Navy Working Capital Fund: Management Action Needed to Improve	 
Reliability of the Naval Air Warfare Center's Reported Carryover 
Amounts (26-JUN-07, GAO-07-643).				 
                                                                 
According to the Department of Defense's (DOD) fiscal year 2007  
budget estimates, working capital fund activity groups (depot	 
maintenance, ordnance, and research and development) will have	 
about $6 billion of funded work that will be carried over from	 
fiscal year 2007 into fiscal year 2008. The congressional defense
committees recognize that these groups need some carryover to	 
ensure a smooth work flow from one fiscal year to the next.	 
However, the committees have previously raised concern that the  
amount of carryover may be more than is needed. GAO was asked to 
determine if (1) the Naval Air Warfare Center's (NAWC) reported  
actual carryover was reliable for fiscal years 2003 through 2006 
and (2) NAWC was utilizing the required triannual review process 
to improve the reliability of its carryover information and	 
underlying financial data.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-643 					        
    ACCNO:   A71428						        
  TITLE:     Navy Working Capital Fund: Management Action Needed to   
Improve Reliability of the Naval Air Warfare Center's Reported	 
Carryover Amounts						 
     DATE:   06/26/2007 
  SUBJECT:   Accounting errors					 
	     Accounting procedures				 
	     Data integrity					 
	     Defense economic analysis				 
	     Financial management				 
	     Financial records					 
	     Funds management					 
	     Naval warfare					 
	     Reporting requirements				 
	     Capital accounts					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-07-643

   

     * [1]Results in Brief
     * [2]Background

          * [3]What Is Carryover and Why Is It Important?
          * [4]DOD Revised Its Carryover Policy
          * [5]DOD Established Triannual Review Requirement in 1996
          * [6]NAWC Implemented a New System in Fiscal Year 2003 and Plans

     * [7]NAWC's Reported Actual Carryover Information Was Unreliable

          * [8]NAWC Reports Showed that It Exceeded Its Carryover Ceiling f
          * [9]Implementation of New System Affected Reliability of Carryov
          * [10]NAWC Took Steps to Better Manage Carryover and Improve the R
          * [11]Some Customer Orders Were Reduced at Year End, which Artific

     * [12]NAWC Did Not Perform the Required Triannual Reviews Until Fi

          * [13]NAWC Did Not Properly Implement DOD's Triannual Review Guida

               * [14]NAWC Did Not Perform Required Triannual Reviews Prior to
                 Fis
               * [15]NAWC Did Not Review All Obligations in Fiscal Year 2006
                 as R
               * [16]DOD Triannual Review Guidance on Dollar Threshold for
                 Review

          * [17]NAWC Continues to Refine Its Triannual Review Process

               * [18]NAWC Weapons Division Improved Its Decentralized Review
                 Proc
               * [19]NAWC Aircraft Division Did Not Generally Involve BFMs in
                 Its

     * [20]Conclusions
     * [21]Recommendations for Executive Action
     * [22]Agency Comments and Our Evaluation
     * [23]Appendix I: Scope and Methodology
     * [24]Appendix II: Analysis of Dormant Obligations and Accrued Exp

          * [25]More Effective Reviews of Dormant Obligations Could Result i

               * [26]More Effective Reviews of Dormant Accrued Expenditures
                 Could

     * [27]Appendix III: Comments from the Department of Defense
     * [28]Appendix IV: GAO Contacts and Staff Acknowledgments

          * [29]GAO Contacts
          * [30]Acknowledgments

               * [31]Order by Mail or Phone

Report to the Subcommittee on Defense, Committee on Appropriations, House
of Representatives

United States Government Accountability Office

GAO

June 2007

NAVY WORKING CAPITAL FUND

Management Action Needed to Improve Reliability of the Naval Air Warfare
Center's Reported Carryover Amounts

GAO-07-643

Contents

Letter 1

Results in Brief 3
Background 5
NAWC's Reported Actual Carryover Information Was Unreliable 10
NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year 2006
17
Conclusions 24
Recommendations for Executive Action 25
Agency Comments and Our Evaluation 26
Appendix I Scope and Methodology 29
Appendix II Analysis of Dormant Obligations and Accrued Expenditures 32
Appendix III Comments from the Department of Defense 40
Appendix IV GAO Contacts and Staff Acknowledgments 44

Table

Table 1: Dollar Amount of Reported Actual Carryover, Carryover Ceiling,
and the Amount of Carryover that is Over or Under the Ceiling 11

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
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office
Washington, DC 20548

June 26, 2007

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

According to the Department of Defense's (DOD) fiscal year 2007 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6 billion of
funded work that will be carried over from fiscal year 2007 into fiscal
year 2008.1 The congressional defense committees recognize that these
activity groups need some carryover to ensure a smooth flow of work during
the transition from one fiscal year to the next. However, past
congressional defense committee reports raised concerns that the level of
carryover may be more than is needed. Excessive amounts of carryover
financed with customer appropriations are subject to reductions by DOD and
the congressional defense committees during the budget review process. To
the extent that carryover is too high, Congress may redirect the funds
gained from such reductions to pay for other priority initiatives.

In May 2001, we reported2 that DOD did not have a sound analytical basis
for its 3-month carryover standard, which it established in 1996. In
December 2002, DOD revised its carryover policy to eliminate the 3-month
across-the-board standard for allowable carryover. Under the new policy,
the allowable amount of carryover (known as the carryover ceiling) is to
be based on the outlay rate3 of the customers' appropriations financing
the work. This means that in determining allowable carryover, the first
year outlay rate of the customers' appropriations financing the work is
used for new orders received in the current year (first year of the work
order). However, we reported4 in June 2006 that the military services have
not consistently implemented DOD's revised policy in calculating
carryover. Instead, the military services used different methodologies for
calculating reported actual and allowable amounts of carryover since DOD
changed its carryover policy in December 2002. We also reported that the
Naval Air Warfare Center (NAWC) exceeded the carryover ceiling for fiscal
years 2003, 2004, and 2005 by millions of dollars each year.

1 The carryover amount includes both work for which obligations have been
made by requesting organizations but that has not yet started and the cost
to complete work that has been started.

2 GAO, Defense Working Capital Fund: Improvements Needed for Managing the
Backlog of Funded Work, [32]GAO-01-559 (Washington, D.C.: May 30, 2001).

As requested by and agreed to with your office, this report assesses
carryover related to NAWC. The objectives of this assignment were to
determine if (1) NAWC's reported actual carryover was reliable for fiscal
years 2003 through 2006 and (2) NAWC was utilizing the required triannual
review process to improve the reliability of its carryover information and
underlying financial data. Our review was performed from July 2006 through
April 2007 in accordance with U.S. generally accepted government auditing
standards. The carryover data used in this report were obtained from
official Navy budget and accounting documents. To assess the reliability
of the data, we (1) reviewed and analyzed the information used to
calculate reported actual carryover, (2) analyzed the NAWC aircraft and
weapons divisions' fiscal years 2003 through 2006 financial statements,
(3) interviewed officials knowledgeable about the carryover data, (4)
reviewed NAWC's implementation of the required DOD triannual review
process, and (5) reviewed selected orders to determine if the orders were
adequately supported by documentation. Further details on our scope and
methodology can be found in appendix I. We requested comments on a draft
of this report from the Secretary of Defense or his designee. Written
comments from the Under Secretary of Defense (Comptroller) are reprinted
in appendix III.

3 The amount of allowable carryover using the outlay rate follows. For
example, customers order $100 of work, which is financed with a specific
appropriation. If the outlay rate for this appropriation at the
appropriation level is 60 percent, then this would result in the working
capital fund activity group being allowed to carry over $40 ($100 - $60
[$100 x 60 percent] = $40).

4 GAO, Defense Working Capital Fund: Military Services Did Not Calculate
and Report Carryover Amounts Correctly, [33]GAO-06-530 (Washington, D.C.:
June 27, 2006).

Results in Brief

Our analysis of accounting data that provide information on customer
orders and discussions with NAWC officials determined that the reported
carryover information was not reliable for fiscal years 2003 and 2004 as a
result of (1) NAWC's conversion to a new accounting system in fiscal year
2003 and (2) the divisions not performing reviews of obligations,
including the required DOD triannual reviews. Reliable carryover
information is essential for DOD and congressional defense committees
during the budget review process since they may redirect excessive
carryover amounts to pay for other priority initiatives. For fiscal years
2003, 2004, and 2005, NAWC reports showed that it exceeded its carryover
ceiling by $16.3 million, $57.2 million, and $51.7 million, respectively.
During this 3-year period, our analysis of Navy reports showed that NAWC
had carryover amounts of $1.1 billion, $1.1 billion, and $1.0 billion,
respectively, which represented over one-third of NAWC's annual workload.
However, both the NAWC aircraft and weapons divisions' comptrollers did
not certify to the accuracy of financial information reported in their
fiscal year 2003 financial statements. To better manage carryover, improve
the reliability of reported carryover information, and avoid exceeding the
carryover ceiling, beginning in fiscal year 2005 and continuing into
fiscal year 2006, NAWC (1) issued guidance on the acceptance of orders at
fiscal year end and (2) began reviewing orders to correct old financial
records and reduce carryover. For fiscal year 2006, NAWC reported that its
actual carryover was below the carryover ceiling. While the reliability of
carryover information improved in fiscal years 2005 and 2006, we
determined that some data reliability problems still exist. For example,
we found that funds on some customer orders totaling $19.5 million were
deobligated at the end of the fiscal year end and then reobligated at the
beginning of the next fiscal year on these same orders. This artificially
lowered carryover at the end of the fiscal year.

Furthermore, NAWC did not perform the triannual reviews of its financial
information until fiscal year 2006, even though DOD guidance has been in
place for about 10 years requiring NAWC and all other fund holders5 to
conduct these reviews of their financial data (outstanding commitments,
obligations, and accrued expenditures). If implemented properly, these
reviews would likely have improved the reliability of reported carryover
information and related underlying financial data. DOD established its
triannual review requirement in 1996 in order to improve the timeliness
and accuracy of its financial data. According to NAWC officials at the
aircraft and weapons divisions, these reviews were not done prior to 2006
because they received guidance from the Naval Air Systems Command that
stated NAWC was not required to conduct the triannual reviews. Further, as
of September 2006, the two divisions were still not fully complying with
several of the 16 specific DOD tasks that they were required to accomplish
as part of the triannual reviews. Because the two divisions did not always
effectively review some obligations, particularly dormant obligations
(obligations over 120 days old), (1) their reported actual carryover was
overstated and (2) they sometimes returned unneeded funds to customers
after the funds had expired. Furthermore, if effectively implemented, the
triannual reviews could help NAWC validate or correct any errors in its
financial records before it implements a new system that is scheduled to
be installed in October 2007.

5 The fund holder is the organization on whose accounting records a
commitment, obligation, and/or accrued expenditure is recorded.

