Contingency Operations: DOD's Reported Costs Contain Significant
Inaccuracies (Chapter Report, 05/17/96, GAO/NSIAD-96-115).

Pursuant to a congressional request, GAO reviewed the reliability of the
Department of Defense's (DOD) reported costs for contingency operations,
focusing on the: (1) accuracy of reported incremental costs; and (2)
adequacy of DOD guidance and accounting systems to ensure accurate cost
reporting.

GAO found that: (1) DOD overstated about $104 million in incremental
costs and understated or failed to report about $171 million in
incremental costs; (2) DOD overstated costs primarily because the
services failed to adjust reported incremental costs for normal costs
they did not incur; (3) DOD understated costs primarily because the
services failed to report certain incremental personnel and munitions
costs; (4) it could not determine the accuracy of some reported costs
because the services could not readily identify special pays and
allowances related to contingency operations; (5) DOD revised its
guidance for developing and reporting incremental costs, but the
guidance generally remains vague and incomplete; (6) the financial
management systems DOD uses to develop incremental cost data are
deficient, unreliable, and a high risk area; and (7) the problems in DOD
reporting of incremental cost are indicative of a material weakness in
DOD accounting systems.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-115
     TITLE:  Contingency Operations: DOD's Reported Costs Contain 
             Significant Inaccuracies
      DATE:  05/17/96
   SUBJECT:  Defense contingency planning
             Cost accounting
             Federal agency accounting systems
             Internal controls
             Accounting errors
             Financial management
             Accounting procedures
             Military operations
IDENTIFIER:  Yugoslavia
             Haiti
             South Korea
             Kuwait
             Saudi Arabia
             Cuba
             Bosnia
             Somalia
             Defense Emergency Relief Fund
             DOD Operation Vigilant Warrior
             Iraq
             DOD Operation Uphold Democracy
             Liberia
             DOD Operation Southern Watch
             United Nations
             Rwanda
             
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Cover
================================================================ COVER


Report to Congressional Requesters

May 1996

CONTINGENCY OPERATIONS - DOD'S
REPORTED COSTS CONTAIN SIGNIFICANT
INACCURACIES

GAO/NSIAD-96-115

Contingency Operations

(701068)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  FMFIA - Federal Managers' Financial Integrity Act
  IG - Inspector General
  OMB - Office of Management and Budget
  OSD - Office of the Secretary of Defense

Letter
=============================================================== LETTER


B-271279

May 17, 1996

The Honorable Benjamin A.  Gilman
Chairman, Committee on
 International Relations
House of Representatives

The Honorable Floyd Spence
Chairman, Committee on
 National Security
House of Representatives

As requested, this report discusses the reliability of the Department
of Defense's (DOD) reported costs for contingency operations.  We
make recommendations that are designed to improve the reliability of
reported costs.  The information in this report should be useful to
your committees in their deliberations on DOD's participation in
contingency operations. 

We are sending copies of this report to other interested
congressional committees; the Secretaries of Defense, the Army, the
Navy, and the Air Force; the Commandant, U.S.  Marine Corps; and the
Director, Office of Management and Budget.  Copies will also be made
available to others on request. 

If you have any questions on this report, please call me on (202)
512-3504.  Major contributors to this report are listed in appendix
II. 

Richard Davis
Director, National Security
 Analysis


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Since fiscal year 1992, the Department of Defense (DOD) has reported
over $7 billion in incremental costs for its participation in
contingency operations.\1 Accurate reporting of contingency
operations costs is important for effective congressional oversight
of appropriated funds.  Over the past several years, the Congress has
provided supplemental funding or reprogramming of previously
appropriated funds to cover contingency operations costs.  When costs
are inaccurately reported, the Congress cannot assess with confidence
the sufficiency of funds it has provided DOD. 

In response to a request from the Chairmen of the House Committees on
International Relations and National Security, GAO reviewed (1) the
accuracy of DOD-reported incremental costs for contingency operations
and (2) the adequacy of DOD guidance and accounting systems to ensure
accurate cost reporting. 


--------------------
\1 As used in this report, "incremental costs" means those costs that
would not have been incurred if it were not for the operation.  This
is the same definition contained in the Omnibus Budget and
Reconciliation Act of 1990 (P.L.  101-508) and the fiscal year 1996
DOD Authorization Act. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The Secretary of Defense's 1995 Annual Report to the President and
the Congress describes "contingency operations" as military
operations that go beyond the routine deployment or stationing of
U.S.  forces abroad but fall short of large-scale theater warfare. 
During fiscal year 1995, U.S.  military forces participated in a
number of contingency operations.  These operations included (1)
support of U.N.  peace operations in the former Yugoslavia, Haiti,
and Southwest Asia; (2) increased deployment to South Korea in
response to heightened tensions; (3) increased deployment to Kuwait
and Saudi Arabia in response to the threat of renewed Iraqi
aggression against Kuwait; and (4) the enforcement of a revised U.S. 
policy to prevent Cuban migrants from reaching the United States. 
DOD continues to be involved in contingency operations, including the
operation in Bosnia involving implementation of the Dayton Peace
Accords, which is estimated to cost $2.5 billion. 

Contingency operations such as these begin when the President decides
to commit U.S.  military forces to respond to developing world
conditions that he judges affect U.S.  interests.  For new
operations, DOD develops cost estimates before the actual deployment
of military forces or early in the deployment.  These estimates are
commonly used as the basis for requested additional funds to cover
operation costs.  As the operation progresses, the incremental costs
that are incurred are reported.  Contingency cost reports
consequently are important for monitoring the adequacy of funding for
such operations as well as for a variety of other purposes. 

GAO has reported that when considering the cost of operations it
should be recognized that DOD's financial systems cannot reliably
determine costs.\2 Systems are classified as high risk, are not
integrated, and cannot easily capture actual incremental costs.  Only
the total obligations are captured by the accounting systems.  The
services use various management information systems to identify
incremental obligations and to estimate costs. 


--------------------
\2 Peace Operations:  Information on U.S.  and U.N.  Activities
(GAO/NSIAD-95-102BR, Feb.  13, 1995). 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

GAO found inaccuracies in DOD's reported costs for contingency
operations, representing about 7 percent of the $4.1 billion in costs
reported in fiscal years 1994 and 1995.  In GAO's judgment, this
variance in reported costs is indicative of a material weakness in
the accounting systems.  GAO identified about $104 million in
overstated costs and about $171 million in understated costs.  GAO
also found that the accuracy of some reported costs could not be
determined.  It was not feasible to examine all reported costs and
their supporting data, and GAO's results are not statistically
projectable.  Consequently, GAO is not able to conclude whether on
balance the sum of reported incremental costs are overstated or
understated. 

DOD guidance for reporting incremental costs is vague and incomplete,
and there are weaknesses in DOD's accounting systems.  In February
1995, DOD added a chapter on contingency operations to its financial
management regulations to include guidance for developing and
reporting incremental costs.  Neither DOD nor the resulting service
guidance provides instructions on which costs to include, how to
calculate them, or how to apply generally accepted internal control
standards to test the accuracy and reliability of the reported costs. 
Finally, the incremental cost data is developed using financial
management systems that DOD has reported as a high-risk area within
its Federal Managers' Financial Integrity Act Statement of Assurance. 
The Office of Management and Budget (OMB) and GAO have also reported
DOD's financial management as a high-risk area.  DOD is taking steps
to improve its incremental cost reporting, but problems in reporting
accurate costs remain. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      DOD'S REPORTED INCREMENTAL
      COSTS ARE NOT ACCURATE
-------------------------------------------------------- Chapter 0:4.1


         SOME COSTS WERE
         OVERSTATED
------------------------------------------------------ Chapter 0:4.1.1

GAO identified about $104 million in incremental costs that were
overstated primarily because the services failed to adjust reported
costs for normal operating and training costs that were not incurred. 
For example, GAO identified about $11 million in reported normal
operating costs at one Army command that were not actually incurred
because the units were deployed to contingency operations. 

