Global War on Terrorism: DOD Needs to Improve the Reliability of 
Cost Data and Provide Additional Guidance to Control Costs	 
(21-SEP-05, GAO-05-882).					 
                                                                 
Since the attacks of September 11, 2001, the Department of	 
Defense (DOD) has reported spending $191 billion through May 2005
to conduct the Global War on Terrorism (GWOT). On an ongoing	 
basis, DOD compiles and reports information on the incremental	 
costs of the war, and uses these data in preparing future funding
requests. To assist Congress in its oversight of war spending,	 
GAO assessed (1) whether DOD's reported war costs are based on	 
reliable data, (2) the extent to which DOD's existing financial  
management policy is applicable to war spending, and (3) whether 
DOD has implemented cost controls as operations mature. GAO	 
focused primarily, but not exclusively, on fiscal year 2004	 
reported costs--the latest full year of data available at the	 
time of GAO's review.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-882 					        
    ACCNO:   A37559						        
  TITLE:     Global War on Terrorism: DOD Needs to Improve the	      
Reliability of Cost Data and Provide Additional Guidance to	 
Control Costs							 
     DATE:   09/21/2005 
  SUBJECT:   Congressional oversight				 
	     Cost analysis					 
	     Counterterrorism					 
	     Data integrity					 
	     Defense cost control				 
	     Defense economic analysis				 
	     Financial management				 
	     Financial management systems			 
	     Financial records					 
	     Fiscal policies					 
	     Funds management					 
	     Military policies					 
	     Policy evaluation					 
	     Reporting requirements				 
	     Terrorism						 
	     Warfare						 
	     Internal controls					 
	     Afghanistan					 
	     DOD Operation Iraqi Freedom			 
	     Global War on Terrorism				 
	     Iraq						 
	     Operation Enduring Freedom 			 
	     Operation Noble Eagle				 

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GAO-05-882

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

September 2005

GLOBAL WAR ON TERRORISM

    DOD Needs to Improve the Reliability of Cost Data and Provide Additional
                           Guidance to Control Costs

                                       a

GAO-05-882

[IMG]

September 2005

GLOBAL WAR ON TERRORISM

DOD Needs to Improve the Reliability of Cost Data and Provide Additional
Guidance to Control Costs

  What GAO Found

GAO found numerous problems in DOD's processes for recording and reporting
costs for GWOT, raising significant concerns about the overall reliability
of DOD's reported cost data. As a result, neither DOD nor Congress can
reliably know how much the war is costing and details on how appropriated
funds are being spent, or have historical data useful in considering
future funding needs. On the basis of GAO's work, DOD is taking steps to
improve its cost reporting. Factors affecting the reliability of DOD's
reported costs include long-standing deficiencies in DOD's financial
systems, the lack of a systematic process to ensure that data are
correctly entered into those systems, inaccurately reported costs, and
difficulties in properly categorizing costs. In at least one case,
reported costs may be materially overstated. Specifically, DOD's reported
obligations for mobilized Army reservists in fiscal year 2004 were based
primarily on estimates rather than actual information and differed from
related payroll information by as much as $2.1 billion, or 30 percent of
the amount DOD reported in its cost report. In addition, GAO found
inadvertent double counting in the Navy's and Marine Corps' portion of
DOD's reported costs amounting to almost $1.8 billion from November 2004
through April 2005. Because it was not feasible to examine all reported
costs and significant data reliability problems existed, GAO was not able
to determine the extent that total costs were misstated.

Further complicating the data reliability issue is the fact that DOD has
not updated its policy to address GWOT spending. Instead, DOD is using its
existing financial management regulation for funding contingency
operations, although it was developed and structured to manage the costs
of small-scale contingency operations. GAO has noted that specific
provisions of the existing policy conflict with the needs of GWOT. One
conflict concerns the use of supplemental funds for base support
activities at home stations. DOD's financial management regulation
administratively precludes such use, but military service officials have
spent billions of dollars in supplemental funds on these activities. Some
of this spending appears to directly support the war, but some does not.
DOD has updated its regulation on the basis of GAO's work.

While individual commands have taken steps to control costs and DOD policy
generally advises its officials of their financial management
responsibilities to ensure the prudent use of contingency funding, DOD has
not established guidelines that would require all commands involved in
GWOT to take steps to control costs and to keep DOD informed of those
steps and their success. For example, the commander of coalition forces in
Iraq has unilaterally set a 10 percent cost reduction target for fiscal
year 2005 but the details are not widely known outside the command. With
the growth in GWOT costs, there is a need to ensure that all commands seek
to control costs, including the need to review and rationalize related
requirements. Until the department establishes guidelines on cost controls
and is routinely informed about the types of controls and their impact on
costs, it cannot be sure that all that can be done to control costs is
being done.

United States Government Accountability Office

Contents

      Letter                                                                1 
                                  Results in Brief                          3 
                                     Background                             7 
                   Reliability of DOD's Reported Costs Is Unknown          10 

DOD Is Using Regulations to Guide GWOT Budgeting, Reporting,

and Spending That Were Not Designed for Wartime

Operations 29 Cost Controls Can Be Strengthened As Operations Mature 33
Conclusions 38 Recommendations for Executive Action 39 Agency Comments and
Our Evaluation 40

Appendixes

Appendix I:                                       Scope and Methodology 46 
Appendix II:    Ineffective Reporting of Fiscal Year 2004 Army Military 
                             Personnel Global War on Terrorism Obligations 50 
    Appendix III:                  Comments from the Department of Defense 63 
Appendix IV:                     GAO Contacts and Staff Acknowledgments 70 

Tables Table 1:

Table 2: Table 3: Table 4: Table 5: Table 6: Table 7:

Comparison of Reported DOD-Wide Imminent Danger Pay
and Implied Number of Deployed Personnel, April
2004-April 2005 16
DOD Military Personnel Obligations for GWOT Operations
in Fiscal Years 2003 and 2004 52
Army Military PersonnelObligations for GWOT Operations
in Fiscal Years 2003 and 2004 53
Army Obligation Plan and Reported Military Personnel
Obligations for GWOT Operations in Fiscal Year 2004 55
Army Obligation Plan and Reported Subsistence
Obligations for GWOT Operations in Fiscal Year 2004 56
Supplemental Budget Authority for Army GWOT Military
Personnel in Fiscal Year 2004 57
Estimated Army Obligations for "Reserve Components
Called to Active Duty" and Related DOD Payroll Costs in
Fiscal Year 2004 61

Figures Figure 1:	Locations of DOD's Fiscal Year 2004 Global War on
Terrorism Operations 8

Contents

Figure 2:	Growth in Reported and Projected GWOT Spending, Fiscal Years
2002-5 34

Figure 3:	Supplemental Funding of DOD Military Personnel for GWOT
Operations in Fiscal Years 2003 and 2004 51

Figure 4:	Army Military Personnel Obligations for GWOT Operations in
Fiscal Year 2004 58

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

September 21, 2005

Congressional Committees

Following the terrorists attacks of September 11, 2001, the United States
began military operations to combat terrorism both in the United States
and overseas. Military operations to defend the United States against
further attacks are known as Operation Noble Eagle. Ongoing military
operations in Afghanistan and Iraq are known as Operation Enduring Freedom
and Operation Iraqi Freedom, respectively. Together, these three military
operations are identified as the Global War on Terrorism (GWOT). Since the
attacks, the Department of Defense (DOD) reports that it has obligated
$191 billion through May 2005 for conducting the war. Congress has enacted
a series of supplemental appropriation acts to fund the war beginning in
September 2001.

To assist Congress in its oversight role, we are continuing to undertake a
series of reviews relating to the cost and funding of contingency
operations in support of GWOT. In September 2003, we issued a report that
discussed the funding outlook for fiscal year 2003.1 We continued our
analysis of fiscal year 2003 obligations and funding, and in May 2004 we
issued a summary report comparing full-fiscal-year 2003 GWOT cost and
funding.2 In July 2004, we reported on the funding outlook for fiscal year
2004.3 We are currently continuing our review series by examining
full-fiscal-year 2004 GWOT obligations and the availability of funding to
cover those expenses and the funding outlook for the fiscal year 2005 GWOT
supplemental appropriations for the war. We will report our results on
these subjects separately.

This report contains our analyses of DOD's reporting on the costs of GWOT.
On the basis of the authority of the Comptroller General, we assessed (1)
whether DOD's reported war costs are based on reliable data, (2) the
extent to which DOD's existing financial management policy is applicable
to war

1 GAO, Military Operations: Fiscal Year 2003 Obligations Are Substantial,
but May Result in Less Obligations Than Expected, GAO-03-1088 (Washington,
D.C.: Sept. 17, 2003).

2 GAO, Military Operations: DOD's Fiscal Year 2003 Funding and Reported
Obligations in Support of the Global War on Terrorism, GAO-04-668
(Washington, D.C.: May 13, 2004).

3 GAO, Military Operations: Fiscal Year 2004 Costs for the Global War on
Terrorism Will Exceed Supplemental, Requiring DOD to Shift Funds from
Other Uses, GAO-04-915 (Washington, D.C.: July 21, 2004).

spending, and (3) whether DOD has implemented cost controls as operations
mature. We focused our analysis primarily on fiscal year 2004 obligations
specifically for military personnel and operation and maintenance
expenses, as they represent the largest amount of reported spending.
Obligations are incurred by the Defense Department and the military
services through actions such as orders placed, contracts awarded,
services received, or similar transactions made during a given period that
will require payments during the same or a future period.4

To accomplish this review, we analyzed DOD's fiscal year 2004 monthly
Consolidated DOD Terrorist Response Cost Report, which was renamed the
Supplemental and Cost of War Execution Report in January 2005, to
determine reported obligations by operation and by appropriation account
for the military services. That report is the source document used by the
department in discussing the cost of the war. It is not used in the
department's funds or appropriations accounting. DOD's cost report does
not include obligations incurred by the intelligence community; therefore,
we did not review those obligations. To assess the reliability of DOD's
data, we undertook a number of steps, including conducting limited testing
on military personnel costs and operation and maintenance costs. At the
unit level, we cross-checked data entries back to the reporting vehicle
used to input the data into the GWOT cost report. We also conducted
limited crosschecking of the U.S. Army Central Command's (ARCENT) document
register numbers against documentation controlled by the Defense Finance
and Accounting Service (DFAS), Rome, New York. We discussed with Army
financial managers the processes used to ensure that GWOT obligation data
provided from Army units were accurate and reliable. We also reviewed Army
Audit Agency, Air Force Audit Agency, and Naval Audit Service reviews of
their respective service's GWOT spending. To determine what guides GWOT
spending, we focused our efforts on analyzing the fiscal year 2004 Defense
Appropriations Act,5 the fiscal year 2004 Emergency Supplemental
Appropriations Act,6 and DOD's and the military services' specific
policies and guidance. We also met with officials from the Office of the
Under Secretary of Defense (Comptroller) and the Army, Navy, and Marine
Corps to discuss the sufficiency of DOD's financial management

4 31 U.S.C. sec. 1501; See Department of Defense Financial Management
Regulations, 7000.14-R, vol. 1, Definitions, xvii.

5 Pub. L. No. 108-87, 117 Stat. 1054 (Sept. 30, 2003).

6 Pub. L. No. 108-106, 117 Stat. 1209 (Nov. 6, 2003).

policies and procedures for contingency operations, including their
applicability to GWOT conditions. To determine controls over spending and
when they could be strengthened, we identified current controls and held
discussions with resource management officials from major commands and
units that had deployed to Iraq and Afghanistan on what benchmarks might
be used to ascertain when controls could be strengthened as operations
mature and what steps DOD has directed or implemented to control costs. We
did limited work at the Air Force because the Air Force Audit Agency was
undertaking a concurrent review of Air Force GWOT spending; instead, we
drew upon that work as appropriate. As discussed below, we found that the
reported cost data are not reliable because of long-standing deficiencies
in DOD's financial and accounting systems, the lack of a systematic
process to ensure that data are properly entered into those accounting
systems, the use of estimates rather than actual data for some of DOD's
reported costs, and the incorrect categorization of some reported costs
due to the large number of cost categories and limited training on how to
apply them.

We performed our work from August 2004 through August 2005 in accordance
with generally accepted government auditing standards.

Results in Brief 	We found numerous problems with DOD's processes for
recording and reporting costs for the Global War on Terrorism, raising
significant concerns about the overall reliability of DOD's reported cost
data. As a result, neither DOD nor Congress (1) can reliably know how much
the war is costing and details on how appropriated funds are being spent
or (2) have historical data useful in considering future funding needs. On
the basis of our work, DOD is taking steps to improve its cost reporting.
However, because it was not feasible to examine all reported costs and
because significant data reliability problems existed, we were not able to
determine the extent that total costs were misstated. Our examination of
DOD's reported costs in support of GWOT found a number of problems
affecting the accuracy of reported costs. These problems included
longstanding deficiencies in DOD's financial management systems and
business processes, reported military personnel obligations that did not
match payroll records, incorrectly categorized operation and maintenance
obligations, the use of estimates instead of actual information, and a
lack of supporting documentation. Factors contributing to DOD's challenges
in reporting reliable GWOT cost data include the previously cited
longstanding deficiencies in DOD's financial management systems, the lack
of a systematic process to ensure that data are correctly entered into
those

accounting systems, inaccurately reported costs, and difficulties in
properly categorizing costs. In at least one case, the reported costs may
be materially overstated. Specifically, reported obligations for mobilized
Army reservists in fiscal year 2004 were based primarily on estimates
rather than actual information and differed from related DOD payroll
information by as much as $2.1 billion, or 30 percent of the amount DOD
reported in its cost report. Initially, the Army could not support this
difference or its reported GWOT military personnel obligations. Over the
next several months, the Army and the Office of the Under Secretary of
Defense (Comptroller) provided us with several possible, though sometimes
inaccurate, explanations for this difference. Some explanations appeared
valid while others did not and, taken together, they failed to fully
account for the difference. Regarding DOD's accounting systems, over the
years we and DOD have reported the following:

o 	We have testified on several occasions, including in November 2004 and
June 2005, about long-standing weaknesses in DOD's financial management
and related business processes and systems.

o 	In September 2004, DOD acknowledged that systematic deficiencies in its
financial management systems and business processes result in its
inability to collect and provide financial and performance information
that is accurate, reliable, and timely.

o 	Still, DOD's Financial Management Regulation directs the services to
capture contingency costs, which include GWOT costs, with their existing
accounting systems and at the lowest possible level of organization.