We are making six recommendations to DOD to (1) reiterate guidance to NAWC
that would prohibit it from deobligating reimbursable customer orders at
fiscal year end and reobligating them in the next fiscal year, an action
that artificially reduces carryover balances that are ultimately reported
to Congress; and (2) improve the effectiveness of the triannual review
process. DOD concurred with the six recommendations and identified
corrective actions it is taking to address them. While we appreciate DOD's
efforts, we are concerned with (1) the timing of the corrective action for
one of the recommendations and (2) the completeness of DOD's planned
actions related to the one recommendation with which it "concurred with
comment." First, with regard to DOD's plans to complete its reviews and
validations of dormant obligations and accrued expenditures by September
2008, we continue to believe that these reviews and validations should be
completed prior to the planned implementation of a new accounting system,
currently scheduled for October 2007. Second, in concurring with our
recommendation for a clarification of the DOD Financial Management
Regulation (FMR) guidance on the triannual reviews, DOD commented the FMR
is clear as currently written but it would issue a letter directing the
Navy to comply with the FMR. As noted in our draft report, we identified
varying interpretations of the FMR guidance among the Navy officials we
interviewed. Thus, while we continue to believe that a revision to the FMR
would be the most efficient means to resolve this issue, a letter such as
that proposed in DOD's response could suffice as long as it includes
clarification of the FMR guidance, particularly with regard to the dollar
thresholds for required reviews.

Background

A working capital fund relies on sales revenue rather than direct
appropriations to finance its continuing operations. A working capital
fund is intended to (1) generate sufficient resources to cover the full
costs of its operations and (2) operate on a break-even basis over
time--that is, neither make a gain nor incur a loss. Customers use
appropriated funds to finance orders placed with the working capital fund.
According to the Navy's fiscal year 2007 budget, the Navy Working Capital
Fund will earn about $23.4 billion in revenue during fiscal year 2007. The
Navy Working Capital Fund consists of the following five major activity
groups: supply management, depot maintenance, transportation, base
support, and research and development. The Navy's research and development
working capital fund activity group is Navy's largest activity group in
terms of expected revenue with $10.1 billion in fiscal year 2007. The
activity group includes the following subactivity groups: (1) the Naval
Surface Warfare Center, (2) the Space and Naval Warfare Systems Centers,
(3) the Naval Undersea Warfare Center, (4) the Naval Research Laboratory,
and (5) the Naval Air Warfare Center.

The Naval Air Warfare Center consists of two divisions: (1) the aircraft
division, which is located at Lakehurst, New Jersey, and Patuxent River,
Maryland; and (2) the weapons division, which is located at China Lake,
California, and Point Mugu, California. NAWC employs about 10,300 civilian
and military personnel and is expected to have revenues of almost $3
billion in fiscal year 2007. The mission of NAWC's aircraft division is to
operate the Navy's principal research, development, test, and evaluation;
engineering; and fleet support activity for naval aircraft engines,
avionics, and aircraft support systems, and ships, shore, air operations.
The mission of NAWC's weapons division is to operate as the Navy's
full-spectrum research, development, test, and evaluation in-service
engineering center for air warfare weapons systems (except antisubmarine
warfare systems), missiles and missile subsystems, aircraft weapons
integration, and assigned airborne electronic warfare systems. The weapons
division also operates one of the Navy's major range and test facility
bases comprising a complex of air, land, and sea test ranges.

What Is Carryover and Why Is It Important?

Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both the
unfinished portion of work started but not completed, as well as requested
work that has not yet begun. Some carryover is necessary at fiscal year
end if working capital funds are to operate efficiently and effectively.
For example, if customers do not receive new appropriations at the
beginning of the fiscal year, carryover is necessary to ensure that the
working capital fund activities have enough work to ensure a smooth
transition between fiscal years. Too little carryover could result in some
personnel not having work to perform at the beginning of the fiscal year.
On the other hand, too much carryover could result in an activity group
receiving funds from customers in one fiscal year but not performing the
work until well into the next fiscal year or subsequent years. By
optimizing the amount of carryover, DOD can use its resources in the most
effective manner and minimize the "banking" of funds for work and programs
to be performed in subsequent years.

Decision makers, including the Office of the Under Secretary of Defense
(Comptroller) and congressional defense committees, use reported carryover
information to make decisions concerning whether working capital fund
activities, such as NAWC, have too much carryover. If NAWC has too much
carryover, the decision makers may reduce the customers' budgets and use
these resources for other purposes. For example, during its review of the
fiscal year 2003 budget, the Office of the Under Secretary of Defense
(Comptroller) determined that the Navy research and development
activities' carryover had been steadily increasing from about $2.2 billion
in fiscal year 1997 to about $3.4 billion in fiscal year 2003. Since a
significant portion of the carryover was related to work that was to be
contracted out, the Office of the Under Secretary of Defense (Comptroller)
reduced the customer funding by $161.1 million, because these efforts
could be funded in fiscal year 2004 with no impact on performance.

DOD Revised Its Carryover Policy

In 1996, DOD established a 3-month carryover standard for working capital
fund activities. In May 2001, we reported6 that DOD did not have a basis
for its carryover standard and recommended that DOD determine the
appropriate carryover standard for depot maintenance, ordnance, and
research and development activity groups. According to Office of the Under
Secretary of Defense (Comptroller) officials, DOD provided verbal guidance
concerning its new carryover policy for working capital fund activities in
December 2002. Subsequently, DOD included its revised carryover policy in
its DOD Financial Management Regulation 7000.14-R, Volume 2B, Chapter 9,
dated June 2004, which eliminated the 3-month standard for allowable
carryover. Under the new policy, the allowable amount of carryover is to
be based on the outlay rate7 of the customers' appropriations financing
the work. This meant that in determining allowable carryover, the first
year outlay rate of the customers' appropriations financing the work would
be used for new orders received in the current year (first year of the
work order). According to the DOD regulation, this new metric allows for
an analytical-based approach that holds working capital fund activities to
the same standard as general fund execution and allows for more meaningful
budget execution analysis.

6 GAO, Defense Working Capital Fund: Improvements Needed for Managing the
Backlog of Funded Work, [34]GAO-01-559 (Washington, D.C.: May 30, 2001).

To calculate the reported actual carryover for the Navy research and
development activity group that includes NAWC, the Navy uses the
summary-level formula shown below.

Balance of customer orders beginning of year Plus: New orders received
Equals: Total available orders Less: Revenue Less: Work-in-process Equals:
Carryover

In accordance with DOD policy, the following orders and related work are
excluded from this calculation: (1) nonfederal orders, (2) non-DOD orders,
(3) foreign military sales, (4) work related to base realignment and
closure, and (5) major range and test facility base work. The reported
actual carryover is then compared to the amount of allowable carryover
using the above-mentioned outlay rate method to determine if the reported
actual amount was over or under the allowable amount.

DOD Established Triannual Review Requirement in 1996

The May 1996 memorandum from the Under Secretary of Defense (Comptroller)
that established DOD's triannual review requirement noted that the timely
review of commitments and obligations to ensure the accuracy and
timeliness of financial transactions is a vital phase of financial
management. To illustrate the point, the Under Secretary stated that the
accurate recording of commitments and obligations (1) forms the basis for
formal financial reports issued by the department and (2) provides
information for management to make informed decisions regarding resource
allocation.

7 The amount of allowable carryover using the outlay rate follows. For
example, customers order $100 of work, which is financed with a specific
appropriation. If the outlay rate for this appropriation at the
appropriation level is 60 percent, then this would result in the working
capital fund activity group being allowed to carry over $40 ($100 - $60
[$100 x 60 percent] = $40).

Carryover-related budget decisions are examples of resource allocation
decisions that require reliable obligation data. This is because there is
a direct link between the (1) carryover data that working capital fund
activities report to Congress and DOD decision makers and (2) obligation
data contained in the accounting records of working capital fund
activities and their customers. Specifically,

           o when working capital fund activities, such as NAWC, accept
           customer orders, obligations are created in the customers'
           accounting records, and the activities become the "fund holders";
           and

           o as work is performed and customers are billed, both the
           unliquidated obligation balances in the customers' accounting
           records and the working capital fund activities' reported
           carryover balances are reduced.

           DOD included the triannual review requirements in its Financial
           Management Regulation. DOD Financial Management Regulation
           7000.14-R, Volume 3, Chapter 8, requires fund holders, such as
           NAWC, to provide written confirmation that they have completed 16
           specific tasks8 during their reviews. For example, the regulation
           requires fund holders to confirm, among other things, that they
           have (1) traced the obligations and commitments that are recorded
           in their accounting systems back to source documentation and (2)
           conducted adequate follow-up on all dormant obligations and
           commitments over 120 days old to determine if they are still
           valid.9 Additionally, the regulation requires fund holders to (1)
           identify the problems that were noted during their reviews; (2)
           advise management of whether, and to what extent, adjustments or
           corrections were taken to remedy noted problems; (3) summarize, by
           type, the actions or corrections remaining to be taken; (4)
           indicate when such actions/corrections are expected to be
           completed; and (5) identify the actions that have been taken to
           preclude identified problems from recurring in the future. Thus,
           if properly implemented by the department, triannual reviews can
           provide a systematic process that can help fund holders not only
           improve the reliability of their financial data but also identify
           and correct the underlying causes of data problems.
			  
8 In June 2006, the Navy added 2 additional tasks, resulting in Navy
activities being required to perform 18 specific tasks in their triannual
reviews and to certify that they have completed them.

9 All obligations and commitment balances are required to be reviewed at
least annually in order to substantiate year-end certification
requirements. However, for those balances that are greater than a certain
amount, these transactions are required to be reviewed during each of the
4-month periods ending January 31, May 31, and September 30 of each fiscal
year (e.g., for customer-order-related obligations and commitments, the
amount is $50,000).

           NAWC Implemented a New System in Fiscal Year 2003 and Plans to
			  Implement a Different System in October 2007

           In 1998, the Navy established four separate Enterprise Resource
           Planning (ERP) pilot programs to address the need for business
           operations reform within the Navy. We reported10 in September 2005
           that (1) the Navy invested approximately $1 billion in its four
           pilot ERP efforts, without marked improvements in its day-to-day
           operations; (2) the lack of a coordinated effort among the pilots
           led to a duplication of efforts in implementing many business
           functions and resulted in ERP solutions that carry out similar
           functions in different ways from one another; and (3) the pilots
           resulted in four more stovepiped systems that did not enhance
           DOD's overall efficiency and resulted in $1 billion being largely
           wasted.

           One of these pilots was managed by the Naval Air Systems Command
           and called SIGMA. SIGMA was to improve program management
           including linkage among contract management, financial management,
           and workforce management. Prior to fiscal year 2003, NAWC used the
           Defense Industrial Financial Management System to account for its
           funds. In January 2003, NAWC began to implement SIGMA and
           completed implementation of this new system in March 2003. As
           discussed later in this report, NAWC encountered significant
           difficulties implementing SIGMA, which affected the reliability of
           the financial information for fiscal years 2003 and 2004. The Navy
           now plans to implement one overall ERP system, referred to as Navy
           ERP, and discontinue using the four ERP systems. This overall ERP
           system is planned to be implemented at NAWC in October 2007.
			  
10 GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best
Business Practices Critical to Avoid Past Failures, [43]GAO-05-858
(Washington, D.C.: Sept. 29, 2005).

