Financial Management: An Overview of Finance and Accounting Activities in
DOD (Letter Report, 02/19/97, GAO/NSIAD/AIMD-97-61).

Pursuant to a congressional request, GAO provided information on the
Department of Defense's (DOD) management of its financial operations,
focusing on: (1) DOD's rationale for creating the Defense Finance and
Accounting Service (DFAS); (2) the current size of the DOD finance and
accounting infrastructure; and (3) the various finance and accounting
activities performed by DOD personnel.

GAO found that: (1) as with any major corporation in the private sector,
DOD must carry out financial management functions such as recording,
tracking, and reporting the value of its assets, liabilities, changes in
equity or capital, and expenses; (2) this type of accounting information
not only helps disclose DOD's financial position and results of
operations but also provides DOD and the Congress with information to
effectively allocate resources and assess department performance; (3) in
addition, DOD must monitor, control, and report on the obligation and
expenditure of appropriations, to ensure that DOD does not violate
spending limitations established in legislation; (4) before fiscal year
1991, the military services and defense agencies independently managed
their finance and accounting operations; (5) according to DOD, these
decentralized operations were highly inefficient and failed to produce
reliable information for decisionmakers; (6) DOD created DFAS as its
accounting agency to consolidate, standardize, and integrate finance and
accounting requirements, functions, procedures, operations, and systems;
(7) the military services and defense agencies also kept some people at
most of the 332 installation-level offices and maintained responsibility
for hundreds of feeder systems that are the source of most finance and
accounting information; (8) DOD is working toward streamlining its
finance and accounting infrastructure; (9) most of the reductions,
however, are anticipated to occur in DFAS operations as it moves toward
consolidating its activities; (10) the military services continue to
perform certain finance and accounting activities at each military
installation; (11) these activities vary by military service depending
on what the services wanted to maintain in-house and the number of
personnel they were willing to transfer to DFAS; (12) significantly
improving financial management operations in DOD is an enormous task,
involving the replacement of many antiquated systems and processes; (13)
the enormity of this task is made even more difficult by the need to
continue paying millions of military and civilian employees and
thousands of defense contractors as improvements are being made; and
(14) as DOD's accounting agency, DFAS records these transactions in the
accounting records, prepares thousands of reports used by managers
throughout DOD and by the Congress, and prepares the DOD-wide and servi*

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

 REPORTNUM:  NSIAD/AIMD-97-61
     TITLE:  Financial Management: An Overview of Finance and Accounting 
             Activities in DOD
      DATE:  02/19/97
   SUBJECT:  Accounting procedures
             Defense cost control
             Federal agency accounting systems
             Financial management systems
             Industrial funds
             Federal agency reorganization
IDENTIFIER:  Defense Business Operations Fund
             Army Working Capital Fund
             Navy Working Capital Fund
             Air Force Working Capital Fund
             Defense-wide Working Capital Fund
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, U.S.  Senate

February 1997

FINANCIAL MANAGEMENT - AN OVERVIEW
OF FINANCE AND ACCOUNTING
ACTIVITIES IN DOD

GAO/NSIAD/AIMD-97-61

Financial Management

(709207)


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

  CFO - Chief Financial Officer
  DBOF - Defense Business Operations Fund
  DFAS - Defense Finance and Accounting Service
  DOD - Department of Defense
  GAO - General Accounting Office

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


B-275755

February 19, 1997

The Honorable Ted Stevens
Chairman, Subcommittee on Defense
Committee on Appropriations
United States Senate

Dear Mr.  Chairman: 

As you are aware, the Department of Defense (DOD) continues to
experience significant problems in managing its financial operations. 
This report, as you requested, provides information to assist the
Subcommittee in its oversight of these operations.  More
specifically, it addresses (1) DOD's rationale for creating the
Defense Finance and Accounting Service (DFAS), (2) the current size
of DOD's finance and accounting infrastructure (e.g., locations,
personnel, and systems) as compared with its size when DFAS was
created, and (3) the various finance and accounting activities
performed by DOD personnel. 

For the most part, the report presents data as of September 30, 1996,
which was provided by DOD.  We did not attempt to independently
verify the accuracy or reliability of the data.  In addition, as
agreed with your office, this report does not discuss the specific
problems DOD is encountering when performing finance and accounting
activities or the actions it is pursuing to correct them.  Included,
however, is a list of reports we have issued over the past several
years detailing DOD's financial management problems (see "Related GAO
Products" at the end of this report).  In addition, we recently
issued a "High-Risk Series," report entitled Defense Financial
Management (GAO/HR-97-3, Feb.  1997).  That report summarizes DOD's
problems in this area and provides our general assessment of DOD's
approach for correcting them.  We also have a number of assignments
underway looking at DOD's actions to correct weaknesses in the
following six areas:  (1) lack of integrated systems, (2) lack of
reliable cost information, (3) problem disbursements, (4) workforce
competencies, (5) poor internal controls, and (6) antiquated business
practices.  We will report separately on these assignments. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

As with any major corporation in the private sector, DOD must carry
out financial management functions such as recording, tracking, and
reporting the value of its assets, liabilities, changes in equity or
capital, and expenses.  This type of accounting information not only
helps disclose DOD's financial position and results of operations but
also provides DOD and the Congress with information to effectively
allocate resources and assess DOD's performance.  In addition, DOD
must monitor, control, and report on the obligation and expenditure
of appropriations.  This is to ensure that DOD does not violate
spending limitations established in legislation. 

Before fiscal year 1991, the military services and defense agencies
independently managed their finance and accounting operations. 
According to DOD, these decentralized operations were highly
inefficient and failed to produce reliable information for
decisionmakers.  On November 26, 1990, DOD created DFAS as its
accounting agency to consolidate, standardize, and integrate finance
and accounting requirements, functions, procedures, operations, and
systems.  Between 1991 and 1994, DFAS assumed control of 6 large
finance and accounting centers, many of the people at 332
installation-level finance and accounting offices, and over 300
systems used to perform specific finance and accounting operations. 
The military services and defense agencies began paying for finance
and accounting services provided by DFAS using their operations and
maintenance appropriations.  The military services and defense
agencies also kept some people at most of the 332 installation-level
offices and maintained responsibility for hundreds of feeder systems
that are the source of most finance and accounting information. 
Table 1 shows the changes that DOD has reported in its total finance
and accounting network since 1991 and targets DFAS and the military
services hope to meet by the year 2000. 



                                     Table 1
                     
                      Reported Changes in DOD's Finance and
                          Accounting Network Since 1991

1991(pre-DFAS)        1996 (current)                2000 (vision)
--------------------  ----------------------------  ----------------------------
                      DFAS                          DFAS
                      5 centers                     5 centers
                      17 operating locations        Not more than 21 operating
                      102 installation-level        locations
                      offices                       No installation-level
                      23,500 employees              offices
                      217 finance and accounting    20,000 employees\a
                      systems                       110 finance and accounting
                      Budget: $1.64 billion         systems
Military services                                   Budget: $1.47 billion (in
6 centers                                           constant 1996 dollars)
332 installation-     Military services
level offices         No centers                    Military services
46,000 employees      332 installation-level        According to military
331 finance and       offices                       service financial management
accounting systems    17,300 employees              officials, there are no
Budget -not           Budget -not precisely known   plans to centrally assess or
precisely known       because finance and           reduce the size of the
because many finance  accounting activities are     military service finance and
and accounting        financed through command and  accounting network. These
operations were       installation budgets          decisions are the
financed through      (estimated personnel budget:  responsibility of local base
major command and     $598 million).                or installation commanders.
installation
budgets.
--------------------------------------------------------------------------------
\a According to DFAS officials, reducing personnel levels to 20,000
is their current goal.  They said, however, that the number of
employees could be reduced by an additional 30 percent if ongoing
economy and efficiency initiatives are successful. 

As this table shows, DOD is working toward streamlining its finance
and accounting infrastructure (locations, personnel, and systems). 
Most of the reductions, however, are anticipated to occur in DFAS
operations as it moves toward consolidating its activities.  For
example, DFAS initially inherited 28,000 of the 46,000 employees that
were working in finance and accounting in 1991.  As of September 30,
1996, it had reported a reduction in this workforce to 23,500 and had
plans to eliminate another 3,500 positions by the year 2000. 
Likewise, DFAS operations were initially spread over 332
installation-level offices and 6 centers.  By the year 2000, DFAS
expects that the 332 installation-level offices will be closed and
all its finance and accounting activities will be performed at 5
centers and no more than 21 operating locations. 