The largest overstatement of reported costs GAO found, about $70
million, occurred in the services' reported flying hour costs.  The
Air Force overstated its fiscal years 1994-95 incremental flying hour
costs by $67 million.  For the most part, this was because the Air
Force failed to adjust its reported fiscal year 1994 flying hour
costs by the value of free fuel provided by other nations.  The Navy
overstated its incremental flying hour costs by $3 million for the
same reason. 


         SOME COSTS WERE
         UNDERSTATED
------------------------------------------------------ Chapter 0:4.1.2

GAO also identified about $171 million in incremental costs that were
either not fully reported or not reported at all.  The largest
instance GAO found of underreporting involved military personnel
costs.  Although the Air Force reported some incremental personnel
costs in fiscal year 1994, it did not report about $81 million for
such incremental costs as imminent danger pay and family separation
pay.  Air Force officials said they were unaware that they were
required to account for and report all incremental military personnel
costs.  The Air Force accounted for and reported its incremental
military personnel costs for contingency operations beginning in
fiscal year 1995. 

Other unreported costs for fiscal year 1995 include $48 million for
munitions the Navy used in the former Yugoslavia and about $28
million in incremental costs related to Air Force mobility equipment
and munitions. 


         ACCURACY OF SOME COSTS
         COULD NOT BE DETERMINED
------------------------------------------------------ Chapter 0:4.1.3

The services cannot readily extract from their pay system the
incremental costs related to special pays and allowances for
contingency operations.  With the exception of the U.S.  Marine
Corps, the payroll and personnel systems are not linked to provide
these incremental personnel costs.  Consequently, the services
generally estimate them.  For example, the Army applies estimated
cost factors to the estimated number of personnel deployed to
determine incremental personnel costs.  DOD has plans underway to
link the payroll and personnel systems, which will provide more
accurate incremental personnel contingency costs. 

The Army and the Air Force have reported the amounts they paid for
transporting personnel and equipment for contingency operations. 
Both services, however, questioned the validity of the bills received
from DOD agencies that were the basis for these payments.  The Army
identified $11 million in fiscal year 1995 transportation charges it
believed to be invalid for airlift, sealift, and port handling.  It
identified problems such as duplicate charges, unidentified
customers, and missing data, which prevented identifying the
appropriate charges.  Air Force officials also have similar concerns
about the accuracy of their transportation bills. 


      FACTORS CONTRIBUTING TO
      INACCURACIES IN COST
      REPORTING
-------------------------------------------------------- Chapter 0:4.2


         VAGUE AND INCOMPLETE
         GUIDANCE
------------------------------------------------------ Chapter 0:4.2.1

While DOD's revised February 1995 guidance provides some instruction
to DOD components to identify incremental costs and determine
offsets, the guidance is general and incomplete.  For example, it
excludes discussion of offsetting certain costs that are not incurred
as a result of contingency operations and other savings that occur
during participation in such operations, such as supply turn-ins. 
Ultimately, the guidance directs the DOD components to determine
incremental costs.  However, the services have not developed
comprehensive implementing instructions that address how to identify,
calculate, and adjust the incremental costs and how to apply internal
control standards to the reported incremental costs. 

As stated in the February 1995 guidance, DOD policy requires that
controls and procedures provide proper identification and recording
of costs incurred in supporting contingency operations in financial
records.  In addition, the guidance delegates the responsibility to
the services to report costs accurately.  DOD guidance is vague on
applying internal control standards to test the accuracy and
completeness of reported incremental costs. 


         WEAKNESSES IN DOD
         ACCOUNTING SYSTEMS
------------------------------------------------------ Chapter 0:4.2.2

The problems GAO has identified in the reporting of contingency
operations costs reflect, in part, the broader problems with DOD's
accounting systems.  DOD's 1994 and 1995 Federal Managers' Financial
Integrity Act Statement of Assurance admit long-standing weaknesses
in DOD's accounting systems and state that none of DOD's operating
accounting systems comply with appropriate accounting standards and
related requirements.  Accordingly, DOD financial management systems
are classified as high risk by OMB.  In a November 1995 testimony,
GAO stated that no military service or major DOD component has been
able to withstand the scrutiny of an independent financial statement
audit, a requirement established by the Chief Financial Officers Act. 
GAO's review of the Navy's financial reports, the Army Audit Agency's
review of the Army's financial statements, and the Air Force Audit
Agency's review of the Air Force's financial statements identified
significant accounting and reporting problems resulting in
unauditable financial statements and reports for fiscal year 1994. 
DOD also has no cost accounting system and has directed that
contingency cost reporting use existing systems, so it must develop
its contingency cost reports within the limitations of its existing
systems. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making two recommendations to the Secretary of Defense to
improve the accuracy of contingency operation cost reporting. 


   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:6

DOD generally concurred with a draft of this report.  It agreed with
GAO's recommendations and said that it will attempt to clarify
existing guidance.  DOD's comments appear in appendix I. 


BACKGROUND
============================================================ Chapter 1

The United States has participated in a number of contingency
operations since the end of the Persian Gulf War.  The Department of
Defense (DOD) describes contingency operations as military operations
that go beyond the routine deployment or stationing of U.S.  forces
abroad but fall short of large-scale theater warfare.  They include
smaller-scale combat operations, peace operations, and other
missions, such as humanitarian assistance.  Contingency operations
involving U.S.  military forces have included (1) operations in
support of U.N.  peace operations in the former Yugoslavia, Haiti,
Somalia, and Southwest Asia; (2) increased deployment of military
capability to Southwest Asia and South Korea in response to
heightened tensions; and (3) other key missions, including
humanitarian and refugee assistance, such as support for Rwandan
refugees. 


   DOD REPORTS INCREMENTAL COSTS
   OF CONTINGENCY OPERATIONS
---------------------------------------------------------- Chapter 1:1

Two broad cost categories are associated with contingency
operations--incremental and total.  DOD reports the incremental costs
of its participation in contingency operations.  As used in this
report, "incremental costs" means those costs that would not have
been incurred except for the operation.  This is the same definition
contained in the Omnibus Budget and Reconciliation Act of 1990 (P.L. 
101-508) as well as in the fiscal year 1996 DOD Authorization Act. 
Examples of incremental costs are (1) special payments to
participating military personnel, such as imminent danger pay; (2)
transportation costs to deploy personnel to the area of operations;
(3) contractor support for deployed forces; and (4) reconstitution of
equipment used in the operation. 

In addition to incremental costs, DOD incurs costs to maintain a
standing military force.  These costs include (1) basic military pay;
(2) fuel, spare parts, and maintenance to train and sustain military
forces; and (3) procurement of military equipment, such as aircraft,
ships, and tanks.  These costs would be incurred regardless of
whether military forces deployed to a contingency operation or
remained at their home station, and they are not to be included in
contingency cost reporting. 

The costs to participate in contingency operations have been
substantial.  Since fiscal year 1992, DOD has reported more than $7
billion in incremental costs.  Table 1.1 provides detail on the
reported incremental costs. 



                               Table 1.1
                
                    Incremental Cost of Contingency
                   Operations (fiscal years 1992-95)

                         (Dollars in millions)

                                                              Reported
Country/region                                                   costs
--------------------------------------------------------  ------------
Former Yugoslavia                                                 $784
Haiti                                                              953
Cuba                                                               372
Rwanda                                                             144
Somalia                                                          1,522
Southwest Asia                                                   2,234
All others                                                       1,138
======================================================================
Total                                                           $7,147
----------------------------------------------------------------------
Source:  DOD Comptroller. 


   DOD OFTEN SEEKS SUPPLEMENTAL
   FUNDING FOR CONTINGENCY
   OPERATIONS
---------------------------------------------------------- Chapter 1:2

Through fiscal year 1996, DOD has not budgeted for the cost of
military operations or contingencies.\1 It has budgeted to be ready
to conduct such operations.  When the services have had to conduct
contingency operations, they initially have had to shift funds within
existing appropriations.  This is done primarily by using funds
appropriated for the same purpose but scheduled for obligation later
in the fiscal year.  Subsequently, DOD has often sought supplemental
funding or reprogramming of appropriated funds to cover its costs. 