           NAWC's Reported Actual Carryover Information Was Unreliable

           Our analysis of accounting data that provide information on
           customer orders and discussions with NAWC officials determined
           that the reported carryover information was not reliable for
           fiscal years 2003 and 2004 as a result of (1) NAWC's conversion to
           a new accounting system in fiscal year 2003 and (2) the divisions
           not performing reviews of obligations including the required DOD
           triannual reviews--as discussed later in this report. Reliable
           carryover information is essential for DOD and congressional
           defense committees during the budget review process since they may
           redirect excessive carryover amounts to pay for other priority
           initiatives. Both the NAWC aircraft and weapons divisions'
           comptrollers did not certify to the accuracy of financial
           information reported in their respective fiscal year 2003
           financial statements. To try to better manage carryover, improve
           the reliability of the carryover information, and avoid exceeding
           the ceiling, beginning in fiscal year 2005 and continuing into
           fiscal year 2006, NAWC (1) issued guidance on the acceptance of
           orders at year end and (2) started to review orders to correct its
           old financial records and reduce carryover. While the reliability
           of carryover information improved in fiscal years 2005 and 2006,
           we determined that data reliability problems still exist. For
           example, we found that funds on some customer orders totaling
           $19.5 million were deobligated at the end of the fiscal year and
           then reobligated at the beginning of the next fiscal year on these
           same orders. This artificially lowered carryover at the end of the
           fiscal year.
			  
           NAWC Reports Showed that It Exceeded Its Carryover Ceiling from
			  Fiscal Year 2003 through Fiscal Year 2005

           Since DOD changed its carryover policy in December 2002, NAWC
           exceeded its carryover ceiling by tens of millions of dollars from
           fiscal year 2003 through fiscal year 2005. During this 3-year
           period, Navy reports showed that NAWC had carryover amounts of
           $1.1 billion, $1.1 billion, and $1.0 billion, respectively, which
           represented over one-third of NAWC's annual workload. Table 1
           shows the dollar amount of the carryover ceiling, the dollar
           amount of the Navy-reported actual carryover for NAWC, and the
           dollar amount of carryover that was over or under the ceiling for
           fiscal years 2003 through 2006.

           Table 1: Dollar Amount of Reported Actual Carryover, Carryover
           Ceiling, and the Amount of Carryover that is Over or Under the
           Ceiling

           Source: Navy reports.

           Note: Figures may not add due to rounding.
			  
			  Implementation of New System Affected Reliability of Carryover
			  Information

           NAWC reports showed that it exceeded the carryover ceiling in
           fiscal year 2003 by $16.3 million. NAWC reports showed that the
           weapons division exceeded the ceiling by $31 million, while the
           aircraft division was $14.7 million under the ceiling. NAWC
           aircraft and weapons division officials stated that their fiscal
           year 2003 carryover information was unreliable as a result of
           NAWC's conversion to SIGMA in fiscal year 2003. According to NAWC
           aircraft and weapons division officials, immediately after the
           conversion to SIGMA between January and March 2003, NAWC personnel
           began experiencing problems with the reliability of the data. This
           resulted from the lack of subject matter expertise and user
           training on the new system, and system configuration problems
           between the previous system, called the Defense Industrial
           Financial Management System, and SIGMA. Further, due to the system
           not operating for approximately 3 months and system-related
           problems, NAWC experienced significant backlogs in processing
           financial documents during fiscal year 2003. For example, NAWC
           weapons division officials noted that their personnel spent the
           first 2 months of fiscal year 2004 processing fiscal year 2003
           customer bills. Due to the delays in processing billing
           transactions, NAWC's work-in-process balances at the end of fiscal
           year 2003 (a key component in the carryover calculation) were
           about 10 times (aircraft) and 8 times (weapons) higher than its
           fiscal year 2002 reported amount. As a result of these system
           problems, both the NAWC aircraft and weapons divisions'
           comptrollers would not certify to the accuracy of financial
           information reported in their fiscal year 2003 financial
           statements.

           For fiscal year 2004, the aircraft and weapons divisions reported
           that their carryover exceeded the ceiling by $35.7 million and
           $21.5 million, respectively, for a total of $57.2 million.
           According to NAWC aircraft and weapons division officials, several
           data fixes were made to SIGMA in fiscal year 2004 that improved
           its processing times and data integrity issues. However, some data
           reliability problems continued to exist. The NAWC aircraft and
           weapons divisions' comptrollers noted problems with the
           reliability of some of their financial information presented in
           the fiscal year 2004 financial statements. In fiscal year 2004,
           NAWC aircraft and weapons division officials stated that, at the
           request of the Naval Air Systems Command Comptroller, a team of
           consultants and analysts conducted a review of SIGMA's processes
           to address its multitude of data integrity issues and its
           inability to provide accurate financial statements. The team
           developed a detailed plan of action and milestones to fix these
           problems with timelines that extended into fiscal year 2006.
           Further, for most of fiscal year 2003 and 2004, NAWC aircraft and
           weapons division officials stated that SIGMA lacked carryover
           management reports that would allow NAWC program managers to
           monitor the status of each order (funding document) and make
           informed decisions to control its carryover. In the executive
           summary to the NAWC aircraft division's fiscal year 2004 financial
           statements, the division reported that the implementation of SIGMA
           resulted in the nonavailability of specific carryover reports
           necessary for managing carryover at the program level. NAWC
           aircraft and weapons division officials stated that while the
           reports became available late in fiscal year 2004, they were of
           limited utility because of continuing data integrity issues and
           NAWC's inability to review and validate both aged and current
           financial records.
			  
           NAWC Took Steps to Better Manage Carryover and Improve the
			  Reliability of Carryover Information

           Beginning in fiscal year 2005 and continuing into fiscal year
           2006, NAWC issued guidance on the acceptance of orders at fiscal
           year end in an attempt to better manage carryover and avoid
           exceeding its carryover ceiling for the third straight year.
           Specifically, in an August 2005 memorandum that contained fiscal
           year 2005 NAWC carryover guidance, NAWC estimated that its
           year-end carryover balance would be $95 million over its
           authorized level. The memorandum placed strict controls over
           acceptance of year-end orders including (1) the rejection of
           noncritical new orders, (2) the acceptance of requests for
           reversion of funds back to customers, and (3) before the NAWC
           accepts any critical workload that would result in additional
           unexpended carryover, the division must obtain approval from the
           NAWC aircraft division or weapons division commander and offset
           the outstanding carryover amounts by reversions of funds to the
           customer of an equal or greater amount. Further, the NAWC
           comptrollers were directed to provide program managers with a list
           of projects or tasks that had 25 percent or less of authorized
           funding executed as a potential source for reversion or offsets.
           Finally, the NAWC weapons division provided its business financial
           management community with tools to give them the capability to
           better manage carryover. For example, one tool provided the
           business financial managers (BFM)11 with the capability to compare
           planned carryover data to actual carryover data for individual
           orders and at the summary level on a weekly basis to determine if
           actual carryover may exceed the carryover ceiling at year end. If
           actual carryover may exceed the ceiling at year end, the weapons
           division can use the tool to identify problems--such as a
           significant delay in a major program's start date--and begin
           working on solutions to mitigate them. Even with these stronger
           management controls over new orders and the increased efforts to
           validate old accounts, NAWC's reports showed that it still
           exceeded the carryover ceiling in fiscal year 2005 by $51.7
           million. The aircraft division exceeded the ceiling by $52.4
           million while the weapons division was under the ceiling by $0.7
           million.

           For fiscal year 2006, NAWC's reported actual carryover amount was
           below the carryover ceiling for the first time since DOD revised
           its carryover policy in December 2002. The aircraft and weapons
           divisions were under the ceiling by about $10 million and $18
           million, respectively. NAWC officials informed us that they
           continued to emphasize the management of carryover during fiscal
           year 2006 by reviewing orders and issuing additional guidance. Key
           elements of this guidance include the following.

           o The aircraft division issued additional carryover guidance in
           September 2006 to reiterate several requirements cited in fiscal
           year 2005. Furthermore, an aircraft division official noted that
           the increased focus resulting from the prior GAO report
           recommending that the research and development subactivity groups
           report their carryover balances separately in the Navy's annual
           budget encouraged NAWC management to more closely monitor and
           manage its carryover.
           o The weapons division issued carryover guidance in August 2006,
           which continued to stress the reviews of customers' orders that
           are financed with appropriations that are canceling or expiring.
           The guidance states that such reviews would (1) improve the
           quality of the year-end carryover and (2) validate the records,
           which is an essential task for accomplishing a smooth financial
           conversion to the new Navy ERP system planned for October 2007.
           The guidance further provided that funds accepted during the
           remainder of the fourth quarter should not negatively impact the
           division's carryover position. Otherwise, the division should
           notify the customer that the order cannot be accepted and
           renegotiate, if possible, the amount of the order that can be
           accomplished using the DOD carryover guidance on outlay rates.
			  
11 BFMs are responsible for pre- and postcontract functions and contract
management, including resource management, manpower management, and
material management.

           Furthermore, starting primarily in fiscal year 2005, the aircraft
           and weapons divisions began reviewing certain types of orders to
           validate old financial records and reduce carryover. According to
           NAWC aircraft and weapons division officials, most of these
           reviews were not done in fiscal years 2003 and 2004 because of
           NAWC's conversion to SIGMA and the problems, mentioned earlier, it
           encountered with implementing the system and the reliability of
           the data in the system. Some of the reviews performed by the
           aircraft or weapons divisions include (1) reviews of funding
           documents (orders) citing appropriations that are canceling12 at
           the end of each fiscal year (such reviews have been done since the
           1990s), (2) reviews of funding documents citing accounts that were
           to expire at the end of the fiscal year (these reviews started in
           fiscal year 2005), and (3) a fiscal year 2006 review of unused
           funds with work completion dates of September 30, 2005, and
           before. According to NAWC officials, these reviews resulted in
           correcting millions of dollars in unsupported or unneeded funds on
           orders, and greatly improved the reliability of the financial
           data. For example, according to a NAWC aircraft division official,
           as of August 2005, this division had 14,353 orders that were still
           open on its books when it converted to SIGMA in fiscal year 2003.
           As a result of the aircraft division's review of these orders from
           August 2005 through November 2006, this number was reduced to
           7,053 open orders--a reduction of about 50 percent--and $10
           million of unneeded funds were removed from its books.
			  
12An appropriation enacted for a fixed period of time is available for
incurring and recording new obligations during such fixed period of time
after which the appropriation account expires. The expired appropriation
account remains available for the period of 5 years to record adjustments
to obligations properly incurred prior to its expiration and to liquidate
such obligations. At the end of the 5-year expired account period, the
appropriation balance is canceled and the account is closed. Once closed,
the expired appropriation account ceases to be available to adjust or
liquidate obligations.

31 U.S.C. SS 1552(a), 1553(a), 1553(b) (1). For further discussion see
GAO, Principles of Federal Appropriations Law, vol. 1, 3rd ed.,
[44]GAO-04-261SP , pp. 5-71 through 5-75 (Washington, D.C.: January 2004)
and Principles of Federal Appropriations Law: Annual Update of Third
Edition, [45]GAO-06-534SP , pp. 5-3 and 5-4 (Washington, D.C.: April
2006).			