The military services (which were left with 18,000 of the 46,000
employees) continue to perform certain finance and accounting
activities at each military installation.  These activities vary by
military service depending on what the services wanted to maintain
in-house and the number of personnel they were willing to transfer to
DFAS.  In making travel payments, for example, DFAS disburses funds
to Army and Air Force travelers while the Navy retained this function
for most of its travelers.  Because the number of personnel and the
activities they perform are controlled and budgeted for at the
installation level, the military services have no specific plans to
centrally assess or reduce the size of their networks. 

Significantly improving financial management operations in DOD is an
enormous task, involving the replacement of many antiquated systems
and processes.  The enormity of this task is made even more difficult
by the need to continue paying millions of military and civilian
employees and thousands of defense contractors as improvements are
being made.  In this respect, table 2 illustrates the scope of DFAS'
fiscal year financial operation, which, by any standard, is
unparalleled in either the private or public sector. 



                                Table 2
                
                 Magnitude of DFAS' Financial Operation
                          for Fiscal Year 1996


* Disbursed a reported $266 billion on

17 million invoices,
6 million payroll accounts, and
2 million travel vouchers.

* Collected a reported $238 million from

116,000 debtors.
----------------------------------------------------------------------
As DOD's accounting agency, DFAS records these transactions in the
accounting records, prepares thousands of reports used by managers
throughout DOD and by the Congress, and prepares DOD-wide and
service-specific financial statements required by the Chief Financial
Officers Act.  The military services play a vital role in that they
authorize the expenditure of funds and are the source of most of the
financial information that allows DFAS to make payroll and contractor
payments.  The military services also maintain stewardship over all
DOD assets and provide asset, liability, and equity information
needed by DFAS to prepare annual financial statements. 


   RATIONALE FOR CREATING DFAS
------------------------------------------------------------ Letter :2



   (See figure in printed
   edition.)

Before fiscal year 1991, the military services and defense agencies
each had their own financial management structure, consisting of a
headquarters comptroller organization; finance and accounting
centers; and accounting, finance, and disbursing offices at military
bases.  Each service and agency developed its own processes and
systems that were geared to its particular mission.  In many
instances, the military services and defense agencies interpreted
governmentwide and DOD-level finance and accounting policies
differently.  According to DOD, these variances sometimes resulted in
managers being provided conflicting information. 

Over the years as greater emphasis was placed on joint operations,
financial management system incompatibility and lack of
standardization (even within a military service) became more
apparent.  For example, there was only one pay schedule for military
personnel, yet DOD maintained and operated dozens of different pay
systems.  These types of conditions produced business practices that
were complex, slow, and error prone.  According to DOD officials, no
matter how skilled the people operating them, DOD's financial
management systems and processes were inherently handicapped in their
efficiency and effectiveness.  Furthermore, DOD officials stated that
there was an inherent inefficiency in having multiple organizations
perform virtually identical functions. 

Given these problems; changes in the economic, political, and
management environments; and advances in technology, DOD officials
became convinced they needed to improve the economy and efficiency of
their finance and accounting operations.  After assessing how finance
and accounting activities were performed, DOD determined that
consolidating these activities offered a number of potential
advantages, including

  -- increasing DOD-wide oversight;

  -- improving consistency in the application of accounting
     principles, policies, procedures, systems, and standards
     throughout DOD;

  -- eliminating the costs of maintaining and operating multiple
     financial operations and systems;

  -- improving decision making by providing DOD managers with more
     timely, meaningful, and accurate financial information; and

  -- accelerating the implementation of standard DOD-wide financial
     systems. 

The establishment of DFAS in January 1991 was the first step taken by
DOD directed at fundamentally reforming finance and accounting
operations.  DFAS was formed by consolidating into a single agency
under DOD's Comptroller, the large finance and accounting centers
that belonged to the military services and the Defense Logistics
Agency.  Recognizing that additional economies and efficiencies could
be achieved, the Deputy Secretary of Defense, in December 1991,
directed DFAS to assume control of existing finance and accounting
operations and personnel at the command and installation levels
within the military services.\1 By 1994, DFAS had assumed
responsibility for many of the finance and accounting activities at
332 offices (in the continental United States, Alaska, Hawaii, Guam,
Puerto Rico, and Panama) and had announced plans to consolidate these
activities at a limited number of DFAS locations. 

To focus DOD management's attention on managing the cost of finance
and accounting activities, DFAS was designated a Defense Business
Operations Fund (DBOF)\2 business area in fiscal year 1992.  The
concept of DBOF is to promote total cost visibility by charging
customers (primarily the military services and defense agencies) for
the full cost of providing goods and services.  By doing this, DOD
hoped that all levels of management would focus their attention on
the total costs of carrying out certain critical DOD business
operations.  DOD anticipated that this would encourage managers to
become more conscious of operating costs and make fundamental
improvements in how DOD conducts business.  In fulfilling DBOF's
concept, DFAS sets the prices it charges the military services and
defense agencies and bills them to cover the full cost of its
operations.  The military services and defense agencies pay for these
services primarily with funds from their operations and maintenance
appropriations. 

The 1997 Defense Authorization Act required DOD to conduct a
comprehensive study of DBOF and present an improvement plan to the
Congress for approval.  Pending the results of this study, DOD's
Comptroller, on December 11, 1996, dissolved DBOF and created four
working capital funds:  (1) Army Working Capital Fund, (2) Navy
Working Capital Fund, (3) Air Force Working Capital Fund, and (4)
Defense-wide Working Capital Fund.  DFAS is part of the Defense-wide
Working Capital Fund.  The four working capital funds will continue
to operate under the revolving fund concept--using the same policies,
procedures, and systems as they did under DBOF--and charge customers
the full costs of providing goods and services to them. 


--------------------
\1 DOD refers to this as "capitalization." In this instance, it means
the transfer of ownership and command and control of the people,
resources, and assets (supplies, equipment, personal computers, etc.)
involved in performing DOD finance and accounting functions or
directly supporting these functions. 

\2 DBOF is a revolving fund that was created by DOD in October 1991
by consolidating DFAS and several other defense business activities
with the nine industrial and stock funds operated by the military
services and defense agencies.  DBOF centralized the cash management
operations of these business activities, but the military services
and defense agencies continued to manage the day-to-day operations of
the activities much as they had before DBOF was created. 


   CHANGES IN DOD'S FINANCE AND
   ACCOUNTING INFRASTRUCTURE
------------------------------------------------------------ Letter :3

Over the past few years, DOD's finance and accounting organization
and management structure has undergone major changes.  For example,
DFAS and the military services now share the finance and accounting
responsibilities that previously belonged to the military services. 
Most significantly, however, DFAS has developed a new concept of
operations that involves performing most of its finance and
accounting operations at consolidated sites rather than at local
bases and installations.  This has allowed it to reduce the number of
locations and personnel needed to perform these operations and to
begin standardizing its accounting systems and processes.  This
section describes the current organizational structure of DOD's
finance and accounting activities and the status of various changes
with respect to finance and accounting locations, personnel, budgets,
and systems. 


      DFAS AND THE MILITARY
      SERVICES SHARE FINANCE AND
      ACCOUNTING RESPONSIBILITIES
---------------------------------------------------------- Letter :3.1



   (See figure in printed
   edition.)

Finance and accounting operations are performed by two chains of
command within DOD.  On one side is DFAS, which reports to the Under
Secretary of Defense Comptroller/Chief Financial Officer within the
Office of the Secretary of Defense.  On the other side are the
military services, which are headed by their respective secretary. 
Each service secretary has an assistant secretary for financial
management who directs and manages financial management activities
consistent with policies prescribed by the Chief Financial Officer
and the service's implementing directives. 

As shown in figure 1, the Under Secretary has no direct line of
authority to any of the financial management staff within the
military services, defense agencies, and DOD field activities.  Those
staff report through their own organizational structure to their
respective unit heads.  The Under Secretary and the unit heads report
to the Secretary of Defense.  The Under Secretary, however, does
issue policies, instructions, regulations, and procedures relating to
financial management matters and the production of financial
statements, which are binding on all DOD activities. 

   Figure 1:  Organizational
   Structure of DOD's Finance and
   Accounting Activities

   (See figure in printed
   edition.)

Note:  There are a number of additional offices at the Under
Secretary of Defense level.  This chart shows only the high-level
relationship between the Secretary of Defense and DFAS and the
military services. 

Source:  Our analysis of DOD data. 

