Navy Working Capital Fund
Backlog of Funded Work at the Space and Naval Warfare Systems Command Was Consistently Understated Gao ID: GAO-03-668 July 1, 2003The Space and Naval Warfare Systems Command (SPAWAR) has hundreds of millions of dollars of funded work that its working capital fund activities did not complete before the end of the fiscal year. Reducing the amount of workload carryover at fiscal year-end is a key factor in the effective management of Department of Defense (DOD) resources and in minimizing the "banking" of funds for work to be performed in subsequent years. GAO was asked to analyze SPAWAR's carryover balances. GAO assessed the accuracy of the budgeted amounts, the accuracy of the reported actual carryover balance, and the reliability of underlying financial data on which reported actual carryover is based.
The budgeted and reported actual amounts of SPAWAR gross carryover were consistently understated, resulting in the Congress and DOD decision makers not having reliable information to decide on funding levels for working capital fund customers. First, GAO found that SPAWAR centers' budgeted gross carryover for fiscal years 1998 through 2002 was significantly less than the reported actual year-end gross carryover. Budgeted gross carryover was understated primarily due to problems with estimating the underlying customer order data. For example, for fiscal year 2002, SPAWAR's budgeted amount for customer orders was 88 percent less than the reported actual orders received. Second, SPAWAR's reported actual carryover balances were also unreliable and adjusted downward by hundreds of millions of dollars. These adjustments understated carryover and resulted in Navy reports to the Congress showing that SPAWAR carryover balances for fiscal years 1998 through 2002 did not exceed DOD's 3-month carryover standard. SPAWAR was able to report reduced carryover balances for the following reasons. As GAO previously reported, the DOD guidance for calculating the number of months of carryover allowed carryover to be adjusted and understated. DOD agreed with GAO's previous recommendation and in December 2002 changed its carryover guidance. SPAWAR centers used accounting entries to manipulate the amount of customer orders for the sole purpose of reducing reported carryover below the 3-month standard. For example, the centers did this for at least $50 million at the end of fiscal year 2001. SPAWAR officials issued guidance in September 2002 discontinuing this practice. Finally, SPAWAR had not taken key steps to verify the underlying financial data on which reported actual carryover is based. The SPAWAR centers had only recently begun conducting the required tri-annual reviews of such data, which DOD has required since 1996. However, the reviews were ineffective, including the exclusion of slightly less than half of their reported actual carryover from the review process.
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-03-668, Navy Working Capital Fund: Backlog of Funded Work at the Space and Naval Warfare Systems Command Was Consistently Understated
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Space and Naval Warfare Systems Command Was Consistently Understated'
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Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives:
July 2003:
NAVY WORKING CAPITAL FUND:
Backlog of Funded Work at the Space and Naval Warfare Systems Command
Was Consistently Understated:
GAO-03-668:
GAO Highlights:
Highlights of GAO-03-668, a report to the Chairman, Subcommittee on
Defense, Committee on Appropriations, House of Representatives
Why GAO Did This Study:
The Space and Naval Warfare Systems Command (SPAWAR) has hundreds of
millions of dollars of funded work that its working capital fund
activities did not complete before the end of the fiscal year.
Reducing the amount of workload carryover at fiscal year-end is a key
factor in the effective management of Department of Defense (DOD)
resources and in minimizing the ’banking“ of funds for work to be
performed in subsequent years. GAO was asked to analyze SPAWAR‘s
carryover balances. GAO assessed the accuracy of the budgeted amounts,
the accuracy of the reported actual carryover balance, and the
reliability of underlying financial data on which reported actual
carryover is based.
What GAO Found:
The budgeted and reported actual amounts of SPAWAR gross carryover
were consistently understated, resulting in the Congress and DOD
decision makers not having reliable information to decide on funding
levels for working capital fund customers. First, GAO found that
SPAWAR centers‘ budgeted gross carryover for fiscal years 1998 through
2002 was significantly less than the reported actual year-end gross
carryover.
SPAWAR Systems Centers‘ Budgeted and Reported Actual Gross Workload
Carryover:
[See PDF for image]
[End of table]
Second, SPAWAR‘s reported actual carryover balances were also
unreliable and adjusted downward by hundreds of millions of dollars.
These adjustments understated carryover and resulted in Navy reports
to the Congress showing that SPAWAR carryover balances for fiscal
years 1998 through 2002 did not exceed DOD‘s 3-month carryover
standard. SPAWAR was able to report reduced carryover balances for the
following reasons:
* As GAO previously reported, the DOD guidance for calculating the
number of months of carryover allowed carryover to be adjusted and
understated. DOD agreed with GAO‘s previous recommendation and in
December 2002 changed its carryover guidance.
* SPAWAR centers used accounting entries to manipulate the amount of
customer orders for the sole purpose of reducing reported carryover
below the 3-month standard. For example, the centers did this for at
least $50 million at the end of fiscal year 2001. SPAWAR officials
issued guidance in September 2002 discontinuing this practice.
Finally, SPAWAR had not taken key steps to verify the underlying
financial data on which reported actual carryover is based. The SPAWAR
centers had only recently begun conducting the required tri-annual
reviews of such data, which DOD has required since 1996. However, the
reviews were ineffective, including the exclusion of slightly less
than half of their reported actual carryover from the review process.
What GAO Recommends:
GAO is making several recommendations aimed at improving the accuracy
and reliability of SPAWAR‘s and other working capital fund activities‘
budgeted and reported actual year-end carryover amounts. GAO is also
making recommendations to improve SPAWAR‘s tri-annual review process
so that these reviews can serve to verify the reliability of
underlying financial data. DOD concurred with 12 of the 14
recommendations and partially concurred with 2. For these 2
recommendations, DOD agreed with GAO‘s intent to ensure that obligated
and unobligated balances are reviewed regularly to ensure effective
use of funds.
www.gao.gov/cgi-bin/getrpt?GAO-03-668.
To view the full report, including the scope and methodology, click on
the link above. For more information, contact Gregory D. Kutz at (202)
512-9505 or kutzg@gao.gov.
[End of section]
Letter:
Results in Brief:
Background:
Gross Carryover Budget Estimates Were Consistently and Substantially
Understated:
Reported Actual Carryover Balances Were Consistently Understated:
Reported Actual Carryover Is Based on Unreliable Underlying Financial
Data:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
GAO Comments:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables :
Table 1: SPAWAR Systems Centers' Budgeted and Reported Actual Gross
Carryover from Fiscal Year 1998 through Fiscal Year 2002:
Table 2: SPAWAR Systems Centers' Budgeted and Reported Actual Orders
Received from Customers for Fiscal Year 1998 through Fiscal Year 2002:
Table 3: SPAWAR Systems Centers' Reported Actual Gross Carryover before
and after Adjustments for Fiscal Years 1998 through 2002:
Figure :
Figure 1: DOD Carryover Computation Based on the Fiscal Year 2002
Budget:
Letter July 1, 2003:
The Honorable Jerry Lewis
Chairman, Subcommittee on Defense
Committee on Appropriations
House of Representatives:
Dear Mr. Chairman:
This is the third in a planned series of reports that discusses the
Defense Working Capital Fund fiscal year-end workload funding issue,
generally referred to as "carryover." Section 1051 of the Floyd D.
Spence National Defense Authorization Act For Fiscal Year 2001[Footnote
1] required that we review various aspects of the Department of Defense
(DOD) policy that allowed Defense Working Capital Fund activities to
carry over a 3-month level of work[Footnote 2] to ensure continuity of
operations from one fiscal year to the next. Excessive amounts of
carryover[Footnote 3] financed with customer appropriations may
indicate excessive or unneeded funds and are subject to reductions by
DOD and the congressional defense committees during the budget review
process. To the extent that carryover is high, the Congress may
redirect the funds gained from such reductions to other priority
initiatives.
In May 2001, we reported[Footnote 4] that (1) DOD did not have a sound
analytical basis for its 3-month carryover standard, (2) military
services used different methods to calculate the number of months of
carryover, and (3) some activity groups underestimated their budgeted
carryover year after year, thereby providing decision makers with
misleading year-end carryover information resulting in more funding
being provided than was:
intended. In June 2002, we reported[Footnote 5] on our review of the
contract portion of the Air Force depot maintenance activity group. We
found that the Air Force reported carryover balances were not reliable
due to (1) faulty assumptions used in calculating work-in-process and
(2) records not accurately reflecting work that was actually completed
by fiscal year-end.
As requested and agreed to with your office, this report assesses
carryover related to the Navy's Space and Naval Warfare Systems Command
(SPAWAR) systems centers located at Charleston, South Carolina and San
Diego, California. The SPAWAR systems centers have hundreds of millions
of dollars of carryover and the carryover balance has been steadily
increasing over the last 5 years. Our objectives were to determine if
(1) differences existed between the budgeted and reported actual
gross[Footnote 6] carryover and, if so, the reasons for the variances,
(2) the reported actual carryover balances accurately reflected the
amount of work that remained to be accomplished, and (3) the SPAWAR
systems centers had reliable underlying financial information to serve
as the basis for reported actual carryover. Our review was performed
from July 2002 through June 2003 in accordance with U.S. generally
accepted government auditing standards. However, we did not fully
validate the accuracy of the accounting and budgeting data referred to
in this report, all of which were provided by the Navy. Further details
on our scope and methodology can be found in appendix I. We requested
comments on a draft of this report from the Secretary of Defense or his
designee. Written comments from the Under Secretary of Defense
(Comptroller) are reprinted in appendix II.
Results in Brief:
We found that the budgeted and reported actual amounts of gross
carryover were consistently understated, resulting in the Congress and
DOD decision makers not having carryover information they need to make
decisions regarding the level of funding to be provided to working
capital fund customers. For fiscal years 1998 through 2002, SPAWAR
systems centers reported that actual gross year-end carryover was
substantially greater than their budgeted gross carryover. For example,
for fiscal year 2002, the Navy budget request estimated that the SPAWAR
systems centers would have about $610 million in gross carryover, but
the Navy subsequently reported that the centers actually had about $896
million--a difference of $286 million, or 47 percent.
The budget requests substantially underestimated gross carryover
because the Navy also underestimated the dollar value of orders that
the SPAWAR systems centers would receive from customers by hundreds of
millions of dollars from fiscal years 1998 through 2002. For example,
for fiscal year 2002, in formulating its budget request the Navy
expected the SPAWAR systems centers to receive about $1.3 billion in
customer orders, but the Navy reported that the centers actually
received about $2.4 billion in customer orders--a difference of $1.1
billion, or 88 percent. The Navy underestimated customer orders from
fiscal years 1998 through 2002 for the following reasons.
