Canceled DOD Appropriations
Improvements Made but More Corrective Actions Are Needed Gao ID: GAO-02-747 July 31, 2002Congress changed the law governing the use of appropriation accounts in 1990 because it found that the Department of Defense (DOD) may have spent hundreds of millions of dollars for purposes that Congress had not approved. The 1990 law provided that, 5 years after the expiration of the period of availability of a fixed-term appropriation, the appropriation account be closed and all remaining balances canceled. After closing, the appropriation account could no longer be used for obligations or expenditures for any purpose. DOD has started the process of correcting the illegal or improper closed account adjustments made during fiscal year 2000. However, this will require substantial effort and, according to DOD, estimates will not be complete before the end of fiscal year 2002. DOD had upgraded its system control features by the end of fiscal year 2001 to preclude many of the wholesale adjustments that GAO had previously identified. Because its system enhancements were done in stages, including some near the end of fiscal year 2001, DOD continued to make large amounts of illegal and otherwise improper closed account adjustments during the year. However, given the intensity of staff efforts to address these issues, it did not expect to complete the correct accounting for transactions found to be in error until September 2004. A lack of fundamental controls and management oversight over the closed accounts was the primary reason DOD was making so many closed account adjustments. DOD's action to resolve its problems with closed account adjustments is beginning to produce positive short-term results. However, if DOD fails to sustain these positive results, Congress could require DOD to validate and report to the Congress all closed account adjustments.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-02-747, Canceled DOD Appropriations: Improvements Made but More Corrective Actions Are Needed
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United States General Accounting Office:
GAO:
Report to Congressional Requesters:
July 2002:
Canceled DOD Appropriations:
Improvements Made but More Corrective Actions Are Needed:
GAO-02-747:
Contents:
Letter:
Results in Brief:
Reversing Illegal and Otherwise Improper Adjustments Revealed
Additional Accounting Problems:
Illegal or Otherwise Improper Adjustments Continued during Fiscal Year
2001:
Contract Reconciliation Controls Reduce Fiscal Year 2002 Closed Account
Adjustments:
Numerous ACRNs and Payment Allocation Changes Cause Errors:
Options Available That Will Reduce or Eliminate Closed Account
Adjustments:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Status of DOD Reversals of $615 Million of Illegal and
Otherwise Improper Closed Account Adjustments:
Table 2: Fiscal Year 2001 Illegal or Otherwise Improper Adjustments:
Table 3: Number of ACRNs per Contract:
Abbreviations:
ACRN: accounting classification reference number:
CRS: contract reconciliation system:
DFAS: Defense Finance and Accounting Service:
DOD: Department of Defense:
MOCAS: Mechanization of Contract Administration Services:
NATO: North Atlantic Treaty Organization:
NULO: negative unliquidated obligation:
[End of section]
United States General Accounting Office:
Washington, D.C. 20548:
July 31, 2002:
The Honorable Jim Nussle:
Chairman:
Committee on the Budget:
House of Representatives:
The Honorable Stephen Horn:
Chairman:
The Honorable Janice D. Schakowsky:
Ranking Minority Member:
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations:
Committee on Government Reform:
House of Representatives:
In 1990, the Congress changed the law governing the use of appropriation
accounts because it determined that controls over them were not
working. [Footnote 1] In particular, the Congress found that the
Department of Defense (DOD) may have spent hundreds of millions of
dollars for purposes that the Congress had not approved. The 1990 law
was intended to improve congressional control by providing that, 5
years after the expiration of the period of availability of a fixed-
term appropriation, the appropriation account be closed and all
remaining balances canceled. After closing, the appropriation account
could no longer be used for obligations or expenditures for any
purpose.
Because agencies need to keep accurate records, they may, in limited
circumstances, adjust accounting records pertaining to closed accounts
to correct unrecorded or improperly charged disbursements. To justify
such an adjustment, an agency must have sufficient documentation for
each proposed adjustment to show that the:
* disbursement was made when the appropriation account to be charged
was available to cover the disbursement;
* agency either did not record the disbursement when it was made or
charged it to the wrong appropriation account at that time, and;
* proposed adjustment will result in the disbursement being charged to
the proper appropriation account.
During fiscal years 1997 through 2001, DOD records show that it made
about $12 billion of adjustments affecting closed appropriation
accounts, including $1.9 billion in fiscal year 2001. [Footnote 2]
Because of the magnitude of DOD closed account adjustments, you
previously asked that we review DOD‘s controls over closed accounts to
determine if adjustments were being made in compliance with the 1990
law. In response to that request, our July 2001 testimony and companion
report [Footnote 3] pointed out that DOD had made over $615 million of
illegal and otherwise improper adjustments to closed appropriation
accounts during fiscal year 2000. [Footnote 4] As a result, you asked
that we continue to review DOD‘s progress in addressing the problems we
had identified.
Specifically, you asked that we (1) monitor DOD‘s efforts to correct the
problems for fiscal year 2000 closed account adjustments that were
identified in our prior audit, (2) determine if DOD has experienced
similar problems with closed account adjustments made during fiscal
year 2001, (3) determine why DOD needs to make so many adjustments to
the closed accounts, and (4) identify options available to DOD or the
Congress to end the practice of adjusting closed appropriation
accounts. Our previous review included a detailed review of $2.2
billion (81 percent) of the $2.7 billion DOD reported closed
appropriation account adjustments made during fiscal year 2000. DOD is
now reviewing its fiscal year 2001 closed account adjustments to
determine if there are problems similar to those we identified for
fiscal year 2000. As agreed with your offices, for our current
review, we evaluated the $291 million of closed account adjustments for
which DOD had completed its own assessments. DOD has advised us that it
plans to review an additional $1.1 billion of its reported $1.9 billion
of fiscal year 2001 closed account adjustments. Appendix I contains
more detailed information on our scope and methodology. On June 11,
2002, we requested comments on a draft of this report from the
Secretary of Defense or his designee. Written comments from the Defense
Deputy Chief Financial Officer are reprinted in appendix II.
Results in Brief:
DOD has started the process of correcting the illegal or otherwise
improper closed account adjustments made during fiscal year 2000.
However, this will require substantial effort and, according to DOD,
estimates will not be complete before the end of fiscal year 2002.
While DOD has reversed about $592 million (96 percent) of the $615
million of illegal and otherwise improper fiscal year 2000 closed
account adjustments as we recommended, this is just the starting point
in addressing the problem transactions we identified. In addition, in
many instances, the challenge to correct the accounting after reversing
these transactions is larger than the specific illegal or otherwise
improper adjustments we identified. For example, a $210 million
adjustment we identified as unnecessary in the prior report was part of
an overall $590 million closed account adjustment on a contract.
[Footnote 5] To correct the $210 million of unnecessary adjustments,
DOD had to reverse the total $590 million adjustment. As a result, DOD
is uncertain what effect the reversal of the additional $380 million
adjustment will have on the accuracy of accounting records. DOD
estimates that it will take 2,300 staff hours to correct the accounting
records for this large contract alone and over 21,000 staff hours (10
staff years) to correct the accounting for all of the affected fiscal
year 2000 transactions. The substantial time and resources it takes to
sort through DOD‘s complex accounting processes to correct these types
of errors is yet another reason why DOD has to ensure that it
accurately records transactions the first time around. The $23 million
in adjustments that have not been reversed include $15 million of
unnecessary and unsupported adjustments that DOD was still reviewing
and $8 million of proper adjustments that do not need to be reversed.
