Canceled DOD Appropriations: $615 Million of Illegal or Otherwise
Improper Adjustments (26-JUL-01, GAO-01-994T).			 
								 
In 1990, Congress changed the law governing the use of		 
appropriation accounts because it determined that controls over  
them were not working. The Department of Defense (DOD)		 
circumvented the provisions in the account closing law that were 
intended to strengthen Congress' control over the amounts and	 
purposes for which appropriated funds were spent. DOD was aware  
of the limitations the account closing law placed on the	 
availability of canceled appropriations and that the law was	 
enacted because of previous abuses by DOD's use of old		 
appropriations. DOD also knew that a major system used to control
its use of appropriations allowed for disbursements to be charged
inconsistent with that law. However, it did nothing to fix the	 
system, although it estimated the cost to do so to be minimal. In
the longer term, DOD will need to resolve its financial 	 
management problems, including the lack of leadership and	 
accountability that have been the subject of numerous reports and
recommended corrective actions over the years. The Secretary and 
the Comptroller of DOD have stated their intention to vigorously 
pursue financial management reform and plans are being developed 
to transform DOD's financial management systems and practices.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-994T					        
    ACCNO:   A01465						        
  TITLE:     Canceled DOD Appropriations: $615 Million of Illegal or  
             Otherwise Improper Adjustments                                   
     DATE:   07/26/2001 
  SUBJECT:   Accounting procedures				 
	     Accounting standards				 
	     Appropriation accounts				 
	     Budget outlays					 
	     Defense appropriations				 
	     Financial management systems			 
	     Financial records					 
	     Internal controls					 
	     Noncompliance					 
	     Expired appropriations				 

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GAO-01-994T
     
Testimony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10 a. m. Thursday, July 26, 2001
CANCELED DOD

APPROPRIATIONS $615 Million of Illegal or Otherwise Improper Adjustments

Statement of Jeffrey C. Steinhoff Managing Director Financial Management and
Assurance

GAO- 01- 994T

Page 1 GAO- 01- 994T

Mr. Chairman and Members of the Subcommittee: Thank you for inviting me here
today to discuss the Department of Defense?s (DOD) adjustments to canceled
appropriation accounts. Our related report, 1 issued today and developed at
the request of this Subcommittee and the House Budget Committee, describes
DOD?s problems in establishing the requisite systems, controls, and
managerial attention to properly account for its disbursements. My testimony
today will summarize the detailed findings included in our report.

In 1990, the Congress changed the law governing the use of appropriation
accounts because it determined that controls over them were not working. 2
Committee reports and other statements relating to the legislation show that
members of the Congress were concerned that the Congress had inadequate
control over the expenditure of hundreds of millions of dollars of expired
appropriations, particularly at DOD. Without adequate control, the Congress
was concerned that agencies could disburse money in amounts and for purposes
that it had not approved. The 1990 law was intended to improve congressional
control by providing that, 5 years after the expiration of the period of
availability of a fixed- term appropriation, the appropriation account be
closed and all remaining balances canceled. After closing, the appropriation
account could no longer be used for obligations or expenditures for any
purpose.

Because agencies need to keep accurate records, they may, in limited
circumstances, adjust accounting records pertaining to closed accounts to
correct unrecorded or improperly charged disbursements. To justify such an
adjustment, an agency must have sufficient documentation for each proposed
adjustment to show that it clearly meets each of the following three
criteria:

 the disbursement was made when the appropriation account to be charged was
available to cover the disbursement,  the agency either did not record the
disbursement when it was made or

charged it to the wrong appropriation account at that time, and 1 Canceled
DOD Appropriations: $615 Million of Illegal or Otherwise Improper
Adjustments (GAO- 01- 697, July 26, 2001). 2 National Defense Authorization
Act for Fiscal Year 1991 (Public Law 101- 510, dated November 1990).

