Defense Budget
Improved Reviews Needed to Ensure Better Management of Obligated Funds Gao ID: GAO-03-275 January 30, 2003As of September 30, 2001, the Navy's operating appropriations had $2.1 billion in unliquidated--or unpaid--funds that were obligated during fiscal years 1997-99. Unliquidated obligations that are no longer needed to pay for goods and services tie up funds that could be used for other permissible purposes. In addition, inaccurate obligation data result in misstatement of budgetary information. Because of the large dollar value, we examined the Navy's management of unliquidated obligations. Specifically, we reviewed a statistically representative sample of the Navy's $1.4 billion in unliquidated operating obligations valued at $50,000 or more for fiscal years 1997-99 to determine whether these obligations were (1) properly accounted for and (2) reviewed in accordance with DOD regulations.
We estimated that $929 million of the $1.4 billion in unliquidated operating obligations valued at $50,000 or more for fiscal years 1997-99 was not properly accounted for (see table). Specifically, the Navy failed to deobligate $452 million of unliquidated operating obligations that was no longer needed and potentially available for other permissible purposes, such as contract modifications. In addition, $147 million of unliquidated operating obligations was inaccurately recorded because of problem disbursements--payments not properly matched to the correct obligation. A further $330 million was inaccurately recorded due to unresolved errors, such as bills that were not processed properly. The remaining $489 million in unliquidated operating obligations was properly accounted for and still needed for the original purpose. An estimated two-thirds of the unliquidated operating obligations over $50,000 were not properly accounted for as a result of the Navy's failure to review such obligations three times each year as required by DOD regulations. In addition, the Navy did not fully adhere to the regulation that unliquidated operating obligations of any value be reviewed at least once each year. Consequently, the Navy did not know how much money was tied up in unliquidated operating obligations that could potentially be used for other appropriate needs, and its budgetary reports to Congress and financial statements were inaccurate. Navy fund managers chose to selectively review their operating obligations, citing obstacles such as difficulties in obtaining accurate payment and billing data and the extensive length of time needed to review large numbers of obligations. Further, the Navy did not apply existing internal control activities to ensure that fund managers performed obligation reviews in accordance with DOD regulations, nor did it hold fund managers accountable for the accuracy and completeness of the reviews.
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Director: Team: Phone:GAO-03-275, Defense Budget: Improved Reviews Needed to Ensure Better Management of Obligated Funds
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Report to the Secretary of Defense:
United States General Accounting Office:
GAO:
January 2003:
DEFENSE BUDGET:
Improved Reviews Needed to Ensure Better Management of Obligated Funds:
Defense Budget:
GAO-03-275:
GAO Highlights:
Highlights of GAO-03-275, a report to the
Secretary of Defense.
DEFENSE BUDGET
Improved Reviews Needed to Ensure
Better Management of Obligated Funds.
Why GAO Did This Study:
As of September 30, 2001, the Navy‘s operating appropriations
had $2.1 billion in unliquidated”or unpaid”funds that were obligated
during fiscal years 1997-99. Unliquidated obligations that are
no longer needed to pay for goods and services tie up funds that could
be used for other permissible purposes. In addition, inaccurate
obligation data result in misstatement of budgetary
information. Because of the large dollar value,
we examined the Navy‘s management of unliquidated obligations.
Specifically, we reviewed a statistically representative sample of the
Navy‘s $1.4 billion in unliquidated operating obligations valued at
$50,000 or more for fiscal years 1997-99 to determine whether these
obligations were (1) properly accounted for and (2) reviewed in
accordance with DOD regulations.
What GAO Found:
We estimated that $929 million of the $1.4 billion in unliquidated
operating obligations valued at $50,000 or more for fiscal years 1997-
99
was not properly accounted for (see table). Specifically, the Navy
failed to deobligate $452 million of unliquidated operating obligations
that was no longer needed and potentially available for other
permissible
purposes, such as contract modifications. In addition, $147 million of
unliquidated operating obligations was inaccurately recorded because of
problem disbursements”payments not properly matched to the correct
obligation. A further $330 million was inaccurately recorded due to
unresolved errors, such as bills that were not processed properly. The
remaining $489 million in unliquidated operating obligations was
properly accounted for and still needed for the original purpose.
An estimated two-thirds of the unliquidated operating obligations over
$50,000 were not properly accounted for as a result of the Navy‘s
failure to
review such obligations three times each year as required by DOD
regulations. In addition, the Navy did not fully adhere to the
regulation
that unliquidated operating obligations of any value be reviewed at
least once each year. Consequently, the Navy did not know how much
money
was tied up in unliquidated operating obligations that could
potentially
be used for other appropriate needs, and its budgetary reports to
Congress and financial statements were inaccurate. Navy fund managers
chose to selectively review their operating obligations, citing
obstacles
such as difficulties in obtaining accurate payment and billing data
and
the extensive length of time needed to review large numbers of
obligations.
Further, the Navy did not apply existing internal control activities to
ensure that fund managers performed obligation reviews in accordance
with DOD
regulations, nor did it hold fund managers accountable for the accuracy
and completeness of the reviews.
Estimate of Navy‘s Unliquidated Operating Obligations Valued at $50,000
or More for Fiscal Year 1997-99, as of September 30, 2001.