           Some Customer Orders Were Reduced at Year End, which Artificially
			  Lowered Carryover

           While we are encouraged by NAWC's actions to review and validate
           its financial records and better manage its carryover, we
           identified some cases where NAWC deobligated millions of dollars
           of funds at fiscal year end on orders for work it still planned to
           perform. NAWC then reobligated funds at the beginning of the next
           fiscal year to perform the work. This action artificially lowered
           NAWC's actual year-end carryover balances in fiscal years 2004 and
           2005 that were reported to DOD and congressional decision makers.
           We analyzed fiscal years 2004 and 2005 year-end orders where
           amendments or adjustments were made to deobligate funds on these
           orders at the end of the fiscal year. We found a total of $19.5
           million was deobligated at the end of fiscal year 2004 or 2005 and
           reobligated at the beginning of the next fiscal year. These
           actions had the effect of reducing carryover even though the
           requirement for the funds still remained at the time the funds
           were returned to their customers. We reported13 on a similar
           problem in fiscal year 2003 on our review of the Space and Naval
           Warfare Systems Command. The following examples illustrate the
           orders that were deobligated at the end of fiscal year 2004 or
           2005, which had the effect of reducing reported carryover even
           though the requirement for the funds still remained but the work
           could not be completed by the end of the fiscal year.

           o Aircraft division officials stated that they did not know why
           adjustments totaling $10.5 million on 14 orders were made to
           deobligate customer funds at the end of fiscal year 2004 or 2005
           and why the funds were reobligated at the beginning of the next
           fiscal year on these same orders. They said that lack of
           documentation, turnover of personnel, and difficulties
           implementing SIGMA hindered their ability to determine why these
           year-end adjustments were made. For example, from December 1,
           2003, to September 23, 2004, the NAWC aircraft division accepted a
           work order and related amendments from the Naval Air Systems
           Command totaling approximately $2.1 million for engineering
           support for the CH-53E helicopter program. Accounting records
           showed that $404,435 was deobligated in September 2004--at the end
           of the fiscal year--and that this same amount was reobligated 1
           month later in October 2004--at the beginning of the next fiscal
           year. According to an aircraft division official, "no
           documentation for reason of the deobligation has been located."
           o In April 2005, the NAWC weapons division accepted two orders
           from the U.S. Army Space and Missile Defense Command totaling $5.5
           million for range instrumentation services and missile flight
           safety support for two separate tests of the Missile Defense
           Agency Target Intercontinental Ballistic Missiles. The tests were
           originally scheduled to be completed in fiscal year 2005, but were
           delayed into fiscal year 2006 due to weather and instrumentation
           problems. Due to program delays and expenditure rates that were 25
           percent or less of authorized funding on the orders, NAWC
           identified these orders as potential funds that could be returned
           to the customer. According to a BFM, the NAWC weapons division
           needed to have these funds "off the books" to relieve the
           carryover problem. The NAWC weapons division's comptroller
           officials stated that the return of funds to customers is
           appropriate when mission support requirements slip from one fiscal
           year to the next and the tasking to be accomplished is severable,
           as in this case. On September 23, 2005, the U.S. Army Space and
           Missile Defense Command issued an amendment to each order
           deobligating a total of $4.85 million. Approximately 1 month
           later, the command issued amendments on the orders returning the
           $4.85 million--the exact amount that was deobligated in September
           2005. The two tests were performed in fiscal year 2006.
           o In January 2005, the NAWC aircraft division accepted an order
           from the Naval Air Systems Command totaling $100,000 for the
           research and development of a low-cost, automated fiber optic
           cable. In September 2005--8 months later--the Naval Air Systems
           Command issued an amendment to the order deobligating the entire
           amount. In October 2005--approximately 1 month later--the command
           issued another amendment to the order returning funds to the
           program totaling $110,000. Work on the order began in November
           2005 and was completed in September 2006. According to a BFM,
           delays in completing work in fiscal years 2003 and 2004 on other
           jobs delayed the start of fiscal year 2005 work. NAWC aircraft
           division accounting officials said, and we agree, that work should
           have been started within a reasonable amount of time after
           accepting the order in January 2005--within 90 days. Otherwise,
           the funds should have been deobligated when the delays caused the
           work to commence beyond a reasonable amount of time as specified
           in the DOD financial management regulation.
			  
13 GAO, Navy Working Capital Fund: Backlog of Funded Work at the Space and
Naval Warfare Systems Command Was Consistently Understated, [46]GAO-03-668
(Washington, D.C.: July 1, 2003).
           
           NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year 2006

           NAWC did not perform the triannual reviews of its financial
           information until fiscal year 2006, even though DOD guidance had
           long required NAWC and all other fund holders14 to conduct these
           reviews of their financial data (outstanding commitments,
           obligations, and accrued expenditures). These reviews would likely
           have improved the reliability of carryover information and the
           underlying financial data. DOD established its triannual review
           requirement in 1996 in order to improve the timeliness and
           accuracy of its financial data. However, the aircraft and weapons
           divisions did not conduct their first reviews until January
           2006--about 10 years later. Further, as of September 2006, the two
           divisions were still not fully complying with several of the 16
           specific DOD tasks that they were required to accomplish during
           their reviews. Because the two divisions did not always
           effectively review some obligations, particularly dormant
           obligations (i.e., those over 120 days old), (1) their reported
           actual carryover was overstated and (2) they sometimes returned
           unneeded funds to customers after the funds had expired. Further
           details on dormant obligations and accrued expenditures are
           included in appendix II. Furthermore, if effectively implemented,
           the triannual reviews could help NAWC validate its financial
           records before it implements a new system that is scheduled to be
           installed in October 2007.
			  
			  NAWC Did Not Properly Implement DOD's Triannual Review Guidance

           NAWC did not properly implement DOD's triannual review guidance
           cited in DOD Financial Management Regulation 7000.14-R, Volume 3,
           Chapter 8. Specifically, (1) NAWC did not perform the required
           triannual reviews prior to fiscal year 2006 although these reviews
           were required in a May 1996 memorandum from the Under Secretary of
           Defense (Comptroller) and in the November 2000 DOD Financial
           Management Regulation and (2) NAWC did not review all obligations
           at least once during fiscal year 2006 as required by the November
           2000 DOD regulation. In addition, the November 2000 DOD regulation
           (triannual guidance) on the dollar threshold for reviewing
           obligations was unclear.
			  
			    NAWC Did Not Perform Required Triannual Reviews Prior to Fiscal Year 2006

           Prior to fiscal year 2006, NAWC did not perform triannual reviews,
           even though these reviews were required by the DOD Financial
           Management Regulation. According to NAWC officials at the aircraft
           and weapons divisions, these reviews were not done because they
           received e-mail guidance from the Naval Air Systems Command that
           stated the NAWC divisions were not required to submit the
           triannual review confirmation report because this requirement was
           only for general funds. In October 2005, the Naval Air Systems
           Command provided guidance to the NAWC aircraft and weapons
           divisions that they were now required to perform the triannual
           reviews and complete the confirmation statements. Officials from
           the NAWC aircraft and weapons divisions stated that the first time
           they completed a triannual review and confirmation statement was
           for the period ending January 31, 2006.
			  
14 The fund holder is the organization on whose accounting records a
commitment, obligation, and/or accrued expenditure is recorded.

             NAWC Did Not Review All Obligations in Fiscal Year 2006 as
				 Required by DOD Regulation

           Although the DOD regulation requires that all obligations be
           reviewed at least annually in order to substantiate year-end
           triannual review requirements, the NAWC aircraft and weapons
           divisions only reviewed obligations, including dormant
           obligations, over a certain dollar threshold--$50,000 or $200,000.
           The weapons division did not review all the obligations because
           guidance received from the Naval Air Systems Command dated June 2,
           2006, and September 28, 2006, and guidance issued by NAWC weapons
           divisions dated September 29, 2006, did not require a review of
           all of them. Officials from Naval Air Systems Command and the NAWC
           weapons division informed us that they did not require the review
           of all obligations at least once a year because they did not
           realize that the DOD regulation required such a review. NAWC
           aircraft division officials told us that although the DOD
           regulation required such reviews, they did not have the time or
           resources to perform the reviews. If effectively implemented, the
           triannual reviews could help NAWC validate its financial records
           before it implements a new system that is scheduled to be
           installed in October 2007.
			  
			    DOD Triannual Review Guidance on Dollar Threshold for Reviewing
				 Obligations Is Unclear

           We also found that DOD's triannual review guidance regarding the
           dollar threshold for reviewing outstanding obligations was
           unclear. The DOD Financial Management Regulation 7000.14-R, Volume
           3, Chapter 8, guidance states that during the January and May
           reviews, obligations of (1) $200,000 or more for investment
           appropriations (e.g., procurement and the capital budget of the
           working capital funds) should be reviewed and (2) $50,000 or more
           for operating appropriations (e.g., operation and maintenance
           funds and the operating portion of the working capital funds)
           should be reviewed. However, the Naval Air Systems Command and the
           NAWC weapons division interpreted the guidance to mean that
           customer orders--which are the operating portion of the working
           capital fund--financed with investment funds fell into the
           $200,000 threshold category for review purposes, rather than the
           $50,000 category. The NAWC weapons division conducted its
           triannual reviews accordingly. In discussing this issue with
           accounting and budgeting officials from the Office of the Under
           Secretary of Defense (Comptroller), they stated that customer
           orders received by working capital fund activities are part of the
           operating portion of the working capital fund regardless of the
           appropriation financing the order. Thus, the January and May
           triannual reviews should have included all obligations over
           $50,000.
			  
			  NAWC Continues to Refine Its Triannual Review Process

           Our review of the process that the NAWC aircraft and weapons
           divisions used to conduct their triannual reviews identified
           several areas that need improvements. The aircraft and weapons
           divisions developed their own separate processes for performing
           the triannual reviews. For fiscal year 2006, the weapons division
           used a decentralized process that relied on both the accounting
           department and the BFMs to conduct its reviews, while the aircraft
           division used a centralized process that relied on the accounting
           department to conduct its reviews. During our review, we
           identified problems with the two divisions' triannual reviews of
           obligation and accrued expenditure balances. Based on the results
           of our review and discussions with NAWC officials, the aircraft
           and weapons divisions issued written guidance on performing the
           triannual reviews and are now including the BFMs in the process.
           If the process is implemented properly, the aircraft and weapons
           divisions' decision to include the BFMs in its triannual review
           process should result in better reviews and more reliable
           financial information, including carryover information, in the
           future.
			  
			    NAWC Weapons Division Improved Its Decentralized Review Process
				 throughout 2006

           The NAWC weapons division accomplished its triannual reviews on a
           decentralized basis. During the first step of the process, the
           Office of the Comptroller for the NAWC weapons division, which has
           overall responsibility for the reviews, developed computer lists
           that contain information on the division's outstanding
           commitments, obligations, and accrued expenditures. The
           Comptroller's office then placed these lists on the Business
           Financial Management Community shared server so that the BFMs
           could access the data and conduct their triannual reviews. When
           the BFMs finished their reviews, the competency15 heads certified
           that their reviews had been completed and then forwarded their
           certifications to the Comptroller's office. On the basis of the
           technical department's certifications, the Comptroller then
           certified that the division has completed its review.
			  
15 Competencies represent different departments aligned to perform
specific functions such as engineering, contracting, and financial
management. Throughout the rest of this report, we will refer to the
competencies as technical departments.

