Financial Management: Improvements in Air Force Fund Balance With
Treasury Reconciliation Process (18-JUL-01, GAO-01-847).	 
								 
The Department of Defense (DOD) and its components have had	 
longstanding problems in reconciling the transaction activity in 
their Fund Balance with Treasury accounts. These reconciliations 
continue to be a significant challenge facing DOD and contribute 
to DOD's inability to prepare auditable financial statements and 
to DOD financial management being a high-risk area. In August	 
1998, DOD developed a strategic plan to improve the		 
reconciliation process for the activity in its Fund Balance with 
Treasury accounts. DOD reported that the Defense Finance and	 
Accounting Service's (DFAS) Denver Center, which provides support
for the Air Force, has made the most progress in implementing	 
this plan, and that its process for reconciling the activity in  
the Air Force General Funds is more comprehensive than that of	 
the other DOD components. In this report, GAO reviews DFAS	 
Denver's reconciliation processes to determine (1) the progress  
DFAS Denver has made in improving its processes for reconciling  
the transaction activity in the Air Force General Funds and (2)  
whether the DFAS Denver reconciliation concepts, policies, and	 
practices could be used in reconciling the Fund Balance with	 
Treasury activity of other DOD components. GAO found that (1)	 
DFAS Denver has made progress in developing a comprehensive	 
reconciliation process for the Air Force General Funds' 	 
transaction activity in the Fund Balance with Treasury accounts, 
primarily by increasing management attention and (2) the concepts
and policies developed thus far by DFAS Denver to identify and	 
resolve transaction differences could improve the reconciliation 
processes of the other DFAS centers that have not made as much	 
progress.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-847 					        
    ACCNO:   A01410						        
  TITLE:     Financial Management: Improvements in Air Force Fund     
             Balance With Treasury Reconciliation Process                     
     DATE:   07/18/2001 
  SUBJECT:   Accounting procedures				 
	     Auditing procedures				 
	     Auditing standards 				 
	     Financial statement audits 			 
	     Fund audits					 
	     General fund accounts				 
	     Air Force General Fund				 
	     DFAS Merged Accounting and Fund			 
	     Reporting System					 
								 
	     DOD Financial Management Improvement		 
	     Plan						 
								 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-01-847
     
GAO United States General Accounting Office

Report to Agency Officials

July 2001 FINANCIAL MANAGEMENT

Improvements in Air Force Fund Balance With Treasury Reconciliation Process

GAO- 01- 847

Page 1 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

July 18, 2001 Mr. Thomas R. Bloom Director Defense Finance and Accounting
Service

Mr. Zack E. Gaddy Director Defense Finance and Accounting Service- Denver
Center

The Department of Defense (DOD) and its components have had longstanding
problems in reconciling the transaction activity in their Fund Balance with
Treasury accounts. These reconciliations continue to be a significant
challenge facing DOD and contribute to DOD?s inability to prepare auditable
financial statements and to DOD financial management being a high- risk
area. 1 We recently testified 2 that DOD could not reconcile billions of
dollars of differences between its available fund balances and the amounts
reported by the Department of the Treasury for those accounts. Until DOD and
its components can reconcile the receipt and disbursement activity and
demonstrate the validity of their Fund Balance with Treasury accounts, the
amount of DOD funds available to them for expenditure in each appropriation
account will remain questionable.

Federal agencies record their budget spending authorization in Fund Balance
with Treasury accounts, and increase or decrease these accounts as they
collect or disburse funds. Routinely reconciling the receipt and
disbursement activity, as Treasury guidance requires, helps to ensure that
all transactions are included in the agencies? Fund Balance with Treasury
accounts. Agencies reconcile differences between their records and
Treasury?s by either recording the transactions that make up the differences
or by correcting errors. In general, the reconciliation process can be
described as consisting of two distinct parts. First, Treasury compares the
payments and collections processed by the Federal Reserve and commercial
banks to the amounts federal agencies reported to Treasury themselves or
amounts reported for them by other agencies.

1 Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244, January 2001). 2 DOD Financial Management: Integrated Approach,
Accountability, and Incentives Are Keys to Effective Reform (GAO- 01- 681T,
May 8, 2001).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Second, agencies must ensure that the disbursements and receipts reported to
Treasury agree with their own data. For DOD components, this second part of
the process is complicated by the fact that DOD components process
disbursements for each other and because DOD components allow certain other
federal agencies to make disbursements on their behalf. As a result, timing
differences often occur between the reporting of DOD transactions to
Treasury and the recording of transactions in DOD components? books.

In August 1998, DOD developed a strategic plan to improve the reconciliation
process for the activity in its Fund Balance with Treasury accounts. DOD
told us that the Defense Finance and Accounting Service?s (DFAS) Denver
Center, which provides support for the Air Force, has made the most progress
in implementing this plan, and that its process for reconciling the activity
in the Air Force General Funds 3 is more comprehensive than that of the
other DOD components. Consequently, we chose to review DFAS Denver?s
reconciliation processes. Our objectives were to determine (1) the progress
DFAS Denver has made in improving its processes for reconciling the
transaction activity in the Air Force General Funds and (2) whether the DFAS
Denver reconciliation concepts, policies, and practices could be used in
reconciling the Fund Balance with Treasury activity of other DOD components.
The scope of our review focused solely on evaluating the processes used by
DFAS Denver to reconcile Air Force?s General Funds activity. However, we did
not perform detailed testing of the transaction data used in the
reconciliation process.