[See PDF for Image]
[End of Figure]
What GAO Recommends:
We are recommending that the Navy adhere to obligation review
regulations and better apply existing internal controls to ensure
fund managers adhere to these regulations and are accountable for
accuracy and completeness. The Navy partially concurred, but
stated that it prioritizes obligation reviews to enable it to also
pursue other efforts to improve financial reporting. We note that DOD
regulations require review of all unliquidated obligations and do not
allow for prioritization.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Sharon Pickup
at (202) 512-9619 or pickups@gao.gov
Contents:
Letter:
Results in Brief:
Background:
Navy Did Not Properly Account for Large Portion of Unliquidated
Operating Obligations:
Navy Did Not Fully Adhere to DOD Review Regulations:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Agency Comments:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Estimate of Navy‘s Unliquidated Operating Obligations for
Fiscal Years 1997-99, as of September 30, 2001:
Table 2: Dollar Value Distribution of Fiscal Year 1997-99 Obligations
Reviewed in the GAO Sample, as of
September 30, 2001:
Abbreviations:
DODDepartment of Defense:
FMRFinancial Management Regulations:
United States General Accounting Office:
Washington, DC 20548:
January 30, 2003:
The Honorable Donald H. Rumsfeld
Secretary of Defense:
Dear Mr. Secretary:
The Department of Defense (DOD) confronts pervasive and complex
financial management problems that can seriously diminish the
efficiency of the military services‘ support operations. Recent audits
of DOD‘s financial statements highlight ongoing financial management
challenges that affect the development of accurate and complete
financial information. Among the challenges facing DOD is the lack of
accurate obligation data needed for effective budget management and
reliable financial reporting.
To ensure accuracy, it is important for the services to liquidate
obligations if funds are no longer needed as originally planned and
adjust their financial records accordingly. Unliquidated obligations
are those that have not yet been paid. The unliquidated obligations
that are no longer needed to pay for goods and services tie up funds
that could be used for other permissible purposes. Inaccurate
obligation data result in misstatement of budgetary information on
federal financial statements and in the President‘s budget and
contribute to the failure to provide basic financial
accountability.[Footnote 1]
DOD has recognized the need for the services to identify and reduce the
number and amount of unliquidated obligations by requiring that fund
managers review these obligations. In 1996, the DOD Office of the Under
Secretary of Defense (Comptroller) issued a memorandum directing DOD
components to review three times each year the accuracy of unliquidated
operating obligations valued at $50,000 or more. DOD also directed
agencies to review all other unliquidated operating obligations at
least once a year. In reviewing service obligation data, we noted that
the Navy has significantly large amounts of unliquidated obligations.
As of September 30, 2001, the Navy‘s operating appropriations[Footnote
2] had $2.1 billion in unliquidated funds that were obligated during
fiscal years 1997-99, of which $1.4 billion (67 percent) represented
unliquidated operating obligations of $50,000 or more.[Footnote 3]
Also, in 1999 and 2000, Navy auditors reported inaccuracies in the
Navy‘s obligation data and found that fund managers were not fully
complying with DOD review regulations.
Because of the large dollar value of unliquidated obligations and Navy
audit findings, we reviewed the Navy‘s management of its unliquidated
operating obligations. More specifically, we determined whether these
unliquidated operating obligations were (1) properly accounted for and
(2) periodically reviewed in accordance with DOD regulations. We
reviewed a statistically representative sample of the Navy‘s
unliquidated operating obligations of $50,000 or more for fiscal years
1997-99. We also analyzed documentation related to DOD‘s obligation
review regulations and the Navy‘s guidance to adhere to the
regulations, and interviewed Navy officials. A more detailed
description of our scope and methodology is included in appendix I.
Results in Brief:
On the basis of our sample, we estimated that $929 million of the
$1.4 billion in unliquidated operating obligations valued at $50,000 or
more for fiscal years 1997-99 was not properly accounted for.
Specifically, the Navy failed to deobligate $452 million of
unliquidated operating obligations that was no longer needed and
potentially available for other permissible purposes, such as contract
cost overruns or contract modifications. In addition, $477 million of
unliquidated operating obligations was not properly accounted for due
to billing and recording errors. For example, payments were made and
recorded on behalf of the wrong obligation, or payments were not made
because bills were not processed properly. In addition to tying up
funds unnecessarily, these obligation errors resulted in inaccurate
reporting in the Navy‘s budgetary reports and in its financial
statements. The remaining $489 million in unliquidated operating
obligations was properly accounted for and still needed for the
original purpose.
An estimated two-thirds of the unliquidated operating obligations over
$50,000 were not properly accounted for as a result of the Navy‘s
failure to review such obligations three times each year as required by
DOD regulations. In addition, the Navy did not fully adhere to the
regulation that unliquidated operating obligations of any value be
reviewed at least once each year. Consequently, the Navy did not know
how much money was tied up in unliquidated operating obligations that
could potentially be used for other permissible needs, and its
budgetary reports to Congress and financial statements were inaccurate.
Navy fund managers chose to selectively review their operating
obligations, citing obstacles such as difficulties in obtaining
accurate payment and billing data and the extensive length of time
needed to review large numbers of obligations. Further, the Navy did
not apply existing internal control activities to ensure that fund
managers performed obligation reviews in accordance with DOD
regulations, nor did it hold fund managers accountable for the accuracy
and completeness of the reviews.
Accordingly, we are recommending that the Navy adhere to its obligation
review regulations and apply existing internal controls to ensure fund
manager adherence to these regulations. The Navy partially concurred
with our recommendations, acknowledging that more thorough efforts
dedicated to the review of obligations would increase the accuracy and
reliability of financial reports. The Navy, however, noted that because
numerous factors contribute to problems in financial reports, it has to
prioritize its remedial efforts and therefore focus on reviewing
unliquidated obligations in available appropriations, correcting
systemic problems, and pursuing broad improvements in financial
management. When appropriate requirements have arisen, the Navy
commented that encumbrances for unliquidated obligations have not been
an impediment to obtaining necessary funds. While we agree focusing on
systemic issues offers opportunities to improve the Navy‘s financial
information, we note DOD‘s obligation review regulations are in fact
designed to minimize systemic problems and do not allow for
prioritization. Furthermore, the ability of the Navy to gain access to
funds when needs arise does not relieve it of the responsibility to
adhere to existing laws and regulations governing sound financial
management. We therefore are making no changes to the recommendations
in our report.