Page 2 GAO- 01- 994T

 the proposed adjustment will result in the disbursement being charged to
the proper appropriation account.

From the enactment of the 1990 law through September 30, 1999, DOD requested
that the Department of the Treasury (Treasury) make adjustments affecting
333 closed accounts valued at $26 billion. By comparison, during the same
period, all other federal agencies combined requested that Treasury make
adjustments affecting only 21 closed accounts valued at $5 million.

According to DOD, adjustments affecting closed appropriation accounts during
fiscal year 2000 exceeded $2.7 billion. Amid concerns over the magnitude of
DOD adjustments affecting closed appropriation accounts and whether they
complied with the 1990 account closing law, you and the Chairman of the
House Budget Committee asked that we review the adjustments. Our review
focused primarily on large dollar value adjustments made during fiscal year
2000, representing $2.2 billion (81 percent) of the $2. 7 billion of DOD?s
reported closed appropriation account adjustments made during fiscal year
2000.

Our review of $2.2 billion of DOD?s fiscal year 2000 adjustments affecting
closed appropriation accounts found that about $615 million (28 percent) of
the adjustments were illegal ($ 146 million) or otherwise improper ($ 469
million). As shown in table 1, these adjustments to closed accounts should
not have been made for four reasons.

Table 1: Fiscal Year 2000 Illegal or Otherwise Improper Adjustments

(Dollars in millions)

Problem with adjustment Adjustment amount

Appropriation already canceled when disbursement was made $107.7
Appropriation not yet enacted when disbursement was made 38.2 No adjustment
was necessary 364.0 Insufficient documentation 104.9

Total $614.8

The following is an explanation of each of the four categories of adjustment
problems. Illegal or Otherwise

Improper Adjustments

Page 3 GAO- 01- 994T

The 1990 account closing law specifically provides that closed appropriation
accounts are not available for expenditures. We found that about $108
million of the adjustments resulted in charging appropriation accounts that
had closed before the disbursements were made. These adjustments produced
the same result as if DOD had made expenditures from and charged closed
appropriation accounts at the time the disbursements were made. Therefore,
these adjustments violated the 1990 account closing law. For example, in
December 1999, the Defense Finance and Accounting Service (DFAS) Columbus
Center recorded an adjustment that changed $79 million of disbursements from
charges against fiscal years 1993 through 1995 research and development
appropriations to charges against a fiscal year 1992 research and
development appropriation. According to documentation in the contract files,
the adjustment was to correct previous disbursing errors by redistributing
the payments in accordance with the payment terms specified in the contract.
The payment terms of the contract specified that payments should be made
using ?oldest funds first.? Under this instruction, payments should be
charged to the oldest appropriation cited on the contract until the
obligated balance has been exhausted for that appropriation. Subsequent
payments are then charged to the next oldest available appropriation, and so
on, until all the funds are used up or the contract is complete. Making the
adjustment that charged the $79 million disbursement to the closed fiscal
year 1992 research and development account used up the unspent balances in
that appropriation account and freed up funds on still open 1993 through
1995 research and development appropriation accounts for other disbursement
charges.

We found that charging the $79 million of disbursements to the fiscal year
1992 research and development appropriation was illegal because the
disbursements were made in February 1999- 4 months after the fiscal year
1992 research and development appropriation account had closed on September
30, 1998. DFAS Columbus officials agreed that the adjustment violated the
1990 law and should not have been made. Our report, issued today, includes
several additional examples of this type of illegal adjustment.

Under 31 U. S. C. 1502 (a), an appropriation may be used to pay only those
expenses properly incurred during the appropriation?s period of
availability. However, we found that over $38 million of the closed
appropriation account adjustments resulted in charging disbursements to
appropriation accounts that had not yet been enacted at the time the
disbursements were actually made. For example, in January 2000, a total
Appropriation Already

Canceled Appropriation Not Yet Enacted

Page 4 GAO- 01- 994T

of $21 million of disbursements charged to fiscal years 1989 and 1990
appropriations were changed to charges against fiscal years 1998 and 1999
missile procurement appropriations. Since the actual disbursements were for
expenses that were incurred before the fiscal years 1998 and 1999
appropriations were enacted, charging disbursements to these two
appropriations violated 31 U. S. C. 1502 (a).