The National Defense Authorization Act for Fiscal Year 1994
designated the Comptroller as DOD's Chief Financial Officer. 
Specific duties of the Comptroller/Chief Financial Officer as
specified in the Chief Financial Officers Act include

  -- directing, managing, and providing policy guidance and oversight
     of agency financial management personnel, activities, and
     operations;

  -- developing and maintaining integrated accounting and financial
     management systems;

  -- monitoring the financial execution of the agency budgets in
     relation to actual expenditures and preparing and submitting
     timely performance reports; and

  -- overseeing the recruitment, selection, and training of personnel
     to carry out agency financial management functions. 

As mentioned, each service secretary has an assistant secretary for
financial management who reports to the service secretary and directs
and manages financial management activities consistent with policies
prescribed by the Chief Financial Officer and the service's
implementing directives.  The assistant secretary for financial
management position in each service was established in the National
Defense Authorization Act for Fiscal Year 1989.  The act delineated
many of the responsibilities of the office, including

  -- managing financial management activities and operations;

  -- directing the preparation of budget estimates;

  -- approving any asset management systems, including cash and
     credit management;

  -- collecting debts; and

  -- accounting for property and inventory systems. 

Because of potentially overlapping responsibilities, DFAS met several
times with the military services' financial managers and their staffs
during 1994 to reach agreement on their respective finance and
accounting roles.  These meetings resulted in "responsibility
matrices" that identify the specific activities that will be
performed by DFAS and each military service.  According to DFAS, the
responsibility matrix agreements were driven, to a large extent, by
the number of finance and accounting personnel each service had
transferred to DFAS.  Prior to the negotiations in 1994, for example,
the Army had transferred about 75 percent of its finance and
accounting people to DFAS.  According to Army officials, it kept only
a small contingent of managerial accountants at each installation and
major command location to interpret accounting reports provided by
DFAS to the installation or major command and provide advice to the
commander on proper stewardship of public funds.  As a result, DFAS
and the Army agreed that DFAS would perform just about all of the
Army's financial activities.  On the other hand, Air Force and Navy
officials stated that they transferred smaller percentages of their
staffs (50 and 29 percent, respectively).  They took this approach to
maintain control of activities they felt were essential to providing
service to their military personnel and families, such as computing
travel pay or helping uniformed personnel solve pay-related problems. 

Travel payment, a finance function, is an example where DFAS provides
different levels of service to its military customers.  In this case,
authorization, computation, disbursement, and accounting are
performed by either the military services or DFAS.  Table 3
identifies the responsible party for each of these steps. 



                                     Table 3
                     
                      Division of Responsibility for Travel
                                     Payments

                            Computation of                      Accounting for
Military  Authorization of  travel            Disbursement of   travel funds
service   travel            entitlement       travel payment    disbursed
--------  ----------------  ----------------  ----------------  ----------------
Air       Air Force         Air Force         DFAS              DFAS
Force

Army      Army              DFAS and Army\a   DFAS              DFAS

Navy      Navy              Navy              DFAS and Navy\b   DFAS

Marine    Marine Corps      DFAS and Marine   DFAS and Marine   DFAS
Corps                       Corps\c           Corps\d
--------------------------------------------------------------------------------
\a The Army computes travel entitlement for all tactical and overseas
units. 

\b The Navy disburses the majority of travel pay today; however, with
the implementation of standard travel system and the subsequent
conversion of Navy accounts to this system, DFAS will assume this
responsibility for all Navy travelers.  This conversion is expected
to be completed in fiscal year 1997. 

\c DFAS computes travel entitlement for 22,000 of 174,000 (about 13
percent) Marines who are stationed at installations that are too
small to have their own finance office. 

\d DFAS disburses the funds for about 109,000 (about 63 percent)
Marines out of all Marine Corps personnel. 


      DFAS IS CONSOLIDATING ITS
      ACTIVITIES
---------------------------------------------------------- Letter :3.2



   (See figure in printed
   edition.)

When DFAS was established, it opened a headquarters office in
Arlington, Virginia, and assumed management control over the six
large finance centers that belonged to the military services and
defense agencies.  One of these centers was subsequently closed,\3

but the others continue to support the military service or defense
agency they supported prior to the formation of DFAS.  According to
the Director of DFAS, this was done primarily to ensure that support
levels to the military services and defense agencies remained at an
acceptable level. 

DFAS also assumed control over many of the people and functions at
332 small finance and accounting offices around the world.  To
improve operational efficiencies and reduce costs, DFAS has focused a
great deal of attention on consolidating the personnel and workload
at a small number of locations.  In May 1994, for example, the Deputy
Secretary of Defense announced plans to move the DFAS workload and
many of the people at these 332 locations to either the existing 5
centers or 20 new operating locations.\4 As of September 1996, DFAS
had closed 230 (or about 70 percent) of the small accounting offices
and opened 17 operating locations.\5 Figure 2 shows the number of
finance and accounting offices that DFAS plans to close through
fiscal year 1998, when the consolidation is now expected to be
completed. 

   Figure 2:  Status of Closing
   DFAS' 332 Finance and
   Accounting Offices

   (See figure in printed
   edition.)

Source:  DFAS Plans and Management Deputate. 

Three of the planned operating locations--Lexington, Kentucky;
Newark, Ohio; and Rantoul, Illinois--have not been formally scheduled
for opening at this time.  The fourth planned operating location, at
Memphis, Tennessee, will be under the cognizance of the U.S.  Army
Corps of Engineers until the Corps completes its consolidation of
finance and accounting operations around fiscal year 1999.  At that
time, the Corps will transfer the activity to DFAS. 

Except for Honolulu, Hawaii; Norfolk, Virginia; Orlando, Florida; and
San Antonio, Texas, each operating location provides services to a
single military service.  Honolulu serves all of the military
services; Norfolk serves Navy and Army customers; and both Orlando
and San Antonio serve Army and Air Force customers.  In addition,
Charleston, South Carolina; Pensacola, Florida; and Omaha, Nebraska,
provide civilian pay service to all military services and defense
agencies.  Figure 3 shows the locations of the 5 centers and 21
existing or planned operating locations as of September 30, 1996. 
The primary customer (military service or defense agency) of each
center is shown in parentheses in the figure. 

   Figure 3:  Locations of DFAS
   Centers and Operating Locations
   as of September 30, 1996

   (See figure in printed
   edition.)

\a Not opened as of September 30, 1996. 

Source:  DFAS Plans and Management Deputate. 

As discussed in the previous section, each of the military services
retained certain functions (e.g., managerial accounting, travel claim
computation, and customer service) in order to support local
commanders and customers.  To do this, the services have maintained
some staff at most of the 332 installation-level finance offices. 
Although there are interfaces and exchanges of information between
the staff at these offices and DFAS, organizationally they are not
part of DOD's Comptroller or DFAS' communities.  Rather, they report
to and receive budgetary support from the base or installation
commander.  Civilian and military personnel at these activities are
paid from operations and maintenance and military personnel
appropriations, respectively. 


--------------------
\3 The Navy Center in Arlington, Virginia, was closed in September
1992 and its functions distributed to other centers. 

\4 On July 1, 1994, a 21st site was added at Ford Island, Hawaii, to
support DOD's finance and accounting operations in the Pacific
theater. 

\5 See our reports on the DFAS consolidation issue:  DOD
Infrastructure:  DOD Is Opening Unneeded Finance and Accounting
Offices (GAO/NSIAD-96-113, Apr.  24, 1996) and DOD Infrastructure: 
DOD's Planned Finance and Accounting Structure Is Not Well Justified
(GAO/NSIAD-95-127, Sept.  18, 1995). 


      NUMBER OF PEOPLE PERFORMING
      FINANCE AND ACCOUNTING
      ACTIVITIES IS NOT TRACKED
---------------------------------------------------------- Letter :3.3



   (See figure in printed
   edition.)

In May 1994, when the Deputy Secretary of Defense announced plans to
consolidate finance and accounting operations, he said that the
number of people performing these activities should drop from about
46,000 to 23,000 by 1999.  As of September 1996, DOD estimates show
that there were about 40,800 people performing finance and accounting
activities--about 5,200 less than estimated in 1994.  However, there
is some uncertainty about these numbers primarily because the
military services do not centrally budget for or manage finance and
accounting operations. 