DFAS Denver has made progress in developing a comprehensive reconciliation
process for the Air Force General Funds? transaction activity in the Fund
Balance with Treasury accounts, primarily by increasing management
attention. However, the process needs some refinements.

DFAS Denver?s two- part process includes reconciling (1) Treasuryidentified
cash differences and (2) DFAS Denver- identified differences between its and
Treasury?s records. To improve the first part, DFAS

3 General funds are used to record financial transactions arising under
congressional appropriations, including personnel, operation and
maintenance, research and development, procurement, and construction
accounts. The Air Force manages 16 general fund accounts, consisting of 7
funded by annual 1- year appropriations and 9 funded by multiyear
appropriations. Results in Brief

Page 3 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Denver has developed additional guidance, provided training to its staff,
and improved oversight to address an Air Force Audit Agency finding that
DFAS Denver was not promptly researching and correcting differences. DFAS
Denver?s records show that this increased management attention has reduced
the reported unreconciled net cash transaction differences that are from 2
months to 1 year old from $26 million as of September 30, 1998, to less than
$400,000 as of September 30, 2000.

Prior to 1998, DFAS Denver was not performing part two of the
reconciliation. Since then, DFAS Denver management has made a concerted
effort to develop a comprehensive reconciliation process. DFAS Denver now
(1) compares Treasury reports to Air Force accounting records to identify
the total difference between the two sets of data, (2) attempts to identify
the transactions that make up the unreconciled difference and categorizes
them by type, and (3) tracks the identified transactions until they are
recorded or corrected by field- level Air Force accounting stations. With
these new procedures and increased management attention, DFAS Denver reports
that it has been able to significantly reduce the amounts for which it has
not been able to identify transactions that make up the unreconciled
differences. DFAS Denver also reported improved ability to reconcile
transactions within DFAS time frame performance metrics.

Although DFAS Denver has reduced the outstanding unreconciled differences
from both parts of its reconciliation process, it has not yet documented the
entire process to ensure that all necessary activities will continue to be
performed if the personnel who currently know the processes leave. Further,
the second part of the process needs additional refinement. For example,
DFAS Denver has not yet developed the capability to identify all the
transactions making up the unreconciled difference between its and
Treasury?s records. In addition, DFAS Denver has not prepared specific desk
procedures for some of the individual activities within the second part of
the process. Without such documentation, the process depends on the
creativity and knowledge of a few individuals and is vulnerable to loss of
momentum should one or more of these individuals no longer work in the area.

The concepts and policies developed thus far by DFAS Denver to identify and
resolve transaction differences could improve the reconciliation processes
of the other DFAS centers that have not made as much progress. The increased
management attention devoted to identifying transactions making up the
differences and reconciling those transactions that has been instrumental in
DFAS Denver?s reported success would

Page 4 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

likely prove successful at the other DFAS centers. With increased management
attention, each DFAS center could tailor the concepts and processes used at
DFAS Denver to its individual environment even though each center has its
own legacy system, which causes them to operate differently.

Once all of the DOD components are able to establish a comprehensive and
routine reconciliation of the transaction activity in each of their
appropriation accounts, DOD will be closer to establishing accountability
over its unexpended balances. Reconciling and auditing the current activity
can, over time, result in having a verifiable beginning balance in the Fund
Balance with Treasury accounts.

We are making recommendations that address the need for DFAS Denver to
continue its efforts to refine the reconciliation process. We are also
recommending that DFAS headquarters direct and facilitate the other DFAS
centers? adaptation of DFAS Denver?s reconciliation concepts and policies to
improve their Fund Balance with Treasury account reconciliations. DOD agreed
with our recommendations, described completed and ongoing actions to address
these issues, and provided estimated completion dates.

Federal agencies record their budget spending authority in fund accounts
called Fund Balance with Treasury (FBWT), and increase or decrease these
accounts as they collect or disburse funds. In the federal government, an
agency?s FBWT account is the closest thing an agency has to a corporate bank
account. The difference is that instead of a cash balance, FBWT represents
unexpended spending authority in appropriations. 4 In enacting
appropriations, Congress authorizes agencies to spend from the various FBWT
accounts to meet their missions. These fund accounts serve as a control
mechanism to help ensure that agencies? disbursements do not exceed the
appropriated amounts.

Reconciling FBWT activity is an important internal control in ensuring that
all receipt and disbursement transactions have been recorded in the
accounting records of government agencies. Reconciling agency FBWT

4 An appropriation provides an agency with two authorities- the authority to
incur obligations and the authority to disburse funds from the Treasury to
liquidate those obligations. Background

Page 5 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

activity records with Treasury activity records is important to establish
the completeness of transactions reported and can be used to determine
unexpended fund balances. Reconciliation is a necessary step in achieving
funds control. A reconciliation consists of comparing two or more sets of
records, researching and resolving any differences, and recording
adjustments if necessary. Reconciliations are to be performed routinely so
that any problems are detected and corrected promptly and differences are
not allowed to age, thereby becoming increasingly difficult to research.