In fiscal year 1993, to pay for the cost of operations in Somalia,
DOD asked for and received a supplemental appropriation that also
rescinded $750 million from other areas within its budget.  Congress
provided no new funds.  In fiscal year 1994, DOD received two
supplementals to fund ongoing contingency operations:  one for $1.2
billion in February 1994 and one for $299 million in September 1994. 
The February 1994 supplemental was funded with a mix of new budget
authority and rescission of existing authority.  The September 1994
supplemental provided funding through the Defense Emergency Relief
Fund, which was designed to reimburse other appropriation accounts
for costs incurred in responding to emergencies.  In fiscal year
1995, DOD received a supplemental appropriation that included $2.2
billion intended for contingency operations.  This supplemental also
contained a mix of new budget authority and rescissions.  For fiscal
year 1996, the administration is seeking $620 million in supplemental
funding and the reprogramming of $991 million in previously
appropriated funds for DOD's incremental costs associated with the
deployment of U.S.  forces to implement the Bosnia peace agreement. 
The administration proposes to fully offset the supplemental with a
corresponding rescission. 


--------------------
\1 The Air Force has included funds in its budget request for the
military personnel appropriation account for the payroll cost of
reserve volunteers participating in contingency operations. 


      COST ESTIMATES TEND TO
      INCREASE
-------------------------------------------------------- Chapter 1:2.1

DOD's estimate of supplemental funding needs is based on cost
estimates developed before or during the operation.  Developing the
estimate involves (1) making assumptions about a number of factors,
including the number of military personnel needed to conduct the
operation, its expected duration, and the logistical requirements to
support operations and (2) costing out the assumed force, using
standard cost factors that are in turn based on historical costs and,
where there are no cost factors, military judgment.  For existing
operations, DOD projects costs based on costs incurred in the
previous year unless it expects an operation to change in size,
scope, or duration.  The estimate of required supplemental funding is
prepared and reviewed within DOD and then reviewed by the Office of
Management and Budget (OMB).  The reviews can result in some parts of
the request being deleted and other costs being added to the request. 
Overall, the cost estimates tend to increase as the estimates move
through the review process. 

Within DOD, the Office of the Secretary of Defense (OSD) Comptroller
reviews service submissions and prepares a program budget decision
that serves as the basis for senior level DOD review.  In the last 2
years, the estimates we have reviewed have tended to increase during
final review within DOD and OMB.  For example, in developing the cost
estimate for fiscal year 1995 contingency operations, the overall
estimate increased by $104 million.  Within this amount, the OSD
Comptroller reduced proposed funding for part of one operation, Cuba
migrant operations, by $3 million and increased funding by $107
million for several other operations, including operations in Haiti. 
DOD's estimated costs as expressed in the approved program budget
decision are also reviewed within OMB when the administration seeks
supplemental funding.  OMB, for example, increased the estimate of
required fiscal year 1995 funding by $126 million over the amount
proposed by DOD.  OMB increased many of the estimates for required
funding to support contingency operations.  The biggest single
increase was for operations in Cuba--an increase of $16 million to
cover additional operating and maintenance costs and personnel costs. 

In developing the cost estimate for operations in and around Bosnia
for fiscal years 1996 and 1997, the estimated cost increased by $164
million between the preliminary program budget decision and the final
one submitted to the Deputy Secretary of Defense.  Within the total
increase, some estimated costs increased while others decreased.  For
example, the estimate for support costs for personnel in Bosnia
decreased by $20 million, and the estimate for contractor support
increased by $32 million.  In approving the final decision document,
the Deputy Secretary added $96 million to the amount proposed in the
final program budget decision to reflect December 1995 special pay
for military personnel deployed in and around Bosnia and command and
control augmentation initiatives, which had not been included in the
estimate submitted to him.  In developing the plan for financing the
operation, DOD further increased the estimated cost by almost $82
million. 


      REPORTED COSTS VARY FROM
      ESTIMATES
-------------------------------------------------------- Chapter 1:2.2

Actual costs can vary from the estimate as changes occur to the
operation.  For example, DOD originally estimated that Vigilant
Warrior, the deployment of military forces to Southwest Asia in
response to Iraqi troop movements, would cost $462 million in fiscal
year 1995.  However, the operation ended in December 1994 and cost
only $258 million.  This was about $204 million below the estimate
because the operation concluded sooner than expected as the Iraqis
pulled their troops back.  On the other hand, DOD estimated that the
operation in Haiti would cost $465 million in fiscal year 1995, but
through the end of fiscal year 1995, DOD had reported costs of $569
million.  This was in part due to unforeseen requirements associated
with Operation Uphold Democracy and U.N.  effort. 


   DOD'S COST REPORTS ARE
   IMPORTANT
---------------------------------------------------------- Chapter 1:3

As previously mentioned, DOD has reported more than $7 billion in
incremental costs for its participation in contingency operations
since the end of the Gulf War.  The number, size, and scope of these
operations have increased over the past several years as the United
States has responded to events in a number of locations, including
Somalia, Haiti, Bosnia, Rwanda, and Iraq.  The U.S.  participation in
implementing the Dayton Peace Accords, including deploying over
18,000 troops to Bosnia-Herzegovina, which began in December 1995,
and the April 1996 evacuation of American civilians from Liberia are
the latest examples of the kinds of operations in which the United
States has become engaged.  Contingency operations such as these
begin when the President decides to commit U.S.  military forces to
respond to developing world conditions that he judges affect U.S. 
interests.  For new operations, DOD develops cost estimates before
the actual deployment of military forces or early in the deployment. 
These estimates are commonly used as the basis for requested
additional funds to cover operation costs.  As the operation
progresses, the incremental costs that are incurred are reported. 

Contingency cost reports consequently are important for monitoring
the adequacy of funding for such operations as well as for a variety
of other purposes.  They help DOD monitor the resources necessary to
support contingency operations, which enables DOD to determine the
implications for readiness when drawing from previously appropriated
operation and maintenance funds to cover contingency costs.  They
also aid DOD in developing requests for supplemental appropriations
and reprogrammings.  DOD uses them to respond to congressional and
public interest about the incremental cost of specific operations as
well as all contingency operations.  Also, they facilitate
congressional oversight of the expenditure of appropriated funds and
the assessment of the financial impact of contingency operations on
DOD's spending plans. 

Cost reporting is also important for reimbursement.  DOD's financial
management regulation for contingency operations discusses proper
identification and reporting of costs to support billings.  This is
important in instances where the United States is due reimbursement
from the United Nations and for the distribution of reimbursements to
applicable organizations. 


   METHODOLOGY FOR DEVELOPING COST
   REPORTS
---------------------------------------------------------- Chapter 1:4

DOD financial guidance requires that the services use existing
systems to record their costs of contingency operations.  The
services record costs as they are incurred during the course of the
mission.  Therefore, unlike the estimates of costs developed before
and during the mission, cost reporting is historical in nature. 

Some costs are initially recorded by the military unit that incurs
the cost.  For example, personnel in an Army unit that purchases
spare parts to prepare equipment for deployment record the purchase
against the financial management code assigned for the operation. 
Individual costs are consolidated at Army headquarters from the
Army's financial management system.  Other costs are determined
centrally.  For example, Air Force units report their flying hours,
but Air Force headquarters translates those flying hours into costs. 
DOD consolidates the services reports and publishes a monthly
contingency cost report. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

In response to a request from the Chairmen of the House Committees on
International Relations and National Security, we reviewed (1) the
accuracy of DOD's reported incremental costs for contingency
operations and (2) the adequacy of DOD guidance and accounting
systems to ensure accurate cost reporting. 