Background:
Obligations are recorded when an authorized agent of the federal
government enters into a legally binding agreement to purchase specific
goods or services.[Footnote 4] As bills are received and payments are
made, the recorded obligation is reduced by the amount of the payments
made. When all services or goods have been received and paid for, the
obligation is considered ’liquidated,“ and any remaining amount of the
unliquidated (unpaid) obligation should be deobligated and reduced to
zero.[Footnote 5] Operating funds must be obligated in the fiscal year
for which they are appropriated. However, obligated funds may be spent
over a period of 5 additional years, as bills for goods and services
are received and paid.[Footnote 6] If the goods and services are
received and paid for in the first year of the obligation, the
remaining unliquidated obligation can be reused for other needs
consistent with the source appropriation. If the goods and services are
received and paid for in the subsequent 5 years, the remaining
unliquidated obligation can still be used, if permissible, to modify
contracts or to increase existing obligations that might need more
funds.
Accurate obligation information is essential for reliable budgeting
reports to Congress, agency financial statements, performance
measurements, and funds control. Inaccurate obligation data misstates
the amount of funds available from the appropriation, contributes to
inaccuracies in the Navy‘s budget and financial reports, and
subsequently leads to inaccuracies in federal financial statements. For
example, the Navy‘s unliquidated obligations are reported in the Navy
Statement of Budgetary Resources, which are in turn incorporated in
other DOD and federal budget reports and financial statements.
We have documented weaknesses in DOD‘s accounting practices and Navy
auditors have documented inaccuracies in the Navy‘s obligations data.
In our 2001 Performance and Accountability Series report, we stated
that because of weaknesses in DOD‘s budget execution accounting, the
department does not know with certainty the amount of funding it has
available.[Footnote 7] Naval Audit Service reports published in
February 1999[Footnote 8] and January 2000[Footnote 9] reported that
Navy fund managers were not complying with obligation review
regulations and documented inaccuracies in the Navy‘s obligation data.
In July 2000 we reported that such inaccuracies in obligation data not
only hamper DOD‘s ability to produce timely and accurate financial
information, but also significantly impair efforts to improve the
economy and efficiency of its operations.[Footnote 10]
To ensure that obligation data are tracked and accurately reported, the
DOD Financial Management Regulations (FMR) require that the services,
including the Navy, review their unliquidated operating obligations
valued $50,000 or more three times a year to ensure that they are
accurate and that the funds are still needed.[Footnote 11] All
unliquidated operating obligations, regardless of dollar value, must be
reviewed at least once a year.[Footnote 12] Also, Congress specifically
established in chapter 15 of title 31, United States Code, a framework
for reviewing, adjusting, certifying to, and reporting on, among other
items, the status and amounts of unliquidated obligations.[Footnote 13]
In addition, for many interagency obligations entered under specific
statutory authority, such as the Economy Act,[Footnote 14] the
authorizing statute may mandate the deobligation of appropriations at
specific times or when certain conditions arise.[Footnote 15]
The DOD regulation also directs the services to implement effective
internal controls to ensure that the required reviews are completed and
that identified corrective actions are completed in a timely
manner.[Footnote 16] Further, the Federal Managers‘ Financial Integrity
Act of 1982[Footnote 17] requires that agencies‘ controls reasonably
ensure that (1) obligations and costs comply with applicable law and
(2) revenues and expenditures applicable to agency operations are
properly recorded and accounted for so that agency accounts and
reliable financial and statistical reports may be prepared and the
accountability of assets may be maintained.[Footnote 18]
Navy Did Not Properly Account for Large Portion of Unliquidated
Operating Obligations:
An estimated two-thirds of the Navy‘s unliquidated operating
obligations valued at $50,000 or more from the fiscal years 1997-99
operating appropriations was not properly accounted for. Specifically,
we estimated that $929 million of the $1.4 billion in unliquidated
operating obligations was not properly accounted for. As shown in table
1, $452 million of the unliquidated operating obligations was no longer
needed for its original purpose. These funds could have been used for
other permissible purposes of the same appropriation and fiscal year,
such as contract modifications. In addition, $477 million was not
properly accounted for due to billing and recording errors, including
$147 million in problem disbursements and $330 million in unresolved
accounting and recording errors. Finally,
$489 million in unliquidated operating obligations was properly
accounted for and still needed for the original purpose.
Table 1: Estimate of Navy‘s Unliquidated Operating Obligations for
Fiscal Years 1997-99, as of September 30, 2001:
Dollars in millions: Category: Still needed for original purpose;
Estimated total: $489; Percentage of total: 35.
Dollars in millions: Category: Not properly accounted for:; Estimated
total: [Empty]; Percentage of total: .
Dollars in millions: Category: No longer needed for original purpose;
Estimated total: 452; Percentage of total: 32.
Dollars in millions: Category: Problem disbursements; Estimated total:
147; Percentage of total: 10.
Dollars in millions: Category: Unresolved errors; Estimated total: 330;
Percentage of total: 23.
Dollars in millions: Category: Subtotal not properly accounted for:;
Estimated total: 929; Percentage of total: 65.
Dollars in millions: Category: Total; Estimated total: $1,419[A];
Percentage of total: 100.
[End of table]
Source: DOD.
Note: GAO analysis of DOD data.
[A] Amounts do not add to total due to rounding.