Because of these problems, we have identified DOD's financial management
as a high risk area since 1995. Regarding ensuring that the military
services are correctly entering GWOT data into their accounting systems,
for the most part the services and the Office of the Under Secretary of
Defense (Comptroller) do not have a systematic process to review reported
GWOT costs to ensure that they are accurate or to test their reliability.
In one instance, we found that the Marine Corps and Navy were
inadvertently double counting their reported costs each month from
November 2004 through April 2005, totaling almost $1.8 billion. The two
services are taking steps to provide correct information beginning with
the May 2005 cost report. Regarding properly categorizing costs, in our
transaction testing we found that improperly categorized costs ranged from
5 to 30 percent of the dollar value of transactions that we and other
audit

agencies reviewed. The large number of DOD cost categories-numbering in
the thousands-and a lack of training for personnel coding the data
contributed to incorrect categorizations. DOD has been responsive to
recommendations that we and the Air Force Audit Agency have made in the
past to improve cost reporting and has agreed to make a number of
improvements. DOD has identified steps it plans to take to improve cost
reporting on the basis of our current work. In discussing how the detailed
cost data are used, the Office of the Under Secretary of Defense
(Comptroller) told us that the detailed information is used for several
purposes, including to make billion-dollar decisions in developing
supplemental funding budget requests and to inform DOD leadership of
detailed costs incurred for GWOT. However, as discussed above, as a result
of the problems we identified in capturing and reporting GWOT costs,
neither DOD nor Congress can (1) reliably know how much the war is costing
and details on how appropriated funds are being spent or (2) have
historical data useful in considering future funding needs.

Further complicating the data reliability issue is the fact that DOD has
not updated its financial management policy to address GWOT spending.
DOD's existing contingency operations' Financial Management Regulation
(vol. 12, ch. 23) was developed and structured to manage the costs of
smallscale contingencies and specifically excludes its use for wartime
activities. Nonetheless, department and service officials are using this
regulation to guide GWOT budgeting, cost reporting, and spending.
Beginning in 1995, DOD's Financial Management Regulation established
policies and procedures for estimating and reporting contingency costs.
Historically, the financial management regulation generally guided the
military services' spending on contingency operations7 by defining what
constituted the incremental costs of contingency operations and by
providing examples of eligible incremental costs.8 DOD's regulation is
broad and has been

7 Volume 12, chapter 23 of DOD's Financial Management Regulation describes
contingency operations as including, but not limited to, support for peace
operations, major humanitarian assistance efforts, noncombatant evacuation
operations, and international disaster relief efforts. DOD also refers to
the operations in support of GWOT as contingency operations although, as
discussed above, the regulation was developed and structured to manage the
costs of small-scale contingencies and specifically excludes its use for
wartime activities.

8 The term "incremental costs" means those directly attributable costs
that would not have been incurred if it were not for the operation.
Sections 230406 and 230902 of DOD's Financial Management Regulation
7000.14-R, vol. 12, ch. 23, Contingency Operations (January 2005) provide
additional information on incremental costs.

interpreted at all levels of DOD and the services in formulating budgets
and determining what should be reported as GWOT obligations. Although this
is the most currently available statement of DOD policy, we believe that
some of its specific provisions conflict with the needs of GWOT. One
conflict concerns limitations on the use of supplemental funds for base
support activities at home stations. The services have spent billions of
dollars in supplemental funds on these activities. In the case of the
Army, its Installation Management Agency, which manages all Army
installations, obligated $1.5 billion in fiscal year 2004 and has budgeted
$2.1 billion in fiscal year 2005 expressly for GWOT-related "home station"
base support activities. Although some home station costs appear to be
directly related to the war, the provisions of chapter 23, as currently
written, administratively limit such costs to be budgeted or reported as
incremental costs. At the same time, we found a number of reported
incremental base operations costs that appear, at best, tangential to the
support of GWOT. The conflicting provisions in chapter 23 indicate
confusion over what is the DOD policy that senior DOD officials and
service resource managers or unit commanders should use to manage the
costs of the war. Without an updated policy, the military services and
other DOD agencies cannot make informed judgments on the appropriate use
of GWOT funding authorities. In response to our work, DOD has updated its
regulation to address GWOT spending.

While individual commands have taken steps to control costs and DOD policy
advises its officials of their financial management responsibilities to
ensure the prudent use of contingency funding, the Office of the Under
Secretary of Defense (Comptroller) has not systematically called for all
commands involved in GWOT to take steps to control costs, set general
parameters to guide cost-control efforts, and keep the Office informed of
those steps and their success. For example, the commander of coalition
forces in Iraq has unilaterally set a 10 percent cost-reduction target for
fiscal year 2005, but the details are not widely known outside the
command. GWOT spending has risen steadily since the attacks of September
11, 2001, as operations have expanded. From fiscal year 2002 through
fiscal year 2004, reported costs rose from $11 billion to $71 billion
annually and on the basis of reported fiscal year 2005 costs through May
2005, we project that they could reach $71 billion again in fiscal year
2005. Current cost controls implemented by individual commands include
acquisition review boards, command review of purchases, limits on some
categories of spending, and a cost-reduction goal in Iraq. However, DOD's
policy does not go beyond advising DOD officials of their financial
management responsibilities to ensure the prudent use of contingency

funding and provides no guidelines on steps that should be taken to
control costs, particularly as operations mature, while ensuring mission
accomplishment. Resource managers from a number of Army divisions that
have deployed to Iraq or Afghanistan have told us that cost controls can
be strengthened as operations mature. In discussing efforts to control
costs with the Office of the Under Secretary of Defense (Comptroller), the
view was expressed that, on the basis of varying combat situations, steps
to control costs were best left to the individual commands. Currently, the
Comptroller's office has no direct knowledge of the commands' costcontrol
efforts and has not asked to be kept informed of cost-control steps. We
believe that more can be done and that absent a DOD-wide policy calling
for systematic cost-control efforts, there is no assurance that successive
commanders will emphasize cost control and that each commands' efforts
will be equally comprehensive.

We are making recommendations to DOD to (1) undertake a series of steps to
ensure that reported GWOT costs are reliable, (2) expand its financial
management regulation for contingency operations to include contingencies
as large as the current Global War on Terrorism, and (3) establish
guidelines to control costs.

In official comments on a draft of this report, DOD agreed with all but
one of our recommendations, stating that it generally agreed with the
intent of the recommendations and outlined several immediate actions it
has taken to improve procedures and strengthen the cost reports. DOD did
not agree with our recommendation to have the Office of the Under
Secretary of Defense (Comptroller) establish guidelines on cost controls,
commenting that field commanders are the correct echelon to adopt and
emphasize cost controls. We recognize that certain individual commands
have done much to control costs and describe some of those efforts.
However, other individual commands have done less to control costs. As a
result, we continue to believe that more can be done and that absent
DOD-wide guidelines on cost control efforts, there is no assurance that
successive commanders will emphasize cost control and that each command's
efforts will be equally comprehensive. Therefore we have retained the
recommendation. The department's comments and our evaluation are discussed
in detail in a later section of this report and the department's comments
are printed in their entirety in appendix III.

Background	Following the terrorist attacks of September 11, 2001, the
United States began military operations to combat terrorism both in the
United States

and overseas. Operations to defend the United States from terrorist
attacks are known as Operation Noble Eagle. Overseas operations to combat
terrorism are known as Operation Enduring Freedom, which takes place
principally in Afghanistan, and Operation Iraqi Freedom, which takes place
in and around Iraq. Figure 1 shows the primary locations where U.S. forces
conducted operations to support GWOT in fiscal year 2004.

Figure 1: Locations of DOD's Fiscal Year 2004 Global War on Terrorism
Operations

Source: GAO.

Since September 11, 2001, DOD reports that it obligated $191 billion
through May 2005 to conduct GWOT. Factors that affect the cost of the war
include the number of deployed personnel, the special pays and allowances
that deployed personnel receive, the additional pay that mobilized
reservists receive when on active duty, the pace of operations, the extent
to which facilities have to be built to house and protect the deployed
forces, and the distance to the theater. Congress has enacted a series of

supplemental appropriation acts, beginning in September 2001, to fund the
war. These supplemental appropriation acts have included funding authority
for operations in Afghanistan and Iraq, homeland security, and other
global counterterrorism military and intelligence operations.

The costs of contingency operations are referred to as "incremental costs"
and are directly attributable costs that would not have been incurred,
were it not for the operation. Specifically, the costs are above and
beyond baseline training, operations, and personnel costs. Incremental
costs include the pay of mobilized reservists as well as the special pays
and allowances of deployed personnel, such as imminent danger pay and
foreign duty pay for those personnel serving in Operation Iraqi Freedom
and Operation Enduring Freedom, the cost of transporting personnel and
materiel to the theater of operation and supporting them upon arrival, and
the operating cost of equipment, such as vehicles and aircraft, among many
other costs. Costs that are incurred regardless of whether there is a
contingency operation, such as the base pay of active duty military
personnel, are not considered incremental.

DOD tracks the obligations incurred to support GWOT and produces a monthly
cost report, which is distributed throughout the department and used by
senior DOD leadership in discussing the cost of the war. It is also used
in formulating future budget requests to fund GWOT. The monthly report,
which, as noted earlier, was titled the Terrorist Response Cost Report
until January 2005, when it was renamed the Supplemental and Cost of War
Execution Report, identifies the monthly and cumulative incremental GWOT
obligations. DOD reports the costs by service, defense agency, contingency
operation, and appropriation. On October 1, 1998, DOD implemented a
standard contingency cost breakdown structure to improve contingency cost
reporting consistency between multiple services and DOD agencies.
Furthermore, this cost breakdown structure was also to facilitate future
efforts to understand and interpret differences between estimated and
actual costs. DOD Financial Management Regulation 7000.14-R, volume 12,
chapter 23, generally establishes financial policy and procedures related
to DOD contingency operations.9 The regulation incorporates the common
cost categories and multiple subcategories,

9 As discussed later in this report, chapter 23 states that it does not
address wartime activities or the unique circumstances that require U.S.
military forces to be placed on a wartime footing. Despite this express
limitation, DOD and service officials are using chapter 23 to guide GWOT
budgeting, cost reporting, and spending in the absence of other guidance.

which were established in 1998 and updated in January 2005, that are used
to report DOD's monthly GWOT costs.

We previously reported our concerns about the reliability of reported
contingency operations cost data. Specifically, our 1996 report on the
reliability of reported contingency operations costs found inaccuracies
representing about 7 percent of the $4.1 billion in costs reported in
fiscal years 1994 and 1995, which we believe was indicative of a material
weakness in the accounting systems.10 These included the following:

o 	$104 million in overstated costs, primarily due to the failure of the
Air Force ($67 million) and the Navy ($3 million) to adjust reported
flying hour costs to reflect the value of free fuel being received at that
time.

o 	The services' failure to adjust reported costs to reflect normal
operating and training costs. For example, one Army command reported
operating costs of $11 million that were not incurred because of
deployments.

o 	The services' failure to report or fully report $171 million in
understated costs, including some military personnel costs such as
imminent danger pay and family separation pay, munitions the Navy used,
and Air Force mobility equipment and munitions.

We further reported that it was not feasible to examine all reported costs
and supporting data and that our results were not statistically
projectable. Consequently, we were unable to conclude, on the whole, if
reported costs were overstated or understated. At that time, we
recommended that DOD clarify existing guidance for reporting costs, which
DOD agreed to do. Over the years DOD and the services have adopted a
number of our recommendations to improve their guidance for spending on
contingency operations.

Reliability of DOD's Reported Costs Is Unknown

We found numerous problems in DOD's processes for recording and reporting
costs for the Global War on Terrorism, raising significant concerns about
the overall reliability of DOD's reported cost data. As a result, neither
DOD nor Congress (1) can reliably know how much the war is costing and
details on how appropriated funds are being spent or (2)

10 GAO, Contingency Operations: DOD's Reported Costs Contain Significant
Inaccuracies, GAO/NSIAD-96-115 (Washington, D.C.: May 17, 1996).

have historical data useful in considering future funding needs. On the
basis of our work, DOD is taking steps to improve its cost reporting.
However, as was the case in our 1996 report, because it was not feasible
to examine all reported costs and significant data reliability problems
existed, we were not able to determine the extent that total costs were
misstated. DOD policy requires that controls, accounting systems, and
procedures provide, in financial records, the proper identification and
recording of costs incurred in supporting contingency operations. However,
our examination of DOD's reported costs in support of GWOT found a number
of problems affecting the accuracy of reported costs. These problems
included long-standing deficiencies in DOD's financial management systems
and business processes, reported military personnel obligations that do
not match payroll records, incorrectly categorizing operation and
maintenance obligations, the use of estimates instead of actual
information, and a lack of supporting documentation. Problems contributing
to DOD's challenges in reporting reliable GWOT cost data include the
previously cited long-standing deficiencies in DOD's financial management
systems, the lack of a systematic process to ensure that data are correct,
the failure to use actual data when available, and a large number of cost
categories and little training on how to apply them.

DOD's Financial Management Regulation Addresses the Importance of
Accurately Reporting Obligations

DOD's Financial Management Regulation (FMR) emphasizes the importance of
accurate cost reporting. Volume 6A, chapter 2 (sec. 020201) of DOD's FMR
establishes the general financial responsibilities for DOD components.
Components are responsible for the following:

o 	ensuring the accuracy, completeness, timeliness, and documentary
support for all data generated by the customer and input into finance and
accounting systems;

o 	or submitted to the Defense Finance and Accounting Service for input
and/or recording in the finance and accounting systems and inclusion in
financial reports;

o 	establishing appropriate internal controls to ensure the accuracy of
data provided to the DFAS; and

o 	reviewing all reports provided by the DFAS to assess the accuracy of
the financial information being reported.

Chapter 2 further states in section 020202 that DOD components must
establish appropriate internal controls to ensure that data provided to
the DFAS that are recorded in the accounting system and subsequently used
in financial reports are accurate, complete, and supportable. Among the
requirements, the regulation states that before submitting transactions,
DOD components must edit all transactions, hard copy and electronic, for
accuracy, e.g., so that the transaction is identified correctly in terms
of the type of transaction, reported quantity, dollar amount, and other
data.

In addition to volume 6A, chapter 2, volume 3, chapter 8 of the FMR has
several provisions that require funds holders11 to take steps to ensure
that transactions have been entered accurately. Section 080401 requires
that funds holders conduct a triannual review of commitments and
obligations. During these reviews, officials are to review commitment and
obligation transactions for timeliness, accuracy, and completeness. The
requirement applies to all appropriations and funds of all DOD components.
Section 080403 establishes the responsibility of conducting reviews of
outstanding commitments and unliquidated obligations to funds holders.
According to the FMR, this is true regardless of whether the funds holders
or the accounting office actually records the commitments or obligations
in the official accounting records. This responsibility is placed on the
funds holders because the funds holder initiates those actions that result
in commitments and obligations and, therefore, is in the best position to
determine the accuracy and the status of such transactions.