* The customers had consistently underestimated the amount of orders
being placed with the SPAWAR systems centers.
* Orders received from certain Navy customers, called third-party
customers, were not included in SPAWAR's budget.
* The Naval Computers and Telecommunications Command merged with SPAWAR
systems centers, resulting in about $125 million of additional orders
being received in fiscal year 2001 than were reflected in the systems
centers' fiscal year 2001 budget request.
* The Navy changed its policy on performing work on certain types of
orders placed with the San Diego Systems Center, resulting in more work
being performed in the working capital fund than envisioned in the
original budget estimates for fiscal years 2001 and 2002.
* The SPAWAR systems centers received about $167 million in orders
financed with a supplemental appropriation in fiscal year 2002 that was
not reflected in the budget.
In addition, we found that the systems centers' reported actual
carryover balances were unreliable and adjusted downward by hundreds of
millions of dollars because (1) DOD's guidance for calculating the
number of months of carryover allowed these adjustments and (2) the
systems centers manipulated customer work orders at year-end to reduce
reported carryover.
* In May 2001, we reported[Footnote 7] that DOD's guidance was not
clear regarding the treatment of contractual obligations in calculating
carryover. The number of months of carryover is a ratio of the dollar
value of unfinished orders (numerator) at year-end to revenue earned
for that fiscal year (denominator). Since DOD's guidance was unclear,
the Navy reduced the dollar value of unfinished orders in the numerator
related to contractual obligations but did not reduce revenue in the
denominator by the amount of revenue earned from customers for
contractual services. As a result of this practice and another
discussed below, from fiscal years 1998 through 2002, the Navy was able
to reduce SPAWAR's carryover balances below the 3-month standard. In
May 2001, we also reported that the months of carryover reported by
Navy activity groups, which include the SPAWAR systems centers, would
more accurately reflect the actual backlog of in-house work if
adjustments for contract obligations affected both contract carryover
and contract revenue. The Office of the Under Secretary of Defense
(Comptroller) agreed with our May 2001 report. DOD revised its
carryover policy in December 2002, and the policy became effective with
the fiscal year 2004 budget submission. Under the revised method, DOD
eliminated the 3-month standard, and the allowable amount of carryover
is to be based on the overall disbursement rate of the customers'
appropriations financing the work. This policy, if implemented as
designed, would eliminate the contractual obligation and related
revenue problem discussed above. DOD is in the process of developing
written procedures for implementing the new policy.
* We found that the two systems centers manipulated their reported
carryover by making accounting entries at fiscal year-end that shifted
reimbursable work (working capital fund) to direct cite work (direct
appropriation) for the sole purpose of reducing reported carryover
below the 3-month standard.[Footnote 8] This practice resulted in the
Navy providing misleading carryover information to the Congress and
DOD. For example, the systems centers made these accounting entries at
fiscal year-end 2000 for at least $38 million and at fiscal year-end
2001 for at least $50 million. SPAWAR officials told us that this has
been a long-standing practice to reduce reported carryover below the 3-
month standard. After we discussed this with SPAWAR officials, guidance
was issued discontinuing this practice beginning in fiscal year 2002.
Furthermore, the actual carryover data that the two SPAWAR systems
centers reported were based on unreliable underlying financial data, in
part, because the two centers had not fully complied with DOD's May
1996 guidance that requires them, and all other DOD fund holders, to
conduct tri-annual reviews of commitments, obligations, and accrued
expenditures to ensure the accuracy and timeliness of financial
transactions. Specifically, our work showed that the two systems
centers (1) did not begin conducting their reviews until September 2001
and September 2002--at least 5 years after the establishment of the DOD
requirement, (2) excluded about 46 percent of their September 2002
reported actual carryover from their tri-annual reviews, (3) did not
effectively review dormant obligations (obligations with balances that
have not changed for more than 120 days) and, therefore, returned
unneeded funds to customers after the funds had expired, and (4) were
not effectively reviewing accrued expenditure data (accrued
expenditures reduce carryover). We also found that neither SPAWAR
headquarters nor the two systems centers' commanders had developed
effective policies and procedures for ensuring that tri-annual reviews
are conducted in accordance with DOD guidance and that timely and
appropriate corrective action is taken on problems that are identified
during the reviews.
We are making recommendations to the Secretary of Defense to (1)
improve the reliability of reported carryover amounts to decision
makers and (2) issue procedures for DOD's new carryover policy. We are
also making a recommendation to the Secretary of the Navy to improve
the management and reporting of budgeted and actual carryover by
comparing budgeted orders to actual orders received from customers, and
to consider these trends in developing the budget estimates on orders
to be received from customers. We are also making recommendations to
the Commanders of SPAWAR and one of the systems centers that are aimed
at improving the effectiveness of their tri-annual reviews. In its
comments on a draft of this report, DOD concurred with 12 of our 14
recommendations and partially concurred with the remaining 2
recommendations. For these 2 recommendations, DOD agreed with our
intent to ensure that obligations, unobligated balances, and
commitments are reviewed regularly to ensure effective use of funds. To
that end, DOD said it would review its guidance to ensure clarity of
intent.
Background:
According to the Navy's fiscal year 2003 budget, the Navy Working
Capital Fund will earn about $20.8 billion in revenue during fiscal
year 2003. The Navy Working Capital Fund consists of the following six
major activity groups: depot maintenance, transportation, base support,
information services, supply management, and research and development.
The Navy estimates that the research and development activity group
will earn about $7.7 billion during fiscal year 2003, the largest
activity group in terms of the dollar amount of revenue earned. This
activity group includes the following subactivity groups: (1) the Naval
Surface Warfare Center, (2) the Naval Air Warfare Center, (3) the Naval
Undersea Warfare Center, (4) the Naval Research Laboratory, and (5) the
Space and Naval Warfare Systems Centers.
The SPAWAR systems centers are the Navy's full-spectrum research,
development, test and evaluation, engineering, and fleet support
centers for command, control, and communication systems and ocean
surveillance and the integration of those systems. The systems centers
(1) support the fleet in mission and capability by providing capable
and ready command and control systems for the Navy and (2) provide the
innovative scientific and technical expertise and facilities necessary
to ensure that the Navy can develop, acquire, and maintain the warfare
systems needed to meet requirements. The SPAWAR systems centers'
primary locations are in San Diego, California and Charleston, South
Carolina.
Description of the Working Capital Fund Process of Setting Prices and
Obligating Customer Funds:
As part of the Navy Working Capital Fund, the SPAWAR systems centers
rely on sales revenue rather than direct congressional appropriations
to finance their operations. DOD policy requires working capital fund
activity groups to (1) establish prices that allow them to recover
their expected costs from their customers and (2) operate on a break-
even basis over time--that is, not make a profit nor incur a loss. DOD
policy also requires the activity groups to establish their sales
prices prior to the start of each fiscal year and to apply these
predetermined or "stabilized" prices to most orders received from
customers during the year--regardless of when the work is actually
accomplished or what costs are actually incurred.
Customers use appropriated funds to finance the orders placed with the
SPAWAR systems centers. When a systems center accepts the customer
order, its own obligational authority is increased and the customer's
appropriation is obligated by the amount of the order. The working
capital fund activity incurs obligations for costs, such as material
and labor, to perform the work.
In addition to receiving orders from customers to do work as part of
the working capital fund, SPAWAR systems centers also award hundreds of
millions of dollars in contracts with the private sector for work to be
performed for the centers' customers. These contracts and related work
are not included in the working capital fund from a financial
standpoint because the contractors directly bill the customers for work
performed and the customers directly pay the contractors. DOD and the
Navy refer to this process of awarding contracts for customers as
direct cite orders, since the SPAWAR systems centers cite the
customers' appropriation(s) on the contracts. The customers' funds are
obligated when the systems centers award the contracts with
contractors.[Footnote 9]
What Is Carryover and Why Is It Important?
Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not yet completed by working capital fund
activities at the end of the fiscal year.[Footnote 10] Carryover
consists of both the unfinished portion of work started but not yet
completed, as well as requested work that has not yet commenced. To
manage carryover, DOD converted the dollar amount of carryover to
equivalent months of work. This was done to put the magnitude of the
carryover in proper perspective. For example, if an activity group
performs $100 million of work in a year and had $100 million in
carryover at year-end, it would have 12 months of carryover. However,
if another activity group performs $400 million of work in a year and
had $100 million in carryover at year-end, this group would have 3
months of carryover.
The congressional defense committees and DOD have acknowledged that
some carryover is necessary at fiscal year-end if working capital funds
are to operate efficiently and effectively. In 1996, DOD established a
3-month carryover standard for all the working capital fund activities
except for the contract portion of the Air Force depot maintenance
activity group.[Footnote 11] In May 2001, we reported[Footnote 12] that
DOD did not have a basis for its carryover standard and recommended
that DOD determine the appropriate carryover standard for the depot
maintenance, ordnance, and research and development activity groups.
Based on our recommendation, in December 2002, DOD revised its
carryover policy for working capital fund activities. Under the revised
method, DOD eliminated the 3-month standard, and the allowable amount
of carryover is to be based on the overall disbursement rate of the
customers' appropriations financing the work. Too little carryover
could result in some activity groups not having work to perform at the
beginning of the fiscal year, resulting in the inefficient use of
personnel. On the other hand, too much carryover could result in an
activity group receiving funds from customers in one fiscal year but
not performing the work until well into the next fiscal year or
subsequent years. By minimizing the amount of the carryover, DOD can
use its resources most effectively and minimize the "banking" of funds
for work and programs to be performed in subsequent years.
Gross Carryover Budget Estimates Were Consistently and Substantially
Understated:
For fiscal years 1998 through 2002, SPAWAR systems centers' budgeted
gross carryover was significantly less than reported actual gross
carryover, thereby providing decision makers, including the Office of
the Under Secretary of Defense (Comptroller) and congressional defense
committees, misleading carryover information.[Footnote 13] These
decision makers use carryover information to determine whether the
SPAWAR systems centers have too much carryover. If the systems centers
have too much carryover, the decision makers may reduce the customers'
budgets and use these resources for other purposes. For example, during
its review of the fiscal year 2003 budget, the Office of the Under
Secretary of Defense (Comptroller) noted that the Navy research and
development activities carryover had been steadily increasing from
about $2.2 billion in fiscal year 1997 to about $3.4 billion in fiscal
year 2003. Since a significant portion of the carryover was related to
work that was to be contracted out, the Office of the Under Secretary
of Defense (Comptroller) reduced the customer funding by $161.1 million
because these efforts could be funded in fiscal year 2004 with no
impact on performance.