DFAS, a component of DOD, has responsibility for providing finance and
accounting services to all other DOD components, including the Air Force,
Army, Navy, and Marine Corps. DFAS? headquarters unit and five DFAS centers
are responsible for accounting, disbursing, collecting, and financial
reporting for DOD components. DFAS Denver, with support from its field
locations, is specifically responsible for Air Force accounting functions.
Air Force and other components? personnel are responsible for funds control
and purchasing the goods and services necessary to meet their missions. The
Office of the Under Secretary of Defense (Comptroller) issues the DOD
Financial Management Regulation containing DOD?s policies and procedures in
the area of financial management.

The DFAS centers and their field locations process cash, interagency, and
intra- DOD transactions based on requests from military service personnel.
Cash transactions primarily consist of paper checks issued, electronic funds
transfers, and deposits. Interagency and intra- DOD transactions are
primarily transfers of funds between federal entities and do not involve
cash; however, they affect the FBWT accounts the same way cash transactions
do. DFAS increases or decreases DOD?s individual FBWT account balances
during the year as funds are collected or disbursed. DFAS is responsible for
maintaining transaction- level details and a record of the unexpended
balance for each of DOD?s appropriation accounts. Treasury also maintains
accounting information on the Air Force?s and other federal agencies? FBWT
activity to prepare governmentwide financial reports. In an effort to ensure
the integrity of these reports, Treasury directs agencies to reconcile their
reported FBWT activity on a regular and recurring basis. 5

5 Department of the Treasury Financial Manual, Vol. 1, part 2, chap. 5100 on
Reconciling Fund Balance with Treasury Accounts, http:// fms. treas. gov/
fundbalance.

Page 6 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Many disbursements from Air Force General Funds are made and reported to
Treasury by other DOD services and federal agencies in accordance with pre-
arranged agreements. These other DOD components and agencies process
disbursements from Air Force General Funds for obligations that were
established by Air Force personnel responsible for buying goods and services
and then transmit information on their disbursements for Air Force to
Treasury and separately to DFAS Denver. Federal agencies and the other DOD
components disburse the funds first, and DFAS Denver field locations receive
the detailed accounting transaction data from them later. This process is
different from both normal bookkeeping operations in the private sector and
keeping one?s personal checkbook. This DOD system is similar to having more
than one person writing checks on the same bank account, which would create
uncertainty in knowing the balance in the account. Increasing the difficulty
in knowing the balance is DOD?s long- standing problem of not having
integrated accounting systems, which routinely causes accounting data to be
processed at different times.

The following example illustrates the interagency disbursement system.
Assume the Air Force authorizes the State Department to disburse Air Force
funds. The State Department pays a bill for the Air Force and sends the
information to Treasury. Treasury then subtracts the funds from the Air
Force?s FBWT. Treasury reports the disbursement to DFAS Denver. However,
DFAS Denver cannot record the related expense transaction or subtract the
already disbursed funds from the FBWT account balance on its books until it
receives sufficient details from the State Department. These details can
come after the month- end Treasury report. When DFAS Denver receives the
transaction data from the State Department, DFAS Denver sends the
information to the Air Force field activity that authorized the
disbursement. The Air Force field activity matches the disbursement to the
original obligation and records the transaction. Each month, DFAS Denver
compares the activity recorded in the Air Force FBWT account to the activity
reported in the account by Treasury. Because multiple federal agencies and
other DOD components can affect the Air Force?s fund balance accounts at
Treasury, DFAS Denver?s recorded transaction activity routinely differs from
Treasury?s, creating reconciling items at any point in time. These multiple
participants in the disbursing and collecting process make the
reconciliation process more complex than reconciling one?s personal
checkbook.

The reconciliation process consists of two parts. First, Treasury compares
agency- reported receipts and disbursements to amounts reported by the
Federal Reserve or commercial banking system. Treasury then provides

Page 7 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

agencies the details of any identified discrepancies in monthly comparison
reports. Each agency is responsible for researching the differences between
its and Treasury?s records. Once differences are resolved, agencies record
any necessary adjustments to their FBWT accounts and report these
adjustments to Treasury. To correct bank errors, agencies contact the bank
or Treasury for assistance. Figure 1 summarizes this first part of the FBWT
reconciliation process.

Figure 1: Treasury Comparison of Agency and Bank Reported Activity

For the second part of the reconciliation process, DFAS Denver compares the
disbursement and collection transaction activity for each appropriation
account in its records for the Air Force General Funds to another monthly
report from Treasury that shows the activity reported by all agencies for
each fund account. Since, as previously explained, Treasury receives some of
the disbursement and collection activity directly from other entities before
DFAS Denver, timing differences often occur. DFAS Denver then identifies and
reconciles any timing differences or errors. Timing differences are resolved
through the normal course of DFAS Denver?s staff recording transactions in
Air Force records. To correct errors, including those made by other agencies
in reporting Air Force fund account transactions to Treasury, DFAS Denver?s
staff records adjustments to Air Force records and reports them to Treasury
and the other agencies as appropriate. Figure 2 summarizes the second part
of the FBWT reconciliation process.

Page 8 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Figure 2: Comparison of Air Force Records and Treasury Activity Reports

The reconciliation process at DFAS Denver and the other DOD components is
complicated by the long- standing problem of a lack of integrated systems
within and among the components. DFAS Denver currently depends on file
extracts from multiple systems for its reconciliations. DFAS Denver?s staff
analyzes the numerous extracts and determines the causes of the differences
in the multiple systems. To be effective, this reconciliation process must
be comprehensive to overcome and compensate for the lack of integration
among its systems.