Finally, volume 12, chapter 23 of the FMR establishes policies and
procedures for budgeting and cost reporting for contingency operations and
states that DOD policy requires that controls, accounting systems, and
procedures provide, in financial records, proper identification and
recording of costs incurred in supporting contingency operations.

Concerns Regarding the Reliability of Reported GWOT Costs Stem from a
Variety of Factors

Our work has identified a number of concerns regarding the reliability of
reported GWOT costs. These include deficiencies in DOD's financial
management systems, discrepancies between some reported military personnel
obligations and DOD payroll information, incorrectly categorized operation
and maintenance costs, the use of estimates instead of actual information,
and a lack of supporting documentation.

11 Funds holders are DOD officials who receive a documented administrative
subdivision of funds through their funding chain of command or other
government departments.

DOD Uses Its Existing Financial Management Systems and Business Processes
to Record GWOT Costs, but These Systems Have Long-standing Deficiencies

Because DOD's accounting systems cannot directly capture GWOT costs, the
department's overall GWOT cost reporting is based on the military
services' reports of obligations. Volume 12, chapter 23 of the FMR
requires that the DOD components collect and report applicable costs
related to contingency operations. Chapter 23 also requires that the
services capture their obligations in their existing accounting systems
and at the lowest possible level of organization.

However, DOD has long-standing deficiencies in its existing financial
management systems and business processes. As recently as September 2004,
DOD acknowledged that agencywide financial statements were not completely
reliable as a result of inadequately designed systems. The department
reported that systemic deficiencies in its financial management systems
and business processes result in its inability to collect and report
financial and performance information that is accurate, reliable, and
timely. In March 2004, the Under Secretary of Defense (Comptroller) stated
in a memo that DOD's fiscal year 2004 agencywide financial statements
would not substantially conform to generally accepted accounting
principles. The department acknowledged that although it has made progress
in its efforts to resolve financial management shortfalls, its financial
management systems currently do not fully comply with the applicable
requirements.

For years we have reported on DOD's financial management deficiencies. In
1995 we first designated DOD financial management as an area of high risk.
We concluded that DOD's financial management deficiencies adversely affect
the department's ability to control costs, ensure basic accountability,
anticipate future costs and claims on the budget, measure performance,
maintain funds control, prevent fraud, and address pressing management
issues.12 From 1995 through 2005, we continued to report on deficiencies
in DOD's financial management processes. In November 2004, we testified
that recent audits and investigations by our and DOD's auditors continue
to confirm the existence of pervasive weaknesses in DOD's financial and
related business processes and systems.13 We found that adverse conditions
included discrepancies in military pay, logistical support such as
duplicate supply requisitions, and data reliability needed by Congress and
DOD to make sound sourcing decisions. Most recently, in

12 GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

13 GAO, Department of Defense: Further Actions Are Needed to Effectively
Address Business Management Problems and Overcome Key Business
Transformation Challenges,

GAO-05-140T (Washington, D.C.: Nov. 18, 2004).

June 2005 we testified that long-standing weaknesses in DOD's financial
management and related business processes and systems have (1) resulted in
a lack of reliable information needed to make sound decisions and report
on the status of DOD activities, including the accountability of assets,
through financial and other reports to Congress and DOD decision makers;
(2) hindered its operational efficiency; (3) adversely affected mission
performance; and (4) left the department vulnerable to fraud, waste, and
abuse.14

Some Reported Military The Army did not have a reasonable and reliable
process to identify and Personnel Obligations Are Not report almost $12
billion of GWOT military personnel obligations in fiscal Consistent with
Related Payroll year 2004. Instead of using related DOD payroll
information, the Army

                                  Information

based the GWOT military personnel obligations used in the GWOT cost report
primarily on its fiscal year 2004 obligation plan and, in the end, forced,
or "plugged," obligations to match available supplemental budget
authority. Effectively, the Army was reporting back to Congress exactly
what it had appropriated. Army officials were unable to readily explain
the process for identifying and reporting GWOT military personnel
obligations. Specifically, the Army Budget Office lacked formal procedures
to guide the monthly reporting of GWOT military personnel obligations to
DOD and a process to ensure management's review of the reported amounts.
Army Budget Office officials stated that these problems were exacerbated
by staff losses in the September 11 terrorist attack on the Pentagon,
personnel turnover, and hiring difficulties.

Our analysis showed that obligations associated with Army military
personnel in the monthly GWOT cost report were not consistent with related
DOD payroll information, and the use of planned obligations instead of
actual payroll information might have resulted in reported Army military
personnel GWOT obligations being materially overstated. For fiscal year
2004, our analysis of the more than $7.1 billion in incremental military
personnel obligations listed in the GWOT cost report category for
mobilized Army reserve-component soldiers identified as much as $2.1
billion of reported obligations in excess of related DOD payroll
information. Initially, the Army could not support this difference or its
reported GWOT military personnel obligations. Over the next several
months, the Army and the Office of the Under Secretary of Defense

14 GAO, DOD Business Transformation: Sustained Leadership Needed to
Address Longstanding Financial and Business Management Problems,
GAO-05-723T (Washington, D.C.: June 2005).

(Comptroller) provided us with several possible, though sometimes
inaccurate, explanations for this difference. Some explanations appeared
valid while others did not and, taken together, they failed to fully
account for the difference. For example, the Army Budget Office stated
that a portion of the difference was attributable to retirement pay and
retirement health care accruals. We found that the retirement health care
accrual did not result in incremental costs and, therefore, was not a
valid explanation for the difference. However, mobilized reserve-component
personnel receive an increase in retirement pay benefits over nonmobilized
reservists and, therefore, DOD incurs incremental costs related to this
benefit. According to the Army, the retirement pay accrual represents part
of the difference, and it reported this amount at $824 million. This
information was provided too late in our audit to assess its accuracy and
completeness. Further details on our review of GWOT obligations for Army
military personnel are included in appendix II.

In addition to examining the obligations for mobilized Army reservists, we
also examined reported imminent danger pay and found wide monthly swings
and little correlation with the numbers of deployed personnel. Imminent
danger pay relates directly to the number of military personnel deployed
to eligible areas. Beginning on October 1, 2002, all military
personnel-both Active and Reserve Component-in areas designated as
eligible for imminent danger pay receive $225 per month for each month for
which they qualify for such pay. Eligible areas include, but are not
limited to, the countries of Iraq, Afghanistan, Kuwait, Qatar, Bahrain,
and Saudi Arabia. The monthly amount is payable in full without being
prorated or reduced, for each month, during any part of which a service
member qualifies and regardless of the actual period of time served on
active or inactive duty during that month.

Month-to-month changes in reported imminent danger pay obligations for
GWOT should be consistent with the number of deployed forces in eligible
areas. However, as shown in table 1, which depicts the amounts reported
for DOD as a whole and the implied number of people who should be
receiving the pay on the basis of dividing the amount per month-$225- into
the reported obligations, there are wide monthly swings in the number of
deployed personnel, based on the amount of reported imminent danger pay,
that do not seem to correlate to the actual numbers of deployed personnel.
For example, the reported imminent danger pay suggests that 173,000
personnel were deployed to support GWOT in July 2004 and that the number
of personnel rose to more than 1 million in August 2004 and then declined
to 264,000 in September 2004 and 61,000 in October 2004.

According to DOD, about 221,300 personnel from all the military services
were deployed throughout the region in December 2004 to support Operation
Enduring Freedom and Operation Iraqi Freedom, including deployed personnel
in Iraq, Afghanistan, and Kuwait.

Table 1: Comparison of Reported DOD-Wide Imminent Danger Pay and Implied
Number of Deployed Personnel, April 2004-April 2005

                                                            Implied number of 
                        Reported imminent danger pay       deployed personnel 
                  Month        (dollars in thousands)  (numbers in thousands) 
             April 2004                       $38,186                     170 
               May 2004                        46,106                     205 
              June 2004                        37,054                     165 
              July 2004                        38,893                     173 
            August 2004                       231,090                   1,027 
         September 2004                        59,500                     264 
           October 2004                        13,713 
          November 2004                        69,699                     310 
          December 2004                        33,228                     148 
           January 2005                        41,499                     184 
          February 2005                       127,769                     568 
             March 2005                        48,659                     216 
             April 2005                         (933)                     (4) 

Source: GAO's analysis of DOD's GWOT data.

In continuing discussions of our analysis, Army Budget Office officials
provided additional detail on the Army's reported imminent danger pay
obligations, which comprise the bulk of DOD-wide reported imminent danger
pay obligations. With respect to the August 2004 reported imminent danger
pay, which was by far the largest reported amount from April 2004 through
April 2005, Army Budget Office officials said that their reported
portion-$217 million-of the DOD-wide $231 million was in error owing to a
misplaced decimal and that the Army's August 2004 imminent danger pay
should have been reported as $21 million. These officials attributed the
month-to-month fluctuations in reported imminent danger pay to the lack of
timeliness and consistency in adjusting costs between those baseline and
GWOT amounts. Beginning in June 2005, the Army said that it adopted a new
process that uses accounting data, with the actual count of deployed
forces as a validation checkpoint.

Operation and Maintenance Obligations Are Not Always Properly Categorized

Obligations are the foundation of all GWOT cost reporting. Operation and
maintenance obligations in support of GWOT represent tens of thousands, if
not hundreds of thousands, of individual transactions ranging in value
from 1 penny to millions of dollars. When obligations are incurred, the
services enter them into their accounting systems using accounting codes.
For example, an Army budget activity, such as an installation or unit,
initially obligates funds for acquired goods and services by using the
Standard Army Accounting Classification Code. An obligation entry includes
information on the funding source; the operational mission, such as
Operation Iraqi Freedom; and the category of cost. The cost categories are
established by the services. In the Army, the cost category is called the
element of resource (EOR).

Because DOD's Financial Management Regulation volume 12, chapter 23
requires that the services capture costs within their existing accounting
systems and report them in a common cost format known as the costbreakdown
structure, the services must translate-or "cross-walk"- their obligations
into 1 of 55 cost categories in the cost breakdown structure established
by the Office of the Under Secretary of Defense (Comptroller) and used in
the monthly GWOT cost reports. For the Army, this involves translating
obligations recorded by EOR into the chapter 23 GWOT cost categories. To
meet DOD's reporting requirements, each month Army resource management
officials must cross-walk costs in the EOR categories into the GWOT cost
categories, sometimes manually. For example, in fiscal year 2004, ARCENT
resource management officials manually cross-walked 266 EORs into 14 GWOT
cost categories.

If obligations are not identified in the correct cost category in the
services' accounting system, they can affect the overall reliability of
DOD's GWOT cost reporting. In the Army, ARCENT resource management
officials told us that on the basis of their reviews of GWOT obligations,
they had confidence in the accuracy of the total dollar obligations as
identified in the GWOT cost report but felt that obligations were being
incorrectly categorized. At two Army divisions, we observed obligations
being assigned to the wrong EOR. In our limited testing of transactions at
one of the divisions, which deployed to Iraq as part of Operation Iraqi
Freedom, we found errors in assigning costs to the correct EOR, which
resulted in overstated costs in some categories and understated costs in
others. We reviewed 31 transactions valued at $15 million and found coding
errors in 11, or 35 percent of the transactions, valued at $770,134, or 5
percent of the amount we reviewed. One example of an error we found
involved $383,147 in obligations for communications services, which was
entered into the

division's financial management systems under an EOR that corresponded
with DOD's GWOT cost report's category of Other Services and Miscellaneous
Contracts. A senior division resource management official stated that it
would have been better to use an EOR that corresponded with the
Facilities/Base Support category. As a result, the Other Services and
Miscellaneous Contracts category was overstated by $383,147 while the
Facilities/Base Support cost category was understated by the same amount.
At the other Army division, which deployed to Afghanistan as part of
Operation Enduring Freedom, we also found errors in assigning costs to the
correct EOR that resulted in overstated costs in some categories and
understated costs in others. We reviewed 146 of 237 transactions valued at
more than $14 million and found coding errors in 32 transactions, or 22
percent of the transactions, valued at more than $4 million, or 30 percent
of the amount we reviewed. For example, the division obligated $6,995 for
a printer, which it originally coded with the EOR for automated
dataprocessing equipment. However, once the purchase request reached the
contracting office, it was recoded as general supplies and not as
automated data-processing equipment. After reviewing this example and
others, a senior resource management official at the division concurred
with our assessment of these coding errors.

In related reporting,15 we have raised concerns about reported equipment
reconstitution costs.16 Reconstitution is one of the cost categories in
DOD's GWOT cost report. We reported that DOD has not accurately tracked
and reported its reconstitution costs because the services are unable to
segregate equipment reconstitution from other maintenance requirements, as
required. In the case of the Air Force, we reported that it does not break
out its equipment reconstitution obligations from other GWOT obligations
in the cost report and was reporting no reconstitution costs. In further
discussions Air Force officials told us that their reconstitution costs
were being captured in their flying hour (operating tempo) costs.
Regarding the Army and the Navy, we reported that equipment reconstitution
obligations reported by those two services are likely overstated because
(1) the Army includes costs other than those required for reconstitution
and (2) the Navy is unable to segregate regular

15 GAO, Defense Management: Processes to Estimate and Track Equipment
Reconstitution Costs Can Be Improved, GAO-05-293 (Washington, D.C.: May 5,
2005).

16 Reconstitution is the process of returning equipment after a deployment
is completed to a condition that enables the unit to perform required
missions and achieved required readiness levels.

maintenance from reconstitution maintenance for ship overhauls. We
recommended and DOD agreed to direct the services to develop comprehensive
and consistent methods for tracking and reporting equipment reconstitution
obligations. In agreeing with our recommendation, the Office of the Under
Secretary of Defense (Comptroller) said that the office had already
revised its financial management regulation to improve the reporting of
equipment reconstitution, but we observed that until additional actions
are taken, such as improving the services' financial management systems'
ability to track obligations, our recommendation will not be fully
implemented. Beginning in October 2004, DOD revised its reconstitution
cost category to include four subcategories, and the Air Force is
reporting reconstitution obligations in two of those categories.

In addition to the concerns with properly categorizing costs that we
identified, officials from the Army Budget Office believe that the Army's
operating support obligation data are reliable at the broad category
levels (personnel support, operating support, and transportation), but
distribution within categories is likely to contain errors.17 These
officials said that the Army is taking two immediate actions. First, it
has refined its EOR to cost breakdown structure code cross-walk. The Army
has specifically identified approximately 135 EORs that directly associate
with the cost breakdown structure. Additionally, Army officials said that
they have added an additional data element (the Functional Cost Account
code, which describes the programmatic function), which will provide one
more reference point to validate entries. This revision was effective with
the June 2005 reporting cycle. Second, Army officials said that the Army
is developing a standard operating procedure with a follow-on "train the
trainers" program for Army-wide distribution. It will prescribe the
methodology for capturing GWOT execution data from the accounting systems
and source documents. This is a longer-term solution that the Army
believes should contribute materially to improved data entry at the
originating organizational levels.