Further, included in the $21 million were $9.9 million in overpayments,
which the contractor identified as a return of funds that were paid from the
fiscal years 1988 through 1990 appropriations. These appropriations were
canceled at the time the overpayments were returned. As discussed in our
companion report, the 1990 law requires that the collection of canceled
funds be deposited into the Treasury as miscellaneous receipts. However, we
found that instead of forwarding the overpayments to the Treasury, DFAS
Columbus redistributed the $9. 9 million to current and expired
appropriations that were funding the still- open contract. In discussing
these errors with responsible DOD officials, they agreed that the $21
million adjustment and the $9. 9 million redistribution were incorrect and
should not have been made. According to the officials, they plan to reverse
the adjustments and determine what actions are required to correct the
accounting records, including returning the $9.9 million to the Treasury.

Closed account adjustments totaling $364 million were improper because the
initial payments had been charged to the correct appropriations and should
not have been adjusted. DOD made these adjustments during contract
reconciliations to try to correct errors in recording disbursements made
under the contracts. Generally, these reconciliations were initiated if DOD
could not pay invoices because other disbursements had been erroneously
recorded against the wrong appropriations funding contracts. For example, in
November 1999, DFAS Columbus received an invoice from a contractor for
$685,000. DFAS Columbus could not pay the contractor because there were not
sufficient funds available in the cited accounting line to pay the invoice.
As a result, DFAS Columbus reconciled the fiscal year 1988 contract, which
resulted in over $590 million of adjustments affecting closed appropriation
accounts. Our review of these found that $210 million of the adjustments
should not have been made because the actual disbursements- some of which
were made over 10 years earlier- were initially recorded correctly. As a
result of this process to free up sufficient funds to pay the $685,000
invoice, DFAS Columbus made improper adjustments affecting the closed
accounts. Thus, the No Adjustment Necessary

Page 5 GAO- 01- 994T

reconciliation resulted in at least $210 million of accounting errors that
did not exist before the reconciliation took place.

To adjust its records, an agency must have sufficient documentation to show
that the adjustment is legal and changed an incorrect charge to a correct
one. However, neither DOD nor we could find sufficient documentation in
DOD?s accounting and contract records to support about $105 million of
closed appropriation account adjustments. For example, in June 2000, DFAS
Columbus made an adjustment that changed over $2.4 million of disbursements
from charges against a fiscal year 1993 appropriation that had not yet been
canceled to a fiscal year 1992 appropriation that had been canceled.
According to the contract files, the adjustment was to correct a previous
disbursing error. However, in reviewing the contract files for this
adjustment, neither DOD nor we could identify the original invoice or other
supporting documentation to show which appropriation should have been
charged for the goods or service. We considered these types of unsupported
adjustments improper because DOD must be able to provide documentation to
show that the adjustments are legal and that they changed incorrect charges
to correct ones. DOD is researching these transactions further to determine
if additional documentation can be located to support the adjustments.

DOD?s contract reconciliation process lacked the controls necessary to
ensure that adjustments to closed appropriation accounts were proper. For
example, system deficiencies in DOD?s Contract Reconciliation System (CRS)
significantly contributed to many of the illegal closed account adjustments.
3 Specifically, CRS did not compare the actual disbursement date with the
appropriation being adjusted to ensure that the adjustment met certain
appropriation law requirements. DOD had been aware of the system deficiency
since at least 1996, but took no action to upgrade CRS until we brought this
problem to its attention. DOD officials could not tell us why they had not
taken action to correct the problem, which they estimated would have cost
$24,460 to fix in 1996. Had CRS been upgraded to make this comparison in
1996 when the programming defect was first identified, the $146 million of
illegal adjustments made during fiscal year 2000 may not have occurred.

