's
financial statements, as well as day-to-day program and budget
decision-making.
--------------------
\23 High-Risk Series: Defense Financial Management (GAO/HR-97-3,
February 1997).
---------------------------------------------------------- Letter :8.1
We are sending copies of this report to the Ranking Minority Member
of the House Committee on the Budget, the Director of the Office of
Management and Budget, the Secretary of Defense, the Secretary of the
Navy, and the Director of the Defense Finance and Accounting Service.
We will also send copies to other interested parties upon request.
Please contact me at (202) 512-9095 if you or your staff have any
questions concerning this report. Major contributors are listed in
appendix IV.
Sincerely yours,
Lisa G. Jacobson
Director, Defense Audits
AUDIT STATUS OF NAVY ENTITIES FOR
FISCAL YEAR 1996
=========================================================== Appendix I
(See figure in printed
edition.)
NAVAL AUDIT SERVICE REPORTS
RESULTING FROM FISCAL YEAR 1996
AUDIT
========================================================== Appendix II
GENERAL FUND REPORTS
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Report on Auditor's Opinion (Report No. 022-97, March 1, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Report on Internal Controls and Compliance with Laws and Regulations
(Report No. 029-97, April 15, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Fund Balance with Treasury and Cash and Other Monetary Assets (Report
No. 004-98, October 31, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Property, Plant, and Equipment, Net (Report No. 051-97, September
25, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Government Property Held by Contractors (Report No. 046-97, August
14, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Ammunition and Ashore Inventory (Report No. 048-97, September 25,
1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Advances and Prepayments, Non-Federal (Report No. 049-97, September
19, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Accounts Receivable, Net (Report No. 045-97, August 12, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Accounts Payable and Accrued Payroll and Benefits (Report No.
006-98, November 14, 1997).
Department of the Navy Fiscal Year 1996 Annual Financial Report:
Department of Defense Issues (Report No. 015-98, December 19, 1997).
DEFENSE BUSINESS OPERATIONS FUND
REPORT
Fiscal Year 1996 Consolidating Financial Statements of the Department
of the Navy Defense Business Operations Fund (Report No. 040-97,
June 16, 1997).
(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(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 March 9, 1998.
GAO COMMENTS
1. See the "Agency Comments and Our Evaluation" section of this
report.
2. Our analysis of the Naval Audit Service reports considered the
Under Secretary of Defense (Comptroller) and Defense Finance and
Accounting Service comments that were included in the reports.
3. As stated in the report, the Navy, like all other federal
entities, has been required to prepare and submit a prescribed set of
financial information to the Treasury since 1950. In addition, the
federal financial accounting standards to which DOD refers were, for
the most part, not required or implemented in the fiscal year 1996
statements. We refer to these standards only in the report's
discussion of financial data that will be available when DOD fully
implements these provisions.
4. The report was revised to indicate that the checks returned to
DFAS applied not only to the Navy, but also to the other military
services and Defense agencies.
5. To ensure proper payment, financial management personnel are
dependent upon obtaining accurate and complete contract information.
To the extent that the financial systems do not contain accurate and
complete information from feeder systems or the feeder systems
provide erroneous information on, for example, contract
modifications, overpayments can occur.
6. As discussed in our August 1996 report, we disagree that
operating materials and supplies held on board ships are considered
to be in the hands of end users. These items should be reported on
the Navy's financial statements as operating materials and supplies.
In addition, we agree that decisions on inventory purchases are not
based on amounts reported in the Navy's financial statements (or, as
in the case of the $7.8 billion in operating materials and supplies,
amounts excluded from the statements). However, as discussed in our
report, the Navy auditors and we have found deficiencies in the
management systems and processes which are used not only to support
the inventory values included in the Navy's financial statements, but
also to support the Navy's budgetary and program decision-making
concerning needed inventories. As a result, the deficiencies
discussed in our report concern not just errors or omissions in the
Navy's financial reporting, but also raise questions about whether
decisionmakers had sufficiently reliable information available on
which to make informed budgetary resource allocation decisions.