Our objectives were to determine (1) the progress DFAS Denver has made in
improving its processes for reconciling the transaction activity in the Air
Force General Funds and (2) whether any of DFAS Denver?s reconciliation
concepts or policies could be used in reconciling the Fund Balance with
Treasury activity of the other DOD components. Our review focused on the
General Funds reconciliations and did not include Air Force Working Capital
Funds 6 reconciliations.

To determine the extent of progress DFAS Denver has made in improving the
reconciliation of the transaction activity in the Air Force General Funds,
we met with DFAS Denver officials and observed DFAS Denver procedures for
monitoring the field reconciliation efforts. We obtained reports of
outstanding differences for the Air Force General Funds from DFAS Denver and
Treasury. We determined whether existing DFAS

6 Working capital funds are revolving funds that receive their initial
working capital through an appropriation or a transfer of resources.
Financial resources to replenish the initial working capital and to permit
continuing operations are generated by the acceptance of customer orders.
Objectives, Scope,

and Methodology

Page 9 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Denver policies, procedures, and practices reflected the need for
improvements outlined in prior year audit reports issued by GAO, DOD?s
Inspector General, and the Air Force Audit Agency.

To determine whether the DFAS Denver reconciliation concepts, policies, and
practices could be used across DOD, we met with DFAS headquarters, Denver,
Cleveland, and Indianapolis officials to identify the similarities and
differences among DFAS centers and the FBWT reconciliation initiatives in
place at each center. To determine the progress other centers had reported
in reconciling their FBWT accounts, we obtained reports of outstanding
differences from DFAS headquarters and Treasury.

The scope of our review at DFAS Denver focused solely on evaluating the
processes used to reconcile the Air Force General Funds activity and did not
include detailed testing of its reconciliations or of data provided by
Treasury or the Air Force Audit Agency. Also, we did not determine whether
DFAS Denver?s policies and processes are uniformly in place throughout all
of its field locations. We did not audit the Air Force?s FBWT reconciliation
and thus provide no conclusions as to whether the processes discussed in
this report are being effectively performed.

We performed our work from August 2000 through April 2001 in accordance with
generally accepted government auditing standards.

Written comments on a draft of this report were received from the Director
of Accounting, DFAS, and have been reprinted in appendix I.

DFAS Denver has developed a two- part process for reconciling its FBWT
receipt and disbursement activity that reconciles differences in (1) cash
transactions identified by Treasury and (2) Air Force transaction records
compared to transaction activity reported to Treasury. Over the past few
years, by increasing management attention on the reconciliation process,
DFAS Denver has made improvements in both parts of the process and has
reported a corresponding reduction in its unreconciled differences. However,
its reconciliation processes are not yet fully refined.

In prior years, auditors identified and reported weaknesses in DFAS Denver?s
ability to effectively reconcile the cash activity part of its FBWT
reconciliation. For example, in reporting on the results of its audit of the
Air Force?s fiscal year 1997 financial statements, the Air Force Audit
Agency noted that DFAS Denver field personnel did not promptly research
Reconciliation

Process Improved but Further Refinement Is Necessary

Improvements in Tracking and Resolving Cash Differences Identified by
Treasury

Page 10 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

and correct deposit and disbursement differences identified by Treasury. 7
In addition, the Air Force Audit Agency identified internal control
weaknesses for fiscal year 1998 related to the (1) monitoring and
reconciliation of check totals, (2) timely reporting of checks, and (3)
prompt resolution of check amount discrepancies. 8

In recent years, DFAS Denver has increased the management attention given to
resolving cash differences identified by Treasury, which is part one of the
FBWT reconciliation process. At the heart of its efforts are several
initiatives to improve its processes for identifying, researching, and
resolving the differences. For example, DFAS Denver has implemented new
procedures for reconciling deposit and electronic funds transfer
transactions. Each month, DFAS Denver produces exception reports containing
specific transactions that have been reported to Treasury (1) by the Federal
Reserve but not by DFAS field personnel, (2) by DFAS field personnel but not
the Federal Reserve, and (3) in different months, for different amounts, or
otherwise reported differently by DFAS field personnel and the Federal
Reserve. DFAS Denver provides these lists each month to field accounting
personnel to aid them in resolving differences. DFAS Denver personnel
monitor the timeliness of field resolution of these differences and contact
field personnel regarding aged unresolved amounts.

In addition to improving its reconciliation processes for deposits and
electronic funds transfers, DFAS Denver also has improved its methods of
monitoring differences related to paper checks. DFAS Denver receives a
Treasury notification of individual paper check errors throughout the month
as Treasury identifies discrepancies between the check amount reported by
DFAS Denver and the amount paid by the bank. In addition, Treasury also
reports these check discrepancies in a summary comparison report sent to
DFAS Denver after month- end. DFAS Denver has added a procedure to monitor
and correct the individual check errors prior to receiving the monthly
summary comparison reports from Treasury.

Other initiatives DFAS Denver has undertaken include 7 Air Force Audit
Agency Report of Audit: Accounting for Selected Assets and Liabilities,
Fiscal Year 1997 Air Force Consolidated Financial Statements (September
1998, Project 97053001). 8 Air Force Audit Agency Report of Audit:
Accounting for Selected Assets and Liabilities - Fund Balance with Treasury,
Fiscal Year 1998 (January 2000, Project 98053001).