The Air Force Audit Agency, in a June 2005 report on Air Force GWOT
spending, also identified errors in properly categorizing GWOT costs.18

17 Personnel support, operating support, and transportation costs are
subcategories in the DOD GWOT cost reports.

18 Air Force Audit Agency, Global War on Terrorism Funds Management,
F2005-0011-FB1000 (June 20, 2005).

Specifically, the audit agency found that in fiscal year 2003, 159 of 923
transactions it reviewed, or about 17 percent of GWOT transactions valued
at more than $163 million, were inaccurately recorded in the Air Force's
accounting system. The report stated that this condition occurred because
resource management officials were uncertain of which costs were GWOT
related and because reported costs were not compared with documentation as
required by DOD's financial management regulation. The audit agency
concluded that inaccurate cost reporting may lead to questionable
cost-of-war information, distorted command resource allocation and
spending plans, and unreliable summary DOD financial reports. The audit
agency made several recommendations, including one that cognizant Air
Force officials review transaction data and notify accounting liaison
office personnel of inaccurate entries monthly, and one that the liaison
office personnel request data correction from appropriate accounting
offices. The Air Force agreed with the recommendations and stated that it
would make the recommended changes. In advance of the report's issuance,
in a March 2, 2005, memo, the Assistant Secretary of the Air Force,
Financial Management and Comptroller, addressed and agreed to revise
guidance to emphasize increased management oversight over transaction
approval, accuracy, and documentation completeness.

Some GWOT Cost Data Are Because ships at sea incur the same types of costs
whether in normal

Based on Estimates	forward-deployed operations or in support of GWOT, the
Navy allocates the costs between normal and GWOT operating costs. The
Navy's major commands use a variety of approaches for allocating these
costs. For example, we found that the Atlantic and Pacific surface
commands, which are responsible for managing the Navy's surface ships, use
two different approaches in order to allocate a portion of each ship's
normal operating costs to GWOT for those ships that have been used to
support GWOT missions. The Atlantic Fleet uses an approach whereby the
portion of a ship's normal operating costs becomes GWOT costs when (1) the
ship has been engaged in a GWOT mission during that month and (2) the ship
exceeds its monthly baseline budget. Once the baseline budget has been
exceeded, the additional cost above that baseline is considered
incremental and is recorded as a GWOT cost. The Pacific Fleet uses a
different approach, which utilizes a model that has evolved over many
years. This model takes a number of factors into consideration in order to
calculate how much of a ship's costs should be allocated to GWOT. These
factors include a running 3-year average of the costs of operating each
individual ship, the cost of maintaining that general class of ships, and
whether the ship has performed GWOT missions. This model calculates an
amount for each ship that should be recorded as a GWOT cost.

Documentation Is Not Always Available

Documentation related to goods and services purchased in support of the
Global War on Terrorism is not always available. Without documentation,
one cannot attest to the reliability and applicability of reported costs
to GWOT. At one of the Marine Expeditionary Forces, we were able to link
reported costs to the supporting documentation for contractual purchases.
However, when we compared a limited number of documents from the ARCENT
document register with documentation controlled by DFAS-Rome, New York, we
found instances where (1) document register descriptions did not match
invoices maintained by DFAS and (2) invoices did not match dollar amounts
associated with the ARCENT documentation number. For example, one item we
identified was listed in the document register as a purchase of unit coins
for $200,000. However, we found no evidence indicating that the $200,000
was actually obligated for the purchase of unit coins. The EOR listed in
the document register indicated that the item was for furniture. When we
reviewed the invoices, we found that the documentation supported the
purchase of furniture for $18,959 but nothing for unit coins or for
$200,000. In another example, a purchase was listed in the document
register for $21,900 toward an operational fund. When we reviewed the
invoice, we found that the documentation supported the purchase of
translator services for $3,950.

Several audit agencies also had mixed success with linking reported GWOT
costs to supporting documentation. In many cases, documentation was not
available or the available documentation was not sufficient enough to
determine the applicability of costs, as shown in the following examples:

o 	The Air Force Audit Agency, in its previously cited June 2005 report on
Air Force GWOT funds management, reported that financial managers could
not provide documentation to support approximately 14 percent of 1,037
fiscal year 2003 transactions reviewed. The transactions had an absolute
value of more than $16 million. The audit agency reported that the
inability to provide documentation occurred for three primary reasons: (1)
Air Force financial managers did not require funds holders and resource
advisors to maintain supporting documents for a minimum of 24 months, (2)
comptrollers did not provide funds holders and resource managers with
documentation requirements training, and (3) Air Force organizations did
not always comply with records management guidance. The agency concluded
that maintaining documentation provides an audit trail and assurance that
Air Force personnel properly expended these funds. The agency made several
recommendations to strengthen controls over documentation, which the Air
Force agreed to implement. In the previously cited March 2,

2005, memo issued in advance of the issuance of the Air Force Audit
Agency's report, the Assistant Secretary of the Air Force, Financial
Management and Comptroller also addressed this finding and agreed to
revise Air Force guidance to require funds holders and resource advisors
to maintain supporting documentation for a minimum of 24 months for all
financial transactions, modify the Web-based Resource Advisor Tutorial to
highlight the need for funds holders and resource advisors to maintain
documentation for financial transactions, and to require comptroller
personnel to include documentation requirements in all funds holders'
training and resource advisor training.

o 	The Naval Audit Service reported that it could not find supporting
documentation for 11 percent of the reported fiscal year 2002 Operation
Enduring Freedom costs for the 14 units it reviewed.19 The Naval Audit
Service found that more than half of these unsupported costs resulted from
one unit's not retaining documentation over a 2-month period. This same
unit's costs for other months reviewed were well documented; so, overall,
the audit service was not overly concerned with the 2-month gap. For the
other units reviewed, documentation was available, but the units could not
always identify the portion of those items reported as being incremental
costs of Operation Enduring Freedom. The Naval Audit Service concluded
that internal controls were adequate and that an expanded review was not
warranted at that time. It made no recommendations.

o 	The U.S. Army Audit Agency found that 58, or about 2 percent, of the
2,751 transactions it reviewed for fiscal year 2003 valued at $37.4
million lacked supporting documentation.20 As a consequence, the agency
was unable to determine if the transactions were valid. The Army Audit
Agency also discovered documentation problems involving government
purchase cards. These problems included a lack of documentation
authorizing purchases and inadequate justification of purchases to ensure
that they were related to contingency operations. The agency concluded
that without adequate justifications and support to ensure that the
transactions are related to contingency operations, these types of
obligations appear questionable. The agency recommended that

19 Department of the Navy, Naval Audit Service, Purchase Justifications at
Department of the Navy Shore Activities (Washington Navy Yard, D.C.:
2003).

20 U.S. Army Audit Agency, FY 03 Supplemental Funds and Cash Flow
(Alexandria, Va.: 2004).

Army financial management leadership emphasize the consistent application
of guidance for justifying and documenting contingency operations
requirements, and the Army financial management leadership said that it
would emphasize the need to fully justify and document expenditures as
related contingency operations and that it had already completed or will
complete action through the distribution of additional guidance by
December 2005.

Several Factors Contribute to Data Reliability Concerns

There Is No Systematic Process to Ensure That GWOT Data Are Accurately
Recorded and Ensure Adequate Management Oversight

Data reliability is affected by the previously discussed long-standing
deficiencies in DOD's financial management systems, which affect the
ability to capture costs in a completely systematic manner. This is
compounded by the lack of a systematic process for ensuring that the data
in the GWOT cost reports are accurate, less-than-adequate management
oversight on the preparation and accuracy of the reports, the failure to
use actual data when available, and a large number of cost categories and
little training on how to apply them.

For the most part, DOD does not have a systematic process to review
reported GWOT costs to ensure that they are accurate. To ensure the
accuracy of DOD's GWOT cost reports, the military services and the Office
of the Under Secretary of Defense (Comptroller) compare each new month's
cost report with previous months' reports to ascertain if there are large
variances from previous reports and, if so, determine what caused them and
make revisions as appropriate. For GWOT cost reporting, individual
obligation data that are coded as being in support of GWOT are aggregated
at successively higher command levels and sent through the services' chain
of command. At each command level, financial management officials review
costs for large anomalies. The services take different approaches to
ensure that GWOT obligation data are correctly recorded. For example, the
Army gains assurance that reported obligations are accurate by reviewing
the monthly obligation data provided by units. However, the Army does not
follow specific guidelines to determine the extent to which obligations
are accurately reported. For example, U.S. Army Forces Command and ARCENT
financial management officials ensure that reported obligations are
correct by using historical knowledge of cost trends to review obligation
reports for large anomalies. If a large anomaly is identified, it is
further investigated to determine the cause and resolve any differences.
However, the two commands do not have specific criteria to determine how
large an anomaly has to be before it is investigated. As a result,
financial management officials at the commands use their judgment to
determine which anomalies to investigate. The Navy

also reviews GWOT cost data for anomalies but lacks a systematic method
for gaining assurance that the data are reliable. According to the
Financial Management and Budget official who manages the process, there is
no systematic approach for reviewing the submissions received from each of
the claimants.

The Marine Corps has adopted additional measures to gain further assurance
that its GWOT obligations are accurately reported. For example, resource
management officials at one Marine Expeditionary Force told us that they
periodically visit subordinate units to reaffirm that these units are
following Marine Corps standard operating procedures for entering and
recording obligation data. During these visits, officials use a checklist
that highlights areas that the visiting officials should emphasize. These
areas include assessing the unit's knowledge of Marine Corps policies and
procedures, reviewing purchases made by the unit, and checking to ensure
that the unit correctly entered obligations into the Marine Corps'
accounting system. Marine Expeditionary Force resource management
officials told us that this process plays an important role in ensuring
that GWOT obligation data are reliable.

Once the services complete their review of GWOT obligations they submit
their obligation reports to DFAS,21 which aggregates the individual
submissions into the monthly GWOT cost report. The Office of the Under
Secretary of Defense (Comptroller) gains assurance that the services'
reported obligations are reliable by reviewing the monthly DFAS cost
reports for anomalies. If a discrepancy is identified, the Comptroller's
office contacts the responsible DOD component, attempts to determine
reasons for the discrepancy, and directs that necessary corrections be
made before distributing the cost report within DOD.

Despite the efforts to review reported costs, there is less-than-adequate
management oversight on the preparation and accuracy of the reports. We
found instances where the services did not identify wide swings in monthly
costs, such as the swings discussed earlier in imminent danger pay in the
GWOT cost reports for DOD as a whole, as well as errors in the overall
GWOT cost reports that amounted to hundreds of millions of dollars
monthly. Specifically, in reviewing the Navy's and Marine Corps' fiscal
year 2005 operation and maintenance and investment GWOT obligations as
part

21 DFAS is responsible for consolidating all DOD contingency costs and for
the billing and reimbursement distribution functions in support of
contingency operations.

of a separate effort, we found that the obligations reported in DOD's
summary GWOT cost report were inadvertently being overstated by hundreds
of millions of dollars monthly between the November 2004 and the April
2005 cost reports. In total, we found that the two services overstated
their obligations during that period by almost $1.8 billion-$1.5 billion
in the case of the Marine Corps and $300 million in the case of the Navy.
Each month DOD prepares a separate report for each of the appropriations
acts that are used to provide funding authority to support GWOT and an
overall summary cost report. In discussions with Marine Corps and Navy
budget officials, it was determined that operation and maintenance and
investment obligations associated with funding authority provided through
title IX of the fiscal year 2005 Defense Appropriations Act were
inadvertently being double counted in the GWOT cost report: once in the
title IX report and once again in the report on funding authority provided
in other fiscal year 2005 appropriations acts, resulting in inflated
figures in the summary report. These reporting problems were present in
all of the GWOT cost reports from November 2004 through April 2005. Once
this matter came to light, Navy and Marine Corps officials took action to
reflect the accurate obligations for the title IX and other fiscal year
2005 appropriations reports. The May 2005 report reflects the corrected
cumulative obligations through May 2005.

Volume 3, chapter 8 of DOD's Financial Management Regulation requires that
steps be taken to verify that transactions are correctly entered into the
services' accounting systems by comparing financial transactions with
supporting documents. However, as discussed earlier, in a detailed review
of fiscal year 2003 GWOT obligations, the Air Force Audit Agency found
that in addition to not properly categorizing costs, officials at 16 of 29
locations visited failed to verify that 159 of 923 transactions, or 17
percent of the transactions the agency reviewed, were accurately entered
into the Air Force's financial accounting system. The audit agency said
that this condition occurred because funds holders were uncertain of which
costs should be coded as GWOT expenditures and did not compare financial
transactions with supporting documents as required by DOD's financial
management regulation. The audit agency concluded that as a result,
financial managers may inadvertently provide questionable "cost of war"
information when data are inaccurately processed in the system.
Furthermore, command resource allocation and spending plans may be
distorted by faulty data. Finally, summary DOD financial reports may be
unreliable. The audit agency made recommendations to the Air Force to
review transaction data; correct inaccurate data; and develop, publish,
and

implement guidelines on the appropriate use of GWOT cost codes, which the
Air Force agreed to do.

Estimated Obligations Are Used As previously discussed, in reviewing the
Army's military personnel GWOT

Instead of Actual Payroll Information

Assigning Correct EORs Are Complicated by a Number of Factors

obligations for fiscal year 2004, we found that the reported amounts for
mobilized Army reservists were inconsistent with related DOD payroll
information. We found that the Army's military personnel GWOT obligations
reported in the GWOT cost report were based primarily on monthly estimates
in the Army obligation plan rather than actual payroll information.

The practice of using estimates in reporting military personnel costs
related to contingency operations rather than payroll data has been
ongoing for almost a decade. In our previously cited 1996 report on the
reliability of contingency operations costs, we reported that the services
used estimates rather than actual data to derive incremental personnel
costs for reservists called to active duty in contingency operations. We
also reported that the services used estimates in reporting the special
pays and allowances, such as imminent danger pay, which all military
personnel become eligible for during deployments, and that they did not
reconcile those costs to actual payroll data. At that time, we reported
that DOD had plans under way to link its payroll and personnel systems,
which would allow the extraction of actual cost data. Until the two
systems were linked, we reported that it would not be possible to test the
accuracy of estimated costs. As of June 2005, more than 9 years after our
earlier report, at least one service, the Army, was still not using actual
payroll information to report its GWOT military personnel obligations.
Army officials advised us in July 2005 that, on the basis of our findings
on reported military personnel obligations, they will now use related DOD
payroll information where applicable.