The Navy failed to deobligate an estimated $452 million that was no
longer needed for the original obligated purpose. According to DOD
regulations, these unliquidated funds should have been deobligated once
services had been performed, final payment issued, and the funds made
available for other purposes consistent with the appropriation. In many
of our sample cases, the entire amount of an obligation was not
required to meet billing needs and resulted in funds remaining over.
For example, in one of the cases we reviewed, $4.7 million had been
disbursed from a 1997 obligation, valued at $6 million, to support the
San Diego Harbor Tug Charter; however, the last disbursement was made
in October 1999. We discovered that the remaining unliquidated funds
were no longer needed and the Navy subsequently deobligated the
unliquidated $1.3 million. Similarly, we reviewed a 1996 (fiscal year
1997) obligation to fund systems development at the Bureau of Naval
Personnel. When the responsible Navy fund manager reviewed the
unliquidated obligation at our request, he determined that the
outstanding balance of $1.4 million attached to this obligation was no
longer required and deobligated it. In both of these cases, if Navy
personnel had reviewed these obligations in accordance with DOD
regulations, they would have detected the error and deobligated the
funds years ago, thereby possibly allowing Navy to use the funds for
other permissible purposes, including contract modifications, or other
obligation needs of the same appropriation and fiscal year.
The Navy had also not properly accounted for an estimated $147 million
in unliquidated operating obligations due to expenditures that were not
properly matched to a specific obligation recorded in the Navyís
recordsóproblem disbursementsWe previously reported that the Navy‘s
financial control policy and procedures do not ensure that the Navy can
match payments to corresponding obligations before or at the time a
payment is made. [Footnote 19]Consequently, if the Navy cannot resolve
these problem disbursements by matching the disbursement to the
original obligation, it must record a new obligation to cover the
disbursement after a payment is made. For example, one of our sample
items had an unliquidated obligation balance of $1,362,790 on September
30, 2001. The fund manager of this 1998 obligation stated that all of
the funds had been disbursed; however, the Navy‘s Standard Accounting
and Reporting System indicated that no disbursements had been made. We
discovered that in fact all of the funds had been disbursed for this
obligation, but the disbursements had been posted to the wrong
obligation in the accounting system. Funds that remain unliquidated due
to a problem disbursement may not be deobligated and used for other
purposes because the funds are still needed to reimburse the obligation
that was erroneously charged for the disbursement..
The Navy had not properly accounted for an estimated $330 million due
to unresolved accounting and recording errors. These obligations
remained unliquidated for several reasons. Most unresolved errors in
our sample occurred because fund managers were unable to identify
whether the providers of goods or services had been paid in full for
services rendered. The fund managers claimed that providers were often
slow to bill or had not sent a final bill. For example, we reviewed a
1997 obligation for aircraft maintenance that had an unliquidated
balance of $14.4 million. The fund managers said that they had not
received a bill from the Air Force, which provided the maintenance
service. In this case, the $14.4 million remained on the books as
unresolved, because the fund managers still expected to receive a bill
for the services. An example of a recording error is illustrated in a
$12 million obligation to support alterations on the USS LaSalle. A
disbursement was input twice and then reversed twice instead of once.
The second reversal of the disbursement left an unliquidated balance on
the obligation that should have been disbursed. Funds that remain
unliquidated due to unresolved accounting and recording errors cannot
be deobligated and used for other purposes, because the Navy needs to
have funds available to pay providers after the errors have been
resolved.
Navy Did Not Fully Adhere to DOD Review Regulations:
The Navy did not fully adhere to DOD regulations to review all
unliquidated operating obligations, including those obligations valued
at $50,000 or more three times per year and those obligations valued at
less than $50,000 once every year. Furthermore, the Navy did not
utilize internal controls to determine the accuracy of the review
process or the outcomes of the reviews. As a result, the Navy did not
know how much money was tied up in unliquidated operating obligations
that could potentially be used for other permissible needs.
According to DOD regulations, obligation reviews are to be conducted by
fund managers within 14 days following the end of January, May, and
September. DOD regulations also require the services to implement
effective internal controls to ensure that the reviews are completed
and corrective actions are implemented in a timely manner. The purpose
of these reviews is to ensure that the unliquidated balances are
accurate and still needed. The Navy issued implementing guidance that
(1) restates the three deadlines provided in the DOD regulations, (2)
requires that internal controls be implemented by each entity as
described in DOD regulations, and (3) requires each fund manager to
complete a checklist of the review steps performed. For example, one
required step is to follow up and ensure the obligation is still
needed. The guidance also requires the comptroller of each major
command to consolidate the review results from the fund managers and
include a list of all fund managers who did not fully adhere to DOD
regulations and the reason why. The major command confirmation
statement is to be forwarded to the Assistant Secretary of the Navy
(Financial Management and Comptroller), Office of Budget.
Although DOD regulations require Navy fund managers to review all
operating obligations once annually and those $50,000 and above three
times each year, fund managers have not fully adhered. Fund managers
stated that they selectively reviewed some unliquidated operating
obligations, but were unable to make all the required reviews or
complete all the steps on some of the cases they reviewed. For example,
fund managers first prioritize for review the high-value unliquidated
operating obligations in the current fiscal year to accommodate
immediate funding requirements. That frees the funds for reobligation
during the same fiscal year. Unliquidated operating obligations that
are approximately 5 years old and, based on appropriations that will
cancel at the end of the fiscal year, are also a high priority for
review in order to pay outstanding bills while funds are available. As
a result of prioritized and selective obligations review, some
operating obligations are not reviewed three times a year as required
by DOD regulations and some are not reviewed at all.