DOD had upgraded its system control features by the end of fiscal year
2001 to preclude many of the wholesale adjustments that had led to the
problems we identified during our prior review. Because its system
enhancements were done in stages, including some near the end of fiscal
year 2001, DOD continued to make large amounts of illegal and otherwise
improper closed account adjustments during the year. Our review of
$291 million of fiscal year 2001 closed account adjustments that DOD had
assessed at the time of our audit showed that $172 million (59 percent)
were either illegal ($8 million) or otherwise improper ($164 million).
The remaining $119 million of adjustments were adequately documented
corrections of errors that DOD had made over the years and, therefore,
were not in violation of appropriations law or otherwise improper. DOD
expects to have completed its assessment of an additional $1.1 billion
of fiscal year 2001 closed account adjustments by December 2002.
However, given the intensity of staff efforts to satisfactorily address
these issues, it did not expect to complete the correct accounting for
transactions found to be in error until September 2004, once again
highlighting the seriousness of its accounting problems.
A general lack of fundamental controls and management oversight over the
use of closed accounts was the primary reason DOD was making so many
closed account adjustments. Upgrading system controls and management
oversight to effectively implement the 1990 account closing law has
substantially reduced adjustments to closed accounts”possibly by 80
percent if the experience for the first 6 months of fiscal year 2002
proves to be a reasonable baseline to gauge future results. For
example, during the first 6 months of fiscal year 2002, DOD reported
making $200 million of closed account adjustments”including only
$253,000 of illegal adjustments”which was 80 percent less than the $1
billion of reported closed account adjustments made during the same 6
months of fiscal year 2001. Therefore, we conclude that the lack of
fundamental controls and management oversight had fostered the idea
among DOD contracting and accounting personnel that it was acceptable
to maximize the use of available funds by adjusting the accounting
records to use up unspent funds in the closed accounts, regardless of
the propriety of doing so. DOD officials acknowledged that this
reduction of closed account adjustments was directly attributable to
the implementation of controls recommended in our July 2001 report.
While DOD had reduced the amount of closed account adjustments to just
$200 million during the first 6 months of fiscal year 2002, the fact
that it had to adjust the accounting records at all to correct previous
errors indicates DOD‘s long-standing problems with accurately
accounting for and reporting on disbursements. Viewed in the context of
all its accounting records”not just closed accounts”DOD data for fiscal
year 1999 showed that almost $1 of every $3 in contract payment
transactions was for adjustments to previously recorded payments”$51
billion of adjustments out of $157 billion in transactions. We found
that DOD contracts that contained numerous fund citations and complex
payment allocation terms were more likely to have payment errors that
will require adjustments because of the amount of data that must be
entered into the system and the opportunities for errors. They also
cause extensive and costly rework. For example, on one contract we
reviewed for closed account adjustments, we noted that there were 548
different accounting classification reference numbers (ACRN). [Footnote
6] We also found that, over the years, the contract had been modified
over 150 times and had received two complete contract reconciliations
to correct prior payment problems, including one reconciliation that
produced 15,322 accounting adjustments. DOD now plans to complete a
third reconciliation for this contract to correct about $3 million of
illegal and otherwise improper closed account adjustments we
identified. It estimates that the reconciliation will take over 9,000
hours to complete.
DOD‘s actions to resolve its problems with closed account adjustments
are beginning to produce positive short-term results. However, if DOD
fails to sustain these positive results, the Congress could require DOD
top management to validate and report to the Congress all closed account
adjustments. Should the Congress want to further restrict DOD‘s closed
account adjustments, legislative options are available that would
eliminate or significantly reduce future closed account adjustments.
These range from prohibiting all adjustments to closed accounts after
an appropriation account closes, to allowing adjustments for a specific
interval after the accounts close. Each option, or possible variation
thereof, poses potentially positive and negative effects. For example,
legislatively prohibiting any adjustments to closed accounts after the
accounts close would completely eliminate future closed account
adjustments. However, not allowing any adjustments to closed accounts
would prohibit any corrections of known errors in accounting records
that could affect DOD‘s ability to promptly pay future invoices. For
example, if the obligated but unspent balance of a closed account was
erroneously reported at less than it should be, current requirements of
the closed account law would prohibit paying a contractor‘s invoice if
the amount of the invoice was more than the unspent balance in the
closed account. Instead, DOD would have to defer payment until it
received additional appropriations from the Congress. [Footnote 7]
In addition to providing options to consider in eliminating or
significantly reducing closed account adjustments, we are also making
recommendations to the Secretary of Defense that address the need for
DOD to continue to review, reverse, and correct closed account
adjustments that are found to be illegal or otherwise improper. In its
comments on a draft of this report, DOD agreed with our recommendations
and outlined its ongoing and planned actions to identify, reverse, and
correct illegal and otherwise improper closed appropriation account
adjustments.
Reversing Illegal and Otherwise Improper Adjustments Revealed
Additional Accounting Problems:
Our prior report recommended that DOD immediately reverse the $615
million of illegal and otherwise improper closed account adjustments
identified in the report and determine the correct accounting for these
adjustments after the reversal. Of the $615 million of illegal and
otherwise improper adjustments, DOD has agreed that $592 million, or
about 96 percent, of the adjustments should not have been made and has
reversed the adjustments. However, because of DOD‘s long-standing
accounting accuracy problems, in many cases, reversing the transactions
brought to light additional accounting problems that will require
detailed reviews to determine the accounting actions necessary to
correct the reversed transactions. As a result, neither DOD nor we can
determine how much remains to be corrected as a result of reversing the
adjustments. Table 1 provides additional details on DOD‘s reversal of
the $615 million fiscal year 2000 illegal and otherwise improper closed
account adjustments.
Table 1: Status of DOD Reversals of $615 Million of Illegal and
Otherwise Improper Closed Account Adjustments (Dollars in millions):
Problems with adjustments: Appropriation already canceled when
disbursement was made;
Initial adjustment amount: $107.7;
DFAS reversed amount: $107.7.
Problems with adjustments: Appropriation not yet enacted when
disbursement was made;
Initial adjustment amount: $38.2;
DFAS reversed amount: $38.2.
Problems with adjustments: No adjustment was necessary;
Initial adjustment amount: $364.0;
DFAS reversed amount: $349.2.
Problems with adjustments: Insufficient documentation;
Initial adjustment amount: $104.9;
DFAS reversed amount: $96.7.
Problems with adjustments: Total;
Initial adjustment amount: $614.8;
DFAS reversed amount: $591.8.
[End of table]
For the remaining $23 million that has not been reversed, DOD provided
us with additional documentation indicating that $8 million of the
adjustments were proper and do not need to be reversed. We still
consider the remaining $15 million to be unnecessary or unsupported
adjustments since DOD has not provided sufficient support to show
otherwise. [Footnote 8]
Thirty Contracts Will Require Reaudits to Correct Accounting:
The $592 million of illegal and otherwise improper closed account
adjustments discussed in our earlier report that have now been reversed
involved 45 contracts. For 30 of the 45 contracts, the reversals
identified additional accounting errors that must also be corrected.