As also discussed earlier, if obligations are not categorized in the
correct cost categories in the services' accounting system, it can affect
the overall reliability of DOD's GWOT cost reporting. The large number of
EORs used by Army units to assign costs to categories, literally in the
thousands, complicates properly categorizing GWOT obligations. We found
that the large number of EORs encourages Army units to adopt shortcuts to
simplify categorization, which can result in incorrectly categorizing
obligations. For example, a resource management official in one Army
division indicated that the division used one particular EOR as a
catch-all category. This EOR corresponded with DOD's GWOT cost-reporting
category of "Other Services and Miscellaneous Contracts." Placing costs in

this category inflates this cost category. At another Army division,
resource management officials reviewed the EOR list in order to streamline
the number of EORs that the division used. After reviewing about 3,700
EORs, resource management officials concluded that about 15 were most
appropriate for the purpose of categorizing its GWOT obligations.

The use of a single standardized EOR to categorize obligations for varying
types of goods and services also affects proper cost categorization. For
example, there is one EOR for all purchases made with a Government
Purchase Card (GPC), regardless of the item or service purchased. In
another example, resource management officials at one Army division told
us that while deployed to Afghanistan, cash purchases made by its field
ordering officers were always coded to the EOR for general supplies, no
matter what item or service was obtained. Finally, ARCENT resource
management officials told us that the command identified contracts that
should have been allocated to several EORs but were consolidated under one
EOR. These contracts inflated the costs for that EOR category.

When coding errors are made, they are not always corrected. Resource
management officials at one Army division told us that it was too
timeconsuming to fix miscoded EORs, as it involves having to coordinate
with customers and make changes in the Army's financial accounting system.
As a result, inaccurate information remains in the accounting system. This
division's Comptroller acknowledged that better attention should be paid
to coding purchase requests at the comptroller level and that oversight
should be a higher concern.

People responsible for categorizing purchases by the EOR are not always
properly trained, which further complicates correct categorization.
Resource management officials at an Army command we visited told us that
there were training concerns with staff in the Comptroller's office,
particularly given the frequent rotation in and out of the office that is
typical of military staff. These officials told us that, often, the person
responsible for entering EORs into the system has not been trained to do
so. Obligations are often entered by lower-ranked enlisted soldiers who
have been assigned to the position because they have downtime and are
computer literate. These soldiers may not have any experience with
entering obligation data and might have received little or no training on
how to do so. According to the officials, inexperience is not a major
issue with more straightforward obligation categories such as
transportation; however, when applied to more complicated categories, such
as supplies, many errors can occur.

Like the Army, the Marine Corps also captures GWOT obligations using cost
categories, known in the Marine Corps as cost account codes. However,
because the Marine Corps uses fewer categories, converting data into the
contingency cost categories is simpler than for the other services. For
example, Marine Corps Forces Pacific resource management officials
established 31 cost account codes that translate into 25 of the 55 GWOT
cost report categories. Resource management officials at one Marine
Expeditionary Force told us that utilizing a simple system helps to
improve the accuracy of their obligation data.

Processes for Recording GWOT Processes used to enter and monitor operation
and maintenance

Costs Can Lead to Errors	obligations may also contribute to unreliable
cost data. For example, in the Army, resource management officials from
two divisions that had deployed to Iraq and one division that had deployed
to Afghanistan reported that, when deployed, the divisions were junior
users of the Army's database Commitment Accounting System and did not have
access to the Army's principal accounting system, the Standard Army
Financial System. As a result, the three divisions had to submit their
document registers to ARCENT to record obligations and commit funds.
Resource management officials at two of the three divisions stated that
the amounts recorded in ARCENT's ledger could not be relied upon because
of manipulations and adjustments made to the data by ARCENT. One official
stated that obligations or commitments would sometimes be doubled or
eliminated entirely from the ledger. For example, one division had to
reenter $40 million in obligations that ARCENT dropped from the ledger
during the fiscal year 2003 closeout. This official also told us that the
system that the Army uses to track commitments was antiquated and did not
support the data needed to accurately track and analyze costs.

The Use of Existing GWOT Cost Data Affects Multiple DOD Financial
Processes

Notwithstanding concerns about data reliability, according to the Office
of the Under Secretary of Defense (Comptroller), which develops GWOT
budget requests in concert with the military services and other DOD
components, a metric is needed and the GWOT cost reports are the only
available data. In discussing the implications of improperly categorizing
GWOT obligations, the Comptroller's office told us that it adversely
affects decision making and the ability to use the data for analysis. In
discussing how the detailed cost data are used, a Comptroller
representative told us that he uses the detailed information presented in
the cost breakdown structure categories in the report for several
purposes, as follows:

o 	to make billion-dollar decisions in developing supplemental funding
budget requests;

o 	to cross-check the cost data as presented in the cost breakdown
structure with the estimates developed by the Contingency Operations
Support Tool (COST) model; and

o 	as a management tool to adjust the cost factors in the COST model and
revise the model, prepare supplemental funding budget requests, and inform
DOD leadership of detailed costs incurred for GWOT.

DOD Is Using Regulations to Guide GWOT Budgeting, Reporting, and Spending
That Were Not Designed for Wartime Operations

Office of the Under Secretary of Defense (Comptroller) and military
service officials are using DOD's existing financial management regulation
that addresses contingency operation funding for guiding budget
submissions, cost reporting, and spending for GWOT. However, DOD's
Financial Management Regulation,22 which contains these policies and
procedures, was designed for small-scale contingency operations and has
language expressly stating that it is not intended to address wartime
activities such as those that DOD is confronted with in the current war.23
Furthermore, specific provisions in this regulation conflict with the GWOT
funding procedures and, in some cases, the needs of the war. Without an
updated policy on GWOT budgeting, cost reporting, and spending, the
military services and other DOD agencies cannot make informed judgments on
the appropriate use of GWOT funding authorities. In response to our work,
the Office of the Under Secretary of Defense (Comptroller) has updated its
regulation to address GWOT spending.

Current Spending Policy DOD's current regulation was designed for
small-scale contingency

Was Developed for Smaller-operations and is not intended to address
wartime activities. In February

Scale Operations 	1995, DOD added a chapter to its financial management
regulation to establish policies and procedures for estimating the budget
and reporting the costs of contingency operations (vol. 12, ch.
23-Contingency Operations). In 1998 the Office of the Under Secretary of
Defense (Comptroller) implemented a standard cost breakdown structure for

22 Department of Defense Financial Management Regulation 7000.14R, vol.
12, ch. 23, Contingency Operations (January 2005).

23 Ch. 23, sec. 230101 and 230105.

standard contingency operations to improve the budgeting and reporting of
these costs. This structure was incorporated in the 2001 version of
chapter 23 and has been expanded in the latest January 2005 version. The
Office of the Under Secretary of Defense (Comptroller) has also
supplemented its regulation through messages regarding cost reporting and
formulating specific fiscal year budget requests. Since its publication in
1995, Comptroller officials have used chapter 23 and later the cost
breakdown structure in particular, to budget, capture the costs, and fund
or seek supplemental funding for contingency operations. Comptroller
officials have also directed the services to prepare budget estimates and
report the costs of contingency operations (to include the various
missions that support the Global War on Terrorism), according to chapter
23's provisions. During our visits to the military commands and
installations that have been involved in supporting GWOT contingency
operations, service financial managers indicated that they use chapter 23
as a primary source to guide all war-related spending.

Although Office of the Under Secretary of Defense (Comptroller) and
service financial management officials are continuing to use the
provisions in chapter 23 to guide their GWOT budget submissions, cost
reporting, and spending, it is not clear to what extent these provisions
should apply, especially given that, on its face, chapter 23 states that
its policies and procedures do not address wartime activities or
circumstances that require U.S. military forces to be placed on a wartime
footing.24 Moreover, numerous specific provisions in chapter 23 conflict
with the GWOT funding procedures and, in some cases, the needs of the war.

In addition to the express language that states that chapter 23 does not
apply to wartime activities, the overall structure of chapter 23 and many
of its specific provisions are not intended to address the types of costs
incurred or funding authorities provided to support GWOT. For example,
although the fiscal year 2004 GWOT budget estimates and cost reporting
contained significant amounts of investment costs, chapter 23, given that
it was designed to address small-scale contingency operations, which
usually would not involve such costs, did not include policies and
procedures to guide the budgeting or reporting of these costs.25 Moreover,
another

24 Ch. 23, sec. 230105.

25 Chapter 23 was revised in January 2005 to include these cost categories
and provide descriptions of these types of costs.

specific provision in chapter 23 states that these costs should not be
considered as incremental costs of a contingency operation.26 Recognizing
that large-scale contingency operations lasting as long as GWOT and
affecting a large portion of U.S. military units may necessarily incur
investment costs, these provisions illustrate an inconsistency between the
needs to support the war and the current DOD policies and procedures used
to guide the preparation of GWOT budgets, cost reporting, and spending.
This lack of clarity could lead to uncertainty at all levels within DOD
over what policies actually are intended to guide the funding for the war.

Use of GWOT Funds for Home Station Operations Is Most Affected by the Lack
of Updated Policy

There is confusion over DOD's policies and procedures for guiding the
preparation of GWOT budgets, cost reporting, and the spending of billions
of dollars in GWOT funding for base operation activities at the home
stations of the military units that are preparing to deploy or have
deployed on GWOT missions. Chapter 23 expressly states that costs
associated with facilities/base support activities may be budgeted and
reported only if the activities occur away from a unit's home station.27
Despite this administrative limitation, many installations have been
budgeting and recognizing as GWOT-related costs base support costs for
home station activities. For example, in fiscal year 2003 the Navy spent
$42.5 million for wharf repairs at Pearl Harbor, Hawaii. In fiscal years
2003 and 2004, the Air Force spent a total of more than $117 million at
Anderson Air Force base in Guam for a variety of installation-related
costs (e.g., support facilities for bomber aircraft and storm damage
repair). The Army's Installation and Management Agency, which manages all
Army installations, obligated $1.52 billion in fiscal year 2004 and has
budgeted about $2.07 billion in fiscal year 2005 expressly for
GWOT-related "home station" base support activities. All of these costs
conflict with the home station spending limitation in chapter

23.

Notwithstanding chapter 23's administrative limitation on budgeting and
reporting costs for home station facilities/base support activities, some
of these reported costs appear to meet the definition of "incremental
costs," which guides all GWOT spending. DOD policy states that costs
associated

26 Ch. 23, sec. 230902.

27 Ch. 23, sec. 230406, Cost Category 3.4, Facilities/Base Support.
Examples of activities away from home station would include those in Iraq.

with contingency operations are limited to the incremental costs of the
operations, that is, costs that are above and beyond baseline training,
operations, and personnel costs or costs that would not have been incurred
had the contingency operation not been supported28 (i.e., costs that are
directly attributable to the operation). During our review, we noted a
number of instances in which GWOT costs were recorded relating to home
station base operation activities that appear to be directly attributable
to the war. At one Army installation-an installation that helped prepare
reserve military personnel for deployments in support of GWOT-we found
reported GWOT costs for the renovation of barracks, dining facilities, and
latrines to accommodate increased numbers of reserve personnel using those
facilities. However, we also found some home station costs that did not
appear to support the war or only to tangentially support it. For example,
at this same installation we found that it also reported GWOT costs for
renovating unneeded vehicles for redistribution within the Army even
though they were not used in any contingency operation and had been
declared excess to the unit before it deployed. At another Army
installation, we found GWOT costs to improve the readiness condition of
equipment not deployed for contingency operations. In addition, we found
that one Navy Command reported GWOT costs for improving the condition of
floating docks that were not properly stored while the unit responsible
for their upkeep was deployed on a GWOT mission. The docks were seriously
corroded as a result of not being stored properly and left in salt water
for more than a year. Navy officials said that nearly $6 million in GWOT
funding had been used in fiscal year 2003 to pay for these repairs. Navy
officials disagreed with our view that these costs were at best tangential
to the support of the war and noted that the justification for the repairs
was that these docks were a requirement and would likely be needed in the
future to support GWOT. However, we believe that GWOT costs are limited by
the provisions of chapter 23 to those costs that are in direct support of
the war.

In response to our concerns about the inconsistencies contained in chapter
23, in August 2005, the Office of the Under Secretary of Defense
(Comptroller) officials approved a revision to chapter 23 to clarify the
policy on both base operations and investment costs for contingency
operations. This clarification should assist the military services and
other DOD agencies in making informed judgments on the appropriate use of
GWOT funding authorities.

28 Ch. 23, sec. 230406 and 230902.

Cost Controls Can Be Strengthened As Operations Mature

DOD and Office of Management and Budget policies emphasize the need to
spend funds prudently. Individual commands and commanders have implemented
a variety of cost controls for GWOT spending. Current cost controls
include acquisition review boards, command review of purchases, limits on
some categories of spending, and a cost reduction goal in Iraq. However,
DOD's policies and guidance do not go beyond advising DOD officials of
their financial management responsibilities with regard to the prudent use
of contingency funding authorities and provide no guidelines on steps that
should be taken to control costs, particularly as operations mature, while
ensuring mission accomplishment. Resource managers from a number of Army
divisions that have deployed to Iraq or Afghanistan have told us that cost
controls can be strengthened as operations mature.

Policy Emphasizes the Need for Prudent Spending

OMB circular A-123 requires all mangers of federal funds to ensure that
cost-effective controls be implemented for the expenditure of appropriated
funds. Section 230108 of DOD's financial management regulation for
contingency operations, which was added in January 2005, advises DOD
officials of their financial management responsibilities to ensure the
prudent use of contingency funding authorities. The section emphasizes
that it is vital for civilian and military personnel authorized to
obligate and expend funds in support of contingency operations to employ a
fiduciary approach to ensure that funds are used in a prudent manner.

GWOT spending has risen steadily since the attacks of September 11, 2001,
as operations have expanded. As shown in figure 2, from fiscal year 2002
through fiscal year 2004, reported costs rose from $11 billion to $71
billion annually and, from our projection of reported fiscal year 2005
obligations through May 2005, could reach about $71.5 billion again in
fiscal year 2005. The large amount of spending and its growth underscore
the need for cost controls.

 Figure 2: Growth in Reported and Projected GWOT Spending, Fiscal Years 2002-5

Some commands have taken steps to seek economy and efficiency in
performing tasks by reviewing existing requirements and seeking more
efficient methods to perform required tasks. Over the years, we have
reported that when the government seeks opportunities to control costs,
savings are usually realized. For example, in July 2004 we reported that
savings are generally realized when the customer reviews logistics support
contractors' work for economy and efficiency but that these reviews have

a GAO projected the fiscal year 2005 GWOT cost on the basis of reported
obligations through May 2005.