As a DBOF entity that is now part of the new Defense-wide Working
Capital Fund, DFAS tracks the number of personnel it employs so that
it can accurately charge its customers for the full cost of
operations.  Therefore, it generally knows how many people it
inherited from the military services and its current on-board
strength.  DFAS officials told us, for example, that by 1994 DFAS had
assumed control of 28,000 personnel--about 10,000 at the 5 large
finance centers and about 18,000 at the 332 small, installation-level
finance and accounting offices.\6 As of September 1996, this
workforce had been reduced to 23,500 and DFAS has plans to eliminate
another 3,500 positions by the year 2000.  According to DOD, most of
these reductions are (or will be) made possible by economies of scale
achieved by closing the 332 small finance and accounting offices and
consolidating activities at the 5 centers and 21 operating locations. 

Finance and accounting personnel and activities in the military
services, however, are budgeted for and controlled at the
installation level.  Consequently, service representatives said there
were no specific plans to centrally assess or reduce the size of
their finance and accounting network.  For this reason, they were
also uncertain of the number of people that remained after DFAS
assumed control of resources in 1994 or that are currently onboard. 
According to DOD, however, there should have been about 18,000
finance and accounting personnel left with the military services in
1994.  In 1992, DFAS and the military services issued a data call to
all installation-level finance offices, and in 1994, estimated that
the total number of people in DOD's network was about 46,000.\7

On the basis of this estimate, DFAS assumed control of 28,000 people,
leaving about 18,000 people in the military services. 

To determine the number of people in the current military service
network, the services (at our request) either issued another data
call to their installations or prepared an estimate based on other
available information.  They reported to us that, as of September 30,
1996, approximately 17,300 people were performing finance and
accounting activities in the military services.\8 On the basis of a
comparison of the original data call and the current estimate, about
700 fewer people are performing finance and accounting activities now
than DOD officials believe were doing so when DFAS completed its
transfer process in 1994.  Figure 4 shows the number of finance and
accounting personnel reported to us by DFAS and the military services
as of September 30, 1996. 

   Figure 4:  Reported Number of
   Personnel Performing DOD
   Finance and Accounting
   Activities as of September 30,
   1996

   (See figure in printed
   edition.)

\a This includes 589 personnel in the Marine Corps. 

Source:  Our analysis of data provided by the DFAS Resource
Management Deputate and the military services' financial management
offices. 


--------------------
\6 According to DFAS officials, the actual number of people it
inherited by 1994 was 30,700.  About 2,700 of these people, however,
were computer operators and software developers who were quickly
transferred to the Defense Information Technology Services Office,
which is now part of the Defense Information Systems Agency. 

\7 DFAS originally determined that the total number of people that
had a finance and accounting position description was approximately
62,000.  However, about 16,000 were excluded from possible transfer
to DFAS for a variety of reasons.  For example, audit personnel and
personnel stationed overseas or belonging to a tactical unit that
would deploy with troops in time of war were not considered part of
DOD's finance and accounting network. 

\8 In an attempt to get information that would be comparable with the
1992 data call, we asked the services to exclude the same type of
personnel excluded from consideration in 1992. 


      BUDGET TO PERFORM FINANCE
      AND ACCOUNTING ACTIVITIES
      EXCEEDS $2 BILLION
---------------------------------------------------------- Letter :3.4



   (See figure in printed
   edition.)

Information that was provided by DFAS and the military services
indicates that DOD budgeted at least $2 billion in fiscal year 1996
to support finance and accounting activities.  This estimate includes
all DFAS costs plus estimated personnel costs in the military
services.  Because military service finance and accounting activities
are budgeted at local installations and bases in various
appropriation accounts, the military services were unable to estimate
other finance and accounting-related costs such as training,
equipment, supplies, and overhead. 

As part of the new Defense-wide Working Capital Fund, DFAS does not
receive an appropriation.  Instead, it bills customers, primarily the
military services, for the cost of operations.  These bills include
charges for direct labor costs related to the performance of finance
and accounting functions; indirect costs, such as systems support and
depreciation expenses; and overhead costs, such as management support
and electricity bills.  The bills may also include additional charges
or reductions to make up for prior year losses or gains.  The
military services use their operations and maintenance appropriations
to pay the bills.  Figure 5 shows DFAS' financial operations budget
from fiscal years 1991 through 1996 and the projected budget for
fiscal years 1997 through 2000--the numbers are in constant 1996
dollars. 

   Figure 5:  DFAS' Budget From
   Fiscal Years 1991 Through 2000
   in Constant 1996 Dollars

   (See figure in printed
   edition.)

Source:  DFAS Resource Management Deputate. 

As shown in figure 5, DFAS' budget for finance and accounting
increased from $339 million (in 1996 dollars) in fiscal year 1991 to
about $1.64 billion in fiscal year 1996, primarily as a result of an
increase in its scope of operations.  In fiscal year 1991, for
example, DFAS was in operation for only 9 months and was only
supporting the finance centers.  In fiscal year 1992, DFAS became a
DBOF entity and began to identify and charge the military services
for the full cost of its operations.  For example, system support
(e.g., computer hardware and software) costs that had been part of
the Defense Information Systems Agency budget in the past were
included in the DFAS budget.  In fiscal year 1993, DFAS began to
assume control of the 332 installation-level finance and accounting
offices, and in 1994, DFAS began renovating buildings at the new
operating locations. 

Between fiscal years 1996 and 2000, DFAS estimates its budget will
decrease by about 10 percent--from $1.64 billion in fiscal year 1996
to $1.47 billion in 2000 in constant 1996 dollars.  According to DFAS
officials, the decrease reflects a leveling off of depreciation
expenses associated with capital expenditures (such as new computer
systems), a drop in workload as DOD continues to downsize its
military force structure, and the completion of personnel and
workload consolidations from the small finance and accounting offices
to DFAS centers and operating locations. 

The military services' finance and accounting activities are funded
through annual operation and maintenance appropriations.  Because
these appropriations are allocated to many different budget
categories at the installation level, military service officials were
not able to estimate the total amount budgeted to support their
finance and accounting activities.  On the basis of the estimated
number of personnel that are currently performing finance and
accounting activities, the services estimated that for fiscal year
1996 they budgeted about $598 million in personnel costs.  Figure 6
shows the personnel costs each of the military services estimated it
incurred during fiscal year 1996. 

   Figure 6:  Estimated Military
   Services' Finance and
   Accounting Personnel Costs
   During Fiscal Year 1996

   (See figure in printed
   edition.)

Sources:  Military services' financial management offices. 


      DFAS IS REDUCING THE NUMBER
      OF FINANCE AND ACCOUNTING
      SYSTEMS
---------------------------------------------------------- Letter :3.5



   (See figure in printed
   edition.)

As part of its mission, DFAS is responsible for standardizing the
finance and accounting systems used throughout DOD.  When it was
established, for example, DFAS reported that it inherited 127 finance
and 197 accounting systems that were in use throughout DOD.  In
general, DOD defines finance systems as those used to process
payments to DOD personnel, retirees, annuitants, and contractors, and
accounting systems as those relied on to track appropriations and
record operating and capital expenses.  In accordance with DOD
Financial Management Regulations (DOD 7000.14-R, Volume 1), DFAS,
however, does not recognize or include in its inventory several
hundred "feeder systems"--systems used to initially record financial
data, such as logistics, inventory, and personnel systems--as finance
and accounting systems.  Yet these feeder systems, which are under
the control and operations of the military services and defense
agencies, are the source of much of the information that is needed to
adequately account for DOD's assets and operations.\9

DFAS embarked on what it calls a migration system strategy to reduce
the number of DFAS finance and accounting systems.  Under this
strategy, which is depicted in figure 7, DFAS plans to gradually
reduce the number of systems used in each functional area (e.g.,
civilian payroll, military payroll, and accounting) until it
eventually arrives at systems that would be used DOD-wide for each
finance and accounting area.  While the completion of this strategy
varies by system and functional area, DFAS estimates that about 49
percent of its current systems (107 of 217) will be eliminated by
2000. 

   Figure 7:  DOD Migration System
   Strategy for Each Finance and
   Accounting Area

   (See figure in printed
   edition.)

Source:  DFAS Financial Systems Plan. 

This migration strategy typically involves (1) selecting one of the
legacy systems from each service, (2) implementing the system
servicewide, (3) selecting the best interim migratory system to be
DOD's standard migratory system, and (4) enhancing the migratory
system until it meets all DOD requirements. 

As shown in table 4, DFAS has reduced the reported number of finance
systems from 127 to 67 (a 47-percent reduction) and accounting
systems from 197 to 150 (a 24-percent reduction).  By the year 2000,
DFAS estimates that the number of systems will be further reduced to
110--43 finance and 67 accounting systems.  Table 4 also shows the
number of finance and accounting locations where these systems were
used as of September 30, 1996. 