Navy fund managers provided several reasons why they selectively
reviewed obligations and did not review all of them. They stated that
the process of reviewing an obligation can be time-consuming due to a
lack of automated tools and, often, a lack of accurate billing
information needed to assess the validity of an obligation, especially
for older obligations. Officials acknowledged that the Navy‘s Standard
Accounting and Reporting System provides users with the capability to
conduct ad hoc queries of the obligation database, but they claim these
tools are not user-friendly because users must be familiar with the
system‘s database-programming code to take full advantage of its
capabilities. Few of the staff assigned to perform obligation reviews
had the required computer training or knowledge to write queries. Some
of the fund managers also told us that they were reluctant to review
the large volume of low dollar unliquidated operating obligations
because they felt the expected rate of return was not cost beneficial
given the magnitude of resources required to conduct the review. To
illustrate the large volume, Atlantic Fleet officials reported that
they had 579,904 unliquidated operating obligations valued $50,000 or
less,[Footnote 20] and officials at the Pacific Fleet reported 724,266
such unliquidated operating obligations.[Footnote 21] Further, some
fund managers stated that it was impossible for them to comply with the
requirement to review all such unliquidated operating obligations even
once a year, because they did not have enough staff to review the large
number of such obligations.
Officials in the Navy Comptroller Office acknowledged that fund
managers have reported difficulties performing obligation reviews. Navy
officials also acknowledged that inaccurate obligation data compromises
the reliability of their financial statements, and therefore it is
reasonable that they review their obligations according to the
regulations. Consequently, the Navy has not sought relief from DOD
obligation review regulations.
The Navy did not utilize internal control activities necessary to
ensure that fund managers performed thorough obligation reviews in
accordance with DOD regulations. Although some major commands had
developed written standard operating procedures or checklists to track
whether fund managers had reviewed their unliquidated operating
obligations, they did not hold managers accountable for the accuracy
and completeness of the reviews. Fund managers submitted obligation-
review confirmation statements to their major commands, but often the
commands could not determine specific details about the obligations,
including the number of unliquidated operating obligations reviewed,
the amount of the obligations reviewed, and the resolution of any
problems identified during the review. For example, one major command
has a process to review whether fund managers submit the required
obligation review paperwork. However, the command does not spot-check
obligations to determine if they are valid as claimed by the fund
managers and accepts the fund managers obligations review paperwork as
is.
Officials in the Navy Comptroller Office stated that fund managers
should place more emphasis on reviewing obligations in accordance with
DOD regulations. However, they did not think it would be productive to
discipline fund managers for failure to adhere to the regulations.
Rather, they believe that the Navy should rely on financial system
upgrades to improve the accuracy of obligation data.
Conclusions:
As highlighted in our 2001 Performance and Accountability Series
reports, financial management is one of the major management challenges
facing DOD.[Footnote 22] The large dollar value of unliquidated Navy
obligations that were not properly accounted for contributes to
inaccuracies in the Navy‘s budget and financial reports, and
subsequently leads to inaccuracies in federal financial statements and
the President‘s budget. Moreover, the Navy will not be able to pass the
test of an independent financial audit until it corrects inaccurate
obligation data.
DOD regulations and Navy guidance provide for unliquidated obligations
to be reviewed by fund managers on a regular basis. The fund managers‘
ability to deobligate or resolve the errors on many of our sample items
demonstrates that the review process could be effective. But the fund
managers have chosen to only selectively follow the requirements for
review because they said they were constrained by too little time to
review the large number of transactions, inaccurate billing
information, and the lack of automated tools. Although the Navy
recognized the potential benefits of timely identification of funds
that are no longer needed or in error, its internal controls have not
ensured that required reviews were made and corrective action taken. We
note that fund managers were able to successfully resolve nearly all of
the unliquidated operating obligations in our sample even though the
resolution of some of the obligations required an extensive amount of
time and effort. Therefore, it is likely that many of the unliquidated
obligations in our sample that were not properly accounted for could
have been identified and accounting errors could have been corrected
prior to our review had fund managers performed obligation reviews in
accordance with the DOD regulations.
Recommendations for Executive Action:
We recommend that the Secretary of Defense direct the Secretary of Navy
to:
* adhere to DOD unliquidated operating obligation review regulations;
and:
* better apply existing internal control activities to ensure adherence
to these regulations, and to hold fund managers accountable for the
accuracy and completeness of their reviews.
As you know, 31 U.S.C. requires the head of a federal agency to submit
a written statement of the actions taken on our recommendations to the
Senate Committee on Government Affairs and the House Committee on
Government Reform not later than 60 days after the dare of this report.
A written statement must also be sent to the House and Senate
Committees on Appropriations with the agency‘s first request for
appropriations made more than 60 days after the date of this report.
Agency Comments and Our Evaluation:
The Director, Office of the Budget, Department of the Navy provided
DOD‘s written comments on a draft of this report, which are provided in
their entirety in appendix II. The Navy partially concurred with our
recommendations and noted that more thorough efforts dedicated to the
review of obligations would increase the accuracy and reliability of
financial reports. It also plans to make the review process a part of
its management structure and stress the importance of accurate
financial statements. The Navy, however, commented that because
numerous factors contribute to problems in financial reports, it has to
prioritize its remedial efforts. Specifically, the Navy places a
premium on reviewing unliquidated obligations in available
appropriations, correcting systemic problems, and pursuing broad
improvements in financial management. For example, the Navy stated it
made significant improvements in correcting systemic issues--such as
problem disbursements--and is working to provide automated tools and
correct systemic issues that would positively impact the fund managers‘
ability to conduct obligation reviews. While it noted validating
unliquidated obligations is desirable and important, the Navy
emphasized that systemic improvement of its financial information
offers the better opportunity for success.