Customers' Underestimated Budgeted Orders Caused Understated Budgeted
Gross Carryover:
SPAWAR systems centers' reported actual year-end gross carryover was
substantially greater than their budgeted gross carryover. Table 1
shows that from fiscal year 1998 through fiscal year 2002 reported
actual gross carryover exceeded budgeted gross carryover, and the
difference has increased from about $153 million to about $286 million.
Table 1: SPAWAR Systems Centers' Budgeted and Reported Actual Gross
Carryover from Fiscal Year 1998 through Fiscal Year 2002:
Dollars in millions.
1998; Budgeted gross carryover[A]: $377; Actual gross carryover[A]:
$530; Actual exceeds budgeted carryover: $153.
1999; Budgeted gross carryover[A]: 332; Actual gross carryover[A]: 563;
Actual exceeds budgeted carryover: 231.
2000; Budgeted gross carryover[A]: 358; Actual gross carryover[A]: 613;
Actual exceeds budgeted carryover: 255.
2001; Budgeted gross carryover[A]: 567; Actual gross carryover[A]: 875;
Actual exceeds budgeted carryover: 308.
2002; Budgeted gross carryover[A]: 610; Actual gross carryover[A]: 896;
Actual exceeds budgeted carryover: 286.
Sources: Navy budget and accounting reports.
[A] Gross carryover is the dollar value of work that has been ordered
and funded (obligated) by customers but not completed by working
capital fund activities at the end of the fiscal year.
[End of table]
The Navy's budget requests consistently underestimated SPAWAR systems
centers' gross carryover, in part, because the Navy consistently
underestimated the amount of orders to be received from customers by
hundreds of millions of dollars. Table 2 shows that the amount of
difference between budgeted and reported actual orders increased from
about $352 million (39 percent) in fiscal year 1998 to about $1.1
billion (88 percent) in fiscal year 2002. Since orders received from
customers are the major source of funds for SPAWAR and one of the key
factors in determining the amount of carryover at fiscal year-end, it
is critical that the Navy has accurate budget estimates on the amount
of orders to be received from customers. However, for fiscal years
2000, 2001, and 2002 actual orders exceeded budgeted orders by at least
68 percent each year.
Table 2: SPAWAR Systems Centers' Budgeted and Reported Actual Orders
Received from Customers for Fiscal Year 1998 through Fiscal Year 2002:
Dollars in millions.
Budgeted; Fiscal year: 1998[A]: $ 912; Fiscal year: 1999[A]: $ 913; Fiscal year: 2000[A]: $ 890;
Fiscal year: 2001: $1,226; Fiscal year: 2002: $1,259.
Actual; Fiscal year: 1998[A]: 1,263; Fiscal year: 1999[A]: 1,243; Fiscal year: 2000[A]: 1,533;
Fiscal year: 2001: 2,055; Fiscal year: 2002: 2,363.
Difference; Fiscal year: 1998[A]: 352; Fiscal year: 1999[A]: 329; Fiscal year: 2000[A]: 644; Fiscal
year: 2001: 829; Fiscal year: 2002: 1,104.
Percentage; difference; Fiscal year: 1998[A]: 39;
Fiscal year: 1999[A]: 36; Fiscal year: 2000[A]:
72; Fiscal year: 2001: 68; Fiscal year: 2002: 88.
Sources: Navy budget and accounting reports.
[A] Figures do not add due to rounding.
[End of table]
The data in table 2 indicate that the SPAWAR systems centers' customers
have not accurately estimated the amount of orders they will place with
the systems centers. Customers determine and justify their anticipated
requirements for goods and services and the levels of performance they
require from the systems centers to fulfill mission objectives. Our
analysis of budget and accounting reports that provide information on
customer orders shows that orders financed with three appropriations
made up a large part of the differences in fiscal years 2000, 2001, and
2002. The appropriations used by customers to finance 49 percent to 67
percent of the differences for these 3 fiscal years were the:
* Other Procurement, Navy appropriation;
* Research, Development, Test, and Evaluation, Defense appropriation;
and:
* Research, Development, Test, and Evaluation, Navy appropriation.
Reasons for Variances between Budgeted and Reported Actual Gross
Carryover and Orders Received from Customers:
Officials from the Charleston and San Diego Systems Centers and SPAWAR
headquarters stated, and our work found, that customers have
historically understated their budget estimates on customer orders that
are received by the SPAWAR working capital fund. They stated that the
systems centers' budgets for orders are based on what the customers
tell them their requirements would be for a particular fiscal year.
However, they also told us that customers are hesitant to make a full
commitment to the estimated amount of work that will need to be
performed.
SPAWAR and Navy headquarters budget officials acknowledged that the
SPAWAR systems centers' budgets have consistently understated gross
carryover and orders received from customers (claimants). They also
stated that the dollar amount of orders that the systems centers
receive from customers must match the dollar amount of orders that
customers submit in their appropriated fund budgets. Customers only
record in their budgets those orders that they will be sending directly
to the systems centers. If a customer initially allocates budgeted
funds to an activity not related to the working capital fund--which is
a third party--and the third party places the order with a SPAWAR
systems center, the customer's budget reflects that these funds went to
a third party. This results in the amount of budgeted orders that the
systems centers receive from customers being understated. Navy
headquarters officials stated that this is not an easy problem to
resolve because there are many customers and no one person or office is
responsible for fixing the problem and it is hard to pinpoint which
customers are not budgeting correctly.
Navy headquarters budgeting officials also stated that the fiscal year
2001 and 2002 budgets further understated gross carryover and orders
for the following three reasons. First, the Naval Computers and
Telecommunications Command merged with SPAWAR, which resulted in about
$125 million of additional orders being received in fiscal year 2001
than was reflected in SPAWAR systems centers' budget. Second, the Navy
changed its policy on work performed on certain types of work orders
placed with the San Diego Systems Center. As a result, customers placed
more orders for work that was contracted out by the working capital
fund than was originally budgeted for in fiscal years 2001 and 2002.
Third, the SPAWAR systems centers received $166.7 million in orders
financed by the Defense Emergency Response Fund in fiscal year 2002
that was not reflected in the SPAWAR systems centers' budget. These
funds were provided via a supplemental appropriation.
Navy headquarters officials were aware of this budgeting problem and
issued guidance in March 2002 on preparing the fiscal 2004/2005 budget
estimates that stressed the importance of customers accurately
preparing budget estimates for orders placed with the Navy Working
Capital Fund, including the SPAWAR systems centers. The guidance also
stated that (1) it was imperative that all funds to be sent to the Navy
Working Capital Fund be accurately reflected in the budget and (2)
customers have historically underreported the funds to be placed with
the Navy Working Capital Fund (particularly with the research and
development business area that includes the SPAWAR systems centers) and
overreported the use of these funds in other areas.
Reported Actual Carryover Balances Were Consistently Understated:
In addition to understating budgeted gross carryover, SPAWAR systems
centers also consistently understated their reported actual carryover.
Inaccurate carryover information results in the Congress and DOD
officials not having the information they need to perform their
oversight responsibilities, including reviewing DOD's budget. Navy
reports show that the systems centers' fiscal year-end carryover
balances for fiscal years 1998 through 2002 did not exceed DOD's 3-
month carryover standard. However, we found that the systems centers'
reported carryover balances were understated because (1) DOD's guidance
for calculating the number of months of carryover allowed this to
happen and (2) the systems centers used accounting entries to
manipulate customer work orders at year-end to help reduce reported
carryover below the 3-month standard.
Defense Carryover Policy:
Prior to 1996, if working capital fund activity groups' budgets
projected more than a 3-month level of carryover, their customers'
budgets could be, and sometimes were, reduced by the Office of the
Under Secretary of Defense (Comptroller) and/or congressional
committees. Because of the military services' concerns about (1) the
methodology used to compute the months of carryover and (2) the
reductions that were being made to customer budgets because of excess
carryover, Defense performed a joint review[Footnote 14] of carryover
in 1996 to determine if the 3-month standard should be revised. Based
on the joint review, DOD decided to retain the 3-month carryover
standard for all working capital fund activity groups except Air Force
contract depot maintenance.[Footnote 15] Furthermore, as a result of
the review and concerns expressed by the Navy, DOD also approved
several policy changes that had the effect of increasing the carryover
standard for all working capital fund activities. Specifically, under
the policy implemented after the 1996 review, certain categories of
orders, such as those from non-DOD customers, and contractual
obligations, such as SPAWAR system centers' contracts with private
sector firms for research and development work, can be excluded from
the carryover balance[Footnote 16] that is used to determine whether
the carryover standard has been exceeded.
These policy changes were documented in an August 2, 1996, DOD decision
paper that provided the following formula for calculating the number of
months of carryover. (See fig.1.):
Figure 1: DOD Carryover Computation Based on the Fiscal Year 2002
Budget:
[See PDF for image]
[End of figure]
Carryover Calculation Understated Reported Carryover:
DOD's 1996 decision to allow certain categories of orders to be
excluded (adjustments) from reported gross carryover has had a
significant impact on SPAWAR systems centers' reported carryover,
particularly the adjustment for contractual obligations. As table 3
shows, these adjustments have allowed the systems centers to
significantly reduce actual reported gross carryover by hundreds of
millions of dollars, resulting in reported carryover below the 3-month
standard. As discussed below, we do not agree with how the Navy
interpreted DOD's guidance for using contractual obligations and
related revenue in calculating carryover. Our analysis of the systems
centers' adjustments to their carryover amounts shown in table 3 found
that contractual obligations accounted for 75 percent to 89 percent of
the dollar adjustments made.
Table 3: SPAWAR Systems Centers' Reported Actual Gross Carryover before
and after Adjustments for Fiscal Years 1998 through 2002:
Dollars in millions.
1998; Before adjustments: Dollars: $530; Before
adjustments: Months: 5.8; [Empty]; After adjustments: Dollars: $196;
After adjustments: Months: 2.1.
1999; Before adjustments: Dollars: 563; Before
adjustments: Months: 5.4; [Empty]; After adjustments: Dollars: 212;
After adjustments: Months: 2.0.
2000; Before adjustments: Dollars: 613; Before
adjustments: Months: 4.8; [Empty]; After adjustments: Dollars: 243;
After adjustments: Months: 1.9.
2001; Before adjustments: Dollars: 875; Before
adjustments: Months: 6.0; [Empty]; After adjustments: Dollars: 368;
After adjustments: Months: 2.5.
2002; Before adjustments: Dollars: 896; Before
adjustments: Months: 4.5; [Empty]; After adjustments: Dollars: 421;
After adjustments: Months: 2.1.
Sources: Navy budget and accounting reports.