                                     Table 4
                     
                     Change in Number of Reported Finance and
                       Accounting Systems Since Fiscal Year
                                       1991

                                                Number of systems
                                  ----------------------------------------------
                    Locations as
                    of Sept. 30,     Fiscal year     Fiscal year     Fiscal year
Activity                    1996            1991            1996     2000 (est.)
----------------  --------------  --------------  --------------  --------------
Finance systems
--------------------------------------------------------------------------------
Civilian
 payroll                       5              27              10               1
 Domestic                     28              37              21              21
 Foreign
 national\a
Military payroll               4              32              13               6
Retiree and                    2               5               1               1
 annuitant
 payroll
Travel payments              124               5               3               1
Contract                       1               2               1               1
 payments
Vendor payments              124               8               6               5
Transportation                 3               3               4               3
 payments
Debt management                5               2               1               1
Disbursing                 536\b               6               7               3
================================================================================
Total finance                                127              67              43
 systems
Accounting                   124             197             150              67
 systems
================================================================================
Total systems                                324             217             110
--------------------------------------------------------------------------------
\a Foreign national systems are unique to specific countries and will
continue to be used to pay foreign nationals as long as DOD maintains
a presence in the respective country. 

\b The 536 locations consist of 256 ships and 280 disbursing stations
where a disbursing officer has both the authority to disburse
payments and access to one of the seven disbursing systems. 

Source:  DFAS Plans and Management Deputate. 

On the basis of the information presented in table 4, DFAS has been
successful in reducing the number of systems in several areas,
particularly those where the military services had already
consolidated activities at a small number of locations.  When DFAS
was formed, for example, each of the military services was already
operating standard retiree and annuitant pay systems at its
respective finance centers.  After evaluating the relative
capabilities of these systems, DFAS selected the Navy's retiree pay
system and the Air Force's annuitant pay system as DOD-wide migratory
systems.  DFAS subsequently integrated these two systems into one
system and pays all retirees from the Cleveland center and all
annuitants from the Denver center. 


--------------------
\9 See our reports on DOD systems:  DOD Accounting Systems:  Efforts
to Improve System for Navy Need Overall Structure (GAO/AIMD-96-99,
Sept.  30, 1996) and Financial Management:  DOD Inventory of
Financial Management Systems Is Incomplete (GAO/AIMD-97-29, Jan.  31,
1997). 


   DOD FINANCE AND ACCOUNTING
   ACTIVITIES
------------------------------------------------------------ Letter :4



   (See figure in printed
   edition.)

DOD's $240-billion appropriation for fiscal year 1996 was used to pay
about 6 million people and about 17 million invoices charged to
nearly 12 million contracts.  The appropriation also supported the
operation of 13 DBOF (now working capital fund) business areas such
as depot maintenance, commissaries, distribution depots, and DFAS. 
In addition, in fiscal year 1996, DOD received about $10 billion
through its foreign military sales programs and about $12 billion
through the operation of base activities such as child care
facilities, golf courses, and the Armed Forces Exchanges. 

To process financial transactions and account for the receipt and
expenditure of funds, DFAS and military services' finance and
accounting operations are generally divided into nine functional
activities.  Table 5 lists these activities, the reported number of
DFAS personnel involved in the activity, and the reported total cost
for DFAS to process the transactions in fiscal year 1996.  The
military services were unable to provide us with comparable
information. 



                                Table 5
                
                   Reported Number of DFAS Personnel
                   Performing Finance and Accounting
                 Functions and the Associated Costs for
                            Fiscal Year 1996

                         (Dollars in thousands)

                                                      Fiscal year 1996
                                         Number of     cost to perform
Activity                                 personnel            function
------------------------------  ------------------  ------------------
Accounting                                   8,006            $673,498
Finance activities
Civilian payroll                             1,184              98,906
Military payroll                             3,079             253,240
Retiree and annuitant payroll                  899              64,125
Travel payments                              1,423              83,246
Contractor payments                          1,625             108,231
Vendor payments                              4,823             268,230
Transportation payments                        438              29,749
Debt management                                327              24,678
Information technology support               1,469                  \a
Other                                        191\b              36,886
======================================================================
Total                                       23,464          $1,640,789
----------------------------------------------------------------------
\a The 1,469 people maintain DFAS' technological infrastructure and
provide systems maintenance, systems development, and software
training to the DFAS activities listed above.  For the most part, the
costs of their services are charged to the DFAS activities on a
reimbursable basis and are already included in the costs listed
above. 

\b The 191 people are not involved in the finance and accounting
activities listed.  Rather they provide reimbursable support (e.g.,
base operations and human resource support), primarily to other DOD
units, which are collocated at DFAS facilities. 

Source:  Our analysis of DFAS data. 

A more detailed description of the sources and uses of DOD funds and
the finance and accounting responsibilities of DFAS and the military
services is presented in appendix I. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

We requested comments on a draft of this report from the Secretary of
Defense.  On January 15, 1997, officials from the Office of the Under
Secretary of Defense Comptroller/Chief Financial Officer and
representatives of DFAS, the Air Force, the Army, and the Navy met
with us to discuss the report.  In general, DOD officials agreed with
our description of DOD's finance and accounting structure and
organization.  They provided us with some suggested changes, which we
have incorporated in our final report where appropriate. 

We performed our review from July 1996 through January 1997 in
accordance with generally accepted government auditing standards. 
Appendix II contains a description of our scope and methodology. 


---------------------------------------------------------- Letter :5.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate and House Committees on
Appropriations; Senate Committee on Armed Services; House Committee
on National Security; Senate Committee on Governmental Affairs; House
Committee on Government Reform and Oversight; the Director, Office of
Management and Budget; the Secretary of Defense; and other interested
parties.  We will make copies available to others on request. 

If you or your staff have any questions concerning this report,
please contact either James E.  Hatcher on (513) 258-7959 or Geoffrey
B.  Frank on (202) 512-9518.  Major contributors to this report are
listed in appendix III. 

Sincerely yours,

David R.  Warren
Director, Defense Management Issues
National Security and International
 Affairs Division

Lisa G.  Jacobson
Director, Defense Financial Audits
Accounting and Information
 Management Division


FINANCE AND ACCOUNTING IN THE
DEPARTMENT OF DEFENSE
=========================================================== Appendix I

This appendix provides an overview of the Department of Defense's
(DOD) finance and accounting operations. 


   ACCOUNTING IN THE DEPARTMENT OF
   DEFENSE
--------------------------------------------------------- Appendix I:1

DOD has focused its accounting operations primarily on monitoring and
controlling the obligation and expenditure of budgetary resources. 
As discussed in the following sections, DOD carries out these
accounting operations for four types of funds -- general, working
capital, nonappropriated, and security assistance. 

With the enactment of the Chief Financial Officers Act (CFO) of 1990,
the Congress called for audited agency financial statements that
would more fully disclose a federal entity's financial position and
results of operations beginning with fiscal year 1996.  Such
statements are intended to provide for (1) better information for
more informed decisions on allocation of budgetary resources and (2)
an annual assessment of an agency's financial performance, including
the effectiveness of its execution of its stewardship
responsibilities. 

DOD officials have forthrightly acknowledged that serious financial
management problems severely hamper their ability to effectively
carry out the full range of accounting and financial reporting
responsibilities called for in the CFO Act.\1

DOD has struggled to put in place the financial management operations
and controls required to produce the information it needs to ensure
adequate accountability and to support decision making.  For example,
few of DOD's accounting systems are now integrated with its finance
systems or with other systems or databases relied on to carry out its
accounting and financial reporting responsibilities.  Consequently,
DOD prepares required financial reports to account for an estimated
80 percent of its physical assets based on management systems that
were not intended for such accounting and financial reporting.  The
absence of a fully integrated general ledger-controlled system
necessitates DOD's reliance on labor-intensive, error-prone processes
to ascertain whether all required items are accounted for and
reported. 

Largely as a result of the CFO Act and other recent legislative
initiatives directed at increasing financial management discipline
throughout the federal government, DOD has recently begun efforts to
broaden the focus of and to bring greater discipline to its
accounting operations.  DOD's Chief Financial Officer stated that the
CFO Act "has contributed to the recognition and understanding of the
scope and depth of the financial management problems that DOD faces
and has defined a standard by which the Department can measure its
progress." DOD has characterized its blueprint for financial
management reform as the most comprehensive reform of financial
management systems and practices in its history. 