The 30 contracts include over $457 million (77 percent) of the $592
million in reversed transactions. Because of the complexity of the
contracts and time it takes to conduct a complete reaudit, officials at
the Defense Finance and Accounting Service‘s (DFAS) Columbus Center
estimate that it will take over 21,000 hours to correct the accounting
for the 30 contracts.
For example, for one contract we found that DFAS Columbus had made
$210 million of closed account adjustments that should not have been
made because the initial disbursement was recorded against the correct
ACRN on the contract. The reason given for the adjustment was that DFAS
Columbus could not pay a November 1999 invoice from a contractor for
$685,000 because the cited ACRN on the invoice did not have sufficient
funds. The inability to pay the invoice prompted DFAS to conduct an
audit of the contract that resulted in over $590 million of adjustments
to closed appropriation accounts. Our earlier audit found that of the
$590 million of adjustments, $210 million were unnecessary and should
not have been made because the actual disbursements”some of which were
made over 10 years earlier”had been recorded correctly. The $210
million was part of the $615 million of illegal or otherwise improper
transactions we identified in our earlier audit.
In response to our recommendation that DOD reverse and correct the
$210 million of unnecessary adjustments, DFAS Columbus reversed all
$590 million of the closed account adjustments. Footnote 9] According
to DFAS officials, when reversing adjustments of this size, they
generally have to reverse all the transactions involved with an
adjustment not just the canceled ones. After the adjustments were
reversed, other errors were created that must now be researched and
corrected. For example, for this one contract, the reversal of the
contract‘s accounting records showed that 63 contract ACRNs had
negative unliquidated obligations (NULO) totaling $85.4 million.
[Footnote 10] DFAS Columbus estimates that it will take about 2,300
hours to reaudit and correct the contract.
Our earlier review of another contract found that DFAS Columbus had
recorded an adjustment that illegally moved $79 million of disbursement
charges from fiscal years 1993 through 1995 research and development
appropriations to charges against a canceled fiscal year 1992 research
and development appropriation. According to the contract files, the
adjustment was made to redistribute the disbursement charges in
accordance with the ’pay oldest funds first“ payment terms specified in
the contract. However, we found that the redistribution was illegal
because it moved disbursement charges back to an appropriation account
that had closed several months before the initial disbursement was
made. For example, the initial $79 million disbursement occurred in
February 1999, but the adjustment resulted in a charge against an
appropriation that canceled 4 months earlier on September 30, 1998. DOD
agreed that the adjustment was illegal and reversed the $79 million.
The reversal identified other accounting errors on the contract that
now must be corrected. According to DFAS contract accounting records,
as of April 2002, the contract had NULOs totaling over $100 million
that will need to be researched and corrected. DFAS Columbus officials
estimate that a reaudit of this contract will take over 1,850 hours to
complete. DOD officials told us they plan to complete all 30 reaudits
to correct the fiscal year 2000 illegal and otherwise improper
adjustments by September 30, 2002.
In addition to DFAS‘s reaudit of the contract, Air Force officials have
also initiated an investigation into the circumstances surrounding the
initial $79 million illegal adjustment to determine if personnel
responsible for monitoring and administering the contract acted
improperly, including the possibility that the adjustments may have
resulted in Antideficiency Act violations. [Footnote 11] Air Force
officials told us that they plan to complete the investigation and
issue their report before the end of fiscal year 2002.
Illegal or Otherwise Improper Adjustments Continued during Fiscal Year
2001:
We previously reported that the DFAS contract reconciliation system
(CRS) and other controls necessary to ensure that adjustments to closed
appropriation accounts were proper were not in place. [Footnote 12] We
noted that DOD was in the process of upgrading CRS and correcting other
control problems that significantly contributed to many of the illegal
or otherwise improper adjustments to closed accounts. However, because
DOD did not complete many of these actions until the end of fiscal year
2001, controls were not in place to ensure that the $1.9 billion of
closed account adjustments made during fiscal year 2001 were legal and
proper.
At Least $172 Million of Fiscal Year 2001 Adjustments Were Illegal or
Otherwise Improper:
Our evaluation of $291 million (15 percent) of DOD‘s reported $1.9
billion fiscal year 2001 closed appropriation account adjustments found
that $172 million (59 percent) were either illegal or otherwise
improper. These adjustments should not have been made because the
initial disbursements (1) occurred after the appropriation being
charged had already canceled, (2) occurred before the appropriation
charged was enacted, or (3) were charged to the correct appropriation
in the first place and no adjustment was necessary. Also included in
the $172 million of illegal or otherwise improper closed account
adjustments were adjustments that were not sufficiently documented to
establish that they were proper. These adjustments were considered
improper because agencies must be able to provide documentation to show
that the adjustments are legal and that they changed an incorrect
charge to a correct one. Table 2 provides additional details on the
$172 million of adjustments that should not have been made.
Table 2: Fiscal Year 2001 Illegal or Otherwise Improper Adjustments
(Dollars in millions):
Problems with adjustments: Appropriation already canceled when
disbursement was made;
Adjustment amount: $3.2.
Problems with adjustments: Appropriation not yet enacted when
disbursement was made;
Adjustment amount: $4.7.
Problems with adjustments: No adjustment was necessary;
Adjustment amount: $82.0.
Problems with adjustments: Insufficient documentation;
Adjustment amount: $82.1.
Problems with adjustments: Total;
Adjustment amount: $172.0.
[End of table]
DOD officials agreed to reverse and correct the $172 million of illegal
and otherwise improper closed account adjustments. The remaining $119
million of the $291 million of adjustments was for adequately
documented corrections of errors that DOD had made over the years and,
therefore, were not in violation of appropriations law or otherwise
improper.
DOD to Review Additional $1.1 Billion of Fiscal Year 2001 Closed Account
Adjustments:
DOD officials told us they plan to review another $1.1 billion of
fiscal year 2001 closed account adjustments in addition to the $291
million of closed account adjustments that we already reviewed.
According to the officials, the additional $1.1 billion of adjustments
were selected based on various factors including large dollar amounts
or indications that the adjustments may be illegal. The officials noted
that completion of the review of additional adjustments would result in
detailed reviews of $1.4 billion (about 74 percent) of the total $1.9
billion of the closed account adjustments made during fiscal year 2001.
According to the officials, they estimate that the additional reviews
will involve several hundred contracts and about 1,000 closed account
adjustments. They plan to have the additional reviews and reversals of
any illegal or otherwise improper adjustments completed by December 31,
2002. However, the officials told us that because there are so many
contracts that may have to be reaudited to correct the accounting, they
do not plan to have the reaudits and corrections for fiscal year 2001
closed account adjustments completed until September 2004.
Contract Reconciliation Controls Reduce Fiscal Year 2002 Closed Account
Adjustments:
In our July 2001 testimony and report, we pointed out that DOD did not
have adequate systems, controls, and managerial attention to ensure that
the $2.7 billion of fiscal year 2000 adjustments affecting closed
appropriation accounts were legal and otherwise proper. Our review
disclosed that CRS routinely processed billions of dollars of closed
appropriation account adjustments without regard to the requirements of
the 1990 account closing law. Further compounding this system deficiency
was the lack of DOD oversight on how contract modifications were written
and processed, which changed the payment terms of some contracts to
improperly make available current and expired funds. As discussed
earlier, our follow-on review of fiscal year 2001 closed account
adjustments found little improvement over fiscal year 2000. As a
result, DOD still could not ensure that closed account adjustments made
during fiscal year 2001 were legal and otherwise proper. However, once
the controls were fully implemented at the beginning of fiscal year
2002, we found that the first 6 months of fiscal year 2002 closed
account adjustments dropped by about 80 percent to $200 million when
compared with the same 6 months during fiscal year 2001.