[End of table]
In May 2001, we reported[Footnote 17] that the months of carryover
reported by Navy activity groups, which include the SPAWAR systems
centers, would more accurately reflect the actual backlog of in-house
work if adjustments for contract obligations affected both contract
carryover and contract revenue. As shown in figure 1, DOD's formula for
calculating months of carryover is based on the ratio of adjusted
orders carried over to revenue. The formula specifies that gross
carryover should be reduced by the amount of contract obligations.
However, DOD did not provide clear guidance on whether downward
adjustments for the revenue associated with contract services should
also be made. Unless this is done, the number of months of reported
carryover will be understated.
In our May 2001 report we recommended, among other things, that the
revenue used in calculating months of carryover be adjusted (reduced)
for revenue earned for work performed by contractors. However, as
discussed below, until recently DOD had not changed its policy for
calculating carryover. As a result, the Navy did not adjust the revenue
amount used in the denominator of the calculation and, therefore,
continued to understate its reported carryover in its budget
submissions to the Congress through fiscal year 2003. Navy officials
informed us that they used total revenue in their calculation because
total revenue represents the full operating capability of a given
activity group to accomplish a full year's level of workload. Further,
even though Navy officials acknowledged that the revenue amount used in
the calculation includes revenue earned from contracts, they stated the
reason for not removing contract-related revenue from the denominator
of the calculation was that the numerator of the calculation includes
carryover (funds) related to work for which contracts would eventually
be awarded but which had not yet been awarded at fiscal year-end. In
addition, Navy officials told us that the accounting systems cannot
readily break out what portion of the total revenue amount is contract-
related. They further told us that the revenue information can be
extracted from the system, but doing so involves a lot of work to
develop the program(s) necessary to obtain the information.
When the Navy reduces the dollar amount of carryover (numerator) by the
amount of contractual obligations and does not reduce the revenue
amount (denominator) for revenue associated with contracts, it is not
being consistent with the use of adjustments in the formula to
calculate carryover. Because the Navy cannot readily determine the
amount of contract-related revenue, we asked SPAWAR headquarters to
estimate what the amount would be for the systems centers based on the
same criteria they use to determine the dollar amount of contractual
obligations to be deducted in the carryover calculation. SPAWAR's
estimate shows that 63 percent of the total revenue amount used in
calculating the SPAWAR systems centers' number of months of actual
carryover reported for fiscal year 2002 is related to revenue
associated with contractual services. By not reducing total revenue
used in the calculation for revenue related to work performed by
contractors, the systems centers' reported months of carryover for that
fiscal year were understated.
In response to our May 2001 report, the Under Secretary of Defense
(Comptroller) agreed that the methodology for calculating carryover
needed to be revised. In December 2002, the Under Secretary of Defense
(Comptroller) issued new guidance on carryover for working capital fund
activities. Under the revised methodology, the formula shown in figure
1 has been eliminated and, therefore, working capital fund activities
can no longer reduce reported carryover by the amount of their
contractual obligations. DOD adopted the revised methodology for the
Defense Working Capital Fund fiscal year 2004 budget estimates, but DOD
has not yet issued written procedures to ensure that the services
consistently implement the new policy. DOD officials informed us that
they are developing the procedures and will update the appropriate
regulations in 2004. We did not evaluate DOD's revised carryover
policy.
Customer Orders Were Manipulated at Year-end to Reduce Reported
Carryover:
We also found that the systems centers reduced reported carryover by
simply making accounting entries that took work to be performed by the
working capital fund and turned it into work to be performed outside
the working capital fund. Customer work that is performed by the
working capital fund is referred to as reimbursable work. Customer work
that is not performed by the working capital fund is referred to as
direct cite work. Under the direct cite method of performing work, the
working capital fund acts as an agent to get the work done through a
private sector contractor. Customer funds that finance work done on a
direct cite basis are not included in the working capital fund.
Instead, the customer uses the direct cite funds to directly pay
private sector contractors for the work performed rather than
reimbursing or paying the working capital fund. Because the funds for
direct cite work are not part of the working capital fund, there is no
carryover associated with this work. Therefore, the work is not subject
to DOD's 3-month carryover standard.
The two SPAWAR systems centers made some accounting entries at fiscal
year-end that moved customer orders out of the working capital fund for
the sole purpose of reducing reported carryover below the 3-month
standard, which understated the amount of carryover that SPAWAR
reported to the Navy and DOD. They then reversed these accounting
entries in the beginning of the next fiscal year. Specifically, the
systems centers did this at fiscal year-end 2000 for customer orders
totaling at least $38 million and at fiscal year-end 2001 for orders
totaling at least $50 million. SPAWAR systems centers' officials
acknowledged that these accounting adjustments were made at fiscal
year-end to reduce reported carryover. The officials told us that this
has been a long-standing practice and was used as a "tool" to manage
reported carryover. For example, comptroller officials at one systems
center told us that as the fiscal year-end grew near, they had a good
idea of how much they needed to move from reimbursable to direct cite
in order to get down below the 3-month carryover standard. At year-end,
if it was determined that they moved more funds than needed to get
below the standard, they would move the excess back to reimbursable
before the accounting period was officially closed.
We do not view these actions as a tool for managing workload as
reflected by the reported carryover but as a misrepresentation of
actual carryover balances in order to mislead decision makers,
including DOD budget officials and the Congress. After discussing this
practice with SPAWAR headquarters officials, they issued guidance in
September 2002, prohibiting the use of reimbursable/direct cite
accounting adjustments to mask year-end carryover balances. In
discussing this with Navy headquarters and DOD officials, they told us
that they were not aware that the systems centers were doing this and
that they did not agree with this practice.
Reported Actual Carryover Is Based on Unreliable Underlying Financial
Data:
In addition to understating budgeted and reported actual carryover
information, the two SPAWAR systems centers' actual carryover data that
were reported to the Congress as part of the President's budget were
based on some unreliable underlying financial data. Although many
factors could have contributed to this data problem, a primary cause
was that the two centers had not fully complied with DOD guidance that
required them and all other DOD fund holders[Footnote 18] to conduct
tri-annual reviews of their financial data (outstanding commitments,
obligations, and accrued expenditures). In fact, although DOD
established its tri-annual review requirement in 1996 in order to
improve the timeliness and accuracy of its financial data, the
Charleston and San Diego Systems Centers did not conduct their first
reviews until September 2001 and September 2002, respectively. Further,
as of September 2002, the systems centers were fully complying with
only a few of the 16 specific tasks that they were required to
accomplish during their reviews.
As discussed below, three carryover-related problems with the two
systems centers' tri-annual reviews are that the centers (1) excluded
about 46 percent of their reported actual carryover from their
September 2002 tri-annual reviews, (2) were not effectively reviewing
dormant obligations[Footnote 19] and, therefore, were sometimes
returning unneeded funds to customers after the funds had expired, and
(3) were not effectively reviewing accrued expenditure data (accrued
expenditures reduce carryover). A fourth problem was that neither
SPAWAR headquarters nor the systems centers' commanders had developed
effective policies and procedures for ensuring that (1) tri-annual
reviews are conducted in accordance with DOD guidance and (2) timely
and appropriate corrective action is taken on problems that are
identified during the reviews.
Effective Tri-Annual Reviews Can Result in More Informed Carryover-
Related Budget Decisions and Other Benefits:
The May 1996 memorandum from the Under Secretary of Defense
(Comptroller) that established DOD's tri-annual review requirement
noted that the timely review of commitments and obligations to ensure
the accuracy and timeliness of financial transactions is a vital phase
of financial management. To illustrate this point, the Under Secretary
stated that the accurate recording of commitments and obligations (1)
forms the basis for formal financial reports issued by the department
and (2) provides information for management to make informed decisions
regarding resource allocation.
Carryover-related budget decisions are examples of resource allocation
decisions that require reliable obligation data. This is because there
is a direct link between the (1) carryover data that working capital
fund activities report to the Congress and DOD decision makers and (2)
obligation data contained in the accounting records of working capital
fund activities and their customers. Specifically,
* when working capital fund activities, such as the SPAWAR systems
centers, accept customer orders, obligations are created in the
customers' accounting records, and the systems centers become the "fund
holders" and:
* as work is performed and customers are billed, both the unliquidated
obligation balances in the customers' accounting records and the
working capital fund activities' reported carryover balances are
reduced.
DOD's implementing guidance for the tri-annual reviews requires fund
holders, such as the two SPAWAR systems centers, to certify that they
completed 16 specific tasks during their reviews. For example, the
guidance requires fund holders to confirm, among other things, that
they have (1) traced the obligations and commitments that are recorded
in their accounting systems back to source documents and (2) conducted
adequate follow-up on all dormant obligations and commitments to
determine if they are still valid.[Footnote 20] Additionally, the
guidance requires fund holders to:
(1) identify the problems that were noted during their reviews, (2)
advise their higher headquarters--SPAWAR headquarters for the two
systems centers--whether, and to what extent, adjustments or
corrections to remedy noted problems have been taken, (3) summarize, by
type, the actions or corrections remaining to be taken, (4) indicate
when such actions/corrections are expected to be completed, and (5)
identify the actions that have been taken to preclude identified
problems from recurring in the future. Thus, if properly implemented,
tri-annual reviews can provide a systematic process that helps fund
holders not only improve the reliability of their financial data but
also identify and correct the underlying causes of their data problems.
Tri-Annual Reviews Have Received Very Little Management Emphasis:
As noted previously, DOD established the tri-annual review requirement
in May 1996, but the Charleston and San Diego Systems Centers did not
conduct their first reviews until September 2001 and September 2002,
respectively. Discussions with SPAWAR officials and the centers'
financial managers indicated that a lack of management emphasis is the
primary reason for this delayed implementation.
For example, SPAWAR headquarters officials pointed out that the Navy's
implementing guidance was not issued until July 2001--more than 5 years
after DOD established the requirement, and San Diego Systems Center
financial managers stated that they were not aware of the tri-annual
review requirement until fiscal year 2001. Further, when Charleston and
San Diego financial managers were asked why their centers did not
conduct their first tri-annual reviews until the end of fiscal year
2001 and 2002, respectively, they stated that their personnel were busy
reconciling data problems that were caused by multiple organizational
consolidations and accounting system conversions, and indicated that
their personnel did not have time to conduct tri-annual reviews.
DOD Guidance Allows a Substantial Amount of Carryover to Be Excluded
from Tri-Annual Reviews:
The SPAWAR systems centers' reported actual carryover falls into two
major categories--obligated carryover and unobligated carryover.