To review the accuracy of reported costs, we examined the methodology
for reporting incremental costs and contingency operation cost
reports for fiscal years 1994 and 1995 throughout DOD.  We used
auditor's judgment as prescribed by the American Institute of
Certified Public Accountants to determine the materiality of
reporting inaccuracies.  We conducted our work at the OSD
(Comptroller); all service headquarters; and major commands within
each service that were heavily involved in determining incremental
costs, including the U.S.  Army Forces Command and U.S.  Army,
Europe, the Air Force's Air Combat Command, Air Mobility Command, and
U.S.  Air Forces in Europe, the Navy's Commanders in Chief, Atlantic
and Pacific Fleet, the Commander, Marine Forces Atlantic, and the
U.S.  Transportation Command.  We also conducted work at individual
military units that participated in contingency operations in fiscal
years 1994 and 1995.  Individual units visited included the XVIII
Airborne Corps in Fort Bragg, North Carolina; 101st Air Assault
Division in Fort Campbell, Kentucky; 25th Infantry Division in
Schofield Barracks, Hawaii; 48th Fighter Wing in Lakenheath, England;
1st Fighter Wing in Langley, Virginia; and the II Marine
Expeditionary Force in Camp LeJeune, North Carolina.  At the
locations we visited we discussed how the incremental costs of
contingency operations are captured and reviewed costs reported at
that location.  We also examined the guidance that the locations had
received from higher command levels regarding contingency cost
reporting and the views of cognizant officials at those locations
regarding the adequacy of the available guidance. 

To assess the adequacy of DOD's accounting systems and internal
controls, we drew from our past work and the work of the DOD
Inspector General (IG) and the military audit agencies on the
financial audits required under the Chief Financial Officers Act.  We
also examined DOD's annual Federal Managers' Financial Integrity Act
(FMFIA) Statement of Assurance, which detail the significant internal
control problems of DOD and the military services.  We consulted with
DOD's IG and the military audit agencies regarding planned work to
assess the extent of audits of contingency cost reporting.  We
discussed the extent to which cost reports are reviewed for accuracy
at locations visited. 

We conducted our review between May and December 1995 in accordance
with generally accepted government auditing standards. 


REPORTED CONTINGENCY COSTS CONTAIN
SIGNIFICANT INACCURACIES
============================================================ Chapter 2

In fiscal years 1994 and 1995, we found inaccuracies in DOD's
reported contingency operation costs that represented about 7 percent
of reported incremental costs.  The American Institute of Certified
Public Accountants states that a financial auditor must consider
materiality in the scope of work to be performed and leaves the
threshold of what constitutes a material weakness to the auditor's
judgment.  In our judgment, a 7 percent known error as well as
potential errors in the unauditable amounts discussed below,
constitutes a material weakness in the accounting systems.  A
material weakness raises questions about the reliability of reported
costs.  DOD reported incremental costs of about $4.1 billion for
contingency operations that occurred in fiscal years 1994 and 1995. 
We identified about $104 million in overstated costs and about $171
million in understated costs between fiscal years 1994 and 1995. 
Table 2.1 summarizes these over- and understatements by
appropriation.  We also found instances where the accuracy of some
reported costs could not be determined.  It was not feasible to
examine all reported cost data, and our results are not statistically
projectable.  Consequently, we are not able to conclude whether on
balance the sum of reported incremental costs are overstated or
understated. 



                               Table 2.1
                
                 Overstated and Understated Contingency
                 Costs by Appropriation Account (fiscal
                             years 1994-95)

                         (Dollars in millions)

                                             Overstated    Understated
Appropriation account                             costs          costs
----------------------------------------  -------------  -------------
Operation and Maintenance                          $104            $14
Military Personnel                                    0             81
Procurement                                           0             76
======================================================================
Total                                              $104           $171
----------------------------------------------------------------------

   COSTS ARE OVERSTATED BECAUSE
   THEY ARE NOT ADJUSTED TO
   REFLECT OFFSETS
---------------------------------------------------------- Chapter 2:1

The services do not have financial management systems that capture
actual incremental costs.  Therefore, the services use various
financial management systems to identify obligations and modify them
to arrive at their incremental costs.  In addition, with the
exception of the Army, the services receive input from their
subordinate commands.  As required by DOD guidance, the services are
then to offset their incremental costs by those costs for which funds
were appropriated, but not spent because of participation in the
contingency operation.  For example, reported costs should be
adjusted for such functions as training not conducted and base
operations not provided.  However, we found that this was not always
being done. 


      REPORTED COST NOT ADJUSTED
      FOR NORMAL OPERATING COSTS
      SAVED
-------------------------------------------------------- Chapter 2:1.1

We found instances where reported incremental costs were not offset
by normal operating costs, such as base operations, that were saved
due to participation in contingency operations.  For example, Army
Headquarters did not apply these offsets when calculating its
incremental costs.  In fiscal year 1995, the U.S.  Army Forces
Command, which was responsible for supporting most of the Army forces
involved in contingency operations in that year, estimated that
military units did not incur about $11 million in funded normal
operating costs as a result of deploying to contingency operations. 
Therefore, these funds were recoverable.  For example, U.S.  Army
Forces Command estimated that Fort Drum, home of the
10th Mountain Division (Light), had not incurred almost $3 million in
base operations cost because a large part of the division was
deployed to Haiti and so was not incurring some normal day-to-day
costs.  Although Forces Command officials made this information
available to senior command officials, no action was taken to offset
reported costs. 

In another instance, the 25th Infantry Division (Light), part of the
U.S.  Army, Pacific saved $1 million from normal operating costs
while part of the division was deployed to Haiti because its
operating costs during deployment were paid by another Army command. 
Thus, the division was able to use the $1 million it saved from
normal operating costs not incurred to acquire equipment it could not
otherwise afford within its annual budget.  Neither the division nor
higher command levels in the Army adjusted these reported contingency
costs to reflect these savings.  The Army chose to allow units that
had savings to retain and use them for otherwise unfunded needs. 

In fiscal year 1996, at least one major command, U.S.  Army, Europe,
has identified offsets and adjusted its funding estimate accordingly. 
U.S.  Army, Europe, which has the lead responsibility for tracking
U.S.  Army costs resulting from participation in implementing the
Dayton Peace Accords in Bosnia, anticipates that it will not incur
about $113 million in fiscal
year 1996 normal operating costs as a result of its participation in
Bosnia.  In reporting fiscal year 1996 costs, the Army should offset
its incremental costs by this amount. 


      REPORTED COSTS NOT ADJUSTED
      FOR TRAINING NOT CONDUCTED
-------------------------------------------------------- Chapter 2:1.2

We identified two cases where the services did not adjust reported
costs to offset training not conducted due to participation in
contingency operations.  In fiscal year 1995, the Army's 25th
Infantry Division (Light) reported about $2 million in costs
associated with deploying to Haiti.  The division was scheduled to
participate in a training exercise at the Joint Readiness Training
Center.  U.S.  Army, Pacific, the command that funds the division,
had budgeted more than $6 million for the cost of this exercise. 
Because elements of the division's brigades were deployed to Haiti,
the division did not participate in this exercise.  The 25th Infantry
Division's (Light) cost to participate in the Haiti operation was not
adjusted to reflect the savings from the missed training exercise. 
The Department of the Army directed the U.S.  Army, Pacific to use $2
million of the $6 million to fund other Army requirements and allowed
the command to retain the remaining $4 million, which it used to
cover all of the 25th Infantry Division's (Light) $2 million cost
associated with Haiti and to meet otherwise unfunded needs. 
Consequently, we believe that the division's $2 million in
incremental costs were fully offset by the training costs that were
not incurred and there were no incremental costs. 

Another example of reported incremental costs not offset by training
not conducted was found in the Air Force.  In fiscal year 1994, the
48th Fighter Wing had to cancel its participation in several training
exercises because of contingency operations.  U.S.  Air Forces,
Europe budgeted $1 million for this training.  Although the training
was canceled, the command made no adjustment to its reported
incremental costs. 