           We found problems with the weapons division's implementation of
           the triannual review process. The NAWC weapons division performed
           its first triannual review for the period ending January 31, 2006.
           The review was performed on a limited basis by the Comptroller's
           office since no formal triannual review procedures had been
           developed by the weapons division. For the second triannual review
           performed for the period ending May 31, 2006, the Comptroller's
           office modified its process to place primary responsibility for
           reviewing its division's commitments, obligations, and accrued
           expenditures on the BFMs within the division's technical
           departments. NAWC weapons division officials stated that the BFMs
           had information that was not immediately available to the
           Comptroller's office on whether work was performed on its orders.
           Consequently, they were in the best position to determine whether
           outstanding obligations and accrued expenditures were valid and
           whether the funds were still needed to perform the work.

           While the May 2006 process was better than the one used for the
           weapons division's January 2006 review, our analysis and
           discussions with technical department and Comptroller's office
           officials found that (1) no written procedures had been developed
           by the weapons division, (2) not all BFMs that were responsible
           for reviewing the transactions participated in the training
           offered by the Comptroller's office, (3) the Comptroller's office
           did not specifically identify which transactions the technical
           departments were required to review, (4) the weapons division did
           not have a standard methodology for reporting the results of its
           technical departments' reviews to the Comptroller's office in
           order to ensure that all required transactions were certified, (5)
           not all BFMs that reviewed transactions were maintaining
           documentation for 24 months on their reviews as required by the
           DOD Financial Management Regulation, and (6) the division did not
           have a procedure in place to ensure the technical departments were
           performing the triannual reviews properly. For example, many of
           the technical departments' BFMs that we interviewed stated that
           the lists provided by the Comptroller's office contained hundreds
           of commitment, obligation, and accrued expenditure transactions
           for review, but the lists did not contain enough information to
           identify the specific transactions that the BFMs were responsible
           for reviewing. As a result, some BFMs did not perform the May 2006
           triannual review at all because they could not identify the
           transactions that they were responsible for reviewing. Further,
           several of the BFMs that did perform reviews stated that they did
           not report their results to the Comptroller's office because a
           clearly defined procedure for reporting the results did not exist.

           In August 2006, we met with weapons division officials to discuss
           the division's triannual review process. Based on those
           discussions, we pointed out internal control weaknesses we
           identified in the May 2006 process. The officials agreed that the
           weapons division's triannual review process could be improved and
           the division needed to document its triannual review procedures.
           Shortly after our meeting, the division established a team to
           develop guidance on its triannual review procedures. The team
           decided to use a phased approach to achieve compliance with the
           DOD triannual review regulation. On September 29, 2006, the
           weapons division issued interim guidance containing the triannual
           review procedures for reporting on the period ending September 30,
           2006. The weapons division made a number of improvements to the
           May 2006 process. The weapons division (1) modified the process to
           clearly identify which technical departments were responsible for
           the transactions, (2) directed the department heads who were
           responsible for the transactions assigned to their departments to
           certify that these transactions were reviewed, and (3) established
           a procedure for reporting results to the Comptroller's office.

           Our discussions with several weapons division technical
           departments' BFMs found that these officials thought the September
           2006 triannual review process was a significant improvement over
           the May 2006 review process because the computer lists provided by
           the Comptroller's office contained sufficient information to
           identify the technical department and BFM responsible for
           reviewing the September 2006 transactions. Further, the interim
           guidance contained clear instructions for reporting their results
           to the Comptroller's office through their technical department
           managers. Our analysis showed that while the guidance for the
           September 2006 triannual reviews was an improvement, the guidance
           (1) did not comply with all the requirements of the DOD Financial
           Management Regulation to review all outstanding commitments,
           obligations, and accrued expenditures at least once annually; (2)
           did not require training for all the technical departments' BFMs
           involved in the review; (3) did not require all BFMs that were
           responsible for performing triannual reviews to maintain
           documentation for 24 months on their reviews; and (4) did not
           establish a procedure for ensuring that the technical departments
           are completing their reviews in compliance with the September 2006
           interim guidance.

           On December 21, 2006--about 3 months later--the NAWC weapons
           division issued additional guidance containing instructions for
           performing all future triannual reviews beginning with the review
           period ending January 31, 2007. The guidance stated that the
           triannual reviews are a critical factor in the NAWC weapons
           division efforts to eliminate problem disbursements, reduce
           potential violations of the Anti-Deficiency Act, and improve
           obligation and expenditure rates. The guidance requires all
           commitments and obligations to be reviewed at least annually in
           compliance with the DOD Financial Management Regulation and
           requires the technical departments' BFMs to attend mandatory
           annual triannual review training. While the new guidance addresses
           many of our concerns, it still does not establish procedures for
           ensuring that the technical departments are completing their
           reviews in compliance with the new guidance. Without these
           procedures, the Comptroller's office does not have a sound basis
           for providing written confirmation that the NAWC weapons
           division's transactions are complete and accurate.
			  
			    NAWC Aircraft Division Did Not Generally Involve BFMs in Its
				 Triannual Reviews

           Unlike the weapons division, the NAWC aircraft division
           accomplished its triannual reviews on a centralized basis within
           the accounting department and the BFMs were generally not included
           in the process. During the first step of the aircraft division
           process, the accounting department generated computer lists that
           contained information on the division's outstanding commitments,
           obligations, and accrued expenditures. The accounting department
           then forwarded these lists to the various team leaders within the
           accounting department to conduct the needed research to ensure
           that the outstanding obligations, accruals, or commitments are
           still valid. For example, the accounting department reconciled the
           disbursements recorded in SIGMA to the disbursements recorded in
           the DOD payment system called the Mechanization of Contract
           Administration Services (MOCAS). In performing the triannual
           reviews, the accounting department involved the BFMs on an
           as-needed basis. When the accounting department team leaders
           finished their reviews, they sent the completed lists back to the
           cost accounting supervisor, who then coordinated with the
           accounting officer to certify that the reviews were completed and
           forwarded these certifications to the Comptroller's office. On the
           basis of these certifications, the Comptroller certified that the
           division had completed its review and the transactions reviewed
           were accurate.

           NAWC aircraft division did not complete its first triannual review
           until January 2006. Our analysis and discussions with NAWC
           aircraft division officials determined that the aircraft division
           had not (1) developed and implemented written procedures for
           performing the triannual reviews and (2) developed or provided
           training to the BFMs on how to conduct the triannual reviews since
           they have not been specifically involved in performing these
           reviews. The accounting officer stated that they were unable to
           review all outstanding obligations, as required by the DOD
           regulation at least annually, due to time and resource
           constraints.

           In addition to the triannual reviews, the accounting officer
           stated that the aircraft division accounting department reviews
           commitments, obligations, and accrued expenditures as part of its
           routine operations. Specifically, the accounting department is to
           take the following actions.

           o Identify outstanding orders funded with appropriations that are
           canceling at the end of the fiscal year and perform detailed
           analyses to resolve these transactions in order to get them off
           the books prior to the end of the fiscal year.
           o Forward information to the budget department, which coordinates
           with the BFMs to review outstanding commitments over 90 days old
           on a monthly basis and respond back to the accounting department
           as to whether the commitments on the list are valid or invalid.

           o Perform research on outstanding accrued expenditures. The first
           accrued expenditure data file was produced as of the end of fiscal
           year 2005. According to a NAWC aircraft division official,
           throughout fiscal year 2006, the accrued expenditure information
           improved. The aircraft division now compares the information in
           this file to information received from MOCAS. The accounting
           department had not provided the accrued expenditure file to the
           BFMs for review prior to January 2007. However, beginning in
           January 2007, the Comptroller's office began generating files that
           identified which accrued expenditure records belonged to which
           BFMs. In addition, one of the data elements identifies the person
           in the accounting department who performed the initial research
           and what research had been performed to date to alleviate the
           duplication of efforts between accounting and BFM personnel. This
           will enable the accounting department to begin using the BFMs in
           researching the accrued expenditures.

           Even though the procedures provide for some BFM involvement, our
           review of 21 dormant obligations involving 17 different BFMs
           disclosed that they had not reviewed the specific transactions in
           our sample prior to our visit. This is an indication that the
           aircraft division's routine reviews of obligations were not always
           effective. Additionally, our analyses identified that the aircraft
           division's current process did not provide an adequate review of
           its obligations and accrued expenditures. We found that:

           o As of September 30, 2006, $43 million (or 23 percent) of the
           NAWC aircraft division's obligations were over 120 days old and
           $20 million (or 11 percent) were over 1 year old. The accounting
           officer stated that they were unable to review all the obligations
           as required by the DOD regulation at least annually, due to time
           and resource constraints. Accordingly, this item was not certified
           on the September 30, 2006, triannual review confirmation
           checklist.
           o As of June 30, 2006, $70 million (or 62 percent) of the NAWC
           aircraft division's accrued expenditures were over 120 days old
           and $35 million (or 31 percent) were over 1 year old. The
           accounting officer stated that accrued expenditures were only
           reviewed within the accounting department and that they had not
           developed policies or procedures for reviewing the accrued
           expenditures.

           In February 2007, NAWC aircraft division officials stated that
           they were developing a new draft instruction for conducting their
           triannual reviews. These officials added that they started with
           the December 2006 NAWC weapons division guidance and are revising
           it to better reflect the aircraft division's operations. A month
           later, on March 20, 2007, the NAWC aircraft division issued
           written procedures that (1) require the division to review all
           outstanding obligations and accrued expenditures at least annually
           in order to substantiate the year-end certification process, (2)
           clearly delineate the responsibilities of the individuals
           performing the review, (3) require the BFMs to participate in
           performing the triannual reviews, (4) clearly describe the process
           for reporting the triannual review results to the division's
           Comptroller office, and (5) require the division to maintain all
           documentation related to the transactions reviewed for a period of
           24 months following the review to ensure that independent
           organizations, such as the Office of Inspector General, can verify
           that the reviews were accomplished as required. While we agree
           with the aircraft division's issuance of written triannual review
           procedures that increase the involvement of the BFMs in the
           triannual review process, we note that the division had not yet
           developed and implemented training that provides detailed
           instructions to the BFMs on performing the triannual reviews.
           Although this may require a short-term increase in resources to
           provide this training, the long-term benefit will be a more
           complete review of obligations, commitments, and accrued
           expenditures. This, in turn, should improve the reliability of the
           aircraft division's financial information, including carryover.
			  
			  Conclusions

           Reliable carryover information is essential for Congress and DOD
           to perform their oversight responsibilities, including reviewing
           and making well-informed decisions on DOD's budget. Moreover, by
           improving the reliability of the underlying data used to calculate
           carryover, NAWC's financial data, such as obligation and accrued
           expenditure balances, will also be more reliable. Management
           accountability at the divisions for the accuracy of reported
           carryover and the timely identification of unneeded funds will be
           a key factor in improving these data. This includes increased
           management attention to help assure that the divisions are
           effectively conducting their triannual reviews, including
           reviewing funded orders. Further, in light of NAWC's planned
           conversion to a new Navy accounting system in October 2007, it is
           especially important for NAWC to review and correct any errors in
           recorded obligations and accrued expenditures, particularly
           dormant ones. If not corrected prior to conversion, any such
           errors could cause additional resource-intensive research to fully
           resolve them and these problem transactions could potentially
           remain unresolved for years.
			  