Individual Commands Have Developed a Variety of Cost Controls for GWOT
Spending, but There Is No Systematic DOD Effort to Ensure That All
Commands Pursue Cost Controls

not been routinely conducted at all work locations.29 We reported that
U.S. Army Europe saved $200 million dollars, or 10 percent of the contract
ceiling price, on its Balkans Support Contract; Third Army would save $31
million annually in Kuwait, or 43 percent by changing food service
contractors; and the Marine Corps saved $8.6 million, or 18 percent, from
an estimated $48 million in work in Djibouti, which is one of the
Operation Enduring Freedom locations.

Military commands and individual commanders involved in GWOT as well as in
earlier operations have put in place a variety of controls on their own
initiative designed to control costs. Some examples are as follows:

o 	Acquisition review boards are being used in Iraq, Afghanistan, and
Kuwait to assess if requirements are valid and, if so, decide how best to
satisfy them. In addition, in an August 2004 order, the commander of
Multinational Forces-Iraq established a stewardship council intended to
reinforce fiscal discipline in order to ensure that limited financial
resources are effectively and efficiently employed to accomplish the
command's strategic objectives.

o 	Individual Army divisions have taken steps to control costs. One Army
division we visited has restricted the use of its Government Purchase
Cards for GWOT reconstitution obligations until the card holders complete
a training class detailing the appropriate use of the cards. The division
Comptroller stated that this action was taken to limit spending and ensure
that purchases made in support of GWOT were appropriate. Another Army
division implemented a Program Budget Advisory Committee to review its
GWOT predeployment requirements. One example of economies directed by the
committee was to consolidate requirements for medical supplies, batteries,
and ballistic blankets into a single division purchase. The committee was
reestablished upon the division's return from Afghanistan for the review
and approval of GWOT reconstitution requirements.

o 	Third Army, which obligated almost $17 billion in fiscal year 2004 to
support GWOT, has taken a number of steps to control costs. Among other
things, it reviews requisitions of items obtained through the stock fund
that are not reviewed by the review boards in Iraq, Afghanistan,

29 GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, GAO-04-854 (Washington, D.C.:
July 19, 2004).

and Kuwait-specifically, items that have a high dollar value, involve
large quantities, are pilferable, or are personal items. In a March 2005
message to the Vice Chief of Staff of the Army, the Third Army commander
also described cost control measures implemented by organizations funded
by Third Army. These included management controls placed on requests to
expand the use of LOGCAP, reducing the cost of transporting cargo into the
theater, and reducing demurrage charges associated with commercial
containers by identifying and returning excess containers.

The Army has also set limits on certain kinds of spending. For example,
the Army set a $6.5 billion limit on LOGCAP spending in fiscal year 2004
on the basis of the estimated cost of required work and a $6.6 billion
limit for fiscal year 2005. On a much smaller scale, in July 2004, Third
Army issued a policy memorandum setting forth procedures for purchasing
and awarding unit coins30 to limit coins purchased with contingency
operations funds. The policy recommends a funding ceiling for coin
purchases from operating funds of $1,000 per battalion and $3,000 per
brigade.

One command has also set spending reduction targets to constrain spending.
The commander of coalition forces in Iraq has set a 10 percent cost
reduction target in Iraq. According to the Deputy Chief of Staff for
Resource Management for Multinational Forces-Iraq, the cost-reduction goal
was intended as a direction to take the command rather than as a hard
target. While realizing that many factors driving costs were outside his
control, the commanding general wanted the command to manage those areas
that the command could affect. The cost-reduction plan was broken down
into three lines of operation-stock fund, LOGCAP, and nonstock fund. As a
result the command reports the following:

o 	Efforts to control stock fund costs have met with mixed results. The
command has encountered difficulties in controlling stock fund costs in
part because units can order items directly from the supplying command,
bypassing the command in Iraq. However, some control procedures have been
established, which reduced direct orders from approximately $50 million
per month to $5 million in April 2005.

30 Unit coins are custom-minted and emblazoned coins or similar items,
typically with unit insignia on the obverse (front) side and an
inscription on the reverse side, presented by or on behalf of the
commander as an on-the-spot award to show recognition for accomplishment
to U.S. military members or civilians.

o 	The command reports that it has been working to control LOGCAP costs,
but additional requirements were subsequently identified that were
expected to drive up LOGCAP costs beyond the initial $4.3 billion goal.
The commanding general has asked the Army Audit Agency to help evaluate
the use of the LOGCAP program in Iraq and provide recommendations for cost
savings and improved processes.

o 	The command reports that it is well on its way to achieving its goal of
$2.25 billion for nonstock fund spending. As of April 30, 2005, the
command reported that it had obligated only about $1 billion in nonstock
funds and was well on its way to come in under the initial savings goal.

ARCENT, the Army command responsible for funding the command in Iraq, was
aware of the initiative but not its details and was not aware of whether
there were similar efforts in other countries, specifically in Afghanistan
and Kuwait.

While DOD policy emphasizes commanders' fiduciary responsibility to spend
funds prudently, it has not directed any systematic effort for the
services and combatant commands to seek opportunities to reduce costs or
provided guidelines for doing so. In discussions with resource management
personnel in Army units that were deployed to Iraq and/or Afghanistan,
there was a consensus that cost controls can be strengthened as an
operation matures. For example, resource managers at one Army division
that deployed to Iraq told us that the division's experience is that
spending can be managed at all stages of a contingency operation, even
under high-operating-tempo combat operations. Another Army division
resource manager who deployed to Iraq told us that he could have operated
under a budget after his third month of deployment to Iraq. He preferred
to operate under a budget where he knew the amount of funding that was
available and could tell commanders that they had to prioritize their
requirements. A third Army division resource manager, who deployed to
Afghanistan, told us that as an operation matures, cost controls can be
strengthened.

In discussing efforts to control costs with the Office of the Under
Secretary of Defense (Comptroller), the view was expressed that on the
basis of the varying combat situations, steps to control costs were best
left to the individual commands. As described above, individual commands
have done much to control costs, but efforts vary by command, and there is
limited knowledge of such efforts outside each command. The

Comptroller's office has no direct knowledge of the commands' cost control
efforts and has not asked to be kept informed of cost control steps. We
believe that more can be done and that absent DOD-wide guidelines on cost
control efforts, there is no assurance that successive commanders will
emphasize cost control and that each command's efforts will be equally
comprehensive.

Conclusions	We found numerous problems with DOD's processes for recording
and reporting costs for the Global War on Terrorism, raising significant
concerns about the overall reliability of DOD's reported cost data.
Because of these problems, neither DOD nor Congress can reliably know how
much the war is costing and details on how appropriated funds are being
spent, or have historical data useful in considering future funding needs.
In response to our work, DOD has identified a number of steps it said it
is taking to improve the accuracy and reliability of its cost reporting.
Until DOD fully implements those steps, gives improving its GWOT cost
reporting high priority, and undertakes an exhaustive effort to ensure
that the data in its GWOT cost reports are reliable, there can be no
assurance that the cost of the war is accurate and whether funding is
adequate.

DOD is generally using its existing contingency operations financial
management regulation to guide GWOT budgeting, cost reporting, and
spending, although this regulation was developed and structured to manage
the costs of small-scale contingency operations. Specific provisions of
the regulation conflict with the needs of GWOT. One such conflict concerns
administrative limitations on the use of supplemental funds for base
support activities at home stations. In addition, the regulation includes
conflicting policies and procedures to guide the budgeting or reporting of
investment costs of the war. Without an updated policy, the military
services and other DOD agencies cannot make informed judgments on the
appropriate use of GWOT funding authorities. In response to our work, DOD
revised its Financial Management Regulation.

While certain individual commands have taken steps to control costs and
DOD policy generally advises its officials of their financial management
responsibilities with regard to the prudent use of contingency funding,
the Office of the Under Secretary of Defense (Comptroller) has not
systematically called for all commands involved in GWOT to take steps to
control costs and to keep the office informed of those steps and their
success. With the growth in GWOT costs, there is a need to ensure that all
commands seek to control costs. Until the department establishes

guidelines on cost controls and is routinely informed about the types of
controls and their impact on costs, it cannot be sure that all that can be
done to control costs is being done.

Recommendations for 	To ensure that Congress and the Department of Defense
can reliably know how much the war is costing, we recommend that the
Secretary of Defense

Executive Action take the following three steps:

1.	Direct the Secretaries of the military services to undertake a series
of steps to ensure that reported GWOT costs are accurate and reliable, to
include:

o  developing a systematic process to review reported obligations;

o 	developing and monitoring procedures to ensure that obligations are
categorized correctly;

o 	using actual data whenever possible and, when not possible, to take
steps to allow the development of actual data; and

o 	ensuring that actions previously agreed to in response to audits have
been implemented effectively.

2.	Direct the Office of the Under Secretary of Defense (Comptroller) to
oversee the above service efforts as well as to develop a systematic
process to review and test the reliability of the overall GWOT cost
reports.

3. Direct the Secretary of the Army to take the following steps:

o 	develop and implement formal procedures to guide the monthly reporting
of GWOT military personnel costs;

o 	formalize the Army's management review of military personnel cost
information submitted for the GWOT cost report;

o 	use information from the DOD payroll system, where applicable, to
identify and report GWOT military personnel cost information; and

o 	review and simplify the numbers of elements of resource currently used
to identify, categorize, and record contingency costs.

To ensure that the military services and other DOD agencies make informed
judgments on the appropriate use of GWOT funding authorities that are
consistent with DOD guidance and meet the needs of GWOT, we recommend that
the Secretary of Defense expand DOD's financial management regulation for
contingency operations to include contingencies as large as the current
GWOT. At a minimum, the updated policy should address the budgeting, cost
reporting, and spending associated with investment and base operation and
support costs at the home stations of units that support GWOT.

To ensure that GWOT mission needs are being met while applying appropriate
cost controls we recommend that the Secretary of Defense direct the Office
of the Under Secretary of Defense (Comptroller) to take the following two
steps:

1.	establish guidelines on cost controls, including identifying what types
of cost controls are available to the services, and

2.	require that the services routinely keep the Comptroller's office
informed about the types of controls and their impact on costs, and share
information on cost control efforts.

Agency Comments and Our Evaluation

DOD provided written comments on a draft of this report. Its comments are
discussed below and are reprinted in appendix III.

DOD agreed with all but one of our recommendations, stating that it
generally agreed with the intent of the recommendations and has carefully
reviewed its guidance and procedures for reporting cost data. DOD further
commented that on the basis of its review and consistent with our
recommendations it has taken several immediate actions to improve
procedures and strengthen the cost reports. These include issuing
additional direction and guidance to strengthen, clarify, standardize, and
simplify procedures for collecting, reporting, and auditing cost of war
information and issuing supplemental guidance to its Financial Management
Regulation to address large-scale contingency operations.

Regarding our recommendations on improving the accuracy and reliability of
reported costs of the Global War on Terrorism and to have the Office of
the Under Secretary of Defense (Comptroller) play a role in overseeing the
efforts as well as to develop a systematic process to review and test the
reliability of the overall GWOT cost reports, DOD stated that it has

completed implementation of this recommendation through the execution of
new guidance and procedures for collecting and reporting cost of war
information and is actively overseeing the preparation of GWOT cost
reports. DOD further stated that the Army has changed its data collection
and reporting process and among other things is now using a Standard
Operating Procedure which prescribes a clear methodology for capturing
contingency operations cost data from the accounting systems and a formal
management review process to prepare military cost information associated
with GWOT.

Regarding our recommendation to expand DOD's Financial Management
Regulation for contingency operations to include contingencies as large as
the current Global War on Terrorism, DOD agreed and stated that it has
published supplemental guidance to volume 12, chapter 23 of its Financial
Management Regulation to address large scale contingencies. While we agree
that many of the revisions address problems we highlighted in our report,
we are concerned with one provision that inappropriately expands the
definition of incremental costs, stating that

"Additionally, because of the scale of operations, including intense
combat or long term stability or anti-insurgency operations, expenses
beyond only direct incremental costs may be appropriate on a case by case
basis in written coordination with the Office of the Under Secretary of
Defense (Comptroller)."

Although the revised guidance states that such costs require coordination
with the Office of the Under Secretary of Defense (Comptroller), we
believe that this expanded definition of incremental costs suggests that
the costs of large-scale contingency operations can be beyond those
defined elsewhere in DOD's guidance as incremental costs--i.e., those
additional costs to the DOD Component appropriations that would not have
been incurred had the contingency operations not been supported. We
further believe that costs incurred beyond what was reasonably necessary
to support a contingency operation cannot be deemed incremental expenses,
since such costs are not directly attributable to support of the
operation. In addition, we believe that expanding allowable costs of
contingency operations beyond those directly attributable to support of
the operation is problematic because it provides no guidance on what costs
beyond those that are attributable to the operation are now allowed to be
reported. We therefore do not believe that this provision meets the intent
of our recommendation. The Under Secretary of Defense (Comptroller) should
reconsider this provision in light of our evaluation of its potential
consequences.

DOD did not agree with our recommendation to have the Office of the Under
Secretary of Defense (Comptroller) establish guidelines on cost controls.
In commenting on our recommendation, DOD stated that field commanders are
the correct echelon to adopt and emphasize cost controls during a
contingency; that it relies on the judgment of the combatant commander in
the theater of operations to manage resources at their disposal to
effectively safeguard personnel and perform the mission; and that
implementing administrative funding controls could have a detrimental
effect on the commanders' ability to make critical decisions in the
theater. DOD further stated that the Office of the Under Secretary of
Defense (Comptroller) has included a section in the Financial Management
Regulation that emphasizes that the DOD components are responsible to
employ a fiduciary approach to ensure that the funds are used in a prudent
manner and that as operations mature, steps should be taken to evaluate
and establish spending constraints. We recognize that certain individual
commands have done much to control costs and describe some of those
efforts, but we further note in our discussion of cost controls that
efforts vary by command and that there is limited knowledge of such
efforts outside each command. We do not believe, as DOD suggests, that our
recommendation would have a detrimental effect on the commanders' ability
to make critical decisions in the theater. We are simply recommending that
DOD provide guidance that increases awareness of the need for reasonable
cost controls and requires that the Office of the Under Secretary of
Defense (Comptroller) be kept informed of the types of controls and their
impact on costs and share information within DOD on cost control efforts.
We continue to believe that more can be done and that absent DOD-wide
guidelines on cost control efforts, there is no assurance that successive
commanders will emphasize cost control and that each command's efforts
will be equally comprehensive. Therefore, we have retained the
recommendation.

