Financial Management

The Defense Business Operations Fund maintains a contractual (buyer-seller) relationship with its customers, primarily the military services. Although the fund could have an estimated $85 billion in revenues by fiscal year 1994, which would make it one of the largest corporations in the world, the fund operates on a break-even basis by recovering the costs incurred in conducting its operations. The fund provides such essential goods and services as the overhaul of ships, tanks, and aircraft and the sale of more than five million kinds of vital inventory items, such as landing gears for aircraft. The Defense Department's (DOD) 1993 plan to improve fund operations underscored the need for policies and procedures governing fund operations, better financial reports, and reliable financial systems to accumulate and report on operation results. Although DOD has made progress in implementing the plan, key steps designed to improve the fund's policies, procedures, and systems are not scheduled to be completed until later this fiscal year or next fiscal year. As a result, the fund continues to face operational problems. Antiquated systems and flawed data will continue to seriously impair DOD's ability to obtain reliable data on the results of operations. Short-term efforts, such as improving the accuracy of the financial data in existing systems, must be given high priority if the fund's current operations are to improve. DOD will not achieve the fund's objectives until its systems are successfully upgraded.

GAO found that: (1) although DOD has made progress toward improving the Fund's operational problems, the Fund continues to be hindered by DOD inability to manage cash, develop policies and procedures, enhance financial systems, and produce accurate financial reports on the results of operations; (2) DOD will need long- and short-term efforts to improve the Fund's operation and financial information systems; (3) DOD needs to implement all of the Fund's policies, select and implement reliable accounting systems, and improve the accuracy of existing financial data systems by the end of 1994 so that it can continue to make progress in resolving the Fund's problems and build a foundation for further improvement; (4) although DOD admits that its past financial management practices were inadequate, the Fund's current operational problems reflect its overall financial management operations and a growing threat to the nation's combat readiness; (5) DOD recognition of the Fund's financial management problems is viewed as a fundamental change in DOD management philosophy and can contribute to the ultimate success of DOD reform initiatives; and (6) the Fund will continue to experience operational problems unless DOD provides strong leadership, implements corrective actions, and successfully upgrades its systems.