			  Recommendations for Executive Action

           In order to improve the reliability of carryover information at
           NAWC, we are making the following six recommendations to the
           Secretary of Defense.

           We recommend that the Secretary of Defense direct the Secretary of
           the Navy to take the following actions.

           o Reiterate its guidance that clearly prohibits Navy working
           capital fund activities from deobligating reimbursable customer
           orders at fiscal year end and immediately reobligating them in the
           next fiscal year, a process that results in artificially reducing
           the carryover balances that are ultimately reported to Congress.
           o Develop and implement procedures for the Naval Air Warfare
           Center's aircraft and weapons divisions to provide assurance that
           triannual reviews of obligation and accrued expenditure balances
           are performed in accordance with the DOD Financial Management
           Regulation.
           o Develop and implement a required training course for BFMs that
           provides instructions on performing the triannual review
           requirements for the Naval Air Warfare Center's aircraft division.
           o Require individuals, including BFMs responsible for performing
           the reviews at the Naval Air Warfare Center's aircraft division,
           to attend the training to ensure that they are aware of the
           triannual review requirements.
           o Review and validate the accuracy of NAWC's aircraft and weapons
           divisions' reported outstanding obligations and accrued
           expenditures, especially those that have remained outstanding
           since the conversion to SIGMA, prior to its conversion to a new
           accounting system in October 2007.

           We recommend that the Secretary of Defense direct the Under
           Secretary of Defense (Comptroller) to clarify the triannual review
           guidance for the January and May reviews in the DOD Financial
           Management Regulation as it pertains to the dollar threshold for
           reviewing outstanding commitments and obligations for the capital
           budget and operating portion of the working capital fund.
			  
			  Agency Comments and Our Evaluation

           DOD provided written comments on a draft of this report. DOD
           concurred with our six recommendations and plans to complete
           actions on five of the six recommendations by the end of fiscal
           year 2007. We appreciate DOD's efforts and find them generally
           responsive to our recommendations. For example, DOD stated that it
           would complete the following actions.

           o Direct the Navy to reiterate its policy on handling reimbursable
           customer orders in its fiscal year end closing guidance.
           o Direct the Navy to develop and implement procedures that provide
           assurance that the required triannual reviews are properly
           performed.
           o Direct the Navy to develop and implement a training course or
           courses for all Naval Air Warfare Center employees involved with
           the triannual reviews and require these employees, including the
           business financial managers, to attend the training.

           However, we are concerned with the timing of the corrective action
           for one of the recommendations and also with the completeness of
           DOD's planned actions related to the one recommendation with which
           it "concurred with comment." Specifically, in its written
           comments, DOD stated that the Navy would emphasize reviewing and
           validating outstanding obligations and accrued expenditures that
           have remained outstanding since the conversion to SIGMA and
           estimated that this action would be completed by September 2008.
           As noted in our draft report, we believe that it is critical that
           such reviews and validations be completed prior to the planned
           conversion to a new accounting system in October 2007. While we
           appreciate that the Navy has already started these reviews,
           validating these transactions prior to the system conversion is a
           best practice that would help avoid some of the problems that were
           encountered when NAWC implemented its current accounting system in
           2003.

           Further, in response to our recommendation that the triannual
           review guidance in the FMR be clarified, DOD "concurred with
           comment" and stated that a letter would be issued directing the
           Navy to comply with the FMR concerning the dollar thresholds for
           performing the triannual review. DOD commented that the FMR was
           clear as currently written. As noted in our draft report,
           officials from the Naval Air Systems Command, the NAWC weapons
           division, and the NAWC aircraft division had varying
           interpretations of the FMR requirements. Thus, while we continue
           to believe that a revision to the FMR would be the most efficient
           means to resolve this issue, a letter such as that proposed in
           DOD's response could suffice as long as it includes clarification
           of the FMR guidance, particularly with regard to the dollar
           thresholds for reviewing outstanding commitments and obligations
           for the capital budget and operating portion of the working
           capital fund.

           We are sending copies of this report to the Chairmen and Ranking
           Minority Members of the Senate Committee on Armed Services; the
           Subcommittee on Readiness and Management Support, Senate Committee
           on Armed Services; the Subcommittee on Defense, Senate Committee
           on Appropriations; the House Committee on Armed Services; and the
           Subcommittee on Readiness, House Committee on Armed Services. We
           are also sending copies to the Secretary of Defense, the Secretary
           of the Navy, and other interested parties. Copies will be made
           available to others upon request.

           Should you or your staff have any questions concerning this
           report, please contact McCoy Williams, Director, at (202) 512-9095
           or [35][email protected] , or William M. Solis, Director, at
           (202) 512-8365 or [36][email protected] . Contact points for our
           Offices of Congressional Relations and Public Affairs may be found
           on the last page of this report. Key contributors to this report
           are listed in appendix IV.

           McCoy Williams
			  Director, Financial Management and Assurance

           William M. Solis
			  Director, Defense Capabilities and Management
			  
			  Appendix I: Scope and Methodology

           To determine if the Naval Air Warfare Center's (NAWC) reported
           actual carryover was reliable for fiscal years 2003 through 2006,
           we obtained budget and accounting documents that provided
           information on reported actual carryover and the carryover ceiling
           for fiscal years 2003 through 2006. We analyzed the carryover
           information to determine if the NAWC aircraft or weapons
           divisions' reported actual carryover exceeded the ceiling for
           fiscal years 2003 through 2006. We (1) discussed with NAWC
           officials the reliability of the carryover information, (2)
           obtained and analyzed the NAWC aircraft and weapons divisions'
           financial statements for fiscal year 2003 through 2006 to
           determine if NAWC certified to the reliability of the information,
           and (3) discussed with NAWC officials actions they were taking to
           improve the reliability of the carryover information. We also
           reviewed year-end transactions that reduced the dollar amount of
           reported actual carryover. For these transactions, we obtained
           data on orders from August through December for 2004 and 2005. We
           identified orders that showed deobligated amounts in August or
           September and matched them to the same orders that showed
           obligated amounts in October through December. We analyzed the
           orders and any amendments to the orders and met with officials
           from the NAWC aircraft and weapons divisions to determine why
           these transactions occurred at the end of the fiscal year. We also
           discussed with NAWC aircraft division and weapons division
           officials actions they were taking or have taken to help ensure
           that the reported actual carryover amount stays below the ceiling.

           To determine if NAWC was utilizing the required triannual review
           process to improve the reliability of its carryover information
           and underlying financial data, we reviewed the policies and
           procedures the Naval Air Systems Command and NAWC used to
           implement the Department of Defense's (DOD) triannual review
           guidance. Specifically, we (1) reviewed the DOD, Navy, Naval Air
           Systems Command, and NAWC triannual review guidance and discussed
           it with cognizant individuals; (2) requested the triannual review
           confirmation statements that NAWC submitted since fiscal year
           2003, and discussed these statements with cognizant individuals;
           (3) discussed NAWC's triannual review procedures with cognizant
           individuals, including those who completed the reviews; and (4)
           reviewed documentation on the results of the review. We also
           reviewed obligations and accrued expenditures to identify problems
           and actions that could be taken to fix these problems if NAWC had
           performed the triannual reviews.

           o We obtained data on the status of obligations related to
           carryover (contracts between NAWC and contractors) at the end of
           fiscal year 2006. From these data, we selected and analyzed 41
           obligations that had outstanding carryover balances at the end of
           fiscal year 2006 to determine if the carryover balances accurately
           reflected the amount of work that remained to be performed. We
           selected obligations that were old (over 120 days) and did not
           have any recent financial activity (no activity for at least 1
           year) since these obligations were more likely to have unneeded
           funds and because a review of these obligations was, therefore,
           more likely to identify problems with the triannual review
           procedures.
           o We obtained data on accrued expenditures related to carryover at
           the end of fiscal year 2005 and June 2006. From these data, we
           selected and analyzed 17 accrued expenditures to determine if the
           accrued expenditure balances were correct. Accrued expenditures
           are critical in the computation of carryover since NAWC recognizes
           revenue and bills customers based on the accrued expenditures,
           which in turn, reduces its amount of carryover. We selected
           accrued expenditures that were over 1 year old and showed no
           financial activity for at least 1 year since these accrued
           expenditures were more likely to have unneeded funds and because a
           review of these orders was, therefore, more likely to identify
           problems with the triannual review procedures.

           We performed our work at or obtained information from headquarters
           offices of the Under Secretary of Defense (Comptroller) and the
           Assistant Secretary of the Navy (Financial Management and
           Comptroller), Washington, D.C.; the Naval Air Systems Command,
           Patuxent River, Maryland; the Naval Air Warfare Center, Aircraft
           Division, Patuxent River, Maryland and Lakehurst, New Jersey; and
           the Naval Air Warfare Center, Weapons Division, China Lake and
           Point Mugu, California. To assess the reliability of the data used
           in this report, we (1) reviewed and analyzed the factors used in
           calculating carryover, (2) analyzed the NAWC aircraft and weapons
           divisions' fiscal years 2003 through 2006 financial statements,
           (3) analyzed the NAWC aircraft and weapons divisions' fiscal year
           2006 triannual review confirmation statements, (4) interviewed
           NAWC officials knowledgeable about the carryover data, and (5)
           reviewed obligations and accrued expenditures to determine if they
           were adequately supported by documentation.

           The carryover information in this report was obtained from
           official Navy budget and accounting documents. We conducted our
           work from July 2006 through April 2007 in accordance with U.S.
           generally accepted government auditing standards. We requested
           comments on a draft of this report from the Secretary of Defense
           or his designee. The Under Secretary of Defense (Comptroller)
           provided written comments, which are presented in the Agency
           Comments and Our Evaluation section of this report and are
           reprinted in appendix III.
			  
			  Appendix II: Analysis of Dormant Obligations and Accrued Expenditures

           Our analysis of the Naval Air Warfare Center (NAWC) aircraft and
           weapons divisions' fiscal year 2006 dormant obligations and
           accrued expenditures showed the two divisions had tens of millions
           of dollars of obligations and accrued expenditures that went
           unresolved for more than 1 year. For the transactions we reviewed,
           we determined that the two divisions did not perform adequate
           reviews on some of their dormant obligation and accrued
           expenditures. If the aircraft and weapons divisions had performed
           adequate triannual reviews as required, NAWC could have
           significantly improved the reliability of the carryover balances
           reported to the Department of Defense (DOD) and congressional
           defense committees.
			  
			  More Effective Reviews of Dormant Obligations Could Result in
			  Better Use of Customer Funds and Reduce Reported Carryover

           A key element of the triannual reviews is the requirement to
           follow up on all obligations that have been dormant for more than
           120 days to determine if unused funds are still needed. The task
           is one of the 16 DOD triannual review requirements and is
           important because it will facilitate the (1) identification and
           recording of work performed on these orders, thereby reducing
           NAWC's reported carryover and, in turn, the likelihood of
           customers' budget cuts; and (2) identification and return of
           unneeded funds to customers so that the customers can reuse the
           funds for other purposes if they are returned before they expire.
           Furthermore, this task is especially important for NAWC as it is
           scheduled to convert to a new system--Navy Enterprise Resource
           Planning (ERP)--in October 2007, and reviewing and validating its
           records to help ensure they are accurate before converting to the
           new system would help ensure a smooth transition.