In commenting on the report's content, DOD disagreed with GAO's position
on the overstatement of the reported costs for mobilized Army reservists
in fiscal year 2004. DOD commented that our report was incomplete because
we did not consider military retirement pay and other costs, which DOD
stated accounted for almost $1.3 billion of the $2.1 billion difference
cited in our report. We disagree. As discussed in our draft report,
initially, the Army could not support its reported costs for mobilized
Army reservists or explain the $2.1 billion difference that we noted
between its payroll system and its reported cost for mobilized Army
reservists. During our audit, the Army and the Office of the Under
Secretary of Defense (Comptroller) provided us with several possible,
although sometimes inaccurate,

explanations for the $2.1 billion difference. After several months, DOD
provided information showing that it could account for about $1.6 billion
of the $2.1 billion difference. While making it clear that the information
was received too late for us to assess its accuracy and completeness as
part of our audit, we did include the information in our draft report. We
stated that some of the explanations appeared valid, while others did not
and, taken together, they failed to fully account for the difference. The
fact that DOD's comment letter reduces the $1.6 billion to $1.3 billion
further confirms the concerns we have expressed throughout this report
over the accuracy of DOD's past reported costs. Finally, we believe that
DOD's reference in its comment letter to the $2.1 billion difference as an
anomaly is a mischaracterization--particularly when viewed in the context
of its explanation that "the Department's use of estimates led to a
difference." As clearly stated in this report, we found that the reported
cost data are not reliable, in part because of long-standing deficiencies
in DOD's financial and accounting systems, a lack of systematic processes
to ensure that data are properly entered into those accounting systems,
and the use of estimates rather than actual information. We understand
that DOD is planning corrective action to address issues related to cost
reporting for military personnel supporting GWOT operations.

We are sending copies of this report to other interested congressional
committees; the Secretary of Defense; the Under Secretary of Defense
(Comptroller); the Secretaries of the military services; and the Director,
Office of Management and Budget. Copies of this report will also be made
available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff has any questions regarding this report, please
contact Sharon Pickup at 202-512-9619 or by e-mail at [email protected] or
Greg Kutz at 202-512-9095 or [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page

of this report. GAO staff that made major contributions to this report are
included in appendix IV.

Sharon L. Pickup
Director, Defense Capabilities
and Management

Gregory D. Kutz
Managing Director
Forensic Audits and Special Investigations

List of Congressional Committees

The Honorable Ted Stevens Chairman The Honorable Daniel Inouye Ranking
Minority Member Subcommittee on Defense Committee on Appropriations United
States Senate

The Honorable John Warner Chairman The Honorable Carl Levin Ranking
Minority Member Committee on Armed Services United States Senate

The Honorable C. W. Bill Young Chairman The Honorable John P. Murtha
Ranking Minority Member Subcommittee on Defense Committee on
Appropriations House of Representatives

The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives

Appendix I

Scope and Methodology

To accomplish this review, we obtained and analyzed copies of all 12
months of the Department of Defense's (DOD) fiscal year 2004 monthly
Consolidated DOD Terrorist Response Cost Report from the Office of the
Under Secretary of Defense (Comptroller), which was renamed the
Supplemental and Cost of War Execution Report in January 2005, to identify
reported obligations by operation and by appropriation account for the
military services. We did not review the obligations reported by the
intelligence community or the other defense agencies, but we do mention
the amount appropriated and obligated because the amount appropriated was
part of the total DOD appropriation. We focused our analysis primarily,
but not exclusively, on reported costs for fiscal year 2004-the latest
full year of data available at the time of our review-and specifically the
military personnel and operation and maintenance accounts as they
represent the largest amount of spending. We also did not conduct site
visits to Air Force units because their audit agency was conducting a
similar review.

To determine the reliability of DOD's data, we reviewed previous GAO
reports and reports from other audit agencies that identified
long-standing material weaknesses in DOD's accounting systems. We
conducted limited testing on operation and maintenance obligations using
Global War on Terrorism (GWOT) funding because DOD's financial management
systems and business processes have been reported to contain significant
deficiencies. At the Army-and Marine Corps-unit levels, we judgmentally
selected obligation data entries and traced them back to a computerized
database or paper documents to determine whether the data were properly
entered into the accounting system. At the Army's Central Command
Headquarters, we judgmentally selected document numbers and item
descriptions for obligations made in Iraq and Afghanistan. We traced the
document register numbers against paper documentation controlled by the
Defense Finance and Accounting Service (DFAS), Rome, New York. We also
provided a written data reliability assessment checklist for Navy
officials to report how they ensured that their data were accurate and
reliable. Finally, we discussed the processes used to ensure that GWOT
obligation data provided were accurate and reliable with service financial
managers. We found that the reported cost data were not reliable because
of long-standing deficiencies in DOD's financial and accounting systems,
the lack of a systematic process to ensure that data were properly entered
into those accounting systems, the use of estimates rather than actual
data for some of DOD's reported costs, and the incorrect categorization of
some reported costs due to the large number of cost categories and limited
training on how to apply them. However, because it was not feasible to

Appendix I Scope and Methodology

examine all reported costs and significant data reliability problems
existed, we were not able to determine the extent that total costs were
misstated.

To identify unusual fluctuations in the reported Army military personnel
GWOT obligations, we analyzed the fiscal year 2004 GWOT cost reports and
discussed our work with the Army Budget Office and DFAS. We also obtained
and reviewed cost-reporting for military personnel information, budget
estimates, supplemental appropriation information, budget reprogramming
documents, and other supporting documentation from the Army Budget Office.
To determine if reported obligations were based primarily on estimates, we
compared reported GWOT amounts for Army military personnel with Army
obligation plans. We obtained monthly extracts of fiscal year 2004
military pay records for Army Reserve and National Guard soldiers
supporting GWOT operations from the DOD payroll system at DFAS,
Indianapolis. To identify GWOT obligations for Army military personnel
based on actual DOD payroll information, we summarized payroll record
extracts by pay component and aligned these amounts with the cost category
structure of the GWOT cost report. For cost category "Reserve Components
Called to Active Duty," we compared actual DOD payroll information with
the estimated Army military personnel amounts in the GWOT cost report,
calculated the difference, and discussed our work with the Army Budget
Office. In July 2005, we obtained information from the Army and DOD on
this difference.

To assess the extent to which DOD's existing financial management policy
is applicable to war spending, we focused our efforts on analyzing
guidance provided by the fiscal year 2004 Defense Appropriation Act and
DOD's and the military services' specific policy and procedures. We
reviewed previous GAO reports regarding guidance and oversight of
contingency operations costs. We also reviewed DOD Financial Management
Regulation volume 12 chapter 23, which establishes DOD policy and
procedures for developing contingency budget estimates and cost reporting.
We analyzed DOD's emergency supplemental budget requests for fiscal year
2003 and fiscal year 2004, and service contingency operation financial
management policies and procedures. Lastly, we spoke with Office of the
Under Secretary of Defense (Comptroller) and service financial management
officials about GWOT budget estimations, cost reporting activities, and
whether the current policy is sufficient or needs to be modified to
reflect GWOT conditions.

To determine controls over costs, we reviewed reports on GWOT spending and
contract management from other audit agencies as well as command

Appendix I Scope and Methodology

guidance and held discussions with resource management officials from
major commands and units that had returned from Iraq and Afghanistan
regarding their experiences. We also discussed what steps DOD has directed
or implemented to strengthen cost controls and what actions it has
implemented. Furthermore, we discussed cost controls implemented by Army
divisions while deployed or upon the units' return to their home station.

We visited the following locations during our review:

o 	Office of the Under Secretary of Defense (Comptroller), Washington,
D.C.

o 	Headquarters, Defense Finance and Accounting Service, Arlington,
Virginia.

o  Headquarters, Department of the Army, Washington, D.C.

o  U.S. Army Installation Management Agency, Washington, D.C.

o 	U.S. Army Installation Management Agency, Southeast Region, Fort
McPherson, Georgia.

o 	Headquarters, U.S. Army Forces Command and Headquarters, Third Army
(Army Central Command), Fort McPherson, Georgia.

o  Headquarters, U.S. Army Pacific, Fort Shafter, Hawaii.

o  Headquarters, 25th Infantry Division, Schofield Barracks, Hawaii.

o  Headquarters, U.S. Army Europe, Heidelberg, Germany.

o  Headquarters, 1st Armored Division, Wiesbaden, Germany.

o  Headquarters, III Corps and 1st Cavalry Division, Fort Hood, Texas.

o  Headquarters, 3rd Armored Cavalry Regiment, Fort Carson, Colorado.

o 	Headquarters, U.S. Marine Corps Forces Pacific, Camp H.M. Smith,
Hawaii.

Appendix I Scope and Methodology

o 	Headquarters, 1st Marine Expeditionary Force, Camp Pendleton,
California.

o  Defense Finance and Accounting Service Center, Denver, Colorado.

o  Defense Finance and Accounting Service Center, Indianapolis, Indiana.

o  Defense Finance and Accounting Service-Rome, Rome, New York.

o 	Assistant Secretary of the Navy, Financial Management and Comptroller,
Washington, D.C.

o  Commander, Naval Installations Command, Washington, D.C.

o  U.S. Fleet Forces Command, U.S. Atlantic Fleet, Norfolk, Virginia.

o  Commander, U.S. Pacific Fleet, Pearl Harbor, Hawaii.

o  Commander, Naval Air Force, San Diego, California.

o  Commander, Naval Surface Force, San Diego, California.

o  Commander, Submarine Force, Pearl Harbor, Hawaii.

o  U.S. Air Force Audit Agency, March Air Reserve Base, California.

o  U.S. Air Forces Pacific, Hickam Air Force Base, Hawaii.

We performed our work from August 2004 through August 2005 in accordance
with generally accepted government auditing standards.

Appendix II

Ineffective Reporting of Fiscal Year 2004 Army Military Personnel Global
War on Terrorism Obligations

As part of our work on cost reporting for the Global War on Terrorism
(GWOT), we undertook a detailed review of obligations for Army military
personnel supporting GWOT operations. The results of that review follow.

Background	In fiscal year 2004, the Department of Defense (DOD) asked for
funds in a supplemental budget request to provide pay, allowances,
subsistence, and other personnel costs for active- and reserve-component
military personnel activated for duty in support of GWOT. This request
included certain special pays that active-duty military personnel received
for deployment, as well as the base pay, special pays, and allowances for
reserve personnel mobilized to participate in or directly support GWOT
operations. In addition, the estimate also included the costs to pay
active-component personnel affected by military stop-loss programs and
additional military personnel maintained on active duty above the normal
end-strength levels to sustain the readiness of deploying units. As shown
in figure 3, Congress provided about $17.8 billion in funding for DOD
military personnel in the fiscal year 2004 supplemental appropriation,1
including almost $12.9 billion provided for the Army. This was an increase
from the about $13.4 billion in funding for DOD military personnel,
including about $7.8 billion for Army military personnel in the fiscal
year 2003 supplemental appropriation.2

1 Emergency Wartime Supplemental Appropriations Act for Defense and for
the Reconstruction of Iraq and Afghanistan, Pub. L. No. 108-106, 117 Stat.
1209 (Nov. 6, 2003).

2 Emergency Wartime Supplemental Appropriations Act, Pub. L. No. 108-11,
117 Stat. 559 (Apr. 16, 2003).

                                  Appendix II
                   Ineffective Reporting of Fiscal Year 2004
                     Army Military Personnel Global War on
                             Terrorism Obligations

Figure 3: Supplemental Funding of DOD Military Personnel for GWOT
Operations in Fiscal Years 2003 and 2004 FY 2003 total = $13.4 billion FY
2004 total = $17.8 billion

$1.2 billion 4.2% $0.8 billion $1.6 billion 4.6% $0.8 billion

$3.4 billion

$2.8 billion

$7.8 billion $12.9 billion

Marine Corps

Navy

Air Force

Army

Source: GAO's analysis of Pub. L Nos. 108-11 and 108-6.

In the September 2004 GWOT cost report, DOD military personnel obligations
totaled over $17 billion of the reported $71.2 billion in total GWOT
obligations for fiscal year 2004. Of this $17 billion, Army military
personnel obligations reported by DOD totaled almost $12 billion, or about
71 percent, of military personnel obligations for GWOT operations. As
shown in table 2, Army military personnel obligations for GWOT operations
increased from fiscal year 2003 through fiscal year 2004, while
obligations reported by other DOD organizations decreased.

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

Table 2: DOD Military Personnel Obligations for GWOT Operations in Fiscal
Years 2003 and 2004

Dollars in millions

                           Dollars DOD organizations

Fiscal year 2003

Fiscal year 2004

                                     Army            $8,730           $11,972 
                                Air Force             3,409             3,272 
                                     Navy             1,934               857 
                             Marine Corps             1,482               918 
                   DOD & defense agencies                11 
                                    Total           $15,566           $17,019 

Source: September 2003 and 2004 GWOT cost reports.

The Army Budget Office controls the Military Personnel, Army,
appropriation account and is also responsible for identifying and
reporting the incremental costs of Army military personnel in support of
GWOT operations. Incremental military personnel costs are to include pay,
special pay, and entitlements above normal monthly payroll costs for
active-and reserve-component personnel.

In fiscal year 2004, the monthly GWOT cost report included the following
six primary cost categories for military personnel as designated in the
DOD Financial Management Regulation:3

o 	"Reserve Components Called to Active Duty" includes basic military pay
for Reserve and National Guard personnel either as part of the operation
or as backfill.

o 	"Imminent Danger or Hostile Fire Pay," when authorized, provides a
monthly special pay for active-and reserve-component personnel.

o 	"Family Separation Allowance" is a monthly special allowance paid to
active-and reserve-component personnel who are separated from their
families for 30 days or more.

3 DOD Financial Management Regulation 7000.14-R, vol. 12, ch. 23 (February
2001). A 2005 change to the FMR calls for eight cost categories related to
military personnel obligations.

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

o 	"Foreign Duty Pay" is a monthly special pay for active-and
reservecomponent personnel who are at a designated location outside of the
continental United States.

o 	"Subsistence" includes the costs of food, water, ice, and other
subsistence items that are purchased expressly to support personnel
engaged in or supporting the operation.

o 	"Other Military Personnel" includes other allowances or special pay for
active-and reserve-component personnel that are not included in another
cost category. In fiscal year 2004, this category included the costs to
pay active-component soldiers affected by military stop-loss programs and
additional soldiers maintained on active duty above the normal
end-strength levels.

Table 3 shows the Army military personnel obligations for GWOT operations
reported in fiscal years 2003 and 2004.

Table 3: Army Military Personnel Obligations for GWOT Operations in Fiscal
Years 2003 and 2004

Dollars in millions

                    Dollars Military personnel cost category

Fiscal year 2003

Fiscal year 2004

             Reserve components called to active duty      $5,988      $7,123 
                  Imminent danger or hostile fire pay         248         499 
                          Family separation allowance         146         105 
                                     Foreign duty pay          87         128 
                                          Subsistence         996       2,308 
                             Other military personnel       1,265       1,809 
                                                Total      $8,730     $11,972 

               Source: September 2003 and 2004 GWOT cost reports.