3 CRS is an automated reconciliation system that has been used since 1995 by
DFAS Columbus to perform contract reconciliations and to correct errors.
Insufficient

Documentation Lack of Fundamental Controls

Page 6 GAO- 01- 994T

We also noted that DOD contracting officers were using contract
modifications and other methods of communications to instruct DFAS Columbus
to charge disbursements to older appropriation accounts without regard to
whether adjustments would result in charging disbursements to appropriations
that had been canceled. This practice, when combined with the deficiencies
in CRS, resulted in some improper adjustments.

Finally, the remaining $1.6 billion (72 percent) of the $2.2 billion of
adjustments we reviewed were adequately documented corrections of errors
that DOD had made over the years and, therefore, were not illegal or
improper. They do, however, exemplify the broad- based, high- risk problems
associated with the accuracy of DOD?s payment and accounting process. As we
have previously reported, DOD has long- standing, serious problems with its
ability to accurately account for and report on payments to contractors,
which in these cases resulted in $2.7 billion in adjustments to closed
appropriation accounts in fiscal year 2000 alone. Such issues have led us to
report on the DOD?s financial management as an area of high risk since 1995.
4 DOD acknowledges that it has major problems with its accounting and
reporting of disbursements and has various ongoing initiatives aimed at
resolving them.

In conclusion, Mr. Chairman, DOD circumvented the provisions in the account
closing law that were intended to strengthen the Congress? control over the
amounts and purposes for which appropriated funds were spent. DOD was aware
of the limitations the account closing law placed on the availability of
canceled appropriations and that the law was enacted because of previous
abuses by DOD?s use of old appropriations. DOD also knew that a major system
used to control its use of appropriations allowed for disbursements to be
charged inconsistent with that law. However, it did nothing to fix the
system, although it estimated the cost to do so to be minimal.

4 GAO has designated government operations and programs as ?high risk?
because of either their greater vulnerabilities to waste, abuse, and
mismanagement or major challenges associated with their economy, efficiency,
or effectiveness. See Major Management Challenges and Program Risks:
Department of Defense (GAO- 01- 244, Jan. 2001) and HighRisk Series (GAO-
01- 263, Jan. 2001). Large Number of

Adjustments Exemplify DOD?s Long- standing Financial Management Problems

Page 7 GAO- 01- 994T

Our companion report on these issues includes recommendations that address
the need for DOD to immediately reverse and correct the $615 million of
closed account adjustments we identified as illegal or otherwise improper
and to take action to strengthen its policies, procedures, and controls over
closed appropriation account adjustments. To the extent DOD is unable to
make proper correcting adjustments because insufficient balances remain in
the correct accounts, we are also recommending that DOD investigate and
report on these adjustments, as required by the Antideficiency Act, 31 U. S.
C. 1351, and implementing guidance.

In the longer term, DOD will need to resolve its financial management
problems, including the lack of leadership and accountability that have been
the subject of numerous reports and recommended corrective actions over the
years. The Secretary and the Comptroller of DOD have stated their intention
to vigorously pursue financial management reform and plans are being
developed to transform DOD?s financial management systems and practices.

Mr. Chairman, this concludes my formal statement. I would be pleased to
answer any questions that you or other members of the Subcommittee may have.

For future contacts regarding this testimony, please contact Jeffrey C.
Steinhoff at (202) 512- 2600. Individuals making key contributions to this
testimony include Bertram J. Berlin, Dennis B. Fauber, Jeffrey A. Jacobson,
Mary Jo Lewnard, Larry W. Logsdon, Keith E. McDaniel, Michael S. Peacock,
and Harold P. Santarelli. Contact and

Acknowledgements

Page 8 GAO- 01- 994T

(192034)
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