In its efforts to improve its accounting activities, DOD is guided by
a set of comprehensive standards that were developed by the Federal
Accounting Standards Advisory Board.  This Board, which was
established in October 1990 by the Comptroller General of the United
States, the Director of the Office of Management and Budget, and the
Secretary of the Treasury Department, recommends accounting standards
after considering the financial and budgetary information needs of
the Congress, executive agencies, and other users and comments from
the public.  The Office of Management and Budget, Treasury, and GAO
then decide whether to adopt the recommended standards; if they do,
the standards are published by the Office of Management and Budget
and GAO and become effective.  Recently, a set of comprehensive
accounting standards was approved by the three agencies.  The new
accounting standards and accompanying reporting concepts are central
to effectively meeting the financial management improvement goals of
the CFO Act of 1990, as amended.  Also, improved financial
information is necessary to support the strategic planning and
performance measurement requirements of the Government Performance
and Results Act of 1993. 


--------------------
\1 See our related report on DOD and the CFO Act:  Financial
Management:  Challenges Facing DOD in Meeting the Goals of the Chief
Financial Officers Act (GAO/T-AIMD-96-1, Nov.  14, 1995). 


      DOD ACCOUNTING FOCUSES ON
      FOUR TYPES OF FUNDS
------------------------------------------------------- Appendix I:1.1

DOD accounting personnel are responsible for accounting for funds
received through congressional appropriations, the sale of goods and
services by working capital fund businesses, revenue generated
through nonappropriated fund activities, and the sales of military
systems and equipment to foreign governments or international
organizations.
Figure I.1 shows the types of funds and the sources and uses of the
funds. 

   Figure I.1:  Types of DOD Funds

   (See figure in printed
   edition.)

Source:  Our analysis of DOD data. 


      GENERAL FUNDS
------------------------------------------------------- Appendix I:1.2

General funds, the largest category of funds the Defense Finance and
Accounting Service (DFAS) must account for, involve monies provided
to DOD through congressional appropriations for military personnel;
operation and maintenance; military construction; procurement; and
research, development, test and evaluation.  The Congress
appropriated over $240 billion to DOD for fiscal year 1996.  Because
some of these appropriations involve multiyear funds, DFAS accounted
for $338.5 billion in obligated and unobligated balances in general
funds monies during fiscal year 1996. 


      WORKING CAPITAL FUNDS
------------------------------------------------------- Appendix I:1.3

As of September 30, 1996, DFAS was required to account for $74.6
billion in obligated and unobligated balances generated by 13 working
capital fund (formally DBOF) business areas.  These business areas
include such activities as depot maintenance, commissaries,
distribution depots, and DFAS.  In general, these business activities
are intended to operate by selling goods and services to the military
services and defense agencies at the cost incurred in providing the
good or service.  Many of the services provided through these
business areas, such as the overhaul of ships, tanks, and aircraft,
are essential to maintaining the military readiness of our country's
weapon systems.  Working capital fund customers pay for the goods and
services, primarily, with operations and maintenance funds
appropriated by the Congress.\2


--------------------
\2 See our reports on DBOF, including Defense Business Operations
Fund:  DOD Is Experiencing Difficulty in Managing the Fund's Cash
(GAO/AIMD-96-54, Apr.  10, 1996) and Defense Business Operations
Fund:  Management Issues Challenge Fund Implementation
(GAO/AIMD-95-79, Mar.  1, 1995). 


      NONAPPROPRIATED FUNDS
------------------------------------------------------- Appendix I:1.4

DOD's nonappropriated funds result primarily from the sale of goods
and services to DOD military personnel, their dependents, and other
qualified persons.  Nonappropriated fund activities are divided into
two major types--morale, welfare, and recreation activities and the
Armed Forces Exchanges.  In fiscal year 1995, DOD reported morale,
welfare, and recreation activities and Armed Forces Exchanges
revenues of $2.5 billion and $9.4 billion, respectively (according to
a DOD official, 1996 revenues are expected to be about the same). 
DFAS, however, has accounting responsibility for only a limited
portion of the nonappropriated activities.  In fiscal year 1996, DFAS
accounted for about $500 million in nonappropriated funds. 

Morale, welfare, and recreation activities are essentially small
businesses such as libraries, gyms, golf courses, child care centers,
and officers' clubs that operate at numerous military installations
worldwide.  Armed Forces Exchanges are located on military
installations worldwide and operate similarly to commercial retail
outlets.  The exchanges offer a variety of goods and services from
military uniforms to fast food.  DFAS has accounting responsibility
only for a portion of the Army morale, welfare, and recreation
workload.  The Air Force, the Navy, and the Marine Corps account for
these activities through their own nonappropriated fund organizations
that are not part of the military service finance and accounting
offices.  The Armed Forces Exchanges are not included in DFAS' or the
military services' finance and accounting office workload. 


      SECURITY ASSISTANCE FUNDS
------------------------------------------------------- Appendix I:1.5

DOD also has responsibility for security assistance funds used for
congressionally approved sales of military weapon systems and
equipment to foreign governments.  In some cases, funds accounted for
in the security assistance program are received from foreign
governments.  In addition, the Congress appropriates funds that
countries can use as loans or grants to make these purchases.  In
fiscal year 1996, DOD reported that the security assistance program
generated almost $10 billion in new sales.  Because many foreign
military sales involve procurements over a number of years, in total,
DFAS accounted for about $28 billion in obligated and unobligated
balances in security assistance funds in fiscal year 1996. 


   FINANCE ACTIVITIES IN DOD
--------------------------------------------------------- Appendix I:2

DOD's finance activities generally involve paying the salaries of its
employees, paying retirees and annuitants, reimbursing its employees
for travel-related expenses, paying contractors and vendors for goods
and services, and collecting debts owed to DOD.\3 This section
describes DFAS' and the military services' involvement in each of
these activities. 


--------------------
\3 See our related reports on DOD payroll:  Financial Management: 
Control Weaknesses Increase Risk of Improper Navy Civilian Payroll
Payments (GAO/AIMD-95-73, May 8, 1995) and Financial Management: 
Defense's System for Army Military Payroll Is Unreliable
(GAO/AIMD-93-32, Sept.  30, 1993). 


      CIVILIAN AND MILITARY
      PAYROLL
------------------------------------------------------- Appendix I:2.1



   (See figure in printed
   edition.)

\a Includes 28 locations and 21 Foreign National Civilian pay
systems. 

Currently, DFAS pays the salaries of 826,000 civilians and about 3
million military personnel.  In order for DFAS to pay DOD personnel,
it receives information from three sources--military and civilian
personnel offices, customer service representatives, and field
finance offices or timekeepers within the employee's unit.  Figure
I.2 shows an overview of the process by which DFAS obtains
information to disburse and account for salary payments made to all
DOD employees. 

   Figure I.2:  Overview of
   Civilian and Military Payroll
   Process

   (See figure in printed
   edition.)

Source:  Our analysis of DFAS and military service data. 

The civilian and military pay processes begin with the military
service's personnel office establishing a record in its personnel
system for a new hire or recruit by entering personal data such as
name, address, and salary.  Since the majority of the military
services' personnel systems are not integrated with the payroll
systems DFAS uses, entitlement data are sent to DFAS payroll systems
through an electronic interface.  This interface allows DFAS to
establish a pay account for the civilian or military employee. 
Throughout a person's employment with DOD, timekeepers, who are
usually administrative support personnel or supervisors in a military
unit or office, or field finance office staff, submit time and
attendance information directly to DFAS.  This information is used by
DFAS to compute the amount each employee should be paid.  After
payments are made, the payroll system transmits disbursement
information to DFAS accounting units where accounting records are
updated and management and budgetary reports are distributed to DOD
and external agencies. 

DFAS also receives information that affects civilian and military pay
from customer service representatives.  DFAS and the military
services' finance personnel share the responsibility of providing
customer service to civilian employees and military members. 
Customer service duties include input of employee initiated
transactions such as bonds, tax withholdings, and address changes;
resolving pay-related problems; and responding to inquiries on all
aspects of the payment process, such as pay computation and the
recording and balancing of annual and sick leave. 


      RETIREE/ANNUITANT PAYROLL
------------------------------------------------------- Appendix I:2.2



   (See figure in printed
   edition.)

DFAS assumed retiree and annuitant pay responsibilities from the
military services upon its establishment in 1991.  In fiscal year
1996, DFAS processed payments to about 2 million retirees and
annuitants.  Figure I.3 provides an overview of the retiree and
annuitant payroll process, identifying duties specific to DFAS and
the military services. 

   Figure I.3:  Overview of
   Retiree and Annuitant Payroll
   Process

   (See figure in printed
   edition.)

Source:  Our analysis of DFAS and military service data. 