DFAS Implements CRS Controls at End of Fiscal Year 2001:
In May 2001, DOD began implementing CRS controls to identify and
prevent illegal backward adjustments. This control compares the actual
disbursement date with the appropriation involved in the adjustment to
ensure that the adjustment does not result in moving disbursement
charges back to an appropriation that had been canceled before the
actual disbursement was made. In September 2001, DFAS upgraded CRS to
identify and prevent illegal adjustments from moving disbursement
charges forward to an appropriation that had not yet been enacted at
the time the initial disbursement was made.
In addition to upgrading CRS to identify and prevent illegal closed
account adjustments, DOD also changed the CRS default reallocation of
adjusting payments from oldest funds first to proration. Under the
oldest funds first reallocation method, CRS would change disbursements
charged to current and expired appropriation accounts to charges
against older appropriation accounts even if the initial disbursement
charges were correct. Because the DFAS contract payment system,
commonly known as MOCAS (Mechanization of Contract Administration
Services), prorated payments across various fund cites in the contract
if no payment terms were specified in the contract, this change was
intended to reduce errors by making both MOCAS and CRS payment
allocation defaults the same.
Previously, problems with payment reallocations arose during contract
reconciliation when payments that MOCAS had initially allocated across
various ACRNs on a pro rata basis were redistributed by CRS across
ACRNs on an oldest funds first basis. When this occurred, the CRS
payment redistributions would differ substantially from how MOCAS had
originally applied the payments. As our previous audit showed, these
situations created significant problems by moving payment charges from
correct ACRNs to incorrect ACRNs on the contract. For example, in one
case, DOD initiated a contract reconciliation because there were
insufficient funds remaining on an ACRN to pay a $685,000 contractor
invoice, and this redistribution process resulted in moving $210
million of correct payment charges to incorrect ACRNs. According to
DFAS Columbus officials, supervisory personnel must now approve any
deviation from the CRS default program before CRS controls can be
overridden to reallocate disbursements in a manner other than
proration.
Upgraded Controls Help Reduce Amount of Closed Account Adjustments:
DOD‘s reported closed account adjustments during the first 6 months of
fiscal year 2002 totaled about $200 million, or about 80 percent less
than the over $1 billion of closed account adjustments DOD reportedly
made during the same 6-month period of fiscal year 2001. According to
DFAS officials, they believe that the significant decline in closed
account adjustments is a direct result of increased DOD management and
employee emphasis on resolving the problems identified in our earlier
report that contributed to illegal and otherwise improper closed
account adjustments.
While DFAS‘s controls had greatly reduced closed account adjustments
during the first 6 months of fiscal year 2002, our analysis of closed
account transactions found that $253,212 of illegal closed account
adjustments had been processed from October 1, 2001, through March 31,
2002. These illegal adjustments moved disbursement charges back to
appropriations that had canceled before the initial disbursements
occurred. We found these adjustments had processed through a DFAS
Columbus computer terminal that did not properly identify and prevent
these types of illegal adjustments. DFAS officials could not explain
why the computer terminal was not operating properly but took immediate
action to upgrade it with the appropriate controls. The officials
agreed to reverse and correct the $253,212 of illegal adjustments. Our
analysis of subsequent closed account adjustments reported after the
upgrade did not identify any additional illegal closed account
adjustments.
Numerous ACRNs and Payment Allocation Changes Cause Errors:
Our earlier testimony and report pointed out that DOD‘s illegal and
otherwise improper closed account adjustments resulted from the lack of
basic controls and managerial attention required to properly account
for its disbursements consistent with the 1990 account closing law. We
also noted that DOD had been aware since 1996 that one of its major
systems allowed for disbursements to be charged in a way that was
inconsistent with the law, but had done nothing to fix the problem.
This lack of fundamental controls and management oversight fostered an
atmosphere in which responsible DOD contracting and accounting
personnel took it for granted that it was an acceptable practice to
adjust the accounting records to use unspent canceled funds on a
contract in order to maximize the use of appropriated funds”a process
that we concluded, and DOD agreed, was illegal. We stated that DOD
would need to effect changes to its systems, policies, procedures, and
the overall weak control environment that fostered the $615 million of
illegal and otherwise improper adjustments made during fiscal year
2000. To do this, we pointed out that DOD top management must clearly
demonstrate its commitment to adhering to the account closing law and
eliminate the abuses of appropriations law.
The 80 percent reduction of closed account adjustments during the first
6 months of fiscal year 2002 is an indication that, in the short term,
DOD policies, procedures, and management commitment aimed at reducing
the amount of illegal and otherwise improper closed account adjustments
are having the desired effect. However, DOD‘s inability to accurately
account for and report on disbursements overall are long-term, major
problems that are pervasive and complex in nature. For example, for
fiscal year 1999, DFAS data showed that almost $1 of every $3 in
contract payment transactions was for adjustments to previously
recorded payments”$51 billion of adjustments out of $157 billion in
transactions. Some of the key causes of these adjustments”for both
closed and unclosed accounts”relate to the complex accounting for
contracts along with frequent changes in payment allocation terms.
Over the years, we have issued numerous reports discussing DOD‘s
financial management problems, and we have designated DOD financial
management as a high-risk area since 1995. The following discussion on
DOD‘s use of ACRNs and changes in contract payment allocations is
illustrative of the convoluted process that contributes to the need to
adjust accounting records to correct errors.
Contracts Contain Numerous ACRNs:
Contracts can be assigned anywhere from 1 to over 1,000 ACRNs to
accumulate appropriation, budget, and management information. Our
review of fiscal years 2000 and 2001 closed account adjustments found
that, in many cases, the contracts had large numbers of ACRNs. According
to DFAS Columbus officials, numerous ACRNs and changes in payment
allocations create payment problems by increasing the amount of data
that must be entered and opportunities for errors. These problems also
lead to costly and extensive contract reconciliations. For example, our
review of fiscal year 2001 closed account adjustments on a Navy
contract valued at about $38 million found that the contract contained
548 ACRNs and had been modified over 150 times. Also, according to DFAS
Columbus‘ reconciliation staff, the contract had received two
reconciliations, one of which in 1998 produced 15,322 accounting
adjustments. In total, we found about $3 million of fiscal year 2001
closed account adjustments for this contract were not adequately
supported and, thus, should not have been made. In discussing the
contract‘s improper closed account adjustments with DFAS Columbus
officials, they agreed that the adjustments were not proper and agreed
to reverse and correct them. Because of the large number of ACRNs and
contract modifications involved, they estimate that it will take over
9,000 hours to complete the contract audit.
Our combined review of the 101 contracts included in our detailed review
of fiscal years 2000 and 2001 closed account adjustments found that
there were 7,440 ACRNs on the 101 contracts”an average of about 74 ACRNs
per contract. As table 3 shows, 38 of the 101 contracts (38 percent)
had 51 or more ACRNs.