           The task of validating obligations to determine if they are still
           needed is especially important for NAWC's aircraft and weapons
           divisions. NAWC's September 30, 2006, report on obligations
           related to carryover showed that $252 million was associated with
           orders received from customers. Our analysis of the obligation
           report showed that about $59 million of the $252 million, or 23
           percent, was over 120 days old as of September 30, 2006, and $27
           million of the $252 million, or about 11 percent, was over 1 year
           old.

           As previously discussed, NAWC's aircraft and weapons divisions did
           not perform the required triannual reviews of obligations to
           determine their validity prior to fiscal year 2006. Even though
           the two divisions did not begin reviewing dormant obligations
           until fiscal year 2006, both divisions certified that adequate
           follow-up was conducted on all dormant obligations over 120 days
           old in the January and May 2006 reports. However, after we began
           our review, the two divisions did not provide written confirmation
           that adequate follow-up reviews of dormant obligations over 120
           days old to determine if they were valid were conducted in their
           respective September 2006 reports.

           To identify problems and actions that could be taken to fix these
           problems if the NAWC had performed the triannual reviews, we
           selected and reviewed 41 outstanding obligations totaling about
           $4.1 million that were more than 120 days old and had not had any
           recent financial activity (sometimes no activity for years). For
           the obligations we reviewed, we determined that the aircraft and
           weapons divisions did not perform adequate reviews on some of
           their obligations. In addition, obligations were overstated, which
           means that the year-end carryover for this work was also
           overstated by varying amounts for several years. In reviewing the
           41 obligations, we found that 14 obligations totaling about $3
           million were valid, and 27 obligations1 totaling about $1.1
           million overstated carryover. The following provides a breakout of
           the obligations that overstated carryover.

           o Eight obligations totaling $467,786 were for work that had been
           performed but (1) no payments had been made to liquidate the
           obligations and (2) no accrued expenditures were recorded for the
           work that was performed.
           o Eleven obligations totaling $273,628 had no work completed on
           them or NAWC was in the process of deobligating the funds.
           o Ten obligations totaling $312,727 were for work that had been
           performed and paid for but (1) the payment had either not been
           correctly recorded or matched to the obligations in order to
           liquidate the obligations and (2) no accrued expenditures were
           recorded for the work performed.

           The following are some examples of the problems we identified with
           the dormant obligations that we reviewed.

           o In March 2004, the NAWC aircraft division obligated $172,552 for
           the inspection of flight test propellers. Since May 2004, no
           financial activity occurred for this obligation (such as payments
           made or accrued expenditures recorded for work performed).
           According to NAWC aircraft division officials, the accounting
           department reviewed this obligation prior to our visit and
           confirmed that this appeared to be a valid outstanding obligation
           since they had not received a bill for this work. As part of our
           review, we requested that the business financial manager (BFM)
           review the status of the dormant obligation. Further research
           performed by the BFM disclosed that while the work had been
           completed by July 15, 2004, the vendor had not submitted a bill.
           At the time we performed our work, the NAWC aircraft division was
           in the process of paying the contractor and liquidating the
           obligation. If the triannual review had been effectively
           performed, this problem could have been identified years earlier
           and NAWC could have reduced its year-end obligations and carryover
           by $172,552 for fiscal years 2004, 2005, and 2006.
			  
1 Portions of two obligation amounts were included in two different
categories.
			  
           o In February 2004, the NAWC aircraft division obligated $25,000
           for ship installation drawings for an aircraft carrier. Since that
           time, no financial activity had occurred. Due to a schedule change
           regarding the availability of the aircraft carrier, the shipyard
           was unable to gain access to the ship in order to develop the
           technical drawings. Consequently, the NAWC aircraft division was
           unable to perform the work and use the funds. NAWC officials
           agreed that this obligation should have been closed out several
           years ago and the funds returned to the customer. According to
           these officials, they did not review this obligation as part of
           the division's triannual review because they lacked the time and
           resources to review all transactions below $50,000. As a result of
           not deobligating the funds from the records, the NAWC aircraft
           division overstated its reported year-end obligations and
           carryover by $25,000 for fiscal years 2004, 2005, and 2006.
           o In fiscal year 2002, the NAWC weapons division obligated $30,000
           for updating electronic software in EP-3 planes. As of September
           2006, the weapons division's accounting records showed that
           $22,798 of the obligation remained on the accounting records. As
           part of our review of NAWC carryover, we requested that the BFM
           review the status of this dormant obligation. The BFM found that
           (1) the work was completed in 2002, (2) the contractor processed
           about $18,986 in invoices but only $7,305 in invoices were
           recorded as being paid, and (3) about $11,014 of the original
           $30,000 was not used by the contractor. The BFM agreed that the
           accounting records were in error and, as a result of our inquiry,
           NAWC weapons division officials are researching the invoice
           difference of $11,681 ($18,986 less $7,305) and plan to return the
           remaining unused amount of $11,014 to the customer. As a result of
           this failure to match invoices with the obligation and revert
           unused funds back to the customer in a timely manner, the NAWC
           weapons division overstated reported year-end obligations and
           carryover by $22,798 in fiscal years 2003, 2004, 2005, and 2006
           while also precluding the customer from using some of these funds
           for some other purpose because the funds had expired.
			  
			  More Effective Reviews of Dormant Accrued Expenditures Could Improve
			  Reliability of Reported Carryover

           At the conclusion of their triannual reviews, fund holders are
           required to provide written confirmation that they have conducted
           adequate research on all accrued expenditures2 that are more than
           120 days old to determine if they are valid. This task is
           important because

           o large accrued expenditures balances in general, and large
           dormant accrued expenditure balances in particular, can indicate
           either serious accounting problems or ineffective procedures for
           developing accrued expenditure schedules; and
           o accrued expenditures reduce reported carryover balances, and
           overly optimistic accrued expenditures can, therefore, cause
           reported carryover to be understated.

           The task of validating accrued expenditures is especially
           important for the aircraft and weapons divisions because NAWC's
           report on accrued expenditures related to carryover showed that it
           had about $138 million of accrued expenditures as of June 30,
           2006, that were associated with orders received from customers
           over the years. Accurately accounting for accrued expenditures is
           important from a carryover standpoint since NAWC recognizes
           revenue and bills customers based on accrued expenditures. The
           Office of the Under Secretary of Defense (Comptroller) has also
           recognized the importance of accrued expenditures in its review of
           Navy working capital fund activities. During its review of the
           Navy's working capital fund research and development fiscal year
           2008 budget, the Comptroller's Office questioned the large amount
           of recorded accrued expenditures. As a result, the Office of the
           Under Secretary of Defense (Comptroller) reduced the Navy's
           working capital fund research and development fiscal year 2008
           budget for three research and development subactivity groups,
           including NAWC, by $214.7 million.

           Our analysis of NAWC's accrued expenditures report showed that
           about $85 million of the $138 million of accrued expenditures, or
           62 percent, were over 120 days old as of June 30, 2006. Further,
           $45 million of the $138 million, or about one-third of the
           reported accrued expenditures, were over 1 year old. NAWC
           officials informed us that when NAWC implemented SIGMA in fiscal
           year 2003, the system did not produce an accrued expenditure
           report.3 Since the new system did not produce a report, the NAWC
           aircraft division designed and developed its own accrued
           expenditure report. The first report was issued in September
           2005--over 2 years after the implementation of the new system. As
           a result, comprehensive reviews of accrued expenditures were not
           performed for fiscal years 2003, 2004, and 2005. The two divisions
           began performing reviews of accrued expenditures during fiscal
           year 2006 but they did not have any written procedures for such
           reviews. The following summarizes the fiscal year 2006 results.
			  
2 According to DOD's Financial Management Regulation 7000.14-R, Volume 1,
accrued expenditures represent the amount of paid and unpaid expenditures
for (1) services performed by employees, contractors, etc.; (2) goods and
tangible property received; and (3) items such as annuities and insurance
claims for which no current service or performance is required.

           o The aircraft division provided written confirmation that
           adequate follow-up was conducted on all dormant accrued
           expenditures over 120 days old in its January, May, and September
           2006 triannual review reports. Our analysis of the aircraft
           division's accrued expenditure report as of June 2006 showed that
           $70 million of the $113 million of the accrued expenditures--or 62
           percent--were over 120 days old and about $35 million of the $113
           million, or 31 percent, were over 1 year old.
           o The weapons division provided written confirmation that adequate
           follow-up was performed in its January and May 2006 reports but it
           did not provide written confirmation that adequate follow-up
           reviews were done of dormant accrued expenditures over 120 days
           old in its September 2006 report. Our analysis of the weapons
           division's accrued expenditure report as of June 2006 showed that
           $14.7 million of the $24.5 million of the accrued expenditures--or
           60 percent--were over 120 days old and $10.6 million of the $24.5
           million, or 43 percent, were over 1 year old.

           To identify problems and actions that could be taken to fix these
           problems if the NAWC had performed the triannual reviews, we
           selected and reviewed 17 accrued expenditures totaling about $4.4
           million4 that were over 1 year old as of June 30, 2006, and did
           not have any recent financial activity (sometimes no activity for
           years). Since accrued expenditures represent the amount of paid
           and unpaid expenditures for services performed by employees or
           contractors, accrued expenditures that remain outstanding for long
           periods of time are an indication of a potential problem with the
           accuracy of recorded accrued expenditure data because the work
           should have already been performed and payment made. In most of
           the cases we reviewed, we determined that the aircraft and weapons
           divisions did not perform adequate reviews of their accrued
           expenditures. Specifically, we found that

           o no work was performed on 10 accrued expenditures totaling about
           $2.2 million (about half the dollar amount reviewed);
           o work was performed for 4 accrued expenditures totaling about $1
           million and while the contractor had billed NAWC, the payment was
           not correctly recorded in the accounting system to liquidate the
           accrued expenditure;
           o for 4 accrued expenditures totaling about $1 million, the
           accrued expenditures were so old that neither we nor NAWC
           officials could determine their status; and
           o documentation for 2 accrued expenditures totaling about $100,000
           showed they were correctly recorded.
			  
3 In our report entitled DOD Business Systems Modernization: Navy ERP
Adherence to Best Business Practices Critical to Avoid Past Failures,
[47]GAO-05-858 (Washington, D.C.: Sept. 29, 2005), we reported that
because the pilots were stovepiped, limited within the scope of their
respective commands, and not interoperable, they did not transform the
Navy's business operations. As a result, under the leadership of a central
office, the Navy decided to start over and undertake the development and
implementation of a single ERP system.

4 The dollar amount for the four categories may not total due to rounding.
Further, portions of three accrued expenditures are included in two
categories.		  