In these examples, neither the Army nor the Air Force adjusted its
reported costs to reflect the savings from canceled training.  For
the Army, this was because Army headquarters did not apply any
offsets, including those related to canceled training, to its
reported costs for fiscal year 1995.  The Air Force example was due
to U.S.  Air Forces, Europe not offsetting its reported costs that
were forwarded to Air Force headquarters, who prepared the final cost
report. 


      FLYING HOUR COSTS NOT
      ADJUSTED FOR ACTUAL COSTS
      AND VALUE OF FREE FUEL
-------------------------------------------------------- Chapter 2:1.3

We found instances where the services overstated flying hour costs. 
For example, the Air Force overstated fiscal years 1994 and 1995
incremental flying hour costs by $67 million.  The reasons for the
overstatement were that it (1) did not use actual cost factors to
report costs in fiscal years 1994 and 1995 and (2) did not offset its
flying hour costs by the value of free fuel received from the Kingdom
of Saudi Arabia in fiscal year 1994. 

According to Air Force officials, the Air Force calculated its
incremental flying hour costs by applying budgeted cost factors for
supplies, repair parts, maintenance, and fuel to the additional hours
flown per aircraft above budgeted flying hours.  These cost factors
reflect the average historical costs, by aircraft type, to operate,
not their actual costs.  In fiscal year 1994, we determined that U.S. 
Air Forces, Europe actual costs of contingency flying hours were
about $19 million below that funded by the Air Force. 

According to command officials, when actual costs are lower than the
budgeted factors for an aircraft, the command is allowed to retain
the excess.  Conversely, when costs are above these factors, the
command must absorb the increased cost within its budget.  For
example, we calculated that Air Combat Command had to absorb $4
million for fiscal year 1994 because its actual costs were higher
than the budgeted factors.  In the same year, Saudi Arabia provided
the Air Force free fuel valued at $45 million to support contingency
operations in Southwest Asia.  The Air Force failed to deduct the
value of this free fuel when computing its incremental flying hour
costs for Operation Southern Watch, thereby overstating its costs. 

In fiscal year 1995, the Air Force headquarters revised its
methodology for calculating incremental flying hour costs to reflect
the receipt of free fuel.  However, it continued to compute the
flying hour costs by using the budgeted versus actual cost factors. 
Consequently, Air Force headquarters computed almost $74 million for
Air Combat Command's incremental flying hour costs, while the
command's actual costs were about $7 million lower because actual
costs were less than the budgeted cost factors.  We did not have
comparable data to calculate U.S.  Air Forces, Europe's costs. 

We also found that the Navy used either budgeted or actual cost
factors when determining its incremental flying hour cost.  The Navy
Atlantic Fleet used budgeted rates reflecting average historical cost
applied to its additional flying hours, while the Pacific Fleet
applied actual rates for the most part when determining its costs. 
The Navy Pacific Fleet provided an example where the actual rates
were higher than the budgeted costs allowed for fiscal year 1995. 
For its F/A-18A, F/A-18C, and P-3C aircraft involved in
contingencies, the actual costs per hour for these aircraft were
higher than the budgeted costs by $2,632, $126, and $41,
respectively. 

Furthermore, Navy officials also stated that the Navy's fiscal year
1994 and 1995 flying costs were not adjusted for free aviation fuel. 
In fiscal year 1994, the Navy reported almost $6 million for aviation
fuel used in Operation Southern Watch but did not adjust this amount
by the $2 million of free fuel received.  Therefore, the Navy
overstated its reported costs by 33 percent.  Similarly, in fiscal
year 1995, the Navy did not adjust its reported costs to reflect $1
million of free fuel received for operations in Southwest Asia.  Navy
headquarter officials stated that the value of free fuel received for
operations was accounted for in its flying hour costs factors, which
were used to determine flying hour costs.  However, the Navy did not
provide documentation to support its position. 


      REPORTED COSTS NOT ADJUSTED
      TO REFLECT UNUSED ITEMS OR
      CREDITS FROM ITEMS RETURNED
      TO THE SUPPLY SYSTEM
-------------------------------------------------------- Chapter 2:1.4

The value of items that have been purchased for contingency
operations but not used and either retained by the unit or returned
to the DOD supply system for credit is not deducted from reported
incremental costs.  For example, the U.S.  Army, Europe purchased
parachutes and rigging supplies to support the airdrop mission over
Bosnia during 1994.  The cost of this material, over $23 million, was
reported as an incremental cost of that contingency operation.  In
July of 1994, the Army Audit Agency found that $12 million of this
equipment was excess to the command's needs and recommended that the
command turn in the supplies to receive a credit.  However, U.S. 
Army, Europe officials did not concur with this recommendation and
retained the material.  They believed that the equipment was
necessary for immediate future contingency airdrop operations.  Also,
they did not want to turn in the inventory because they believed that
it made little sense to turn in equipment, receive a limited credit
for it, and then buy it back at full price for anticipated
operations.  Regardless of whether the material was returned, the
reported incremental cost should have been adjusted by the $12
million of material not used in the contingency operation.  However,
neither the command nor Army headquarters adjusted the reported cost. 

In fiscal year 1995, the Army's 101st Airborne Division was told that
it would deploy to a contingency operation in Southwest Asia. 
Although the Division incurred some costs to prepare to deploy, it
ultimately did not deploy.  However, it reported incremental
predeployment costs of $14 million.  The reported costs were not
adjusted by Army headquarters to offset the value of items not used. 
Division officials estimated that about $7 million or more of the
reported costs were incremental, the balance was eventually used for
normal operating costs. 

When items that are purchased for use in a contingency are ultimately
not used and are returned to the supply system, they are credited to
a general operation and maintenance fund, but the reported
incremental costs of the contingency are not reduced.  According to
Army officials, there is no system in place to ascertain which of the
supplies turned in were originally purchased for a contingency
operation.  In addition, the DOD guidance on reporting contingency
costs does not specifically require the services to turn in these
items as a means to credit the reported costs of the contingency
operation or adjust reported costs to reflect the value of items
purchased for contingency operations but not used in them. 


      MILITARY PAY COSTS FOR
      RESERVISTS NOT ADJUSTED TO
      REFLECT BASE PAY
-------------------------------------------------------- Chapter 2:1.5

The reported incremental military personnel costs for reservists
volunteering for or called to active duty are not adjusted to reflect
regular monthly reserve pay that is not being incurred.  When
federalized, reservists receive active duty base pay plus allowances,
and special pays, some of which are based on where they are deployed. 
According to Army and Air Force officials, they do not adjust
reported incremental military pay for reservists on active duty in
contingencies by the monthly reserve pay they would have received had
they not been activated.  We believe that because these are costs
that are not incurred as a result of contingency operations, the
incremental personnel costs should be offset by these amounts.  We
did not determine the amount of this overstatement. 


   SOME CONTINGENCY OPERATION
   COSTS WERE INCURRED BUT NOT
   REPORTED
---------------------------------------------------------- Chapter 2:2

We found instances where services did not report certain incremental
contingency costs.  The unreported costs included military personnel
pay, aviation parts, and procurement. 


      MILITARY PERSONNEL COSTS NOT
      REPORTED BY AIR FORCE
-------------------------------------------------------- Chapter 2:2.1

Military personnel who deploy to contingency operations become
eligible for special pay and allowances such as imminent danger pay,
certain places pay (formerly known as foreign duty pay), and family
separation pay.  We found that the Air Force did not report about $81
million of the almost $100 million it estimated as incremental
personnel costs for fiscal year 1994.  According to Air Force
officials, they were not aware that they were required to track and
report these costs.  Table 2.2 compares the Air Force's reported
incremental personnel costs for fiscal year 1994 with the estimated
costs that should have been reported. 