The Navy did not agree that the difficulty the fund managers have had
in reviewing unliquidated obligations precluded the use of funds for
other appropriate needs. It noted that Congress has intentionally and
progressively limited the availability of funds from prior year
appropriations, clearly establishing that the appropriateness of use
outweighs the efficiency of use. When appropriate requirements for the
application of available funds from prior year appropriations have
arisen, the Navy commented that encumbrances for unliquidated
obligations have not been an impediment to obtaining necessary funds.
While we understand numerous factors, including systemic issues, affect
the accuracy of Navy financial reports, DOD regulations require that
fund managers annually review all unliquidated obligations and, as
currently written, do not provide for prioritization of such reviews.
We recognize the Navy has taken steps to significantly reduce the
amount of outstanding problem disbursements; however, as our report
points out, problem disbursements are only part of the reason for the
significant amount of unliquidated obligations. For example, about $782
million of the $929 million in unliquidated obligations in our sample
were improperly accounted for due to reasons unrelated to problem
disbursements. Specifically, the aggregate of these transactions
involved funds that were no longer needed for their original purpose or
involved unresolved accounting and recording errors. While we agree
that focusing on systemic issues offers opportunities to improve the
Navy‘s financial information, we also note that the internal control
procedures reflected in DOD‘s obligation review regulations are in fact
designed to minimize systemic problems such as problem disbursements.
To the extent that the Navy‘s efforts to make systemic improvements
include automated tools designed to assist the fund managers in
complying with obligation review requirements, we believe these efforts
represent a positive step.
We disagree with the Navy‘s views regarding the impact of failing to
review all unliquidated obligations as required under current DOD
regulations. Regardless of whether the Navy is able to gain the funds
necessary from unliquidated obligations to satisfy appropriate
requirements as they arise, inaccurate obligation data in the Navy‘s
financial system has broader implications, such as inaccurate financial
reports and misstatements of budgetary information on federal financial
statements and in the President‘s budget. While we agree Congress has
placed statutory limitations on the availability of appropriated funds,
DOD, like all agencies, is responsible for effectively and efficiently
implementing its activities within the limitations applicable to the
appropriations it receives. Indeed, Congress specifically established
in chapter 15 of title 31, United States Code, a framework for
reviewing, adjusting, certifying to, and reporting on, among other
items, the status and amounts of unliquidated obligations.[Footnote 23]
In addition, the Federal Managers‘ Financial Integrity Act of
1982[Footnote 24] requires that agencies have controls to reasonably
ensure that revenues and expenditures applicable to agency operations
are recorded and accounted for properly so that accounts and reliable
financial and statistical reports may be prepared and accountability of
assets may be maintained.[Footnote 25] Finally, for many interagency
obligations entered under a specific statutory authority--such as the
Economy Act[Footnote 26]--the authorizing statute may mandate the
deobligation of appropriations at specific times or when certain
conditions arise.[Footnote 27] In this context, the ability of the Navy
to access funds encumbered by unliquidated obligations does not relieve
it of the responsibility to adhere to existing laws and regulations
governing sound financial management. We therefore are making no
changes to the recommendations in our report.
We are sending copies of this report to congressional committees with
jurisdiction over DOD‘s budget and the Secretary of the Navy. We will
also make copies available to others upon request. In addition, the
report will be available at no charge on the GAO Web site at http://
www.gao.gov.
If you or your staff have any questions about this report, please call
me at (202) 512-9619. Key contributors to this report are listed in
appendix III.
Sharon Pickup
Director, Defense Capabilities and Management:
Signed by Sharon Pickup:
[End of section]
Appendix I: Scope and Methodology:
Our objective was to determine whether the Navy‘s unliquidated
operating obligations were (1) properly accounted for and (2)
periodically reviewed in accordance with DOD regulations.
To determine whether Navy‘s unliquidated operating obligations were
properly accounted for, we requested that the Defense Finance
Accounting Office provide us with a database that identified all
unliquidated operating obligations outstanding on September 30, 2001.
We relied on the completeness and accuracy of that database based on
the office‘s representations and did not independently test or
reconcile the validity of their database. For our review, we selected
unliquidated operating obligations for fiscal years 1997-99. Older
obligations are more likely to be in error and thus provided a better
test of the Navy‘s obligation management practices. We then divided the
individual unliquidated operating obligations into two groups--those
valued at less than $50,000 and those valued at $50,000 or more. Those
valued at $50,000 or more represented $1.4 billion, or 67 percent of
the value of all outstanding operating obligations for fiscal years
1997-99.
From the population of obligations valued at $50,000 or more, we drew a
stratified random sample of 205 unliquidated operating obligations to
review. For each transaction, we obtained the following documentation:
(1) documentary support describing each obligation, including
amendments and modifications for each sample transaction; (2) responses
from Navy officials regarding whether each unliquidated operating
obligation in our sample was still needed for its original purpose
according to the criteria in the DOD Financial Management
Regulation[Footnote 28] (FMR); and (3) support for how to classify each
unliquidated operating obligation in our sample as still needed, no-
longer-needed, problem disbursement, or an unresolved accounting and
recording error.
The sample was selected from three strata defined by the dollar value
of the obligations, as shown in table 3.
Table 2: Dollar Value Distribution of Fiscal Year 1997-99 Obligations
Reviewed in the GAO Sample, as of September 30, 2001:
Strata: Over $10,000,000; Number of items: 5; Total value:
$240,382,914.38.
Strata: $500,000 to $10,000,000; Number of items: 100; Total value:
113,190,918.46.
Strata: $50,000 to $499,999; Number of items: 100; Total value:
14,571,125.75.
Strata: Total; Number of items: 205; Total value: $368,144,958.59.
[End of table]
Source: DOD.
Note: GAO analysis of DOD data.