                                  Appendix II
                   Ineffective Reporting of Fiscal Year 2004
                     Army Military Personnel Global War on
                             Terrorism Obligations

Army Lacked a Reasonable and Reliable Process to Report GWOT Military
Personnel Obligations

The Army did not have a reasonable and reliable process to identify and
report almost $12 billion of GWOT military personnel obligations in fiscal
year 2004. Instead of using actual information, the Army based the GWOT
military personnel obligations used in the GWOT cost report primarily on
estimates in its fiscal year 2004 obligation plan and, in the end, forced,
or "plugged," obligations to match available supplemental budget
authority. Army officials were unable to readily explain the process for
identifying and reporting GWOT military personnel obligations owing to the
lack of both formalized reporting procedures and management review of
reported obligations, problems which were exacerbated by staff losses in
the September 11 terrorist attack on the Pentagon, personnel turnover, and
hiring difficulties.

Our analysis showed that obligations associated with Army military
personnel in the monthly GWOT cost report were not consistent with related
DOD payroll information, and the use of planned obligations instead of
related DOD payroll information might have resulted in reported GWOT
military personnel obligations being materially overstated. For fiscal
year 2004, our analysis of the more than $7.1 billion in incremental
military personnel costs listed in the cost category "Reserve Components
Called to Active Duty" identified as much as $2.1 billion of reported
obligations in excess of related DOD payroll information. Army Budget
Office officials were unable to explain the entire difference.

Army GWOT Reporting Process Used Estimated Obligations

In 2003, the Army developed a monthly obligation plan for estimated GWOT
military personnel obligations in fiscal year 2004 on the basis of
anticipated funding of $12.5 billion from the fiscal year 2004 DOD
supplemental appropriation request. In October 2003, the Army began
incurring military personnel obligations for fiscal year 2004 GWOT
operations before passage of a supplemental appropriation. However,
instead of using actual information, the Army based the military personnel
obligations used in the monthly GWOT cost report primarily on estimates in
its fiscal year 2004 obligation plan, and "plugged" to available
supplemental budget authority. Effectively, the Army was reporting back to
Congress exactly what it had appropriated.

Through much of fiscal year 2004, the Army Budget Office based military
personnel obligations for GWOT operations primarily on its monthly
obligation plan. As illustrated in table 4, this resulted in the
cumulative

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

GWOT military personnel obligations tracking closely to and, in two cases
equaling, the estimated amounts from the fiscal year 2004 obligation plan.

Table 4: Army Obligation Plan and Reported Military Personnel Obligations
for GWOT Operations in Fiscal Year 2004

Dollars in millions

                               Cumulative dollars

                         Month        Obligation plan        GWOT cost report 
                  October 2003                   $956                    $811 
                 November 2003                  2,018                   2,018 
                 December 2003                  3,122                   2,819 
                  January 2004                  4,366                   3,818 
                 February 2004                  5,320                   4,886 
                    March 2004                  6,528                   6,528 
                    April 2004                  7,650                   7,686 
                      May 2004                  8,669                   8,535 
                     June 2004                  9,657                   9,421 
                     July 2004                 10,621                  10,324 
                   August 2004                 11,577                  11,219 
                September 2004                $12,530                 $11,972 

Source: Army Budget Office and fiscal year 2004 GWOT cost reports.

One example of military personnel obligations reported directly from the
Army obligation plan is evident with the cost category for "Subsistence"
described earlier. The Army obligation plan for "Subsistence" showed an
estimated obligation amount of about $130 million monthly in most of
fiscal year 2004 and, except for a large increase4 in September 2004, was
largely identical to the monthly GWOT cost report amounts as shown in
table 5. Subsistence costs at the end of fiscal year 2004 were a major
factor in the need to "plug" reported military personnel obligations in
the GWOT report's cost category "Reserve Components Called to Active Duty"
as discussed later.

4 Army budget officials attributed this large, year-end increase to
additional water contracts, transfers due to incorrect funding of the
logistics civilian augmentation program, and anticipated carryover of
fiscal year 2004 subsistence costs.

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

Table 5: Army Obligation Plan and Reported Subsistence Obligations for
GWOT Operations in Fiscal Year 2004

Dollars in millions

                               Dollars per month

                         Month        Obligation plan        GWOT cost report 
                  October 2003                   $100                    $130 
                 November 2003                    160                     130 
                 December 2003                    130                     130 
                  January 2004                    130                     130 
                 February 2004                    130                     148 
                    March 2004                    130                     130 
                    April 2004                    130                     130 
                      May 2004                    130                     130 
                     June 2004                    130                     130 
                     July 2004                    130                     130 
                   August 2004                    130                     130 
                September 2004                    130                     860 
                         Total                 $1,560                  $2,308 

Source: Army Budget Office and fiscal year 2004 GWOT cost reports.

Budget authority for Army military personnel supporting GWOT operations
provided in the fiscal year 2004 emergency supplemental appropriation was
reduced late in the fiscal year. As detailed in table 6, reprogrammings
and additional reductions lowered the supplemental budget authority
available from the supplemental appropriation to about $12 billion for
Army GWOT military personnel in fiscal year 2004.

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

Table 6: Supplemental Budget Authority for Army GWOT Military Personnel in
Fiscal Year 2004

Dollars in millions

                            Budget authority Dollars

         Fiscal year 2004 emergency supplemental appropriation $12,859

August 2004 omnibus reprogramming (801) September 2004 additional
reductions (86)

Available supplemental budget authority $11,972

Source: Pub. L. No. 108-106, DOD, and GAO's analysis of Army Budget Office
information.

The Army Budget Office reported negative obligations of more than $439
million in the cost category "Reserve Components Called to Active Duty"
for September 2004 so that GWOT military personnel obligations would equal
available supplemental budget authority of about $12 billion. This was
necessary (1) because the fiscal year 2004 Army obligation plan was
originally developed for about $12.5 billion in GWOT military personnel
spending and the available supplemental budget authority was reduced late
in the fiscal year and (2) because of the unexpected need to obligate a
large amount for the "Subsistence" cost category in September 2004. As
shown in figure 4, the reporting of a negative amount effectively resulted
in the Army's use of "plugging," or reporting back to Congress exactly the
amount of available budget authority, as adjusted, remaining from the
fiscal year 2004 emergency supplemental appropriation.

                                  Appendix II
                   Ineffective Reporting of Fiscal Year 2004
                     Army Military Personnel Global War on
                             Terrorism Obligations

Figure 4: Army Military Personnel Obligations for GWOT Operations in
Fiscal Year 2004

The process used in fiscal year 2004 to determine the Army's military
personnel obligations for the monthly GWOT cost report was not clearly
understood by Army Budget Office management, and we found that Army
management was not familiar with the process used to force, or "plug," the
reported fiscal year 2004 GWOT military personnel obligations to match
available supplemental budget authority.

According to Army Budget Office officials, they did not have formal
procedures for developing and reporting GWOT military personnel
obligations. These officials explained that, in the absence of written

                  Source: Fiscal year 2004 GWOT cost reports.

Army's Reporting Process Hampered by Lack of Formal Procedures and
Management Review

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

procedures, the process used to develop the monthly obligation information
reported to the Defense Finance and Accounting Service (DFAS) was entirely
dependent on the staff person assigned to this task. A DOD Financial
Management Regulation includes general guidance on developing and
reporting incremental costs related to contingency operations. For
example, the guidance requires that controls, accounting systems, and
procedures provide, in financial records, a proper identification and
recording of the costs incurred for DOD contingency operations. However,
this general guidance is not a substitute for detailed, written
implementing procedures at the service level.

Furthermore, the Army Budget Office did not establish a formal management
review process for the GWOT military personnel obligations reported
monthly to DFAS. The Army could not provide documentation to show that
management-level officials reviewed its GWOT military personnel
obligations in fiscal year 2004 that were sent to DFAS for inclusion in
the monthly GWOT report. Army Budget Office officials also told us that
these problems were exacerbated by staff lost in the September 11
terrorist attack on the Pentagon, personnel turnover, and hiring
difficulties. Specifically, the Army Budget Office-Military Personnel
Division is authorized 10 civilian positions and had not been fully
staffed in over 2 years. The position of Chief for the Military Personnel
Division was held by three different individuals in the last 2 years. We
were told that only one staff member had been with the division longer
than 2 years. As of May 2005, Army Budget Office officials told us that 2
of the 10 positions were staffed by interns and 3 positions were not
filled.

High staff turnover and new staff training make it increasingly important
that detailed, documented procedures be developed for identifying and
reporting incremental GWOT military personnel obligations. Formal
procedures would help ensure that the monthly amounts are reported
consistently and accurately, using the best available information. Lacking
such procedures, Army Budget Office management provided two different
explanations for the process for identifying and reporting GWOT military
personnel obligations. When asked, Army management initially explained
that reported GWOT military personnel obligations for fiscal year 2004
were based largely on payroll expenditures. However, our analysis of
reported obligations revealed a significant, unexpected monthly
fluctuation in two GWOT military personnel cost categories, raising doubts
about the reasonableness of management's explanation and the reliability
of the Army's estimation process. For example, as previously noted, a
large negative obligation amount was reported in the "Reserve Components

                                  Appendix II
                   Ineffective Reporting of Fiscal Year 2004
                     Army Military Personnel Global War on
                             Terrorism Obligations

Called to Active Duty" cost category in September 2004 even though the
associated Army National Guard and Reserve soldier strength remained
relatively constant during the period.

In December 2004, Army Budget Office management provided a different
explanation and stated that GWOT military personnel obligations were
estimates based principally on a calculation that considered the number of
soldiers (e.g., mobilized, deployed) and a monthly composite pay rate or
special pay/allowance amount. The Army Budget Office provided a schedule
in January 2005 supporting this description of the estimating process for
its GWOT military personnel obligations in fiscal year 2004. Using this
description, our analysis of these obligations, however, indicated that
the Army's estimation process was not reliable. For example, our analysis
showed that the estimated obligations reported were not reasonable owing
to both inconsistencies with the number of soldiers and the high composite
pay rate (i.e., officer-grade equivalent).

After further discussion with us about the reasonableness of their earlier
explanations, an Army Budget Office official agreed with our determination
in February 2005 that the reported amounts were based on planned
obligations and later agreed that the year-end amount was matched, or
"plugged," to available supplemental budget authority. Army and DOD
officials stated that efforts were being undertaken to improve GWOT cost
reporting by using, where applicable, DOD payroll information instead of
estimated amounts.

Reported GWOT Obligations for Mobilized Army Soldiers Were Significantly
Higher Than Related DOD Payroll Information

GWOT military personnel obligations reported in fiscal year 2004 were not
consistent with the DOD payroll information we reviewed. Army management
expressed a belief that pay and allowance information could not be
obtained from the DOD payroll system and used for the monthly GWOT cost
report. However, we obtained fiscal year 2004 payroll information from
DFAS for reserve-component soldiers mobilized for GWOT operations and
demonstrated that actual DOD payroll information, where applicable, could
be used to identify incremental military personnel obligations for
mobilized Army National Guard and Reserve soldiers. Although we previously
reported that several system issues were significant factors impeding
accurate and timely payroll payments to

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

mobilized reserve-component soldiers,5 we believe that payroll information
represents the best information available and should be used, where
applicable, to prepare the GWOT cost report.

For fiscal year 2004, we evaluated the Army obligation plan estimates and
military personnel cost category titled "Reserve Components Called to
Active Duty." Army officials explained that this estimate included a
soldier's basic pay, Federal Insurance Contribution Act contributions
(i.e., Social Security and Medicare), allowances for housing and
subsistence, and accrual amounts for retirement pay and retirement health
care. From the DOD payroll system, we identified the payroll information
for Army soldiers mobilized to support GWOT operations in fiscal year 2004
and analyzed payroll information for the related pay components used to
estimate Army military personnel GWOT obligations. As shown in table 7,
military personnel costs identified from the DOD payroll system were as
much as $2.1 billion less than the estimated Army obligations reported in
the monthly GWOT cost report.

Table 7: Estimated Army Obligations for "Reserve Components Called to
Active Duty" and Related DOD Payroll Costs in Fiscal Year 2004

Dollars in millions

         Reserve Components Called to Active Duty cost category Dollars

                Estimated obligations in GWOT cost report $7,123

                           Related DOD payroll costs

                                Basic pay 3,472

                                    FICA 266

                          Allowance for housing 1,204

Allowance for subsistence (officer)

                            DOD payroll total 4,972

                               Difference $2,151

Source: September 2004 GWOT cost report and GAO's analysis of DOD payroll data.

5 GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty
Experienced Significant Pay Problems, GAO-04-911 (Washington, D.C.: Aug.
20, 2004), and Military Pay: Army National Guard Personnel Mobilized to
Active Duty Experienced Significant Pay Problems, GAO-04-89 (Washington,
D.C.: Nov. 13, 2003).

Appendix II
Ineffective Reporting of Fiscal Year 2004
Army Military Personnel Global War on
Terrorism Obligations

Initially, the Army could not support this difference or its reported GWOT
military personnel obligations. Over the next several months, the Army and
the Office of the Under Secretary of Defense (Comptroller) provided us
with several possible, though sometimes inaccurate, explanations for this
difference. Some explanations appeared valid while others did not and,
taken together, they failed to fully account for the difference. For
example, when asked to explain the difference in military personnel
obligations between the GWOT cost report and related DOD payroll
information, Army Budget Office officials stated in March 2005 that a
portion of the difference was attributable to retirement pay and
retirement health care accruals. We found that the retirement health care
accrual did not result in incremental costs and, therefore, was not a
valid explanation for the difference. In July 2005, DOD agreed that
mobilized reservists do not receive an increase in retirement health care
benefits over benefits for nonmobilized reservists and, therefore, DOD
does not incur incremental costs related to this benefit. However,
mobilized reservists receive an increase in retirement pay benefits over
benefits for nonmobilized reservists and, therefore, DOD incurs
incremental costs related to this benefit. In July 2005, Army and Office
of the Under Secretary of Defense (Comptroller) officials reported to us
that $824 million of the difference was attributable to the inclusion of
the retirement pay accruals and provided other potential reconciling cost
information totaling $732 million as additional explanations for the
difference. This information was provided too late in our audit to assess
its accuracy and completeness.

                                  Appendix III

                    Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix IV

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Sharon Pickup (202) 512-9619 Greg Kutz (202) 512-9095

Acknowledgments	In addition to the contacts named above, Steve Sternlieb,
Mark Connelly, Leo Sullivan, Vince Balloon, Kurt Burgeson, Laura Czohara,
Dave Mayfield, Francine Delvecchio, Abe Dymond, K. Eric Essig, Jason
Kelly, John Ledford, and Wayne Turowski made key contributions to this
report.

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