Table 3: Number of ACRNs per Contract:
Number of ACRNs per contract: 1 to 25;
Number of contracts: 38;
Total number of contract ACRNs: 446;
Percentage of total number of ACRNs: 6.
Number of ACRNs per contract: 26 to 50;
Number of contracts: 25;
Total number of contract ACRNs: 933;
Percentage of total number of ACRNs: 12.
Number of ACRNs per contract: 51 to 100;
Number of contracts: 19;
Total number of contract ACRNs: 1,346;
Percentage of total number of ACRNs: 18.
Number of ACRNs per contract: 101 to 250;
Number of contracts: 13;
Total number of contract ACRNs: 2,211;
Percentage of total number of ACRNs: 30.
Number of ACRNs per contract: 251 to 548;
Number of contracts: 6;
Total number of contract ACRNs: 2,504;
Percentage of total number of ACRNs: 34.
Number of ACRNs per contract: Total;
Number of contracts: 101;
Total number of contract ACRNs: 7,440;
Percentage of total number of ACRNs: 100.
[End of table]
We did not determine for each of these contracts why and for what
purpose the numerous ACRNs were being used. However, it is clear that
simplified contract accounting will be a key element to reform DOD‘s
financial management. For example, as we pointed out in our July 2001
report, even a simple purchase could cause extensive and costly rework
if assigned numerous ACRNs. We noted that a $1,209 Navy contract for
children‘s toys, candy, and holiday decorations for a child care center
was written with most line items (e.g., bubble gum, tootsie rolls, and
balloons) assigned separate ACRNs. A separate requisition number was
generated for each item ordered, and a separate ACRN was assigned for
each requisition. In total, the contract was assigned 46 ACRNs to
account for contract obligations against a single appropriation. To
record this payment against the one appropriation DFAS Columbus had to
manually allocate the payment to all 46 ACRNs.
In addition, the contract was modified three times”twice to correct
funding data and once to delete (deobligate) the funding on the
contract for out-of-stock items. The modification deleting funding did
not cite all the affected ACRNs. DFAS Columbus made errors in both
entering and allocating payment data, compounding errors made in the
modification. Consequently, DFAS Columbus allocated payment for the toy
jewelry line item to fruit chew, jump rope, and jack set ACRNs”all of
which should have been deleted by modification. Contract delivery was
completed in March 1995, but payment was delayed until October 1995.
DFAS Columbus officials acknowledged that this payment consumed an
excessive amount of time and effort when compared to the time to
process a payment charged to only one ACRN. A single ACRN would also
have significantly reduced the amount of data entered into the system
and the opportunities for errors.
Change in Contract Payment Allocation Terms:
Further compounding the problem of numerous ACRNs are changes in how
payments are to be allocated across various ACRNs on a contract. For
example, our review of an Air Force contract that had 50 ACRNs contained
about $126 million of closed account adjustments of which we found that
about $100 million (79 percent) were illegal or otherwise improper.
Further, the contract had been modified 292 times for various reasons,
including changes to how payments were to be allocated across the
various ACRNs. For example, the following instructions were included in
contract modifications to specify payment instructions for special ACRN
XB”one of several special ACRNs on the contract. [Footnote 13]
* Contract modification 94 dated October 22, 1993, stated that, ’During
FY90 pay FY90 funds first until exhausted and during FY91 pay FY91
funds first until exhausted. After these funds are exhausted, pay from
the oldest ACRNs first.“
* Two years later, contract modification 126 added additional payment
terms for special ACRN XB as follows: ’During FY90 pay FY90 funds first
until exhausted and during FY91 pay FY91 funds first until exhausted.
During FY94 pay FY88 funds first until exhausted. After these funds are
exhausted, pay from oldest ACRNs first.“
* In June 2000, modification 160 provided more payment instructions for
special ACRN XB. The modification noted that special ACRN XB consisted
of funds from both the United States and North Atlantic Treaty
Organization (NATO). The payment instructions specified that payments
were to be made using the oldest U.S. funds before using NATO funds.
According to a July 2000 Air Force memorandum from the Air Force
Materiel Command‘s Deputy Director of Contracting, the special ACRNs
were not to be added to any existing contracts or used in new contracts.
The Deputy Director noted that the Air Force still had over 1,300
special ACRNs in the system related to the older contracts, and that
there was evidence that special ACRNs were still being created or used
for new contract line items or subcontract line items. In discussing
this memorandum with responsible Air Force contracting officials, we
were told that the Air Force no longer uses special ACRNs and that once
all the contracts that currently contain special ACRNs are closed out,
errors or other accounting problems caused by this type of contract
funding should no longer be a problem.
DFAS Columbus officials acknowledged that the combination of numerous
ACRNs and modifications that change contract payment allocation terms
makes it difficult to maintain accurate payment records. They agreed
that the $100 million of illegal and otherwise improper closed account
adjustments for the Air Force contract discussed above should not have
been made. They told us they plan to reverse and correct the illegal and
otherwise improper closed account adjustments on the contract as part of
their overall effort to correct fiscal year 2001 closed account
adjustments. Because of the numerous ACRNs and contract modifications
on the contract, DOD estimates that it will take over 1,500 hours to
completely correct the accounting for this contract.
In discussing the issues of payment errors caused by numerous ACRNs and
changing contract payment allocation terms, military service contracting
officials agreed that in the past their contracts contained numerous
ACRNs and modifications to change payment allocations. They told us
that during the last 2 or 3 years, they have started to write contracts
to include more specific payment allocation terms, which should make it
much easier for DFAS Columbus to pay contractors without making errors
that require subsequent adjustments. Further, on October 1, 2001, the
Under Secretary of Defense for Acquisition, Technology, and Logistics
issued a memorandum in response to our recommendation that he issue a
policy to prohibit the writing of contract modifications to change the
payment terms of a contract if the change would result in illegal or
otherwise improper adjustments. The memorandum instructed the military
service secretaries and defense agency directors to make certain that
all contracting activities have procedures in place that ensure
compliance with the department‘s financial management policies, which
currently preclude the improper adjustments we identified in our
report. It also required all contract modifications that include
adjustments to closed appropriation accounts to be supported with
contract file documentation sufficient to establish that the
adjustments are legal and proper and received supervisory review. It
further required that contract modifications involving closed accounts
be approved in writing by the appropriate level comptroller or financial
resource manager.
DFAS Columbus officials acknowledged that the change in contract writing
policies and procedures should result in fewer payment errors and
adjustments. While we agree that the changes in contract writing
procedures and additional policy requirements should help to reduce
errors that require subsequent correcting, we found that there are still
thousands of older contracts in MOCAS that have one or more closed
accounts that will need to be monitored closely to ensure that illegal
or otherwise improper adjustments do not occur. For example, at our
request, DFAS Columbus analyzed the MOCAS database to identify
contracts for which at least one of the appropriations was canceled.
The results of the MOCAS inquiry showed that as of April 2002, there
were 15,421 active contracts valued at $519 billion for which at least
one appropriation had been canceled. DFAS officials told us that these
older contracts may contain errors that will not be discovered until a
contract is completed and final contract reconciliation is performed.