                               Table 2.2
                
                   Air Force's Reported and Estimated
                 Fiscal Year 1994 Incremental Personnel
                                 Costs

                         (Dollars in millions)

                                                Report  Estima
                                                    ed     ted  Differ
Operation                                        costs   costs    ence
----------------------------------------------  ------  ------  ------
Bosnia                                            $7.6   $66.5  $(58.9
                                                                     )
Cuba/Haiti                                         0.0     1.1   (1.1)
Rwanda                                             0.4     0.0     0.4
Somalia                                            0.4     4.3   (3.9)
Southwest Asia                                    10.4    27.8  (17.4)
======================================================================
Total                                            $18.8   $99.7  $(80.9
                                                                     )
----------------------------------------------------------------------
Source:  Developed by GAO using Air Force data. 

Air Force headquarters officials said that, in fiscal year 1994, they
reported the amount of supplemental funding received for military
personnel as their military personnel incremental costs.  However,
beginning in fiscal year 1995, the Air Force tracked and reported
these costs. 


      COST OF AVIATION PARTS NOT
      REPORTED
-------------------------------------------------------- Chapter 2:2.2

We found one instance where an Air Force command did not report the
value of aviation spare parts used in contingency operations at one
of its bases.  The cost was instead recorded in the base's account
for normal operations.  According to a 1st Fighter Wing official, if
parts are not available to support deployed aircraft during
contingency operations they are removed or cannibalized from base
aircraft and replaced when needed parts are received.  Between May
1994 and October 1995, the command's 1st Fighter Wing estimated that
it had used approximately $10 million in spare parts to support
operations in Southwest Asia.  However, the Wing official stated that
this cost was charged to the base maintenance account when
replacement parts were cannibalized for contingency operations rather
than reported as contingency cost because in their view the base
accounting system only allows one account for maintenance.  Thus, the
contingency-related maintenance costs were commingled with normal
base maintenance costs. 


      REPLACEMENT COSTS FOR
      EQUIPMENT NOT REPORTED
-------------------------------------------------------- Chapter 2:2.3

We found that the Air Force did not report $12 million to replace
mobility equipment (tents, field kitchens, water systems, and
warehouse and maintenance facilities) that were reported as lost
during contingency operations in fiscal year 1995.  An Air Force
official stated that replacement costs for these items were not
considered incremental costs because funding for these items was
requested through the budget process and additional expenses were not
incurred.  However, we believe that these replacement costs should
have been reported as incremental costs because the equipment was
used in support of contingency operations and in all likelihood would
not have been rendered unusable or destroyed were it not for the
operation. 


      MUNITIONS COST NOT REPORTED
-------------------------------------------------------- Chapter 2:2.4

The Navy and the Air Force are not tracking and reporting the cost of
munitions used in contingency operations.  During the 1995 bombing
campaign in Bosnia, the two services consumed almost $64 million
worth of munitions--$48 million for the Navy and $16 million for the
Air Force.  According to an Air Force official, Air Force munitions
were not drawn from excess stock levels.  A Navy official said that
Navy munitions will have to be replaced. 

DOD officials told us that services are not reporting the costs of
munitions consumed in contingency operations because they absorbed
munitions procurement costs in normal budgets and do not consider the
value of munitions consumed in contingencies to be incremental costs. 
However, since these are costs that would not have been incurred were
it not for the operation, we believe that they should be included in
reported costs. 


   ACCURACY OF SOME OTHER COSTS
   COULD NOT BE DETERMINED
---------------------------------------------------------- Chapter 2:3

The accuracy of reported costs could not be determined for some cost
categories relating to active and reserve military personnel and
transporting personnel and equipment. 


      SERVICES REPORT ESTIMATED
      INCREMENTAL PERSONNEL COSTS
-------------------------------------------------------- Chapter 2:3.1

Military personnel deployed to contingency operations become eligible
for several types of special pays and allowances.  These can include
imminent danger pay, certain places pay, and family separation pay. 
These types of special pays and allowances would not be paid were it
not for the contingency operation, so they are considered incremental
costs.  Because the military services cannot readily extract the
amount of the special pays and allowances from their military pay
system, they estimate the incremental pay costs.  This makes it
difficult to ascertain the accuracy of these costs, which may be
over- or understated.  In addition, the military services do not all
use the same estimating methodology. 

In fiscal year 1995, the Air Force applied estimated cost factors to
the actual number of deployed active military personnel to derive
special pays and allowances.  The Army and the Marine Corps also
applied estimated cost factors but instead used the estimated number
of deployed active personnel.  The Navy, on the other hand, reports
actual costs from its military pay center but only included imminent
danger pay.  This is because the nature of the Navy's normal
deployment schedules already include special pays and allowances,
such as family separation pay.  Therefore, those pays are not
characterized by the Navy as incremental. 

Officials from the other services told us that they do not reconcile
reported incremental personnel costs to actual payroll cost reports
to determine the accuracy of their reported estimated contingency
figures.  Although the services' payroll systems calculate how much
the personnel deployed should receive in special pays and allowances
and are able to distinguish between geographic locations, they are
not configured to distinguish between contingency operations and
other deployments.  On the other hand, the personnel systems are
capable of determining who is deployed and the location of this
deployment.  However, the payroll and personnel systems are not
configured or linked to provide the incremental contingency costs. 

DOD has plans underway to link the payroll and personnel systems.  On
the basis of discussions with Defense Finance Accounting System
officials (who operate the military payroll system) and OSD officials
in the military personnel arena, we believe that linking the payroll
and personnel systems to allow the extraction of actual special pay
and allowance costs may only involve providing one additional space
in computer records to allow for a code indicating that a service
person is deployed to a contingency operation.  Until the two systems
are linked it is not possible to test the accuracy of estimated
costs. 

The services also use estimates rather than actual data to derive
incremental personnel costs for reservists on active duty in
contingency operations.  The Air Force and the Army multiply actual
numbers of reservists participating in contingency operations by
estimated base salary as well as by the special pays and allowances. 
According to Navy officials, the Navy did not report any incremental
personnel costs for the number of reservists who supported
contingency operations in fiscal years 1994 and 1995. 


      REPORTED COSTS INCLUDE
      DISPUTED TRANSPORTATION
      BILLS
-------------------------------------------------------- Chapter 2:3.2

Although paid and reported as incremental contingency costs, the Army
and the Air Force question some of their bills to transport personnel
and equipment for contingency operations, which may have resulted in
overstated costs.  Allowable transportation costs include moving
personnel, material, equipment, and supplies to the contingency area. 
The services pay the Military Traffic Management Command for port
handling, the Military Sealift Command for sealift, and the Air
Mobility Command for airlift.  If billing errors exist, reported
incremental transportation costs are also inaccurate. 

The U.S.  Army Forces Command identified $11 million in
transportation charges it believed to be invalid for airlift,
sealift, and port handling services in fiscal year 1995.  This
represented 16 percent of the command's total contingency
transportation charges for that year.  In the review of bills,
command officials found problems such as unidentified customers,
duplicate charges, and missing data that prevented the validation of
charges.  For example, officials estimated that over 50 percent of
fiscal year 1995 contingency port handling bills had disputed
charges.  The command requested transportation providers to respond
to disputed charges; however, responses have been minimal and few
credits applied. 

Air Force officials also told us that they have noticed problems with
transportation bills but do not have the resources to research and
validate the bills.  In fiscal year 1995, the Air Combat Command
incurred $17 million in airlift contingency charges.  Command
officials believe that the airlift bills may include errors and
reported incremental costs may be inaccurate.  For example, command
officials told us that some of their bills may include other
services' airlift mission charges. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:4

We found a number of inaccuracies in DOD's fiscal years 1994 and 1995
reported incremental costs, which resulted in costs being overstated,
understated, or unable to be determined.  In our opinion the
magnitude of these inaccuracies is material to the reported costs. 
With regard to incremental military pay costs, we believe DOD's plan
to link the military pay and military personnel systems will be
helpful in capturing actual military pay incremental costs. 