Obligated carryover refers to the portion of customer orders for which
the systems centers have obligated their own funds. For example, if a
customer submits a $1,000 order for engineering services, and a
contractor will accomplish 10 percent of the work, then the systems
center will award a contract for $100--which will obligate the center's
funds--and the $100 will, therefore, be referred to as obligated
carryover. A customer order's unobligated carryover balance is
calculated by subtracting obligated carryover from the total amount
remaining on the order--or $900 for this example. As of September 30,
2002, the two SPAWAR systems centers had about $896.1 million of
reported actual carryover--$379.5 million of obligated carryover and
$516.6 million of unobligated carryover.
The distinction between obligated carryover and unobligated carryover
is important because (1) neither DOD nor Navy guidance explicitly
requires the systems centers to review unobligated carryover during
their tri-annual reviews (unless the work is recorded as a commitment
in their accounting records) and (2) about $414 million of the systems
centers' September 30, 2002, unobligated carryover was not recorded as
a commitment in the centers' accounting records. In other words, even
if the tri-annual reviews were performed effectively and in a timely
manner, they would not cover about 46 percent of the systems centers'
reported actual carryover.
DOD guidance does require customers, as part of their tri-annual
reviews, to validate the orders they have placed with working capital
fund activities because these orders are recorded as obligations in
their accounting records, regardless of whether they are obligated or
unobligated carryover in the working capital fund activities' records.
However, customers have limited visibility over whether the unobligated
portion of their funded orders are needed to finance future work, and,
therefore, the working capital fund activities are in a better position
than the customers to make this determination.
If the systems centers were required to review unobligated carryover
balances when performing their tri-annual reviews, they could (1)
reduce the amount of carryover on their records and (2) better identify
unneeded funds and be in a better position to return them to customers
before the funds expired[Footnote 21] so the customers could use them
for new obligations. For example, our review of 34 customer orders that
(1) had $7 million of unobligated carryover balances as of September
30, 2001, and (2) were financed with funds that had already expired as
of that date showed that most of the orders contained unneeded funds
that were eventually returned to customers. Our analysis showed that
(1) 27 of the orders (about 79 percent) had unneeded funds and (2) $2.9
million, or about 41 percent, of the orders we reviewed represented
unneeded funds.
Although most of the unneeded funds we identified were eventually
returned to customers, in some instances the funds were not returned
until long after the funds expired. For example, $469,916 of unneeded
funds on two Charleston Systems Center orders expired in September
2001, but was not returned to the customer until September 2002--almost
1 year after the funds had expired. Similarly, $71,718 of unneeded
funds on a San Diego order expired in September 1998, but was not
returned to the customer until December 2002--more than 4 years after
the funds had expired.
We believe, and a senior DOD accounting official agreed, that the
systems centers and other working capital fund activities should be
required to validate their unobligated carryover during tri-annual
reviews because, as noted previously, they have better visibility over
whether unobligated funds will be needed in the future. However,
neither center requires its managers to review unobligated carryover
during the tri-annual reviews because, as financial managers at one
center pointed out, they are concentrating on the requirements
explicitly identified in the DOD guidance, and they will add other
tasks, such as reviews of unobligated carryover, if and when (1) the
guidance is changed or (2) they have the time and resources to do so.
More Effective Reviews of Dormant Obligations Could Result in More
Effective Use of Customer Funds:
A key element of the tri-annual reviews is the requirement to follow up
on all obligations that have been dormant for more than 120 days to
determine if unused funds are still needed. This task is one of the 16
tri-annual review requirements and is important from the systems
centers' perspective because the identification and return of unneeded
funds to the customer will reduce the centers' reported carryover--
thereby reducing the likelihood of customers' budget cuts.
Additionally, the task is important from the customers' perspective
because the funds can be reused for other purposes if they are returned
before they expire.
However, our analysis of the two centers' financial data and review of
individual customer orders showed that neither center was effectively
identifying unneeded funds and returning them to customers in a timely
manner. For example, our analysis of the two systems centers' financial
data showed that, as of September 30, 2002, the two centers had
thousands of obligated carryover balances, valued at more than $7
million, that had not changed for more than a year. Further, some of
these dormant balances were financed with customer funds that had long
since expired. For example, 165 of the dormant carryover balances were
financed with fiscal year 1996 or earlier appropriations. According to
a systems center official, the monumental financial workload involved
with the acquisition of additional activities and the transition to a
consolidated financial accounting system occurring over the past
several years greatly hindered their efforts to close all expired
funding documents and return the unused funds to customers in a timely
manner. For example, the official pointed out that the center had
almost 13,000 old funding documents needing to be reconciled and closed
at the start of fiscal year 2000 because of these problems and that the
center was still working on them.
Large Accrued Expenditure Balances Warrant Increased Management
Emphasis:
At the conclusion of their tri-annual reviews, fund holders are
required to certify that they have conducted adequate research on all
accrued expenditures[Footnote 22] that are more than 120 days old to
determine if they are valid. This task is important because:
* large accrued expenditure balances, in general, and large dormant
accrued expenditure balances, in particular, can indicate either
serious accounting problems or ineffective procedures for developing
accrued expenditure schedules and:
* accrued expenditures reduce reported carryover balances, and overly
optimistic accrued expenditure schedules can, therefore, cause reported
carryover to understate actual carryover.
The task of validating accrued expenditures is especially important for
the two SPAWAR systems centers because they had about $673 million of
accrued expenditures as of September 30, 2002.
However, the San Diego Systems Center, which had the larger accrued
expenditure balance--about $423 million as of September 2002--is
currently developing a methodology for validating its accrued
expenditures. Further, although the Charleston Systems Center had
developed a methodology to review its accrued expenditures, the
Charleston Comptroller was concerned about the timeliness and adequacy
of these reviews and, therefore, was unwilling to certify that the
center adequately reviewed its dormant accrued expenditures.
Although the tri-annual review's tasks related to accrued expenditures
focus primarily on accounting problems, reviews of dormant accrued
expenditures are also important from a carryover perspective. Overly
optimistic accrued expenditure schedules--which are the basis for
determining when accrued expenditures will be recorded in the
accounting system--can cause reported carryover to understate actual
carryover. For example, if a contractor is to perform $600 of work, and
an accrued expenditure schedule is based on the assumptions that the
work will begin immediately and will be performed at a uniform rate
over a 6-month period, then (1) $100 of expenditures will be accrued
each month and (2) each accrued expenditure will trigger a $100
customer payment and, in turn, a $100 reduction in the reported
carryover. Thus, after 4 months, the reported carryover will be $200,
regardless of how much work has actually been accomplished. If the work
begins later than expected or if it takes longer than expected to
complete, and accrued expenditures are not adjusted accordingly,
reported carryover would be understated.
Two ways to put the magnitude of the systems centers' accrued
expenditure balances in perspective are to (1) compare the balances
with other financial indicators and (2) show their impact on reported
carryover. For example, the San Diego Systems Center's September 2002
accrued expenditure balance of $423 million is the equivalent of about
32 percent of the orders the center received during fiscal year 2002
($1.315 billion) and about 31 percent of the revenue it received during
the year ($1.372 billion). The accrued expenditures allowed the center
to reduce its reported carryover at the end of fiscal year 2002 by
about 3.7 months.
A San Diego Systems Center accounting official acknowledged that the
center's large accrued expenditure balance is a major area of concern.
Specifically, this official indicated that the center's large accrued
expenditure balance is caused partly by delays in contractor and
interfund billings, but acknowledged that there are other apparent
problems that warrant attention. For example, the official said that
the $405 million variance between the center's September 30, 2002,
accrued expenditure and accounts payable balances is an apparent
problem that should be reviewed.
However, the accounting official also pointed out that currently the
center cannot analyze its accrued expenditures because its new
accounting system, which has been tailored to meet its specific needs
and is unique within DOD, cannot provide the data in a format that will
allow it to do so. When asked what the San Diego Systems Center is
doing to develop the data needed to effectively analyze its accrued
expenditure data, the accounting official indicated that the center is
developing a "data warehouse." However, the official acknowledged that
(1) they have just begun identifying the specific requirements for the
data warehouse, (2) there will be many competing requirements, (3) due
to resource constraints, the data warehouse will not be able to satisfy
all of the center's data analysis needs, and (4) they, therefore, do
not know when or, for that matter, if they will ever have the data they
need to effectively analyze their accrued expenditures.
Improvements Are Needed in SPAWAR's Tri-Annual Review Procedures:
In addition to the major problems identified above, our review of the
procedures that SPAWAR headquarters and its two systems centers use to
conduct their tri-annual reviews identified several areas that need
improvements. For example, SPAWAR headquarters has not evaluated the
systems centers' reviews and, as a result, the command (1) does not
have a sound basis for assessing the adequacy of the reviews that the
centers have conducted on individual obligation, commitment, and
accrued expenditure balances and (2) was not aware of the process-
related problems discussed below.
San Diego's Decentralized Review Process Needs to Be Refined:
The San Diego Systems Center accomplishes its tri-annual reviews on a
decentralized basis. During the first step of the process, the Office
of the Comptroller, which has overall responsibility for the reviews,
develops computer lists that contain information on all of the center's
outstanding obligations and commitments. The Comptroller's Office then
provides these lists to the center's technical departments, which are
then required to conduct the actual reviews. When the technical
departments finish their reviews, their department heads certify that
the reviews have been completed and then forward this certification to
the San Diego Systems Center's Comptroller. On the basis of the
technical departments' certifications, the Comptroller then certifies
that the center has completed its review.
Although this approach seems reasonable on the surface, we found
numerous problems with the process. For example, because the systems
center's draft tri-annual review guidance does not specifically require
the technical departments to accomplish many important tasks, the
effectiveness and usefulness of the reviews varied significantly from
one department to another. For example, two of the center's technical
departments did not (1) summarize or analyze the results of their
reviews, (2) establish internal controls to ensure that timely and
appropriate corrective action was taken on problems that were
identified during the reviews, or (3) maintain adequate documentation
to show who conducted the reviews, what problems were identified, and/
or what additional actions were required.
Conversely, although it was not required to do so, another department
(1) summarized the results of its reviews in a single Excel spreadsheet
to facilitate analysis of the review results, (2) analyzed the data to
determine if there were any indications of systemic or compliance
problems (e.g., inadequate reviews by one or more of the department's
divisions or problems with accrual schedules), and (3) developed
internal control procedures to ensure that timely and appropriate
action was taken on identified problems and/or unresolved research
requirements. Additionally, this department requires its managers to
maintain documentation that (1) shows who conducted the actual reviews
(so these individuals can be held accountable for the adequacy of the
reviews), (2) identifies the additional research or corrective action
that is required as a result of the reviews, and (3) indicates who is
responsible for taking the action.