Page 11 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

 adding a new section to the mandatory training class for new disbursing
officers describing procedures for clearing differences reported by
Treasury;

 adding a section to the DFAS Web page providing detailed instructions for
DFAS Denver and field accounting personnel for resolving cash transaction
differences;

 increasing the use of electronic funds transfers rather than paper checks
(issuing electronic funds transfers is a more automated process than issuing
paper checks, and, since the transaction occurs immediately, timing
differences are virtually eliminated); and

 issuing memorandums requiring field personnel to increase the priority
given to resolving FBWT differences identified by Treasury.

These proactive initiatives have been a major factor in DFAS Denver?s
reported reduction in cash transaction discrepancies. For example, according
to Treasury reports as of September 30, 2000, the current net unresolved
cash differences from 2 months to 1 year totaled less than $400,000 compared
to $26 million as of September 30, 1998.

DFAS Denver?s experience also provides evidence that not performing routine
reconciliation can result in differences getting so old that they become
difficult to reconcile. Treasury records as of September 30, 2000, show $56
million still outstanding in net unreconciled cash differences that occurred
over 5 years ago before the new reconciliation procedures were in place.
DFAS Denver has found it difficult to locate supporting documentation to
determine the causes of these old differences. The records also show that
DFAS Denver has only $260,000 net unreconciled differences that are from 1
to 5 years old.

Every month, timing differences occur between when Treasury and Air Force
receive and record transactions. These differences are caused by the lack of
integrated accounting systems and routine business processing. Consequently,
DFAS Denver must routinely reconcile its transaction records to those at
Treasury. Prior to fiscal year 1998, DFAS Denver was not reconciling these
monthly differences in the two sets of records. Over the past 3 years, DFAS
Denver developed the second part of the overall reconciliation process to
reconcile the difference between its records and those at Treasury as shown
in figure 3. DFAS Denver?s goal for this process is to identify the
transactions that make up the difference, categorize them to facilitate
reconciliation, and track them until they are reconciled. Improvements in

Reconciliation of Air Force Records to Transaction Activity Reported to
Treasury

Page 12 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Figure 3: Reconciliation of Difference Between Air Force Records and
Treasury Records

The first step is to determine the difference between Treasury and Air Force
records each month. DFAS Denver does this by comparing the total Air Force
disbursement and receipt transactions in Treasury?s records to the
comparable transactions in Air Force accounting records and calculating the
difference. This is the amount that has to be reconciled, which was $1.6
billion at September 30, 2000.

Step two is a monthly data analysis process to identify the specific
transactions making up the difference calculated in step one. DFAS Denver
refers to the calculated difference in the two sets of records as the
undistributed difference. The term ?undistributed? applies to those
transactions that have not yet been reconciled- recorded or corrected in the
accounting records.

To identify the transactions, DFAS Denver uses data retrieval and analysis
tools to extract the transactions in DFAS Denver?s Merged Accounting and
Fund Reporting system. The function of this system is to track transactions
from the time DFAS Denver receives them from either Treasury or the
originators of the transactions until Air Force personnel reconcile them.
Once DFAS Denver identifies the transactions that make up the unreconciled
difference, it sorts them by appropriation into various categories to help
speed and simplify the reconciliation process. Sorting the transactions into
categories with common elements facilitates tracking the transactions until
the field- level accounting staff fully reconciles them by either recording
them in Air Force accounting records, making

Page 13 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

corrections to the records, or submitting adjustments or corrections to the
originators of the transactions. DFAS Denver has developed 11 categories
that reflect the nature of transactions. For example, the categories into
which the unreconciled transactions are sorted include the following.

 Army- Navy Current Month. The Army and the Navy, which make payments on
behalf of the Air Force, cite Air Force appropriations when they submit the
payment information to Treasury. Since Air Force field locations often have
not yet received the detailed accounting transactions for these payments,
these transactions are placed in this category awaiting reconciliation.

 Rejects. This category is used when Air Force field locations cannot
verify payments made by someone else on their behalf. This can happen when
they determine that they have not been provided sufficient supporting
documentation to post the transaction or the payment belongs to another
accounting station. The field locations ?reject? the individual payment back
to DFAS Denver for transmission either back to the originator of the payment
or to another field location.

 Interfund. 9 DOD components sometimes use the interfund system to sell
materials to each other. If the seller and buyer do not record the
transactions in the same month, which often occurs, it automatically appears
as a reconciling difference between DFAS Denver?s records and Treasury?s
records and would be placed in this category for reconciliation purposes.

Reducing the total undistributed amount is important because fewer
transactions will have to be tracked until reconciled. However, the use of
nonintegrated systems and routine business processes does not permit the
simultaneous processing of transactions and affects when transactions are
recorded. Therefore, eliminating the undistributed amount entirely is not
possible because timing differences will continue to cause a difference
between DFAS Denver?s and Treasury?s records that will need to be identified
and reconciled.

DFAS Denver?s analysis cannot yet identify all the transactions that make up
the total undistributed difference. The amount that is not identified is
referred to as the ?variance.? Eliminating the variance is important

9 Interfund is a system of billing and collecting for sales of material
between activities of different DOD components, or between DOD components
and the General Services Administration.

Page 14 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

because the variance constitutes the amount of receipt and disbursement
activity for which DFAS Denver cannot identify transactions. Without first
identifying the transactions, DFAS Denver cannot reconcile the activity.