To determine whether the amount of each unliquidated operating
obligation was properly accounted for, we reviewed support provided by
the Navy, discussed the status of the unliquidated obligation with the
primary Navy official responsible for the individual transaction, and
used the criteria set forth in DOD‘s regulations. We classified
unliquidated operating obligation transactions as ’still needed“ and
properly accounted for when the Navy provided documentation to support
that the contracted goods or services were still needed; thus, the
transaction passed a bona fide needs test. Items not properly accounted
for fell into three categories. We classified the transaction ’no
longer needed for original purposes“ when the Navy could not provide
support that a bona fide need existed. We classified transactions as
’problem disbursements“ when specific disbursements were not properly
matched to corresponding obligations recorded in the department‘s
records. We classified the remaining unliquidated operating obligation
transactions as ’unresolved accounting and recording errors“ when they
did not clearly meet the criteria for needed, no-longer-needed, or
problem disbursements.
To determine if the Navy‘s unliquidated operating obligations were
periodically reviewed in accordance with DOD regulations, we requested
that the Navy provide documentation and guidance on the Navy‘s
implementation of the regulations. We also interviewed officials at
12 locations to discuss (1) their procedures for performing obligation
reviews, (2) the magnitude of transactions involved to perform the
review as set forth in the DOD obligation review regulations, and (3)
whether the officials had difficulty meeting the obligation review
requirements, including the reasons why. We visited the Commander in
Chief of the Atlantic Fleet in Norfolk, Va.; the Commander, Navy Mid-
Atlantic Region in Norfolk, Va.; the Commander, Naval Sea Systems
Command in Washington, D.C.; the Naval Facilities Engineering Command
in Washington, D.C.; the Director of Strategic Systems Programs in
Washington, D.C.; the Commander in Chief of the Pacific Fleet in Pearl
Harbor, Hawaii; the Commander, Naval Region in Pearl Harbor, Hawaii;
the Commander, Naval Air Force Command of the Pacific Fleet in San
Diego, Calif.; the Commander, Naval Surface Force Command of the
Pacific Fleet in San Diego, Calif.; the Space and Naval Warfare Systems
Command in San Diego, Calif.; the Commander, Naval Air Systems Command
in Patuxent River, Md.; and the Bureau of Medicine and Surgery in
Washington, D.C.
We conducted our review from October 2001 through October 2002 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Agency Comments:
DEPARTMENT OF THE NAVY:
OFFICE OF THE ASSISTANT SECRETARY (FINANCIAL MANAGEMENT AND
COMPTROLLER) 1000 NAVY PENTAGON WASHINGTON, DC 20350-1000:
DEC 13:
Ms. Sharon L. Pickup:
Director, Defense Capabilities and Management U.S. General Accounting
Office:
441 G. Street, N.W. Washington, DC 20548:
Dear Ms. Pickup,
This is the Department of Defense (DoD) response to the GAO draft
report, ’DEFENSE BUDGET: Improved Reviews Needed to Ensure More
Efficient Use of Obligated Funds,“ dated November 8, 2002, (GAO Code
350126/GAO-03-275).
The Department of the Navy (DoN) has reviewed the draft report and
partially concurs with the recommendations. More thorough efforts
dedicated to the review of obligations in expired accounts would
increase the accuracy and reliability of financial reports. However,
problems in departmental financial reports have been recognized as
attributable to numerous factors, and DoN must prioritize its approach
to pursuing the most effective remedies across-the-board. DoN places a
premium on reviewing those accounts available for new obligations, in
correcting major systemic problems, and in pursuing improvements in
financial management of broad reach. We also do not agree that the
difficulty our organizations have had in comprehensively validating
unliquidated obligations has precluded the use of funds for other
appropriate needs. The availability of resources in expired accounts
has been intentionally and progressively limited by the Congress,
clearly establishing that the appropriateness of use outweighs the
efficiency of use. When appropriate requirements for application of
expired balances have arisen, encumbrances for unliquidated obligations
have simply not been an impediment.
Our focus on systemic solutions has resulted in significant
improvements. For example, outstanding problem disbursement balances in
DoN, over $14 billion just a few years ago, have been reduced to less
than $400 million in FY 2002. The DoN will continue to explore ways to
improve our accounting and reporting systems, in accordance with the
priorities that emerge from the Financial Management Modernization
Program. In short, we believe that although unliquidated obligation
validation requirements are desirable and important, the systemic
improvement of our financial information offers the better opportunity
for success. Specific comments for each recommendation are enclosed. My
action officer is Mr. John Frey, (703) 614-5343, frey.john@hq.navy.mil.
We appreciate the opportunity to comment on the draft report.
Sincerely,
Albert T. Church, III:
Director:
Office of Budget:
Signed by Albert T. Church III:
GAO DRAFT REPORT - DATED NOVEMBER 8, 2002 GAO CODE 350126/GAO-03-275:
’DEFENSE BUDGET: IMPROVED REVIEWS NEEDED TO ENSURE MORE EFFICIENT USE
OF OBLIGATED FUNDS“:
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense:
direct the Secretary of the Navy to adhere to DoD and Navy unliquidated
operating obligation review regulations. (p.12/GAO Draft Report):
DOD RESPONSE: Partially concur. Secretary of Defense direction is not
needed to implement the recommendation. DoN has demonstrated that
accurate budgetary and financial reports are important by focusing its
resources on unliquidated obligations in available appropriations and
correcting systemic issues such as problem disbursements. The DoN has
made tremendous strides over the past several years in reducing
outstanding problem disbursement balances, with an FY 2002 ending year
balance of less than $400 million compared with over $14 billion
several years ago.