Managers from this department said that they were initially skeptical
about the benefits of the tri-annual reviews, but indicated that they
are now strong supporters because the reviews have provided a
structured way to address their data problems and have already resulted
in significant improvements in the quality of their data. Additionally,
they acknowledged that documenting what corrective action is required
and who is responsible for taking it requires additional time, at least
in the short term. However, they believe this documentation is
essential for (1) holding people accountable and (2) having effective
internal controls to ensure that timely and appropriate corrective
action is taken on the problems that are identified. Further, they
believe that the documentation may save time in the long term because
it will serve as a "memory jogger" for subsequent reviews.
Additional process-related problems we identified during our assessment
of the San Diego Systems Center's tri-annual review process include the
following.
* As noted previously, although the center had about $423 million of
accrued expenditures as of September 2002, it had not yet developed a
methodology for identifying and reviewing its accrued expenditures.
* Fund holders are required to conduct sufficient follow-up on dormant
obligations and commitments to determine if they are still valid.
However, the computer lists that the San Diego Comptroller provides to
the center's technical departments do not distinguish between the
obligations and commitments that have been dormant and those that have
not. As a result, the technical departments have no way to focus their
attention on the obligations and commitments that require follow-up
action.
* The certifications that the department heads sign are much more
general than the one that the Comptroller must sign on behalf of the
system center and they, therefore, do not provide an adequate basis for
the Comptroller's certification. For example, the Comptroller is
required, among other things, to (1) advise SPAWAR headquarters
whether, and to what extent, adjustments or corrections to remedy noted
problems have been taken, (2) summarize, by type, the actions or
corrections remaining to be taken, (3) indicate when such actions/
corrections are expected to be completed, and (4) identify the actions
that have been taken to preclude identified problems from recurring in
the future. However, the Comptroller does not require the departments
to report this information to him and, therefore, cannot report this
information to SPAWAR headquarters.
* Although, as noted previously, the Comptroller has overall
responsibility for the center's tri-annual reviews, his office has not
assessed the adequacy of the reviews that are being conducted by the
technical departments. As a result, the Comptroller does not have a
sound basis for his certification.
Charleston's Basic Approach Is Sound, but Some Improvements Are Needed:
The Charleston Systems Center has developed a basic approach for its
tri-annual reviews that appears sound. Charleston's approach addressed
several of the concerns we noted with the San Diego Systems Center's
approach. First, rather than assigning all review requirements to the
technical departments, Charleston divides the responsibilities between
the Comptroller's Office and the technical departments. This approach
allows the Comptroller's Office to concentrate on the tasks it is best
qualified to perform, such as tracing obligations back to source
documents, and lets the technical departments concentrate on those
tasks that they are best qualified to perform, such as verifying that
dormant obligations are still valid. Second, the Charleston Comptroller
provides the technical departments with a list of all dormant
commitments, obligations, and accrued expenditures so they can easily
focus on those that they must follow up on. Finally, Charleston's tri-
annual review guidance requires those who conduct the reviews to
document actions taken during the reviews and is to (1) include
corrective actions remaining to be taken and when such actions will be
completed and (2) identify actions that have been taken to preclude
identified problems from recurring in the future.
However, we did identify several problems with Charleston's overall
approach. More specifically, we found the following:
* Although the Comptroller must sign a certification statement
attesting to the results of the center's tri-annual review, the systems
center has not conducted all of the required reviews, and the
Comptroller has not developed internal control procedures to ensure
that the reviews that were conducted were performed properly and
completely.
* Charleston's technical department heads are responsible for ensuring
that reviews are properly conducted and documented, but they are not
required to certify that this has been done. Consequently, the
Comptroller does not have a sound basis for certifying that the tri-
annual review tasks the center is required to accomplish have been
completed. In fact, Charleston's Comptroller acknowledged that our work
shows that the technical departments' reviews are not adequate, and he
indicated that his concern about the timeliness and adequacy of the
technical departments' reviews is the reason why he has limited his
tri-annual review certification to the 4 tasks that are under his
control and why he has been unwilling to certify the remaining 12
tasks. The Comptroller stated, and we agree, that department heads
should be held accountable for their respective departments' portion of
the tri-annual review process. Specifically, he believes they should be
required to complete and sign certification statements similar to the
one that he must complete and sign on behalf of the systems center, and
accordingly, has developed a proposed certification statement for the
department heads to sign.
We also found that DOD's tri-annual review guidance regarding the
dollar thresholds for reviewing outstanding commitments and obligations
was unclear. The guidance states that during the January and May
reviews, commitments and obligations of (1) $200,000 or more for
investment appropriations (e.g., procurement funds and the capital
budget of the working capital funds) should be reviewed and (2) $50,000
or more for operating appropriations (e.g., operation and maintenance
funds and the operating portion of the working capital funds) should be
reviewed. Charleston interpreted the guidance to mean that customer
orders--which are the operating portion of the working capital fund--
financed with investment funds fell into the $200,000 threshold
category for review purposes, rather than the $50,000 category, and
conducted its tri-annual reviews accordingly. In discussing this issue
with the Office of the Under Secretary of Defense (Comptroller) and
Navy headquarters officials, the officials acknowledged that the
guidance was unclear and, thus, open to interpretation. They stated
that the guidance needed to be examined and clarified.
Conclusions:
SPAWAR has consistently understated and provided misleading carryover
information to the Congress. Reliable carryover information is
essential for the Congress and DOD to perform their oversight
responsibilities, including reviewing DOD's budget. To provide
assurance that SPAWAR systems centers report reliable carryover
information, managers at SPAWAR headquarters and the systems centers
must be held accountable for the accuracy of reported carryover and
ensure the timely identification of unneeded customer funds. This
includes increased management attention that would provide more
assurance that the systems centers are effectively reviewing funded
orders as part of their tri-annual review process. Until these problems
are resolved, the Congress and DOD decision makers will be forced to
make key budget decisions, such as whether or not to enhance or reduce
customer budgets, based on unreliable information.
Recommendations for Executive Action:
We recommend that the Secretary of Defense:
* direct the Secretary of the Navy to issue guidance to all Navy
working capital fund activities, including SPAWAR, that prohibits them
from deobligating reimbursable customer orders at fiscal year-end and
reobligating them in the next fiscal year for the sole purpose of
reducing carryover balances that are ultimately reported to the
Congress;
* direct the Under Secretary of Defense (Comptroller) to determine the
extent to which working capital fund activities throughout DOD may be
similarly manipulating customer order data at fiscal year-end to reduce
reported carryover and, if necessary, issue DOD-wide guidance
prohibiting this practice as needed; and:
* direct the Under Secretary of Defense (Comptroller) to develop and
issue written procedures to implement the December 2002 carryover
policy.
To provide reasonable assurance that the dollar amount of orders to be
received from customers in developing annual budgets are based on more
realistic estimates, we recommend that the Secretary of the Navy direct
the Commander of the Space and Naval Warfare Systems Command to compare
budgeted to actual orders received from customers and consider these
trends in developing the following year's budget estimates on orders to
be received from customers.
We recommend that the Under Secretary of Defense (Comptroller):
* revise the tri-annual review guidance in the DOD Financial Management
Regulation so that working capital fund activities are required to
expand the scope of their tri-annual reviews to include unobligated
balances on customer orders and:
* review and clarify the tri-annual review guidance for the January and
May reviews in the DOD Financial Management Regulation as it pertains
to the dollar threshold for reviewing outstanding commitments and
obligations for the capital budget and operating portion of the working
capital fund.
We recommend that the Commander of the Space and Naval Warfare Systems
Command establish internal control procedures and accountability
mechanisms that provide assurance that the systems centers are
complying with DOD's tri-annual review guidance.
We also recommend that the Commander of the Space and Naval Warfare
Systems Command direct the Commanders of the Charleston and San Diego
SPAWAR Systems Centers to:
* maintain documentation that shows who conducted the tri-annual
reviews so that these individuals can be held accountable for the
reviews;
* maintain documentation that identifies (1) any additional research or
corrective action that is required as a result of the tri-annual
reviews and (2) who is responsible for taking the action;
* require cognizant managers, such as department heads, to confirm in
writing that they have (1) performed the required tri-annual reviews
and (2) completed the related follow-up actions by signing a statement,
such as the draft certification statement developed by the Charleston
Systems Center Comptroller, that describes the specific tasks that were
accomplished and provide this statement to the systems centers'
comptrollers;
* develop and implement internal control procedures to provide
assurance that tri-annual reviews of individual commitment, obligation,
and accrued expenditure balances are adequate; and:
* develop policies and procedures to capture the information on tri-
annual review results, such as the amount of obligations reviewed,
confirmed, and revised, that they are required to report to SPAWAR
headquarters and that SPAWAR headquarters, in turn, is required to
report to Navy headquarters.
We recommend that the Commander, San Diego SPAWAR Systems Center direct
the Center Comptroller to:
* develop and implement a methodology for identifying and analyzing
accrued expenditure balances and:
* identify dormant commitments, obligations, and accrued expenditures
in the tri-annual review computer lists that are provided to the
technical departments.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report. In its
comments, DOD concurred with 12 of our 14 recommendations and partially
concurred with the remaining 2 recommendations. For these 2
recommendations, DOD agreed with our intent to ensure that obligations,
unobligated balances, and commitments are reviewed regularly to ensure
effective use of funds. Our evaluation of DOD's comments is presented
below. DOD's comments are reprinted in appendix II.
For the 12 recommendations with which DOD concurred, it stated that 7
of them were completed based on the issuance of SPAWAR Instruction
7301.1A on Tri-Annual Reviews of Commitments and Obligations, dated
October 9, 2002. We believe that the guidance provided in the
instruction is an important step. SPAWAR and the systems centers now
need to develop and issue implementing procedures because, in most
cases, the guidance provided in the instruction that is related to
these 7 recommendations is too general to fully address our
recommendations. For example, although the instruction requires those
responsible for conducting the review to report the results to the
systems center's comptroller, the instruction does not require, as we
recommended, that cognizant managers, such as department heads, sign a
written statement to be provided to the comptroller to confirm that
they have performed the required reviews and certify the results of
those reviews.
Further, in concurring with our recommendation that SPAWAR compare
budgeted to actual orders received from customers and consider these
trends in developing budget estimates on orders to be received from
customers, DOD did not state how the Navy would ensure that SPAWAR's
budget estimates would accurately reflect orders to be received from
customers. In its comments, DOD stated that the Navy will continue to
refine its budget estimates for customer orders. We believe that the
Navy must take additional actions to develop more reliable budget
estimates. As noted in our report, reported actual customer orders
received exceeded budget estimates from 36 percent to 88 percent during
fiscal years 1998 through 2002. For example, for fiscal year 2002, in
formulating its budget request, the Navy expected the SPAWAR systems
centers to receive about $1.3 billion in customer orders, but the Navy
reported that the centers actually received about $2.4 billion in
customer orders--a difference of $1.1 billion, or about 88 percent.