GUIDANCE FOR REPORTING INCREMENTAL
COSTS IS VAGUE AND ACCOUNTING
SYSTEMS ARE UNRELIABLE
============================================================ Chapter 3

The DOD Comptroller and the service secretaries have not developed
sufficiently specific guidance for identifying contingency operation
costs and the methodology for calculating them.  DOD and the services
also have not taken steps to ensure that cost development
methodologies are consistent and that key officials involved in
accounting for incremental cost reporting are made aware of guidance. 
In addition, DOD and the services have not adequately ensured that
cost reports are complete, accurate, timely, and appropriately
reviewed.  This would include that costs are properly recorded and
classified and supporting documentation is maintained.  Further, DOD
accounting systems are classified as high risk and cannot reliably
determine incremental costs. 


   DOD AND SERVICE GUIDANCE FOR
   REPORTING INCREMENTAL COSTS IS
   VAGUE
---------------------------------------------------------- Chapter 3:1

In February 1995, DOD added a chapter on contingency operations to
its financial management regulations.  Prior to the addition of this
chapter, contingency cost guidance consisted of a patchwork of
messages and directives issued during and since the Gulf War.  The
new chapter directs the services to provide monthly incremental cost
reports in accordance with DOD policy and makes the services
responsible for accurate cost reporting.  The chapter also

  -- requires that controls, accounting systems, and procedures
     identify and record costs incurred in support of contingency
     operations;

  -- directs that the services use the project code established for
     an operation;

  -- makes service Comptrollers responsible for determining
     incremental costs;

  -- sets out cost reporting requirements;

  -- provides broad guidelines for determining costs; and

  -- requires that reported costs be adjusted for offsets. 

DOD guidance is vague about what costs to include as contingency
costs and what methodology to use in calculating these costs. 
Because DOD's guidance is vague, the services and some commands
within the same service calculate costs differently.  The guidance is
also vague on applying internal controls standards to test the
accuracy and completeness of reported costs.  Several service
officials at the reporting level stated that more specific guidance
was needed.  DOD officials stated that they are willing to clarify
the guidance to the services if this will assist them in their cost
reporting. 

To date, Army guidance has consisted of a series of messages
regarding reporting procedures for specific contingency operations,
funding responsibilities, and reimbursement from the United Nations. 
The guidance also notes broad cost categories but does not contain
specific guidance as to what costs to report and how to calculate
them.  The Army has since drafted some implementing guidance that
discusses how to calculate offsets and requires major commands to
certify costs, but as of April 1996, this guidance had not been
approved.  Air Force guidance has been limited to describing
reporting formats and deadlines.  Neither the Navy nor the Marine
Corps has developed any formal instructions to guide their
subordinate commands.  They have relied, for the most part, on oral
instructions and electronic mail messages, which have also been
limited to reporting procedures. 


      GUIDANCE IS NOT SPECIFIC
      ABOUT WHAT COSTS TO INCLUDE
-------------------------------------------------------- Chapter 3:1.1

Lack of specific guidance has resulted in services' not offsetting or
reporting certain costs.  For example, while the guidance requires
reported costs to be adjusted for offsets, such as training not
conducted, it does not specify that services' offsets should include
the value of items that have been purchased for contingency
operations but not used.  U.S.  Army, Europe and the 101st Airborne
Division did not adjust their reported costs to reflect the value of
supplies that were unused in the contingency. 

DOD's February 1995 guidance also is not specific about reporting
costs for training conducted to prepare for a contingency.  As a
result, the Army did not report these costs.  In fiscal year 1994,
aviation elements from the XVIII Airborne Corps incurred almost $1
million in training costs for Haiti that were not included in the
Army's contingency cost report.  Also in fiscal year 1994, U.S. 
Army, Europe officials stated that they did not report predeployment
training costs incurred for one division to prepare for Operation
Able Sentry in Macedonia.  Nonetheless, the Army is now tracking and
reporting predeployment training costs associated with the
preparation for operations in the former Yugoslavia. 


      GUIDANCE IS NOT CLEAR ON HOW
      TO CALCULATE CERTAIN COSTS
-------------------------------------------------------- Chapter 3:1.2

The DOD guidance does not specify how the services should calculate
incremental personnel costs.  It only provides examples of allowable
categories of personnel costs such as family separation allowance and
imminent danger pay.  Consequently, the services calculate their
incremental personnel cost differently.  The Navy does not include
all the special pays and allowances, the Air Force uses actual
numbers of deployed personnel to estimate these costs, and the Army
and the Marine Corps use an estimate of the number of persons
deployed. 

In some cases, commands within the services also calculate some costs
differently.  For example, the Navy's Atlantic and Pacific fleets
used different methods to calculate flying hour costs.  According to
Navy officials, the Atlantic Fleet computed its incremental flying
hour costs by determining its incremental hours and multiplying them
by budgeted cost factors, while the Pacific Fleet used mostly actual
costs.  This is because Pacific Fleet officials believe that the
difference between actual and budgeted cost factors allows them to
fund unforeseen maintenance costs that do not appear until later
fiscal years due to increased flying hours in support of contingency
operations.  Again, using different methods results in inconsistent
cost reporting. 


      GUIDANCE IS NOT CLEAR ON HOW
      TO APPLY INTERNAL CONTROL
      STANDARDS
-------------------------------------------------------- Chapter 3:1.3

According to our Standards for Internal Controls, there are standards
that are essential for providing the greatest assurance that the
objective of accurate reporting will be achieved.  These include
maintaining supporting documentation, properly recording and
classifying costs, and having adequate supervision and review of cost
reporting. 

We found that these generally accepted internal control standards
were not always followed.  For example, Navy Pacific Fleet officials
were unable to support about $2 million of their reported $48 million
in incremental costs for Operation Southern Watch because supporting
documentation was unavailable.  Further, one U.S.  Army, Europe
division did not capture and report its predeployment training costs
for Macedonia and Rwanda.  It also recorded some supply costs to the
wrong operation. 

We also found that adequate rigor was not always applied in the
review of reported incremental costs.  For example, in fiscal year
1994, the Navy inappropriately reported an $8 million reimbursable
cost as an incremental cost.  The Navy was reimbursed for this cost
by the Army.  The Army also reported this cost resulting in reported
costs being duplicated since both the Army and the Navy reported the
same cost. 


      REPORTING OFFICIALS NOT
      AWARE OF GUIDANCE
-------------------------------------------------------- Chapter 3:1.4

For costs to be reported accurately and in accordance with guidance,
service officials involved in the cost reporting need to be aware of
this guidance.  However, during our visits we found that some
officials involved in accounting for incremental cost reporting at
the service, major command, and unit levels were unaware of the
February 1995 DOD guidance on contingency cost reporting.  This
included officials at various U.S.  Army, Europe subordinate units;
the Navy Surface Forces, Pacific Fleet; and the U.S.  Marine Corps
Headquarters and Commander in Chief, Marine Forces Atlantic. 


   WEAKNESSES EXIST IN DOD
   ACCOUNTING SYSTEMS USED TO
   PROVIDE DATA
---------------------------------------------------------- Chapter 3:2

DOD's Financial Management Regulation notes that data from existing
systems shall be used as applicable to determine contingency
operation costs and that cost accounting systems will not be
established solely to determine incremental costs.  Consequently, DOD
must develop its cost reports within its existing systems.  However,
problems exist with DOD's accounting systems and the reliability of
its data.  The systems do not provide a firm foundation for DOD's
managers to use in determining incremental costs for contingency
operations. 