7. Undistributed collections and disbursements represent amounts
reflected in Treasury's records but not recorded by the Navy. The
Navy then recorded these amounts in its department-level accounting
records without having corroborating support in the form of
transaction detail needed to verify that these amounts accurately
represent Navy activities. As a result, the Navy does not know
whether its records are accurate.
8. While DOD has efforts underway that are intended to match
disbursements against valid obligations before payment, this is not
currently required for all payments. Consequently, until DOD can
establish controls to ensure that all disbursements can be related to
a valid obligation at the time of payment, DOD cannot rely on its
obligation records for funds control purposes and will continue to
lack assurance that it will have sufficient funding available to pay
its expenses.
9. DOD's comment concerning an adequate accounting system at the
DFAS Cleveland Center relates to a quote from a Naval Audit Service
report and has no impact on the point being made in our report.
10. We disagree that simply recording obligations ensures that fund
balances are not exceeded. DOD, under law, must maintain accurate
and reliable obligation and disbursement records. The Antideficiency
Act prohibits not only overobligations but overexpenditures as well.
Obligated balances forecast expenditures and, in that regard, offer
some measure of funds control by, in effect, "setting aside" funds
for these projected amounts. However, even if all obligations have
been recorded, actual expenditures can be more (or less), making it
necessary to adjust obligated amounts when payment occurs. By not
matching payments to obligations at the time of disbursement, the
Navy has undermined this control feature.
11. The report was revised to omit reference to the specific
Antideficiency Act violations previously reported by the Navy.
12. The report was revised to indicate that DOD officials stated
that the entire $2.5 million discussed in the Naval Audit Service
report may not represent erroneous or duplicate payments.
13. After an appropriation cancels, Public Law 101-510 permits
agencies to liquidate obligations that had been properly charged to
the appropriation during its period of availability. However, the
liquidation must be from current funds available for the same
purpose, and the agency may not charge expenditures against such
accounts in excess of the lesser of 1 percent of that appropriation
or the unexpended balance of the cancelled appropriation. To track
compliance with these limitations, agencies need to maintain in their
records for the cancelled appropriation memorandum account entries to
track transaction amounts.
We do not agree that maintaining memorandum account balances requires
the reopening of cancelled accounts, as implied by DOD's comments.
Public Law 101-510 prohibits agencies from using cancelled
appropriations for any purpose whatsoever. As indicated in our
report, reopening cancelled accounts provides an opportunity for an
agency to inappropriately charge current disbursements against
reopened cancelled appropriations, thereby weakening the controls the
Congress established in Public Law 101-510.
14. While information on the status of the Navy's use of its
resources is currently available, it has not been audited. Only when
this information is compiled through a disciplined process that can
withstand the rigors of a financial audit test will congressional and
Navy decisionmakers have assurance that this information is accurate
and reliable.
15. We agree that OMB is responsible for providing minimum guidance
for all agencies to follow in preparing their financial statements.
However, it remains the responsibility of each agency to expand on
these minimum requirements, as appropriate, so that its financial
statements (1) provide sufficiently detailed information on the
unique circumstances and operations of that agency and (2) are most
relevant and informative for oversight officials and other users.
16. While the Navy was required to record a liability for certain
environmental cleanup costs based on existing accounting standards at
the date of the financial statements, this report addresses audited
information that will be available upon full implementation of the
federal financial accounting standards. As a result, the report was
revised to delete reference to a Naval Audit Service finding
concerning reporting a projected environmental cleanup cost
liability.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.
Geoffrey Frank, Assistant Director
George Botic, Senior Auditor
Matthew Femia, Auditor
Francine DelVecchio, Communications Analyst
ATLANTA FIELD OFFICE
William Cordrey, Senior Auditor
*** End of document. ***