Having reliable budget estimates on customer orders to be received is
critical since this information is used in calculating carryover using
DOD's new carryover policy.
DOD partially concurred with our recommendation that it revise its tri-
annual review guidance in the DOD Financial Management Regulation to
require working capital fund activities to expand their tri-annual
reviews to include unobligated balances on customer orders. In its
comments, DOD stated that reviewing such balances during the tri-annual
reviews was the responsibility of the customer who placed the order
with the working capital fund and that the working capital fund
activity should work in cooperation with the customer to ensure that
unobligated balances are reviewed. We agree that the working capital
fund activity should work in conjunction with customers to review
unobligated balances. However, as stated in our report, working capital
fund activities are in the best position to determine whether
unobligated balances are still needed to finance future work. To ensure
that unobligated balances are properly reviewed during the tri-annual
review process, we continue to recommend that the DOD Financial
Management Regulation be revised to specify the working capital fund
activities' role in reviewing unobligated balances on customer orders.
DOD also partially concurred with our recommendation for the SPAWAR
systems centers to review all balances related to dormant customer
orders in excess of $50,000 during the January and May tri-annual
reviews. In its comments, DOD indicated that the current guidance is
not clear with regard to whether all such dormant balances over $50,000
are to be reviewed during the specified months. DOD stated that it will
review the guidance, as it pertains to working capital fund activities,
and make adjustments if appropriate. We agree that DOD's tri-annual
review guidance regarding the dollar thresholds for reviewing
outstanding commitments and obligations was unclear. We have revised
our report accordingly, including the related recommendation, to
reflect that DOD's tri-annual review guidance was unclear.
In addition, in the cover letter transmitting its comments on our draft
report, DOD took exception to our discussion in the draft report
regarding the methodology used by Navy to determine the levels of
carryover--reducing the numerator in the carryover formula by the
amount of contractual obligations, but not reducing the formula's
denominator by the amount of revenue earned from contractual services.
Because DOD revised its methodology for calculating carryover in
December 2002, DOD commented that such a discussion in the report was
irrelevant and confusing to the reader and recommended that it be
deleted. We disagree with DOD's comment. Although DOD revised its
methodology for calculating carryover, it was not incorporated into
Navy's budget submissions until fiscal year 2004. When we undertook
this review in July 2002, one of our objectives was to determine if
reported carryover accurately reflected the amount of work remaining to
be accomplished. As such, this issue was and still is relevant. As
stated in this report, our May 2001 report recommended that the revenue
used in calculating carryover be adjusted (reduced) for revenue earned
for work performed by contractors. Unless this is done, reported
carryover will be understated. The Navy did not adjust the revenue
amount and, therefore, continued to understate its reported carryover
in its budget submissions to the Congress. We continue to believe that
this is a reportable issue and have made a related recommendation for
DOD to develop and issue written procedures to implement the December
2002 carryover policy. Further, we believe this issue remains of
interest to the Congress since the Navy has understated SPAWAR's
reported carryover from fiscal year 1998 through fiscal year 2002.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services; the
Subcommittee on Readiness and Management Support, Senate Committee on
Armed Services; the Subcommittee on Defense, Senate Committee on
Appropriations; the House Committee on Armed Services; the Subcommittee
on Readiness, House Committee on Armed Services; and the Ranking
Minority Member, Subcommittee on Defense, House Committee on
Appropriations. We are also sending copies to the Secretary of Defense,
the Secretary of the Navy, and other interested parties. Copies will be
made available to others upon request. Should you or your staff have
any questions concerning this report, please contact Gregory D. Kutz,
Director, at (202) 512-9505. He can also be reached by E-mail at
kutzg@gao.gov.
An additional contact and key contributors to this report are listed in
appendix III.
Sincerely yours,
Gregory D. Kutz
Director, Financial Management and Assurance:
Signed by Gregory D. Kutz:
William M. Solis
Director, Defense Capabilities and Management:
Signed by William M. Solis:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine if differences existed between the budgeted and reported
actual gross carryover and, if so, the reasons for the variances, we
obtained and analyzed budget and accounting documents that provided
information on budgeted and reported actual gross carryover and orders
received from customers from fiscal year 1998 through fiscal year 2002.
When variances occurred between the budgeted and reported actual
information, we met with accounting and budgeting SPAWAR and Navy
headquarters officials to ascertain why there were differences. We also
discussed with officials what actions they were taking to develop more
reliable budget information on carryover and orders received from
customers.
To determine if the reported actual carryover balances reflected the
amount of work that remained to be accomplished, we obtained and
analyzed the Department of Defense's (DOD) regulations and guidance on
carryover. We also obtained and analyzed the SPAWAR systems centers'
calculations for the fiscal year 1998 through fiscal year 2002 actual
reported year-end carryover balances. We met with officials from SPAWAR
and Navy headquarters to discuss the methodology they used to calculate
carryover. We (1) obtained explanations about why the Navy made
adjustments in calculating the dollar amount of carryover balances as
well as the number on months of carryover and (2) determined the impact
of those adjustments on the carryover figure. We also reviewed year-end
transactions that affected the dollar amount and number of months of
carryover. For these year-end transactions, we met with officials from
SPAWAR and the two systems centers to determine why these transactions
occurred at year-end.
To determine if the Charleston and San Diego SPAWAR Systems Centers
have the financial data they need in order to provide reliable data on
actual carryover levels to DOD and congressional decision makers, we
reviewed the policies and procedures SPAWAR headquarters and the two
systems centers have used to implement DOD's tri-annual review
guidance. Specifically, we (1) reviewed the DOD, Navy, SPAWAR
headquarters, and the two SPAWAR systems centers' tri-annual review
guidance and discussed it with cognizant individuals, (2) reviewed the
tri-annual review certifications that the two systems centers have
submitted since DOD issued its tri-annual review guidance in 1996, and
discussed these certifications with cognizant individuals, (3)
discussed the systems centers' tri-annual review procedures with
cognizant individuals, including those who actually accomplished the
reviews, and (4) reviewed documentation on the results of the reviews.
We also obtained data on the status of unfilled orders and carryover at
the end of fiscal year 2001. Additionally, from these data, we selected
and analyzed 34 orders that had outstanding carryover balances at the
end of fiscal year 2001 to determine if the carryover balances
accurately reflected the amount of work that remained to be performed.
We selected orders that (1) were financed with expired appropriations
and (2) were unobligated carryover at year-end since these orders were
more likely to have unneeded funds and because a review of these orders
was, therefore, more likely to identify problems with the systems
centers' review procedures.
We performed our work at the headquarters offices of the Under
Secretary of Defense (Comptroller) and the Assistant Secretary of the
Navy (Financial Management and Comptroller), Washington, D.C.; Space
and Naval Warfare Systems Command, San Diego, California; the
Charleston Space and Naval Warfare Systems Center, Charleston, South
Carolina; and the San Diego Space and Naval Warfare Systems Center, San
Diego, California. The reported actual year-end carryover information
used in this report was produced from DOD's systems, which have long
been reported to generate unreliable data. We did not independently
verify this information. The DOD Inspector General has cited
deficiencies and internal control weaknesses as major obstacles to the
presentation of financial statements that would fairly present the
Defense Working Capital Fund's financial position for fiscal years 1993
through 2002.
Our review was performed from July 2002 through June 2003 in accordance
with U.S. generally accepted government auditing standards. The Navy
provided the budgeting and accounting information referred to in this
report. We requested comments on a draft of this report from the
Secretary of Defense or his designee. DOD provided written comments,
and these comments are presented in the Agency Comments and Our
Evaluation section of this report and are reprinted in appendix II.
[End of section]
Appendix II: Comments from the Department of Defense:
UNDER SECRETARY OF DEFENSE 1100 DEFENSE PENTAGON WASHINGTON DC 20301-
1100:
JUN 10 2003:
COMPTROLLER:
Mr. Gregory Kutz, Director, Financial Management and Assurance
Mr. William Solis, Director, Defense Capabilities and Management
U.S. General Accounting Office:
Washington D.C. 20548:
Dear Mr. Kutz and Mr. Solis:
This is the Department of Defense (DoD) response to the General
Accounting Office (GAO) draft report, "NAVY WORKING CAPITAL: Backlog of
Funded Work at the Space and Naval Warfare Systems Command Was
Consistently Understated," dated May 6, 2003 (GAO Code 192067). I
concur with the majority of the recommendations identified in the draft
report and am taking action to comply with the recommendations. I
partially concur with two of the recommendations as they are currently
written both dealing with revisions to existing guidance for
performance of the tri-annual review of commitments and obligations. I
do agree with the GAO's intent: to ensure that obligations, unobligated
balances, and commitments are reviewed regularly to ensure effective
use of funds, and to that end will review the guidance to ensure
clarity of intent. Additional comments are provided in the enclosure.
In addition, much of the discussion in the opening sections of the
draft report centers on the methodology used by the Space and Naval
Warfare Systems Command to determine levels of funded backlog
(carryover). This issue was previously addressed in the May 2001 GAO
audit Defense Working Capital Fund: Improvements Needed for Managing
the Backlog of Funded Work, GAO-01-559. While the current report
acknowledges that, in response to the May 2001 GAO report, the
Department instituted a new analytically based methodology in December
2002. It also includes considerable discussion of the problems and
inconsistencies of the old methodology. The draft report makes no
recommendations regarding these inconsistencies and the discussion is
both irrelevant and misleading in that readers are left with the false
impression that carryover levels far exceeded previously acceptable
metrics.
Based on the above, I recommend that the draft report be modified to
delete the discussion regarding the old carryover methodology, and
instead, focus on the new findings associated with yearend funding
document modifications and tri-annual reviews.
Sincerely,
Dov S. Zakheim
Signed for Dov S. Zakheim:
Enclosure As stated:
THE GAO DRAFT REPORT DATED MAY 6, 2003 GAO-03-668 (GAO CODE 192067):
"NAVY WORKING CAPITAL FUND: BACKLOG OF FUNDED WORK AT THE SPACE AND
NAVAL WARFARE SYSTEM COMMAND WAS CONSISTENTLY UNDERSTATED":
DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to determine the
extent to which working capital fund activities throughout DoD may be
similarly manipulating customer order data at fiscal year end to reduce
reported carryover and, if necessary, issue DoD-wide guidance
prohibiting this practice as needed. (p. 41/Draft Report):
DOD RESPONSE: Concur.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to develop and
issue written procedures to implement the December 2002 carryover
policy. (p. 41/Draft Report):
DOD RESPONSE: Concur. USD(C) provided general guidance in Management
Initiative Decision 903 of 3 December 2002. Additional detailed
guidance is currently being developed.