           The following are examples of the problems we identified with the
           accrued expenditures that we reviewed including their impact on
           reported NAWC carryover balances.

           o On July 7, 2003, the NAWC weapons division obligated $232,318 on
           a contract with Northrop Grumman Field Support Services to provide
           engineering services in support of the F-14 Weapons System Support
           Activity. On September 29, 2003, the weapons division recorded an
           accrued expenditure in its system totaling $201,651--the balance
           remaining unpaid to the contractor that was obligated in fiscal
           year 2003. As part of the weapons division's May 2006 triannual
           review, the BFM that had responsibility for this contract
           determined that the accrued expenditure recorded in fiscal year
           2003 was unsupported. NAWC weapons division officials stated that
           the final invoice for this contract was processed on September 20,
           2006. In October 2006, the administrative contracting officer
           issued an amendment to the contract that deobligated these funds
           which had expired. One month later, the weapons division reversed
           the accrued expenditure and returned the funds to its customer. As
           a result of the erroneous accrued expenditure, our analysis showed
           that the weapons division understated its carryover in fiscal
           years 2003, 2004, 2005, and 2006 by $201,651 and billed its
           customer for work that was not performed.
           o As of March 2002, the NAWC aircraft division obligated $226,901
           on an order with Northrop Grumman to provide engineering design
           data services. In fiscal year 2003, the contractor billed and
           received payment of $5,626, leaving a remaining balance of
           $221,275. Our analysis of the aircraft division's June 2006
           accrued expenditure report indicated that the aircraft division
           recorded accrued expenditures in its accounting system for
           $221,275--the outstanding balance--over 3 1/2 years ago. Although
           no further work was performed on this order, the accrued
           expenditure of $221,275 remained outstanding until August 2006. In
           August 2006, NAWC reversed the remaining accrued expenditure of
           $221,275 and deobligated the funds because the customer
           appropriation financing the order was canceling at the end of the
           fiscal year. By not performing the triannual reviews prior to
           fiscal year 2006 which would have identified this problem, the
           aircraft division recognized revenue and billed its customer
           $221,275 for work that was not performed and understated its
           carryover by this amount in fiscal years 2003, 2004, and 2005.
           o In March 1996, the NAWC weapons division issued an order to the
           Electronic Proving Ground totaling $333,000 to provide funding for
           Global Positioning System test support. On September 18, 1996, the
           NAWC weapons division recorded an accrued expenditure for the full
           amount of the obligation in its financial management system. In
           February 1997, a payment totaling $123,195 was processed against
           these funds. The remaining accrued expenditure amount ($209,805)
           has been outstanding since it was recorded in 1996. These
           transactions were recorded in a financial management system that
           has been replaced twice. Many details associated with these
           transactions are no longer available. Because of the limited data
           available, we could not determine the validity of the accrued
           expenditure amount. However, if the weapons division had performed
           the triannual reviews as required by DOD regulation, the records
           may have been available to either reverse the outstanding accrued
           expenditure amount or liquidate the accrued expenditure amount
           against vendor payments.
           o In July 2003, the NAWC aircraft division increased funding on a
           task order by $126,477 to provide software support services for
           the Navy's HE-2K aircraft tactical systems program. In July 2004,
           the NAWC aircraft division recorded an accrued expenditure in its
           accounting system totaling $126,477--the entire balance for the
           software support services to be performed. According to a BFM, the
           work for the software support services was never performed. In
           January 2006, an amendment to this task order decreased excess
           funds for the entire $126,477 that was previously obligated for
           the additional software support services. However, the NAWC
           aircraft division did not reverse the accrued expenditure until
           August 2006--about 2 years after it had recorded the accrued
           expenditure. As a result, we determined that the NAWC aircraft
           division recognized revenue and billed its customers $126,477 for
           work that was not performed and understated its carryover by this
           amount in fiscal years 2003, 2004, and 2005.
           o Between March 1997 and April 1998, the NAWC weapons division
           issued an order and three amendments totaling $505,000 to the 46th
           test group at Holloman Air Force Base for work on the radar cross
           section of the QF-4E range targets. Between September 1997 and
           August 2001, the NAWC weapons division recorded accrued
           expenditure amounts totaling $505,000 in its financial management
           system--the full amount obligated on the order. In the late 1990s,
           Holloman Air Force Base and the Defense Finance and Accounting
           Service Denver paid the 46th test group the full amount obligated
           on the order. However, the NAWC weapons division records showed
           that only $151,074 was recorded in the financial management system
           as paid. Thus, an accrued expenditure totaling approximately
           $353,926 remains outstanding. If the NAWC weapons division had
           performed its triannual review as required by DOD regulation, the
           weapons division could have reduced its end of fiscal year
           outstanding accrued expenditures by $353,926 for fiscal years 2001
           through 2006. NAWC weapons division officials stated that in this
           case, the carryover amount was accurately reported but the accrued
           expenditure amount was distorted by $353,926.
			  
			  Appendix III: Comments from the Department of Defense
			  
			  Appendix IV: GAO Contacts and Staff Acknowledgments
			  
			  GAO Contacts

           McCoy Williams, (202) 512-9095 William M. Solis, (202) 512-8365
			  
			  Acknowledgments

           Staff who made key contributions to this report were Richard
           Cambosos, Francine DelVecchio, Steve Donahue, Mary Jo LaCasse,
           Keith McDaniel, Greg Pugnetti, Chris Rice, and Hal Santarelli.
			  
			  GAO's Mission

           The Government Accountability Office, the audit, evaluation and
           investigative arm of Congress, exists to support Congress in
           meeting its constitutional responsibilities and to help improve
           the performance and accountability of the federal government for
           the American people. GAO examines the use of public funds;
           evaluates federal programs and policies; and provides analyses,
           recommendations, and other assistance to help Congress make
           informed oversight, policy, and funding decisions. GAO's
           commitment to good government is reflected in its core values of
           accountability, integrity, and reliability.
			  
			  Obtaining Copies of GAO Reports and Testimony

           The fastest and easiest way to obtain copies of GAO documents at
           no cost is through GAO's Web site ( [37]www.gao.gov ). Each
           weekday, GAO posts newly released reports, testimony, and
           correspondence on its Web site. To have GAO e-mail you a list of
           newly posted products every afternoon, go to [38]www.gao.gov and
           select "Subscribe to Updates."
			  
			  Order by Mail or Phone

           The first copy of each printed report is free. Additional copies
           are $2 each. A check or money order should be made out to the
           Superintendent of Documents. GAO also accepts VISA and Mastercard.
           Orders for 100 or more copies mailed to a single address are
           discounted 25 percent. Orders should be sent to:

           U.S. Government Accountability Office 441 G Street NW, Room LM
           Washington, D.C. 20548

           To order by Phone: Voice: (202) 512-6000
			  TDD: (202) 512-2537
			  Fax: (202) 512-6061
			  
			  To Report Fraud, Waste, and Abuse in Federal Programs

           Contact:

           Web site: [39]www.gao.gov/fraudnet/fraudnet.htm
			  E-mail: [40][email protected]
			  Automated answering system: (800) 424-5454 or (202) 512-7470
			  
			  Congressional Relations

           Gloria Jarmon, Managing Director, [41][email protected] (202)
           512-4400 U.S. Government Accountability Office, 441 G Street NW,
           Room 7125 Washington, D.C. 20548
			  
			  Public Affairs

           Paul Anderson, Managing Director, [42][email protected] (202)
           512-4800 U.S. Government Accountability Office, 441 G Street NW,
           Room 7149 Washington, D.C. 20548


(195095)

[48]www.gao.gov/cgi-bin/getrpt?GAO-07-643 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact McCoy Williams at (202) 512-9095 or
[email protected].

Highlights of [49]GAO-07-643 , a report to the Subcommittee on Defense,
Committee on Appropriations, House of Representatives

June 2007

NAVY WORKING CAPITAL FUND

Management Action Needed to Improve Reliability of the Naval Air Warfare
Center's Reported Carryover Amounts

According to the Department of Defense's (DOD) fiscal year 2007 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6 billion of
funded work that will be carried over from fiscal year 2007 into fiscal
year 2008. The congressional defense committees recognize that these
groups need some carryover to ensure a smooth work flow from one fiscal
year to the next. However, the committees have previously raised concern
that the amount of carryover may be more than is needed. GAO was asked to
determine if (1) the Naval Air Warfare Center's (NAWC) reported actual
carryover was reliable for fiscal years 2003 through 2006 and (2) NAWC was
utilizing the required triannual review process to improve the reliability
of its carryover information and underlying financial data.

[50]What GAO Recommends

GAO makes six recommendations to DOD that are aimed at improving the
reliability of carryover information and the effectiveness of the
triannual review process. DOD concurred with all of GAO's recommendations.

GAO's analysis of NAWC reports determined that NAWC's reported carryover
information was not reliable. Since DOD changed its carryover policy in
December 2002, NAWC reports showed that while under the ceiling for fiscal
year 2006, it exceeded its carryover ceiling by tens of millions of
dollars from fiscal year 2003 through fiscal year 2005, as shown in the
following table. To the extent that carryover is too high, Congress can
redirect the customers' funds for other priorities.

NAWC's Reported Carryover Amounts Over/Under Ceiling

Source: Navy reports.

Note: Figures may not add due to rounding.

GAO's analysis of accounting information on customer orders and
discussions with NAWC officials determined that its fiscal year 2003 and
2004 carryover information was unreliable due to (1) NAWC converting to a
new accounting system in fiscal year 2003 and (2) NAWC not performing
reviews of obligations, including the required DOD triannual reviews. To
better manage carryover and improve the reliability of carryover
information, starting in fiscal year 2005, NAWC (1) issued guidance on the
acceptance of orders at year end and (2) began reviewing orders to correct
its old financial records. While the reliability of carryover information
improved in fiscal years 2005 and 2006, GAO determined that problems still
exist. For example, GAO found that funds on some customer orders totaling
$19.5 million were deobligated at fiscal year end and then reobligated at
the beginning of the next fiscal year on these same orders. This
artificially lowered reported NAWC carryover at fiscal year end.

Further, even though DOD's 1996 guidance required NAWC as well as other
activities to conduct triannual reviews of its financial information, NAWC
did not perform these reviews until fiscal year 2006. If implemented
properly, these reviews would improve the reliability of reported
carryover information and the underlying financial data. In addition, as
of September 2006, the two NAWC divisions were still not fully complying
with several of the 16 specific DOD tasks required as part of the
triannual reviews. For example, because the two divisions were not always
effectively reviewing some obligations, especially dormant obligations
(obligations over 120 days old), their reported actual carryover was
overstated. Also, effective triannual reviews would help NAWC validate its
financial records before it implements a new system that is scheduled to
be installed in October 2007.

References

Visible links
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-01-559
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-06-530
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-01-559
  35. mailto:[email protected]
  36. mailto:[email protected]
  37. http://www.gao.gov/
  38. http://www.gao.gov/
  39. http://www.gao.gov/fraudnet/fraudnet.htm
  40. mailto:[email protected]
  41. mailto:[email protected]
  42. mailto:[email protected]
  43. http://www.gao.gov/cgi-bin/getrpt?GAO-05-858
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-04-261SP
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-06-534SP
  46. http://www.gao.gov/cgi-bin/getrpt?GAO-03-668
  47. http://www.gao.gov/cgi-bin/getrpt?GAO-05-858
  48. http://www.gao.gov/cgi-bin/getrpt?GAO-07-643
  49. http://www.gao.gov/cgi-bin/getrpt?GAO-07-643
*** End of document. ***