As figure 4 shows, DFAS Denver has reported progress in reducing both the
variance and the total undistributed amount. As of September 30, 2000, the
reported variance for all appropriations totaled $35 million, or about 2
percent, of the $1.6 billion in total difference in Treasury?s and DFAS
Denver?s records. As of September 30, 1998, the reported variance was $386
million, or almost 10 percent, of the $3.7 billion in total difference. At
the time of our review, DFAS Denver had additional efforts under way to
refine its methodology for identifying transactions for the remaining
variance. DFAS Denver officials told us that by April 2001 they had
identified causes and potential explanations for all but $2 million of the
$35 million variance as of September 30, 2000. However, they will not be
able to prevent the variance from continuing until they have learned how to
consistently identify the types of transactions that were causing the
variance.

Page 15 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Figure 4: Reported Reduction in Undistributed Transactions and Variance

Source: Based on DFAS Denver data.

DFAS Denver?s analysis of undistributed transactions is crucial to part two
of the overall reconciliation process, and the progress DFAS Denver has made
in reducing the reported variance is commendable. However, the undistributed
analysis is incomplete because two types of transactions are not subject to
the analysis. As discussed in the following section, adding these
transactions to the analysis is one of the needed refinements to the
reconciliation process.

Step three is the tracking process. DFAS Denver tracks all undistributed
transactions until its field- level accounting staff fully reconciles them
by either recording them in Air Force accounting records or making
corrections to Air Force or Treasury records. In this step, DFAS Denver
transmits lists of undistributed transactions in aging categories to the
fieldlevel accounting stations each month and requires them to return the
lists annotated with a proposed resolution for each transaction. To complete
the loop, DFAS Denver personnel are to monitor that the annotated

Dollars in millions 0 1,000

2,000 3,000

4,000 1998

10%

Undistributed Variance

Fiscal Year 2000

2%

Page 16 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

resolution does, in fact, take place by examining subsequent accounting
cycles for evidence of the action.

DFAS Denver measures the success of its tracking efforts against performance
metrics for reconciling transactions established by DFAS headquarters. These
time frame performance metrics range from 60 to 180 days, depending on the
type of transaction. DFAS Denver data indicate that about 85 percent of the
total undistributed transactions are reconciled within 60 days, so DFAS
Denver?s primary focus is on the other 15 percent, although it tracks all
undistributed transactions until they are reconciled. DFAS Denver has
reported progress in reducing the volume of transactions that fall outside
the established time frame performance metrics for reconciling identified
transactions. As figure 5 shows, according to DFAS Denver reports, it
reduced the portion of the undistributed transactions shown in figure 4 that
were not reconciled within the performance time frame metrics from $234
million at the end of fiscal year 1998 to $37 million at the end of 2000.

Figure 5: Reported Reduction in Transactions Identified but Not Reconciled
Within Established DFAS Time Frame Performance Metrics

Source: Based on DFAS Denver data.

Dollars in millions 0 50

100 150

200 250

1998 Fiscal Year

2000

Page 17 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Although DFAS Denver has made progress in developing its reconciliation
process to fully reconcile the differences between Treasury?s and its own
FBWT records for the Air Force General Funds, it has not yet achieved that
goal. First, DFAS Denver has not documented the overall reconciliation
process with explanations of the individual steps, their objectives, and
their associated comparisons and reconciliations. Such a description could
provide both a road map for the entire process and a means for ensuring that
the FBWT activity reconciliation is complete and thorough. In addition to
potentially omitting important activities without a complete description of
the process, a loss of one or more of the few key people who understand the
entire process, especially part two, would jeopardize DFAS Denver?s ability
to maintain its reconciliation progress and to continue needed refinements.

Second, in addition to the need to document the overall reconciliation
process, we identified three refinements to part two of the process that are
necessary.

 Identification of Transactions for Remaining Variance. As discussed above,
DFAS Denver has not yet determined the causes of the remaining difference
between its and Treasury?s receipt and disbursement activity or the
transactions that make it up. Because all transactions have not been
identified and because the variance fluctuates somewhat from month to month,
further analysis is necessary. Until DFAS Denver can identify all of the
transactions that make up the variance, it will not be able to fully
reconcile the difference.

 Undistributed Analysis Incomplete. DFAS Denver has not included two types
of unreconciled transactions in its analysis of the undistributed
transactions because they are not in the Merged Accounting and Fund
Reporting system. The first type consists of the transactions that field-
level personnel have accepted, processed, and entered into the Air Force
accounting records but not yet matched to obligations. Field- level
accounting staffs recorded these transactions even though DFAS does not
consider transactions ready to be recorded in Air Force?s official
accounting records until they have been matched with their obligations. The
second type consists of the transactions recorded temporarily in Treasury
suspense accounts. DFAS Denver and Treasury use these suspense accounts to
record receipt or disbursement transactions pending identification of the
fund holders. 10 DFAS Denver includes these

10 A fund holder is a unit or individual responsible for incurring
obligations against an appropriation and for managing the use of the
appropriation?s funds. Refinements to

Reconciliation Process Are Necessary

Page 18 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

transactions in the undistributed analysis at fiscal year- end but not
routinely every month. Until both types of transactions are routinely
identified by appropriate data extracts and included in the monthly analysis
of undistributed transactions, DFAS Denver will not have assurance that it
has identified the complete universe of transactions that must be
reconciled. During our review, DFAS Denver agreed to begin including both
types of transactions in the monthly undistributed analysis.