Options Available That Will Reduce or Eliminate Closed Account
Adjustments:
As we have indicated, since we began our closed account work, and
especially since our testimony and report on this issue in July 2001,
DOD has taken actions to eliminate illegal or otherwise improper
adjustments involving closed account records. As noted earlier in this
report, these actions are beginning to produce positive short-term
results while efforts to address the long-term problems are still
ongoing. At the same time, given the severity of the existing problems
and the long-term nature of DOD‘s transformation efforts, you asked us
to identify options the Congress could consider, including prohibiting
some or all adjustments to closed accounts. We basically see two
options”do nothing at this time or prohibit any adjustments immediately
or shortly after an appropriation account is closed. These options are
discussed in the context of our closed account work at DOD. However,
options that change the account closing law would also apply to all
federal agencies unless the Congress specifically limited them to DOD.
The ’No Legislative Action“ Option:
One option is to take no legislative action at this time and to
continue to allow DOD to adjust closed account records when appropriate
to correct accounting errors. This would mean that DOD could make
adjustments to closed account records when there is sufficient
documentation to show that the (1) disbursement was made when the
appropriation account to be charged was available to cover the
disbursement, (2) agency either did not record the disbursement when it
was made or charged it to the wrong appropriation account at the time,
and (3) proposed adjustment will result in the disbursement being
charged to the proper appropriation account. Given that DOD‘s
implementation of controls to identify and prevent illegal and
otherwise improper adjustments seem to be having a positive effect
based on 6 months of analysis, the Congress could postpone any decision
to change the law in order to allow DOD additional time to monitor how
its implementation of controls, policies, and procedures needed to
eliminate illegal and otherwise improper closed account adjustments is
working. However, given DOD‘s weak overall control environment, unless
DOD‘s internal controls and management commitment to this problem are
sustained, new ways may be developed to circumvent the controls recently
put into place. Thus, there is a risk that, over time, illegal or
otherwise improper closed account adjustments could reoccur.
If the Congress finds in the future that DOD top management does not
sustain its commitment to address its overall disbursement problems, the
Congress could require a combination of oversight and reporting by DOD
as to the validity of any closed account adjustments.
Prohibit Adjustments after Appropriation Account Closes:
The second option is to amend the account closing law to prohibit any
adjustments to an appropriation account after it is closed. Under this
option, accounting records of an appropriation account would be final
when the account was closed. This option would eliminate adjustments to
closed accounts as well as the substantial time and expense associated
with making them. It would also provide an additional incentive for DOD
to keep better records during the time the account is open since there
would be no opportunity to correct the records once the account was
closed.
At the same time, this change would mean that known errors in accounting
records could not be corrected once the account was closed and therefore
accounting records would be permanently inaccurate. These inaccurate
records could also affect DOD‘s ability to promptly pay for goods and
services. For example, assume that because of accounting errors
associated with a closed appropriation account, the unspent balance of a
currently available account was reduced to less than the amount needed
to make a subsequent payment. If DOD could not correct the error, it
would not be able to make the current payment. [Footnote 14]
In another example, assume that because of accounting errors, the
balance of a closed account was less than the amount needed to pay an
obligation that had been charged to the closed account when it was
open. Current law allows the payment to be made from current funds if
the closed account balance exceeds the amount of the payment.
Prohibiting all adjustments to closed accounts would make permanent the
erroneously reduced balance and therefore the payment could not be made
with current funds. In each of these examples, DOD would be unable to
pay for the goods or services without obtaining an additional
appropriation or other form of legislative relief, which could cause a
hardship for the contractor.
The Congress could also provide a variation of this option by allowing
DOD a limited period, such as 6 months or 1 year, after an account is
closed to adjust the accounting records for known errors. This option
would provide for finality of records, but only after DOD has some
additional opportunity to correct errors it detects immediately after
the account is closed. This legislation, while not totally eliminating
closed account adjustments, would provide some of the benefits
discussed above while increasing the likelihood that DOD records
relating to the closed account are more accurate. However, this option
also presents some of the same payment and fund availability
limitations discussed above.
Conclusion:
DOD has made significant improvements to its controls to identify and
prevent illegal and otherwise improper closed account adjustments as
evidenced by the 80 percent reduction of closed account adjustments
during the first 6 months of fiscal year 2002. These short-term efforts
serve as an example of what can be achieved when DOD takes prompt
action to correct known problems through a strong top management
commitment.
At the same time, closed account adjustments are only a small fraction
of the overall disbursement adjustments DOD makes each year as a result
of its long-standing financial accounting and management problems. There
are no quick fixes to the underlying problems, which must be dealt with
over the long term. Nevertheless, there are some additional short-term
actions that can be taken by focusing on simplifying accounting and
contract payment allocation terms. Modernizing financial management
systems, and improving the systems adherence to basic accounting
requirements, will ultimately be key to DOD effectively resolving its
financial management and contract payment problems. This will require a
sustained commitment by DOD‘s top management team over a number of
years.
Recommendations for Executive Action:
We recommend that the Secretary of Defense direct the Under Secretary of
Defense (Comptroller) to direct the Director of the Defense Finance and
Accounting Service to:
* help ensure that DFAS Columbus completes its review and correction of
the remaining fiscal year 2000 illegal and otherwise improper
adjustments;
* reverse closed account adjustments made during fiscal year 2001
identified in this report as illegal or otherwise improper;
* determine the entries necessary to correct the accounting for reversed
fiscal year 2001 transactions;
* help ensure that DFAS Columbus completes the review and correction
of the additional $1.1 billion of fiscal year 2001 adjustments it has
scheduled for detailed review, and;
* continue with DFAS‘s top-level management attention and monitoring of
the program for future adjustments to closed appropriation accounts.
We also recommend that the Secretary of Defense direct the Under
Secretary of Defense (Comptroller) to continue to monitor these
adjustments so that any potential Antideficiency Act violations that may
occur are promptly investigated and reported as required by the
Antideficiency Act, 31 U.S.C. 1351, and implementing guidance.
Agency Comments and Our Evaluation:
DOD agreed with our recommendations and outlined its ongoing and
planned actions to identify, reverse, and correct illegal and otherwise
improper fiscal year 2000 and 2001 closed appropriation account
adjustments. DOD pointed out that this process may create adverse
accounting conditions for a large number of contracts that will require
either complete or partial reaudit to determine the correct accounting
necessary to resolve the illegal or otherwise improper closed account
adjustments we identified. For example, as we noted in our report, for
one contract where DOD made a total of $590 million of closed account
adjustments, we found that $210 million of the $590 million of
adjustments were unnecessary and should not have been made because the
actual disbursements had been recorded correctly. In order to reverse
and correct the $210 million of unnecessary adjustments, DOD had to
reverse the total $590 million in adjustments, which created other
accounting errors that must now be researched and corrected. As our
report noted, DOD estimates that it will take about 2,300 hours to
resolve all the errors necessary to correct the $210 million of
unnecessary adjustments we identified for this contract. DOD said it
planned to have all its reaudits and corrective actions completed by
September 30, 2004. DOD‘s comments are reprinted in appendix II.
We are sending copies of the report to interested congressional
committees. We are also sending copies of this report to the Secretary
of Defense; the Principal Deputy Under Secretary of Defense for
Acquisition, Technology, and Logistics; the Secretaries of the Army,
Navy, and Air Force; the Director of the Defense Finance and Accounting
Service; the Secretary of the Treasury; and the Director of the Office
of Management and Budget. We will make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [hyperlink, http://www.gao.gov]. If you or your staffs
have any questions regarding this report, please contact me at (202)
512-9505 or kutzg@gao.gov, or Larry W. Logsdon, Assistant Director, at
(703) 695-7510 or logsdonl@gao.gov. Major contributors to this report
are acknowledged in appendix III.