The military services' personnel offices process the paperwork
required for establishing a retiree pay account.  This information is
sent electronically to the DFAS Cleveland center where personnel in
retired pay operations verify that the retiree's account has been
deleted from the military pay systems (to avoid dual payments to the
retiree); compute the retiree's pay; disburse payment to the retiree;
and forward pay information to a DFAS accounting unit that updates
accounting records and distributes management and budgetary reports. 

Upon receipt of a death notice, retired pay operations personnel in
Cleveland will suspend or terminate the retirement pay account and
electronically transfer the case to the Denver center.  Denver
personnel in the annuity pay office maintain the annuitant's pay
account, issue surviving annuity payment, provide customer service
support, and update accounting records.  These personnel also
annually verify the annuitant's eligibility status.  Factors that
affect entitlement eligibility include, but are not limited to,
changes in Social Security benefits, remarriage, and age of children. 


      TRAVEL PAYMENTS
------------------------------------------------------- Appendix I:2.3



   (See figure in printed
   edition.)

The travel payment process for both DOD civilian and military
employees can be broken down into three stages--travel authorization,
actual travel, and travel settlement.\4 Military service finance
personnel are involved in the travel authorization process and, in
some cases, the travel settlement process.  DFAS performs the
majority of the responsibilities in the travel settlement step in
which the traveler is reimbursed.  Annually, DFAS processes about 2.1
million travel settlements.  Figure I.4 provides an overview of the
travel payment process, distinguishing between activities performed
by DFAS and the military services. 

   Figure I.4:  Overview of Travel
   Payment Process

   (See figure in printed
   edition.)

Note:  This chart represents travel pay that supports the military
services.  It does not reflect DFAS travel service that is provided
to other defense agencies. 

Source:  Our analysis of DFAS and military service data. 

The travel pay process begins when a DOD employee or supervisor
identifies a need for travel.  The employee prepares and submits a
travel request and cost estimate to the appropriate superior for
approval.  The administrative support staff within the organization
reviews the approved request, obligates funds, and issues a travel
order.  The administrative support staff includes personnel who have
authority to input obligations into the record and may, for example,
be personnel in the finance, resource management, or budget offices. 
At this time, the employee makes travel arrangements and may receive
a travel advance through the use of an official government travel
card or, when no other means is available, from the appropriate
disbursement office. 

Upon completion of travel, the employee submits a travel voucher to
his/her supervisor for reimbursement of expenses, attaching
supporting documentation such as receipts.  Once the supervisor
approves the claim, it is sent to either a DFAS travel pay office or
the military service's finance office where the traveler's
entitlement is computed and an audit is conducted.\5 After
entitlement is computed, DFAS or the appropriate military
disbursement office makes payment, and DFAS updates the accounting
records to reflect the disbursement.\6


--------------------
\4 Travel settlement includes computing the traveler's entitlement,
disbursing funds, and accounting for travel expenses as shown in
table 3. 

\5 DFAS computes travel pay for most of the Army and a small
proportion of the Marine Corps, while the Air Force and the Navy
perform their own computations. 

\6 Although DFAS disburses travel pay for all of DOD, the Navy and
the Marine Corps also disburse travel pay for some of their members. 


      CONTRACTOR, VENDOR, AND
      TRANSPORTATION PAYMENTS
------------------------------------------------------- Appendix I:2.4



   (See figure in printed
   edition.)

DOD finance and accounting personnel are also responsible for making
payments to contractors for goods and services such as the production
of weapon systems, the purchase of computer equipment, and the
shipment of freight and personal property.  DFAS has the primary
responsibility for processing the transactions, paying the contractor
or vendor, and accounting for the disbursement of funds.  Military
service finance personnel are involved to the extent that they verify
that funds are available for use and they enter information into
accounting systems to show that funds have been committed or
obligated for various goods and services.  In fiscal year 1996, DFAS
employees made payments on approximately 17 million invoices
submitted by contractors and vendors.\7

As shown in figure I.5, while variations exist, the process of
acquiring goods and services starts outside of the finance and
accounting community, usually with a program manager issuing a
request for a procurement of an item or the shipment of freight. 

   Figure I.5:  Overview of
   Contractor, Vendor, and
   Transportation Payment Process

   (See figure in printed
   edition.)

Source:  Our analysis of DFAS and military service data. 

Once a requirement for a good or service has been identified,
personnel from a military service finance office are contacted to
ensure that funds are available for use.  If funds are available, the
finance personnel set up a commitment on their accounting system.  If
the supply office has the needed item, it is issued to the requestor. 
If it is not available through a supply office, the contracting
office awards a contract for high-dollar value items or the military
service finance office establishes a purchase order for lower value
items.  For the movement of freight and personal property, DOD either
provides the service using its own resources or generates a
government bill of lading for the service. 

Once a supply item is ordered or service has been contracted for, the
vendor delivers or performs the service and sends an invoice to the
appropriate DFAS office for payment.  A receiving report is sent by
the requestor to the same office to show that the delivery was
received.  Personnel at each DFAS location are responsible for
matching contract, invoice, and receiving report information prior to
making a payment to a contractor/vendor.  After a payment is made,
accounting personnel at the operating locations are responsible for
activities such as matching payment information against obligations
and providing status of funds information to the military services. 


--------------------
\7 See our related reports on contractor pay, including Financial
Management:  DOD Needs to Lower the Disbursement Prevalidation
Threshold (GAO/AIMD-96-82, June 11, 1996) and DOD Procurement: 
Millions in Contract Payment Errors Not Detected and Resolved
Promptly (GAO/NSIAD-96-8, Oct.  6, 1995). 


      DEBT MANAGEMENT
------------------------------------------------------- Appendix I:2.5



   (See figure in printed
   edition.)

Federal law requires that all government agencies pursue collection
action against individuals or contractors that owe the government
money.  Within DOD, these debts can result from a wide variety of
transactions such as defaulted loans (education or small business) or
for various overpayments of pay and benefits.  If an individual is
employed by DOD or receiving any compensation payment, the military
service finance offices attempt to collect the money or process an
offset against the individual's pay account.  If the individual is no
longer employed by DOD or is not receiving any compensation payment,
it is considered an out-of-service debt and DFAS personnel are
responsible for collecting the debt.  DFAS is also responsible for
collecting all debts owed by contractors.  As of September 30, 1996,
about 319,000 military and civilian debtors owed DOD $464 million and
approximately 2,500 contractors owed DOD about $3.5 billion. 

DFAS personnel closed about 116,000 cases as of the end of fiscal
year 1996 during which time they collected approximately $238
million.  The military services perform debt management activities at
each of their installations.  However, we were unable to obtain
information related to the number of cases that were processed during
fiscal year 1996.  Figure I.6 provides an overview of the process
used by DOD to collect debts. 

   Figure I.6:  Overview of Debt
   Management Process

   (See figure in printed
   edition.)

Source:  Our analysis of DFAS and military service data. 

Upon the initial identification of a debt, many military
installation-level organizations, such as a hospital, attempt to
collect the debt.  If the debt is determined to be uncollectible and
is owed by a contractor or someone no longer working for DOD, it is
sent to a DFAS center for collection.  DFAS is required to send three
letters--30 days apart--to debtors in an attempt to collect the
money.  Then, if the money has not been collected, it can be turned
over to a private agency for collection or to the Internal Revenue
Service for a potential tax refund offset.  The debt may also be sent
to the Department of Justice for legal action if research shows the
debtor has the ability to pay.  If DFAS determines that an individual
debtor is employed by another federal agency, it can obtain payment
for the outstanding debt through payroll deductions.  At any time
during the process, the debt can be collected in full, compromised to
a lesser amount with the remainder written off, or written off in
total if the debt falls below established dollar thresholds.  DFAS
updates its accounting records to reflect any of these events and
reports the information back to the military services.  If any debt
is collected, it is refunded to the military service that incurred
the debt or deposited into the Treasury Miscellaneous Receipts
Account. 


OBJECTIVE, SCOPE, AND METHODOLOGY
========================================================== Appendix II

The Subcommittee on Defense, Senate Committee on Appropriations,
asked us to provide an overview of DOD finance and accounting
activities.  We focused our work on describing how DOD is organized
to perform finance and accounting, the size of the finance and
accounting infrastructure, and the various activities that are
performed by DFAS and the military services.  To determine how DOD is
organized to perform finance and accounting activities, we reviewed
documents that discussed the rationale for centralizing accounting
activities within DFAS and DFAS and military service finance and
accounting organizational charts.  We also discussed the
organizational structure with officials at DFAS Headquarters and the
military services' Office of the Assistant Secretary for Financial
Management. 