 Lack of Documentation for Specific Desk Procedures. DFAS Denver has not
fully documented, with how- to desk procedures, some of the steps and
activities within the second part of the reconciliation process. For
example, the various categories of transactions displayed in the
Undistributed Report and the Merged Accounting and Fund Reporting system
files from which they are extracted are defined and documented, but the
techniques and specific procedures for performing the analysis and
developing the report are not. DFAS Denver began a project to document these
techniques and procedures during our review. Recreating these management
tools without documentation would be difficult for someone who was not
familiar with the process. How- to procedures can ensure that the process
can be replicated over time. Furthermore, in some instances, only one or two
key individuals developed these and other procedures and know how to perform
them. Without complete documentation, the loss of a few key people could put
DFAS Denver at risk of losing its momentum in reconciling its FBWT activity.

The FBWT reconciliation concepts, policies, and procedures developed at DFAS
Denver could be used by other DFAS centers, which have not made as much
progress in reconciling their FBWT activity, according to DFAS reports and
officials. The other centers have not been as successful as DFAS Denver has
in identifying transactions that constitute the undistributed difference
between their DOD components? accounting records and Treasury?s. For
example, even though their overall General Funds operating expenditures are
comparable to Air Force?s, the Army and Navy variances- the amounts for
which they cannot determine specific transactions- are substantially larger.
As stated previously, DFAS Denver reported a $35 million variance as of
September 30, 2000, for the Air Force. In comparison, DFAS Cleveland
reported a $5.8 billion variance for the Navy, and DFAS Indianapolis
reported $664 million for the Army.

DOD?s legacy accounting systems complicate the FBWT reconciliation process.
These systems are not integrated, which causes timing differences in
processing receipts and transactions since all DOD DFAS Denver?s

Process Improvements Transferable to Other DFAS Centers

Page 19 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

components pay bills for each other. In addition, the systems were not
designed to facilitate the reconciliation process. Although DOD has had
plans under way for years to create integrated systems, it is likely many
years away from implementing fully integrated financial management systems.

Nevertheless, the DFAS centers must reconcile their FBWT activity. Each DFAS
center processes billions of dollars of transactions each month that must be
accounted for and reconciled. Consequently, the centers must create
auditable FBWT activity reconciliation processes. To facilitate its efforts,
DFAS Denver has designed interim workaround measures, such as its data
extracts, to identify undistributed transactions to create useful
reconciliation data. DFAS Denver?s efforts have demonstrated that current
DOD systems can be adapted for routine financial reconciliations if used
creatively and with perseverance.

Transferring DFAS Denver?s experiences to the other centers is reasonable
even though each center relies on different legacy systems, which cause them
to operate differently to accomplish the same tasks. Since each center?s
systems are different, it is the concepts and general approach to developing
processes and practices developed at DFAS Denver that can be adapted and
utilized, rather than the specific steps in the processes. An example is
DFAS Denver?s concept of identifying, categorizing, and tracking
undistributed transactions as illustrated in figure 3. After comparing their
records to Treasury?s, the other DFAS centers could first identify the
individual transactions that make up the difference between their records
and Treasury?s. After identifying the individual transactions, they could
categorize them by type to facilitate reconciliation. Finally, they could
track and monitor the transactions until they are reconciled at the field
level.

DFAS Denver has demonstrated that increased management attention can,
indeed, result in positive change. Reconciliation of FBWT- a key step in
DOD?s ability to establish adequate funds control and financial
accountability- will only be achieved if the other centers follow DFAS
Denver?s lead and provide the needed attention to this area.

Page 20 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Increased attention, improved monitoring, and adaptation of the concepts
used by DFAS Denver will help all of the DOD components to reconcile their
FBWT transaction activity. In addition, a comprehensive reconciliation
process can facilitate achieving a successful audit of only that year?s FBWT
transaction activity. However, one year?s successful audit of the
reconciliation of FBWT activity will not result in an auditable FBWT
financial statement balance because the issue of verifying and auditing the
beginning balances will remain. The balances in each FBWT account roll
forward from year to year until the account is closed, which can be 5 years
or more, depending on the type of appropriation. 11 For example, the DOD-
wide financial statement reported a FBWT balance of $178 billion as of
September 30, 2000. Some portion of this can be attributed to the beginning
balance of $175 billion in FBWT brought forward on October 1, 1999. Although
one year?s audit of current activity will not resolve this issue, a series
of successful audits can. After a number of years, if current activity is
routinely reconciled and audited, the balances from prior years when
reconciliations were not routinely being performed will ultimately be
immaterial.

One other issue that affects the reliability of the amount of DOD funds
available for expenditure in each appropriated fund is DOD?s practice of
making large amounts of adjustments to closed accounts. For example, as we
discussed in our May 2001 testimony on DOD financial management, 12 DOD
reported $2. 7 billion of adjustments to closed appropriation accounts in
fiscal year 2000. Although closed accounts are not included in FBWT
balances, we reported that DOD made frequent adjustments to move
transactions from current accounts and charge them to closed accounts. Until
all of DOD?s transactions are accurately recorded, the reliability of FBWT
amounts will remain questionable.