Signed by:
Gregory D. Kutz:
Director, Financial Management and Assurance:
[End of section]
Appendix I: Scope and Methodology:
To meet our first objective of monitoring DOD‘s efforts to correct the
problems we identified in our prior audit, we reviewed DFAS officials'
corrective actions taken on 162 adjustments that we previously reported
as $615 million of illegal or otherwise improper adjustments. As part
of this review, we gathered vouchers that documented the reversal of the
adjustments and analyzed financial information from DFAS Columbus‘
records and reports, including contracts, contract modifications,
shipping notices, invoices, payment vouchers, and schedules of
adjustments. We identified and met with the DFAS Columbus officials
knowledgeable about each reversed adjustment. We also identified the
responsible DFAS or military service locations that maintained the
official account records and obtained documentation to show how
adjustments were reversed or corrected in the accounting records.
To meet our second objective of determining if DOD experienced problems
with adjustments to closed appropriation accounts in 2001 similar to the
problems with the 2000 adjustments, we monitored DFAS Columbus‘ review
of $291 million of the $1.9 billion of closed account adjustments DOD
reportedly made during fiscal year 2001. DFAS Columbus had already
selected the $291 million of closed account adjustments for review at
the time we began our audit. We took this approach rather than
selecting a large number of adjustments for our own independent review
because we knew that DOD had not fully implemented the controls
necessary to identify and prevent fiscal year 2001 illegal and
otherwise improper closed account adjustments. We reviewed the results
of DFAS Columbus‘ efforts and worked with staff members responsible for
conducting the reviews to resolve any disagreements between DFAS and
GAO on whether the documentation showed that the adjustments were legal
and proper. As part of our analysis of DFAS Columbus‘ reviews, we
analyzed documentation supporting DFAS's detailed summaries for each
adjustment to determine the reason for the adjustment and whether it
was valid. For each adjustment, we reviewed the contract files for
supporting hard copy documentation including modifications, invoices,
payment vouchers, and MOCAS print screens. We also identified and met
with the DFAS Columbus staff members who completed the reviews to
discuss the reasons for the adjustments and resolve any differences of
opinion between DFAS‘s and our conclusions on whether the adjustments
were legal and proper.
To determine if DOD had implemented the effective system controls, which
we identified in our prior report, to its contract reconciliation
system to prevent illegal adjustments, we tested the CRS for two types
of potentially illegal adjustments during a 6-month period. To do this,
we independently analyzed the closed account adjustments included in
the CRS database for the first 6 months of fiscal year 2002 to
ascertain if CRS had processed any closed account adjustments that
resulted in moving a disbursement charge (1) back to an appropriation
that was canceled before the actual disbursement was made or (2)
forward to an appropriation that had not yet been enacted at the time
the actual disbursement was made. We met with responsible DFAS Columbus
officials to discuss and resolve any transactions that our analysis
identified as violations of either of these two measurements. In
instances where there were violations, we met with DFAS Columbus
personnel to determine why CRS controls had not prevented the
transactions from processing and worked with DFAS‘s staff to correct
the system deficiencies. We did not validate the accuracy of the CRS
database information pertaining to the disbursement dates or
appropriations.
To meet our third objective of determining why DOD makes so many
adjustments to closed accounts, we reviewed the reconciliation summaries
for the fiscal years 2000 and 2001 closed account adjustments that we
reviewed in detail. We also met with the DFAS Columbus staff members
who performed reconciliations to obtain their opinions on the primary
reasons why errors occur. However, we did not determine the specific
reasons why certain contracts have numerous ACRNs or how the detailed
cost information was to be used.
Finally, to determine options available to DOD and actions for the
Congress to consider that would eliminate or reduce adjustments to
closed appropriation accounts, we developed and presented options based
on our reviews of fiscal year 2000 and 2001 closed account adjustments
and discussions with DOD accounting and procurement officials.
We performed our work primarily at the DFAS Center in Columbus, Ohio.
We also obtained documentation from the following DFAS locations that
were responsible for maintaining official accounting records: Cleveland,
and Dayton, Ohio; Denver, Colorado; San Bernardino, California; and St.
Louis, Missouri. Our review was conducted from June 2001 through April
2002 in accordance with U.S. generally accepted government auditing
standards, except that we did not validate the accuracy of CRS
information pertaining to the number of closed account adjustments and
related dollar values.
[End of section]
Appendix II: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
Comptroller:
1100 Defense Pentagon:
Washington, DC 20301-1100:
July 23, 2002:
Mr. Gregory D. Kutz:
Director, Financial Management and Assurance:
U.S. General Accounting Office:
Washington, DC 20548:
Dear Mr. Kutz:
This is the Department of Defense response to the General Accounting
Office (GAO) draft report GAO-02-747, "Canceled DoD Appropriations:
Improvements Made but More Corrective Actions Are Needed," June 11,
2002 (GAO Code 192017). The Department appreciates the opportunity to
review the draft report and provide comments.
On July 31, 2001, the Under Secretary of Defense (Comptroller) directed
the Director, Defense Finance and Accounting Service (DFAS) to correct
erroneous disbursement adjustments, install adequate internal controls
in the Contract Reconciliation System (CRS), and implement procedures
to monitor future adjustments to closed accounts. The DFAS has
corrected many of the deficiencies cited in the GAO audit report. For
example, improved controls in the CRS now prevent illegal canceled
funds adjustments.
The status of corrective actions for Recommendations 1 through 5 are
included at the enclosure and represent significant accomplishments in
correcting cited deficiencies. The DFAS Columbus personnel and the GAO
auditors will continue working together until all the actions are
completed.
My point of contact for this matter is Mr. Oscar Covell. He may be
reached by e-mail: covello@osd.pentagon.mil or by telephone at (703)
697-6149.
Sincerely,
Signed by:
JoAnn R. Boutelle:
Deputy Chief Financial Officer:
Enclosure:
General Accounting Office (GAO) Draft Report:
June 11, 2002 (GAO Code 192017):
"Canceled DOD Appropriations: Improvements Made But More Corrective
Actions Are Needed"
Department Of Defense (DOD) Comments To The GAO Recommendations:
Recommendation 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to direct the
Director of the Defense Finance and Accounting Service (DFAS) to ensure
that the DFAS Columbus completes its review and correction of the
remaining fiscal year (FY) 2000 illegal and otherwise improper
adjustments by September 30, 2002.
DOD Response: On July 31, 2001, the Under Secretary of Defense
(Comptroller) directed the Director, Defense Finance and Accounting
Service to correct erroneous disbursement adjustments, install adequate
internal controls in the Contract Reconciliation System, and implement
adequate procedures to monitor future adjustments to closed accounts.
The DFAS has taken the required actions. Of the $615 million of
adjustments identified by the GAO for FY 2000 as illegal or otherwise
improper, $593 million adjustments have been reversed as of June 13,
2002. The DFAS has supplied additional documentation for $8 million of
adjustments that the GAO now recognizes as proper and not requiring
reversal. Supporting documentation has been supplied to the GAO for an
additional $7 million and is awaiting review and approval by the GAO
Office of General Counsel. The remaining $7 million of adjustments is
under review by the DFAS and will be resolved by September 30, 2002,
either through GAO approval of supporting documentation or reversal by
the DFAS.
