Rebuttal of Defense Comptroller's Reply to Quality Assurance Cost Report

In a report dated March 22, 1979, GAO disclosed that during the past 6 fiscal years the Department of Defense (DOD) had not charged an estimated $370 million for quality assurance services provided on items sold to foreign countries, even though recovery of costs for these services had been required since 1970. Failure to recover the costs resulted from inadequate implementation of pricing policies by the military departments and Defense agencies, and insufficient followup or monitoring of the departments' and agencies' actions by DOD policymakers. GAO recommended in its report that responsibility for insuring effective and consistent implementation of foreign military sales pricing policies should be assigned to an organization which could follow up and monitor implementation of foreign military sales pricing policies. The Assistant Secretary of Defense did not accept this recommendation because: (1) followup to assure compliance with Defense policies should be the responsibility of internal audit staffs, inspector general teams, and financial quality assurance organizations, and (2) he believed that a new foreign military sales "audit/inspection" organization would not be the most efficient use of available personnel. Further, he questioned the estimate of up to $370 million in costs not recovered for quality assurance services, but advised that corrective action had been initiated to recover those costs and to avoid incurring future deficits. Cumulative foreign military sales since 1972 have totaled about $70.2 billion, and during that time GAO has issued 30 reports on deficient accounting, billing, and collecting on foreign military sales. Since 1976 over $1 billion in unrecovered costs on selected sales cases have been identified. GAO believes that corrective action is long overdue, and that DOD should provide sufficient resources to ensure that its pricing policies are effectively implemented.

The Assistant Secretary of Defense believes that the GAO estimate of $370 million in unrecovered quality assurance services costs may be overstated. However, DOD has no statistics to show the amount of quality assurance spent on foreign military sales items, and this lack of information strongly indicates a deficient accounting system. To obtain a rough approximation of the quality assurance costs incurred, GAO determined the ratio of the dollar values of foreign military sales acceptances to Defense procurement appropriations and multiplied that by the cost of the regions' quality assurance for fiscal years 1973 through 1978. The resulting estimate of $370 million represented an average of 57 cents for each sales dollar. DOD examined a random sample of 100 contracts and estimated quality assurance costs at 48 cents per sales dollar; thus, the GAO estimate and the results of the DOD estimate were not appreciably different. There is no doubt, that the amount of the underrecoupment for quality assurance is substantial. Since fiscal year 1976, the Defense Logistics Agency (DLA) has identified $16 million in quality assurance costs on foreign military sales items, but this amount represents only 2 percent of the DLA's quality assurance efforts. Since the military services are responsible for quality assurance at only 36 of about 20,000 Defense contractor plants, the services were notified to honor the DLA billings for quality assurance provided on foreign military sales items.