The problems we identified in contingency cost reporting stem, in
part, from the long-standing and pervasive problems that plague DOD's
accounting systems.  DOD's 1994 and 1995 Federal Managers' Financial
Integrity Act (FMFIA) Statements of Assurance admit long-standing
weaknesses in DOD's financial accounting process and systems.  Under
the FMFIA and implementing OMB guidance, the Secretary of Defense is
required to provide this annual Statement of Assurance to the
President and the Congress on whether the Department's system of
internal controls, taken as a whole, complies with the act's
requirements.  DOD's Statements of Assurance cite its financial
accounting process and systems as a high-risk area.  The Statements
note that DOD's operating accounting systems are not always in
compliance with generally accepted government accounting standards or
with internal management control objectives.  As a result, the
quality of financial information is not always reliable, and
financial management practices are sometimes inadequate. 
Additionally, compilation of accurate financial statements is
impeded, in part, by the lack of reliable information.  Some broad
categories of systemic problems reported include inadequate financial
property records, unreliable accounting and payroll information,
inaccurate or incomplete cost accounting information, improper or
incomplete accrual accounting, improper reporting of the results of
financial operations, and lack of financial system integration. 

DOD has made numerous efforts to improve its financial management
activities.  A significant action was the establishment of a single
DOD finance and accounting organization, the Defense Finance and
Accounting Service, in January 1991.  Its mission is to implement
standard accounting policies and procedures throughout DOD.  In May
1994, DOD announced the consolidation of over 300 finance and
accounting sites into 26 locations.  The Defense Finance and
Accounting Service also has responsibility for consolidating service
incremental cost reports for contingency operations. 


      DOD ACCOUNTING SYSTEMS ARE
      HIGH RISK AND DO NOT SUPPORT
      AUDITABLE STATEMENTS
-------------------------------------------------------- Chapter 3:2.1

We stated in a November 1995 testimony that DOD does not yet have
adequate financial management processes in place to produce the
information it needs to support its decision-making process.\1 We
further stated that no military service or major DOD component has
been able to withstand the scrutiny of an independent financial
statements audit, a requirement established by the Chief Financial
Officers Act.  DOD's financial systems are not integrated and do not
provide reliable information.  Our review of the Navy's financial
reports, the Army Audit Agency's review of the Army's financial
statements, and the Air Force Audit Agency's review of the Air
Force's financial statements identified significant accounting and
reporting problems resulting in unauditable financial statements and
reports for fiscal year 1994.\2 As an example, control practices used
in the Navy's financial operations were fundamentally deficient: 
accounts and records were not routinely reconciled; periodic physical
inventories were not always conducted; undocumented adjustments were
common; and the reasonableness of account balances, adjustments, and
data presented in financial reports was not regularly reviewed.  DOD
has acknowledged that its financial management systems are antiquated
and cannot be relied upon to provide DOD management and the Congress
with accurate and reliable financial information for use in
decision-making. 

DOD's FMFIA Statements of Assurance also noted that financial data in
DOD is inadequately maintained within current accounting systems.  In
turn, the financial information and statements do not always
adequately assist the management functions of budget formulation,
budget execution, and proprietary and financial reporting with a high
degree of reliability and confidence.  An important deficiency cited
included the lack of flexibility of most finance and accounting
systems to rapidly respond to changing customer bases, legislative
changes, contingency operations, management initiatives, requirements
from other government central agencies, and other changes. 
Accordingly, DOD systems are classified as high risk by fiscal year
1994 and 1995 Statements of Assurance and OMB.  Our February 1995
High Risk report also cited DOD's serious and long-standing financial
management problems as high risk especially vulnerable to waste,
fraud, abuse, and mismanagement.\3


--------------------
\1 Financial Management:  Challenges Facing DOD in Meeting the Goals
for the Chief Financial Officers Act (GAO/T-AIMD-96-1, Nov.  14,
1995). 

\2 CFO Act Financial Audits:  Immediate Attention Must Be Given to
Preparing Reliable Financial Information on Navy Operations
(GAO/AIMD-96-7, Mar.  27, 1996), Audit of the Army's Principal
Financial Statements Fiscal Years 1994 and 1993 (HQ 95-451, 23 Mar. 
1995), and Opinion on Fiscal Year 1994 Air Force Consolidated
Financial Statements (AFAA Project 94053001, 1 Mar.  1995). 

\3 High-Risk Series:  An Overview (GAO/HR-95-1, Feb.  1995). 


      DOD'S SYSTEMS REPORT TOTAL
      OBLIGATIONS
-------------------------------------------------------- Chapter 3:2.2

Besides the unreliability of its basic accounting data, DOD does not
have cost accounting systems that can reliably state what was
actually expended in support of a contingency operation.  Existing
systems report what was obligated to be spent.  Previous audits have
shown that such obligations can differ significantly from actual
disbursements,\4 resulting in DOD's paying billions of dollars in the
course of normal business without being able to validate payments. 
For example, vendors were paid $29 billion that cannot be matched to
supporting documentation to determine if payments were proper.  Such
errors can affect the accuracy of the reported contingency costs
extracted from these systems.  DOD IG and service audits have also
cited material weaknesses that exist in accounting and related
systems.\5 For example, billing data was not always available,
reliable, or accurate to determine the authenticity of claims. 


--------------------
\4 Financial Management:  Status of Defense Efforts to Correct
Disbursement Problems (GAO/AIMD-95-7, Oct.  5, 1994) and Financial
Management:  Financial Control and System Weaknesses Continue to
Waste DOD Resources and Undermine Operations
(GAO/T-AIMD/NSIAD-94-154, Apr.  12, 1994). 

\5 Management Data Used to Manage the U.S.  Transportation Command
and the Military Department Transportation Organizations (DOD IG
Report No.  94-163, June 30, 1994) and Audit of Reimbursements for
Humanitarian Aid Missions, 21st Theater Army Area Command,
Kaiserslautern, Germany (Army Audit Agency Report NR-95-707, April 3,
1995). 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:3

To improve the accuracy of cost reporting, we recommend that the
Secretary of Defense direct the DOD Comptroller to clarify existing
guidance to specify what costs to include in contingency operations
cost reporting.  At a minimum the guidance should specify the
methodology to (1) calculate these costs and (2) adjust costs to
reflect offsets.  We further recommend that the Secretary of Defense
direct the service secretaries to develop comprehensive implementing
instructions from the DOD Comptroller's guidance.  This guidance
should specify how the services would like reporting units to apply
internal controls standards so that incremental costs are adequately
supported, recorded, and reviewed. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:4

DOD generally concurred with a draft of this report as being a
reasonable portrayal of the problems inherent in accounting and
reporting for contingency operations.  DOD agreed with our
recommendations and stated that it will attempt to clarify existing
guidance to specify which costs to include in the cost reports and to
better explain methodologies to be used and offsets to be
incorporated. 

Regarding our finding that DOD's guidance is general and incomplete
and excludes discussion of offsetting certain costs, DOD commented
that chapter 23, volume 12, of the DOD Financial Management
Regulation discusses the intent that reported costs be adjusted for
offsets, and while the regulation does not list every example of when
offsets should be taken, it provides several examples of such
offsets.  Further, DOD noted that its regulation is intended to
impart general guidance for use by the components, not detailed
instructions.  Such instructions in DOD's view are best left to the
components to formulate to meet their individual requirements and
circumstances.  DOD's Financial Management Regulation does require
that reported costs be adjusted for offsets and it provides some
examples of types of offsets.  But, DOD's guidance is vague about
what costs to include as contingency costs and what methodology to
use in calculating these costs.  In addition, the services have not
issued comprehensive implementing instructions.  We have clarified
our discussion in the executive summary of this report to reflect our
overall concern with DOD's existing guidance. 




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================ Chapter 3



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

Steven H.  Sternlieb, Assistant Director
Lisa M.  Quinn, Evaluator
Joanne L.  Jurmu, Evaluator


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:2

Roger R.  Stoltz, Assistant Director


   NORFOLK FIELD OFFICE
-------------------------------------------------------- Appendix II:3

Lindsay B.  Harwood, Senior Evaluator
Joseph A.  Rutecki, Senior Evaluator
Tracy W.  Banks, Evaluator
Carleen C.  Bennett, Evaluator
Willie J.  Cheely, Jr., Evaluator
J.  Larry Peacock, Evaluator
Suzanne K.  Wren, Evaluator


*** End of document. ***