The DFAS has initiated either a full or partial reaudit of 33 contracts
adversely affected by reversing adjustments. The partial reaudit of two
of these contracts, including corrective actions, is complete. The
remaining 31 reaudits and corresponding corrective actions will be
completed by September 30, 2002.
Recommendation 2: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to direct the
Director of the DFAS to immediately reverse and correct closed account
adjustments made during FY 2001 identified in this report as illegal or
otherwise improper.
DOD Response: Reversing adjustments for all the FY 2001 closed account
adjustments identified as illegal or otherwise improper either have
been processed or are pending canceled fund approval. Many of the
reversing adjustments created adverse accounting conditions for a large
number of contracts. As a result, either a complete or partial reaudit
will he necessary to determine the correct accounting for these
contracts. Due to the high volume and the complexity of contracts
requiring review, reaudits will be completed by September 30, 2004.
Recommendation 3: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to direct the
Director of the DFAS to ensure that the DFAS Columbus completes the
review and correction of the additional $1.1 billion of FY 2001
adjustments it has scheduled for detailed review.
DOD Response: The DFAS Reconciliation Directorate's review of $1.1
billion FY 2001 closed account adjustments for sufficiency of
supporting documentation and necessity is in process and will be
completed by December 31, 2002. Reversing adjustments will be effected
immediately upon identification of improper closed account adjustments.
The reversing adjustments may create adverse accounting conditions for
a large number of contracts. As a result, either a complete or partial
reaudit may he necessary to determine the correct accounting for these
contracts and will be completed by September 30, 2004.
Recommendation 4: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to direct the
Director of the DFAS to continue with its top-level management
attention and monitoring of the program for future adjustments to
closed appropriation accounts.
DOD Response: Top-level management will continue to pay close attention
to closed account adjustments, as well as ensuring a periodic review of
internal controls is performed to evaluate their adequacy. The
performance standards for all Reconciliation personnel, including the
Reconciliation and Contract Pay Directors, now reflect the
responsibility for ensuring the propriety of canceled fund adjustments.
In addition, changes have been made to the Contract Reconciliation
System to identify and prevent canceled fund adjustment violations.
Finally, the reconciliation matrix has been updated to include a
quarterly review of canceled fund adjustments for necessity and
sufficiency of supporting documentation.
Recommendation 5: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to continue to
monitor these adjustments to ensure that any potential Antideficiency
Act violations that may occur are promptly investigated and reported as
required by the Antideficiency Act, 31 U.S.C. 1351, and implementing
guidance.
DOD Response: Corrections to charge the proper appropriation must be
made irrespective of whether the correct appropriation has sufficient
balances available or whether there is a potential violation of the
Antideficiency Act. If an apparent violation of the Antideficiency Act
occurs as a result of a correction, the applicable DoD Component is
required to conduct a review and/or investigation, as applicable, in
accordance with the Antideficiency Act and Volume 14, "Administrative
Control of Funds and Antideficiency Act Violations," of the Department
of Defense Financial Management Regulation.
[End of enclosure]
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Larry W. Logsdon, (703) 695-7510:
Acknowledgments:
Staff members who made key contributions to this report were Bertram J.
Berlin, Francine M. Delvecchio, Stephen P. Donahue, Dennis B. Fauber,
Jeffrey A. Jacobson, Keith E. McDaniel, and Harold P. Santarelli.
[End of section]
Footnotes:
[1] National Defense Authorization Act for Fiscal Year 1991 (Public Law
101-510, dated November 1990).
[2] DOD did not maintain complete information on the number of closed
account adjustments made prior to January 1997, therefore, this
information was not readily available and could not be verified.
[3] U. S. General Accounting Office, Canceled DOD Appropriations: $615
Million of Illegal or Otherwise Improper Adjustments, GAO-01-994T
(Washington, D.C.: July 26, 2001) and Canceled DOD Appropriations: $615
Million of Illegal or Otherwise Improper Adjustments, GAO-01-697
(Washington, D.C.: July 26, 2001).
[4] An adjustment to a closed appropriation account is illegal if the
appropriation account being charged (1) was closed before the initial
disbursement was made or (2) had not yet been enacted when the initial
disbursement was made. Otherwise improper adjustments occur when
accounting records show that no adjustment was necessary because the
initial payment was charged correctly or there is not sufficient
documentation available to determine if the initial disbursement charge
is incorrect and that the adjustment corrected an error.
[5] The $590 million adjustment for this contract is a different number
than the $592 million of reversed closed account adjustments. Only $210
million of the adjustment is included in the $592 million of reversed
adjustments.
[6] DOD uses a ’long line of accounting“ to accumulate appropriation,
budget, and management information for contract payments. DOD buying
activities assign a two-character code”ACRN”to each accounting line
containing unique information. As payments are made against the
contract, they are allotted to the applicable ACRNs.
[7] Under the law, once an account is closed, any further obligation
adjustments or disbursements cannot be made from it. Thereafter,
obligation adjustments and disbursements that previously would have
been chargeable to the expired appropriation account may only be
charged to current appropriations. However, agencies may not (1) use
more than 1 percent of the current amount appropriated for the same
purpose or (2) make any payment otherwise chargeable to the closed
account that would cause cumulative outlays to exceed the unexpended
balance remaining in the closed account.
[8] DOD provided additional documentation for $7 million of the $15
million too late for us to complete an analysis for the report.
[9] Our review was limited to those transactions within an adjustment
that involved only closed accounts. Reversing closed account
transactions may also require that proper closed and unclosed account
transactions be reversed. Therefore, there may have been millions of
dollars of other closed and unclosed account transactions included in
the reversal, in addition to the $590 million, for this contract and
the other 29 contracts.
[10] NULOs occur when recorded disbursements exceed recorded
obligations, indicating that expenditures may exceed amounts authorized
to be disbursed against an ACRN.
[11] The Antideficiency Act provides that an officer or employee of the
U.S. government may not make or authorize an expenditure or obligation
exceeding an amount available in an appropriation or fund, or enter
into a contract or other obligation for payment of money before an
appropriation is made. (31 U.S.C. 1341 (a).)
[12] CRS is an automated reconciliation system that DFAS Columbus has
used since 1995 to perform contract reconciliations and to correct
errors.
[13] The term special ACRN was used by the Air Force to establish
multiple funding of contract items. It provided payment instructions
necessary to allocate payments across other ACRNs as disbursements were
made. For example, special ACRN XB consisted of nine ACRNs with total
funding of $145.8 million.
[14] The Congress has provided DOD with legislative relief in recent
appropriation acts. For example, section 8079 of the fiscal year 2002
DOD appropriations act, Public Law No. 107-117, 115 Stat. 2265,
provides that for an expired or closed account that has a negative
unliquidated or unexpended balance, obligations or adjustments to
obligations that would have been chargeable to the account before it
expired or was closed (except for amount), and which are not otherwise
chargeable to any other current account, may be charged to any current
account available for the same purpose in an amount not to exceed 1
percent of the total appropriation for the current account. As a
result, DOD may use current funds even when an expired or closed
account has an inadequate balance to cover the payment.
[End of section]
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