Departmental financial statement accuracy and completeness in general,
and unliquidated obligation reviews specifically, are affected by
numerous systematic issues; therefore, DoN fund holders are required to
prioritize their efforts and have been unable to comply fully with the
requirement to review expired appropriations. Since reviewing
unliquidated obligations in expired appropriations is required, the
Department of the Navy is working to provide automated tools and
correct systemic issues which positively impacts the fund holders‘
ability to perform these reviews.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense:
direct the Secretary of the Navy better apply existing internal control
activities to ensure adherence to the DoD and Navy‘s unliquidated
operating obligation review regulations, and to hold fund managers
accountable for the accuracy and completeness of their reviews. (p.12/
GAO Draft Report):
DOD RESPONSE: Partially concur. Secretary of Defense direction is not
needed to implement the recommendation. The Department of the Navy will
continue to make the review process itself a continuous part of our
management structures and stress the importance of accuracy of monthly
and quarterly financial statements.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Sharon Pickup (202) 512-9619
Gary L. Billen (214) 777-5703:
Staff Acknowledgments:
In addition to the individuals named above, Lori Adams, Linda Garrison,
Gregory Kutz, Steve L. Pruitt, Rhonda P. Rose, and R.K. Wild made key
contributions to this report.
GAO‘s Mission:
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analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO‘s commitment to
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FOOTNOTES
[1] ’Providing basic financial accountability“ has been identified by
GAO as a governmentwide high-risk area in need of attention. See U.S.
General Accounting Office, High-Risk Series: An Update, GAO-01-263
(Washington, D.C.: Jan. 2001).
[2] ’Operating“ appropriations include the Operation and Maintenance
(O&M), Defense-wide, and Defense Health Program appropriations.
[3] The Navy obligated a total of $25.6 billion in operating funds
during fiscal years 1997-99, as reported in its Standard Accounting and
Reporting System, which maintains approximately 90 percent of all
operating appropriation obligations.
[4] 31 U.S.C. 1501; DOD Financial Management Regulation (FMR) volume 3,
chapter 8, section 080301.
[5] DOD FMR volume 3, chapter 8, section 080405 A, requires all
deobligations, adjustments or corrections to be documented and
processed within 10 working days of their identification.
[6] 31 U.S.C. 1552.
[7] U.S. General Accounting Office, High Risk Series: An
Update,GAO-01-263 (Washington, D.C.: Jan. 1, 2001).
[8] Naval Audit Service, Obligations Associated Primarily with
Indefinite Delivery Contracts and Basic Ordering Agreements (Falls
Church, Va.: February 18, 1999).
[9] Naval Audit Service, Validation of Selected Work Request
Obligations in the Standard Accounting and Reporting System
(Washington, D.C.: Jan. 28, 2000).
[10] U.S. General Accounting Office, Department of Defense:
Implications of Financial Management Issues, GAO/T-AIMD/NSIAD-00-264
(Washington, D.C.: July 20, 2000).
[11] DOD FMR volume 3, chapter 8, section 080403 B. DOD first
implemented this requirement in May 1996 via a memorandum issued by the
Office of the Under Secretary of Defense to all military services,
including the Navy. DOD formally added the requirement to volume 3,
chapter 8 of the FMR in November 2000.
[12] DOD FMR volume 3, chapter 8, section 080403 E.
[13] 31 U.S.C., chapter 15, subchapter IV. 31 U.S.C. § 1554(b)
specifically directs heads of agencies to report to the President and
the Secretary of the Treasury, and to certify to those reports,
regarding unliquidated obligations and other balances and adjustments.
Section 1554(c) directs agencies to establish controls to assure that
an adequate review of obligated balances is performed.
[14] 31 U.S.C. § 1535.
[15] Section 1535(d) of the Economy Act, for example, requires
deobligation of funds at the end of their period of availability if the
performing agency has not performed or otherwise made authorized
contracts.
[16] DOD FMR volume 3, chapter 8, section 080404.
[17] P.L. 97-255, § 2, 96 Stat. 814, September 8, 1982 (codified at 31
U.S.C. § 3512(b) and (c)), and is commonly called the Federal Managers‘
Financial Integrity Act of 1982.
[18] 31 U.S.C. § 3512(c)(1).
[19] U.S. General Accounting Office, Financial Management: Problems in
Accounting for Navy Transactions Impair Funds Control and Financial
Reporting, GAO/AIMD-99-19 (Washington, D.C.: Jan. 19, 1999).
[20] As of Mar. 10, 2002.
[21] As of June 14, 2002.
[22] U.S. General Accounting Office, High Risk Series: An Update,
GAO-01-263 (Washington, D.C.: Jan. 1, 2001).
[23] 31 U.S.C., chapter 15, subchapter IV. 31 U.S.C. § 1554(b)
specifically directs heads of agencies to report to the President and
the Secretary of the Treasury, and to certify to those reports
regarding unliquidated obligations and other balances and adjustments.
Section 1554(c) directs agencies to establish controls to assure that
an adequate review of obligated balances is performed.
[24] P.L. 97-255, § 2, 96 Stat. 814, September 8, 1982 (codified at 31
U.S.C. § 3512(b) and (c)), and is commonly called the Federal Managers‘
Financial Integrity Act of 1982.
[25] 31 U.S.C. § 3512(c)(1).
[26] 31 U.S.C. § 1535.
[27] Section 1535(d) of the Economy Act, for example, requires
deobligation of funds at the end of their period of availability if the
performing agency has not performed or otherwise made authorized
contracts.
[28] DOD FMR volume 3, chapter 8, section 080303 A.
GAO‘s Mission:
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of the federal government for the American people. GAO examines the use
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analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO‘s commitment to
good government is reflected in its core values of accountability,
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Each day, GAO issues a list of newly released reports, testimony, and
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