To determine the current size of DOD's finance and accounting
infrastructure, we obtained and reviewed budget, personnel, workload,
and cost figures provided by DFAS.  The military services did not
have comparable information readily available.  Therefore, officials
from the Army's and the Marine Corps' financial management offices
sent out a data call to their respective installations to obtain
information on the number of personnel currently performing finance
and accounting activities.  The Air Force updated personnel figures
obtained from DOD's central personnel database.  The Navy updated its
personnel figures using a variety of Navy reports and DOD's central
personnel database.  From these numbers, each of the services
estimated the amount of money it spends on personnel costs to perform
finance and accounting activities.  Given our overall assignment
objectives and the descriptive nature of our report, we did not
verify the data provided to us by either DFAS or the military
services. 

For purposes of this report, we did not obtain information from
defense agencies related to how many personnel are currently
performing finance and accounting activities.  This decision was
based on the lack of a single focal point within DOD that could
provide us with the needed information from approximately 24 defense
agencies and the small number of personnel involved with defense
agency finance and accounting activities prior to the establishment
of DFAS in 1991. 

To determine the type of activities DOD finance and accounting
personnel are responsible for performing, we reviewed DOD's Chief
Financial Officer Financial Management 5-Year Plan, the DFAS Customer
Service Plan, the responsibility matrices negotiated by DFAS with
each of the military services, and work flow descriptions for each
finance and accounting activity.  To supplement information included
in formal reports, we interviewed headquarters and field officials at
the following locations: 

  -- DFAS headquarters in Arlington, Virginia;

  -- DFAS centers in Cleveland, Ohio; Columbus, Ohio; Denver,
     Colorado; and Indianapolis, Indiana;

  -- the Army's and the Navy's Office of the Assistant Secretary for
     Financial Management in Arlington, Virginia;

  -- the Air Force's Secretary of the Air Force (Financial Management
     and Plans) in Arlington, Virginia; and

  -- the Marine Corps' Office of the Deputy Chief of Staff for
     Program and Resources in Arlington, Virginia. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

David R.  Warren
Brad H.  Hathaway
James E.  Hatcher
Cheryl K.  Andrew
Leticia V.  Bates

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Lisa G.  Jacobson
Geoffrey B.  Frank
Galen L.  Goss




RELATED GAO PRODUCTS
=========================================================== Appendix 0

CONTRACTOR PAY

Financial Management:  DOD Needs to Lower the Disbursement
Prevalidation Threshold (GAO/AIMD-96-82, June 11, 1996). 

DOD Procurement:  Millions in Contract Payment Errors Not Detected
and Resolved Promptly (GAO/NSIAD-96-8, Oct.  6, 1995). 

Financial Management:  Status of Defense Efforts to Correct
Disbursement Problems (GAO/AIMD-95-7, Oct.  5, 1994). 

DOD Procurement:  Overpayments and Underpayments at Selected
Contractors Show Major Problem (GAO/NSIAD-94-245, Aug.  5, 1994). 

DOD Procurement:  Millions in Overpayments Returned by DOD
Contractors (GAO/NSIAD-94-106, Mar.  14, 1994). 

Financial Management:  Navy Records Contain Billions of Dollars in
Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993). 

Financial Management:  Air Force Systems Command Is Unaware of Status
of Negative Unliquidated Obligations (GAO/AFMD-91-42, Aug.  29,
1991). 

DEFENSE BUSINESS OPERATIONS FUND

Defense Business Operations Fund:  DOD Is Experiencing Difficulty in
Managing the Fund's Cash (GAO/AIMD-96-54, Apr.  10, 1996). 

Defense Business Operations Fund:  Management Issues Challenge Fund
Implementation (GAO/AIMD-95-79, Mar.  1, 1995). 

Defense Business Operations Fund:  Improved Pricing Practices and
Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,
June 22, 1994). 

Financial Management:  DOD's Efforts to Improve Operations of the
Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar.  24,
1994). 

Financial Management:  Status of the Defense Business Operations Fund
(GAO/AIMD-94-80, Mar.  9, 1994). 

Financial Management:  Opportunities to Strengthen Management of the
Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993). 

Financial Management:  Defense Business Operations Fund
Implementation Status (GAO/T-AFMD-92-8, Apr.  30, 1992). 

Defense's Planned Implementation of the $77 Billion Defense Business
Operations Fund (GAO/T-AFMD-91-5, Apr.  30, 1991). 

FINANCIAL MANAGEMENT

Financial Management:  DOD Inventory of Financial Management Systems
Is Incomplete (GAO/AIMD-97-29, Jan.  31, 1997). 

DOD Accounting Systems:  Efforts to Improve System for Navy Need
Overall Structure (GAO/AIMD-96-99, Sept.  30, 1996). 

Navy Financial Management:  Improved Management of Operating
Materials and Supplies Could Yield Significant Savings
(GAO/AIMD-96-94, Aug.  16, 1996). 

CFO Act Financial Audits:  Navy Plant Property Accounting and
Reporting Is Unreliable (GAO/AIMD-96-65, July 8, 1996). 

CFO Act Financial Audits:  Increased Attention Must Be Given to
Preparing Navy's Financial Reports (GAO/AIMD-96-7, Mar.  27, 1996). 

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

Financial Management:  Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-146, May 23, 1995). 

Financial Management:  Challenges Confronting DOD's Reform
Initiatives (GAO/T-AIMD-95-143, May 16, 1995). 

Financial Management:  Control Weaknesses Increase Risk of Improper
Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995). 

Financial Management:  Financial Control and System Weaknesses
Continue to Waste DOD Resources and Undermine Operations
(GAO/T-AIMD/NSIAD-94-154, Apr.  12, 1994). 

Financial Management:  Strong Leadership Needed to Improve Army's
Financial Accountability (GAO/AIMD-94-12, Dec.  22, 1993). 

Financial Management:  Army Real Property Accounting and Reporting
Weaknesses Impede Management Decision-Making (GAO/AIMD-94-9, Nov.  2,
1993). 

Financial Management:  Defense's System for Army Military Payroll Is
Unreliable (GAO/AIMD-93-32, Sept.  30, 1993). 

Financial Management:  DOD Has Not Responded Effectively to Serious,
Long-Standing Problems (GAO/T-AIMD-93-1, July 1, 1993). 

Financial Audit:  Examination of the Army's Financial Statements for
Fiscal Years 1992 and 1991 (GAO/AIMD-93-1, June 30, 1993). 

Financial Audit:  Examination of the Army's Financial Statements for
Fiscal Year 1991 (GAO/AFMD-92-83, Aug.  7, 1992). 

Financial Management:  Immediate Actions Needed to Improve Army
Financial Operations and Controls (GAO/AFMD-92-82, Aug.  7, 1992). 

Financial Audit:  Aggressive Actions Needed for Air Force to Meet
Objectives of the CFO Act (GAO/AFMD-92-12, Feb.  19, 1992). 

Financial Audit:  Status of Air Force Actions to Correct Deficiencies
in Financial Management Systems (GAO/AFMD-91-55, May 16, 1991). 

Financial Audit:  Financial Reporting and Internal Controls at the
Air Logistics Centers (GAO/AFMD-91-34, Apr.  5, 1991). 

Financial Audit:  Air Force's Base-Level Financial Systems Do Not
Provide Reliable Information (GAO/AFMD-91-26, Jan.  31, 1991). 

Financial Audit:  Financial Reporting and Internal Controls at the
Air Force Systems Command (GAO/AFMD-91-22, Jan.  23, 1991). 

LOCATIONS PERFORMING FINANCE AND
ACCOUNTING ACTIVITIES

DOD Infrastructure:  DOD Is Opening Unneeded Finance and Accounting
Offices (GAO/NSIAD-96-113, Apr.  24, 1996). 

DOD Infrastructure:  DOD's Planned Finance and Accounting Structure
Is Not Well Justified (GAO/NSIAD-95-127, Sept.  18, 1995). 

Military Bases:  Analysis of DOD's 1995 Process and Recommendations
for Closure and Realignment (GAO/NSIAD-95-133, Apr.  14, 1995). 

Defense Infrastructure:  Enhancing Performance Through Better
Business Practices (GAO/T-NSIAD/AIMD-95-126, Mar.  23, 1995). 

Military Bases:  Analysis of DOD's Recommendations and Selection
Process for Closures and Realignments (GAO/NSIAD-93-173, Apr.  15,
1993). 

*** End of document. ***