DFAS Denver has made progress in developing an auditable process capable of
fully reconciling its FBWT activity, but it has more to do to finish the
job. For example, DFAS Denver has not yet identified all of the transactions
that make up the difference between its and Treasury?s

11 Although there can be activity in an expired account until it is closed,
only open appropriation accounts are the subject of FBWT activity
reconciliation. 12 DOD Financial Management: Integrated Approach,
Accountability, and Incentives Are Keys to Effective Reform (GAO- 01- 681T,
May 8, 2001). Other Issues Affecting

Fund Balance With Treasury Reconciliation

Conclusions

Page 21 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

receipt and disbursement activity. Finally, a significant amount of the
progress has been highly dependent upon the work of a few key people, but
their efforts have not been captured in detailed documented procedures.
Consequently, if these people were lost, DFAS Denver would risk being unable
to institutionalize these processes and losing the momentum it has gained.

The reconciliation process is convoluted in that it involves extracting and
comparing data from several DOD systems, which are not fully integrated.
However, other DOD components do not have to wait for future system
enhancements to institute good financial management practices. DFAS Denver?s
experience demonstrates that an effective combination of people, policies,
procedures, and controls can serve as a short- term solution to the larger
and longer term problem of overhauling inadequate systems. The concepts used
at DFAS Denver can be adapted by other DFAS centers. However, each center
will have to develop its own procedures, data extracts, comparisons, and
reconciliations based on the systems it uses.

To further improve the reconciliation of the activity in Air Force Fund
Balance with Treasury General Fund accounts and to ensure that the process
is comprehensive and institutionalized with continuity of effort, we
recommend that the Director, DFAS, direct the Director, DFAS Denver, to

 further refine the reconciliation process to identify and include all
transactions that make up the differences between Air Force and Treasury
records and resolve these differences within established time frames; and

 document the entire Fund Balance with Treasury General Funds activity
reconciliation process, including specific procedures for the various
reconciliations within the overall process.

To improve and expedite the reconciliation processes at other DOD
components, we recommend that the Director, DFAS, require the other DFAS
centers to adapt DFAS Denver?s reconciliation concepts and practices to
their own environments. To ensure that each center?s adaptations are
consistent and in accordance with DFAS policies, we further recommend that
the Director, DFAS, provide leadership and assistance in transferring
knowledge from DFAS Denver to the other centers. Recommendations for

Executive Action

Page 22 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

In written comments on a draft of this report, DOD concurred with our
recommendations. DOD?s response described the actions that DFAS has underway
to address each recommendation and provided estimated completion dates.

We are sending copies of this report to the Under Secretary of Defense
(Comptroller and Chief Financial Officer); the Commissioner of the Financial
Management Service, Department of the Treasury; and the directors of the
four other DFAS Centers: DFAS Cleveland, DFAS Columbus, DFAS Indianapolis,
and DFAS Kansas City. Copies will be made available to others upon request.

Please contact Linda Garrison at (404) 679- 1902 or by e- mail at garrisonl@
gao. gov if you or your staffs have any questions about this report. GAO
staff making key contributions to this report were Ray Bush, Francine
DelVecchio, David Shoemaker, and Carolyn Voltz.

Gregory D. Kutz Director Financial Management and Assurance Agency Comments

Appendix I: Comments From the Department of Defense

Page 23 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Appendix I: Comments From the Department of Defense

Appendix I: Comments From the Department of Defense

Page 24 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Appendix I: Comments From the Department of Defense

Page 25 GAO- 01- 847 Air Force Fund Balance With Treasury Reconciliation

Related Products Page 26 GAO- 01- 847 Air Force Fund Balance With Treasury
Reconciliation

Financial Audit: Issues Regarding Reconciliations of Fund Balances With
Treasury Accounts (GAO/ AIMD- 99- 271, September 17, 1999).

Financial Audit: Issues Regarding Reconciliations of Fund Balances With
Treasury Accounts (GAO/ AIMD- 99- 3, October 14, 1998).

Financial Audit: Reconciliation of Fund Balances With Treasury (GAO/ AIMD-
97- 104R, June 24, 1997).

Performance Measures for Disbursing Stations (Report No. D- 2001- 024,
December 22, 2000).

Disclosure of Differences in Deposits, Interagency Transfers, and Checks
Issued in the FY 1999 DOD Agency- Wide Financial Statements (Report No. D-
2000- 123, May 18, 2000).

Accounting for Selected Assets and Liabilities - Fund Balance With Treasury,
Fiscal Year 1999 (99053001, August 28, 2000).

Accounting for Selected Assets and Liabilities - Fund Balance With Treasury,
Fiscal Year 1998 (98053001, January 6, 2000).

Accounting for Selected Assets and Liabilities, Fiscal Year 1997 Air Force
Consolidated Financial Statements (97053001, September 3, 1998). Related
Products

General Accounting Office Reports

Department of Defense Inspector General Reports

Air Force Audit Agency Reports

(924053)

The first copy of each GAO report is free. Additional copies of reports are
$2 each. A check or money order should be made out to the Superintendent of
Documents. VISA and MasterCard credit cards are also accepted.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U. S. General Accounting Office P. O. Box 37050 Washington, DC 20013

Orders by visiting:

Room 1100 700 4 th St., NW (corner of 4 th and G Sts. NW) Washington, DC
20013

Orders by phone:

(202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537

Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email
message with ?info? in the body to:

Info@ www. gao. gov or visit GAO?s World Wide Web home page at: http:// www.
gao. gov

Contact one:

 Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm

 E- mail: fraudnet@ gao. gov

 1- 800- 424- 5454 (automated answering system) Ordering Information

To Report Fraud, Waste, and Abuse in Federal Programs

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
*** End of document. ***