RECOMMENDATION 3: The GAO recommended that the Under Secretary of
Defense (Comptroller) revise the tri-annual review guidance in the DoD
Financial Management Regulation so that working capital fund activities
are required to expand the scope of their tri-annual reviews to include
unobligated balances on customer orders. (p. 41/Draft Report):
DOD RESPONSE: Partially concur. The existing guidance requires
customers, as part of their tri-annual reviews, to validate the orders
they have placed with working capital fund activities. We believe they
are the responsible office for primary review of the status of their
funds. However, we do agree that the working capital fund activity
should work in cooperation with the customer to ensure unobligated/
unfilled order balances are reviewed prior to expiration of funds as
required by Volume 3, Chapter 15, paragraph 1503, of the DoD Financial
Management Regulation.
RECOMMENDATION 4: The GAO recommended that the Secretary of Defense
direct the Secretary of the Navy to issue guidance to all Navy working
capital fund activities, including SPAWAR, that prohibits them from
deobligating reimbursable customer orders at fiscal year end and
reobligating them in the next fiscal year for the sole purpose of
reducing carryover balances that are ultimately reported to Congress.
(p. 40/GAO Draft Report):
DOD RESPONSE: Concur.
RECOMMENDATION 5: The GAO recommended that the Secretary of the Navy
direct the Commander of Space and Naval Warfare Systems Command to
compare budgeted to actual orders received from customers and consider
these trends in developing the following year's budget estimates on
orders to be received from customers. (p. 41/Draft Report):
DOD RESPONSE: Concur with comment. As GAO noted, the Navy has already
distributed budget guidance detailing the importance of fully reporting
working capital fund purchases in customer budgets. While we will
continue to refine our estimates it should be noted that appropriated
budgets are submitted by line item, and that many line items do not
have a consistent historical trend, or for new programs, any history at
all. This fact is particularly noticeable in procurement
appropriations, where programs rarely have level funding profiles.
Similarly, research and development programs are not all constant
level-of-effort in nature and therefore offer little in the way of
historical trend analysis.
RECOMMENDATION 6: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command establish internal control procedures and
accountability mechanisms that provide assurance that the systems
centers are complying with DOD's tri-annual review guidance. (p. 41/
Draft Report):
DOD RESPONSE: Concur. SPAWAR established GAO's recommended internal
control and accountability processes in SPAWARINST 7301.1A, "Tri-Annual
Reviews of Commitments and Obligations," issued 9 October 2002.
RECOMMENDATION 7: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command direct the Commanders of the Charleston
and San Diego SPAWAR Systems Centers to maintain documentation that
shows who conducted the tri-annual reviews so that these individuals
can be held accountable for the reviews. (p. 42/Draft Report):
DOD RESPONSE: Concur. See Response 6.
RECOMMENDATION 8: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command direct the Commanders of the Charleston
and San Diego SPAWAR Systems Centers to maintain documentation that
identifies (1) any additional research or corrective action that is
required as a result of the tri-annual reviews and (2) who is
responsible for taking the action. (p. 42/Draft Report):
DOD RESPONSE: Concur. See Response 6.
RECOMMENDATION 9: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command direct the Commanders of the Charleston
and San Diego SPAWAR Systems Centers to require cognizant managers,
such as department heads, to confirm in writing that they have (1)
performed the required tri-annual reviews and (2) completed the related
follow-up actions by signing a statement, such as the draft
certification statement developed by Charleston Systems Center
Comptroller, that describes the specific tasks that were accomplished
and provide this statement to the systems center comptroller. (p. 42/
Draft Report):
DOD RESPONSE: Concur. See Response 6.
RECOMMENDATION 10: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command direct the Commanders of the Charleston
and San Diego SPAWAR Systems Centers develop and implement internal
control procedures to provide assurance that tri-annual reviews of
individual commitment, obligation, and accrued expenditure balances are
adequate. (p. 42/Draft Report):
DOD RESPONSE: Concur. See Response 6.
RECOMMENDATION 11: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command direct the Commanders of the Charleston
and San Diego SPAWAR Systems Centers develop policies and procedures to
capture the information on tri-annual review results, such as the
amount of obligation reviewed, confirmed, and revised, that they are
required to report to SPAWAR headquarters and the SPAWAR headquarters,
in turn, is required to report to navy headquarters.
(p. 42/Draft Report):
DOD RESPONSE: Concur. See Response 6.
RECOMMENDATION 12: The GAO recommended that the Commander of Space and
Naval Warfare Systems Command direct the Commanders of the Charleston
and San Diego SPAWAR Systems Centers to review all dormant customer
order-related _ balances in excess of $50,000 during the January and May
tri-annual reviews as currently required. (p. 43/Draft Report):
DOD RESPONSE: Partially concur. In subsequent discussions with GAO it
was determined that the basis for the recommendation was to ensure that
SPAWAR was in compliance with guidance provided in the DoD Financial
Management Regulation Volume 3, Chapter 8, Section 0804. Current
guidance requires the following reviews as part of the tri-annual
review: (1) outstanding commitments and unliquidated obligations
$200,000 or greater for the capital budget of the working capital fund
activities, and (2) outstanding commitments and unliquidated
obligations $50,000 or greater for the operating portion of the working
capital fund. The definitions of what is included in the operating
portion, whether it pertains to the pure working capital fund operating
cost, or whether the reimbursable customer orders (many of which are
funded using RDT&E and investment funds) are to be included in this
review needs to be examined further. The Department will review the
current guidance, specifically as it pertains to the working capital
fund activities, and will make adjustments if appropriate.
RECOMMENDATION 13: The GAO recommended that the Commander, SPAWAR
Systems Center, San Diego direct the Center Comptroller to develop and
implement a methodology for identifying and analyzing accrued
expenditure balances. (p. 43/Draft Report):
DOD RESPONSE: Concur. SPAWAR Systems Center, San Diego is currently
developing the required methodology and plans to implement the
recommendation by 30 Dec 2003.
RECOMMENDATION 14: The GAO recommended that the Commander, SPAWAR
Systems Center, San Diego direct the Center Comptroller to identify
dormant commitments, obligations, and accrued expenditures in the tri-
annual review computer listings that are provided to the technical
departments. (p. 43/Draft Report):
DOD RESPONSE: Concur. See Response 6.
The following are GAO's comments on the Department of Defense's (DOD)
letter dated June 10, 2003.
GAO Comments:
1. See the Agency Comments and Our Evaluation section of this report.
2. As discussed in the Agency Comments and Our Evaluation section of
this report, we have modified this recommendation and the related
section of the report in response to DOD's comment.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Greg Pugnetti, (703) 695-6922:
Acknowledgments:
Staff who made key contributions to this report were Francine
DelVecchio, Karl Gustafson, William Hill, Christopher Rice, Ron Tobias,
and Eddie Uyekawa.
(192067):
FOOTNOTES
[1] Floyd D. Spence National Defense Authorization Act For Fiscal Year
2001, Pub. L. No. 106-398, Section 1051, 114 Stat. 1654, 1654A-264
(2000).
[2] DOD changed this policy in December 2002 by revising its
methodology for calculating the allowable amount of carryover. Under
the revised method, DOD eliminated the 3-month standard, and the
allowable amount of carryover is to be based on the overall
disbursement rate of the customers' appropriations financing the work.
[3] The carryover amount includes work for which customers have
recorded obligations but the work has not yet started and the cost to
complete work that has been started.
[4] U.S. General Accounting Office, Defense Working Capital Fund:
Improvements Needed for Managing the Backlog of Funded Work, GAO-01-559
(Washington, D.C.: May 30, 2001).
[5] U.S. General Accounting Office, Air Force Depot Maintenance:
Management Improvements Needed for Backlog of Funded Contract
Maintenance Work, GAO-02-623 (Washington, D.C.: June 20, 2002).
[6] Gross carryover is the dollar value of work that has been ordered
and funded (obligated) by customers but not completed by working
capital fund activities at the end of the fiscal year.
[7] GAO-01-559.
[8] Reimbursable work is work performed for the customer by the systems
centers for which the customer pays the systems centers directly.
Direct cite work is work performed for the customer by a private sector
contractor, which bills the customer directly.
[9] The systems centers charge customers a fee for awarding and
administering these contracts.
[10] The two basic types of orders customers can place with a working
capital fund activity are Project Orders and Economy Act orders, which
are issued under the authority of Section 23 of Title 41, United States
Code, and Section 1535 of Title 31, United States Code, respectively.
These two types of orders are distinguished for accounting purposes by
the period of time that the related funding is available for use by a
working capital fund. For example, an Economy Act order funded by the
Navy Operation and Maintenance appropriation that is not used
(obligated) by the working capital fund activity by the end of the
fiscal year is no longer available for new obligations and must be
returned to the customer, absent some specific statutory authorization.
However, the same appropriated funds used to finance a Project Order
may be used (or "carried over") by the working capital fund activity to
enter into new obligations in the next fiscal year.
[11] The Air Force is the only military service that includes its
contract depot maintenance operation in its working capital fund. To
reflect this difference, DOD established a 4.5-month carryover standard
to account for the additional administrative functions associated with
awarding contracts. The Air Force is currently in the process of taking
its contract depot maintenance operation out of the working capital
fund.
[12] GAO-01-559.
[13] We previously reported on this issue in May 2001 in our report
GAO-01-559.
[14] This joint study group included representatives from the Office of
the Secretary of Defense, the Office of the Joint Chiefs of Staff, and
each of the military services.
[15] The Air Force is the only service that contracts out significant
amounts of depot maintenance work through the working capital fund.
Because of the additional administrative functions associated with
awarding contracts, DOD set a 4.5-month carryover standard for Air
Force contract depot maintenance. The Air Force is currently in the
process of removing the contract portion of its depot maintenance
operation from the working capital fund.
[16] Adjusted carryover is the obligated balance of budget authority
carried over from one fiscal year to the next and adjusted for
contractual obligations and certain categories of orders, such as those
from non-DOD customers.
[17] GAO-01-559.
[18] The fund holder is the organization on whose accounting records a
commitment, obligation, and/or accrued expenditure is recorded.
[19] Obligations are considered dormant if their unliquidated balances
have not changed for more than 120 days.
[20] All obligation and commitment balances that have not changed for
more than 120 days are required to be reviewed during the 4-month
period ending September 30 each fiscal year--but only those balances
greater than a certain amount are required to be reviewed during each
of the 4-month periods ending January 31 and May 31 of each fiscal year
(e.g., for customer order-related obligations and commitments, the
amount is $50,000).
[21] The Congress generally provides budget authority to an agency for
use during a specific period, referred to as the period of
availability. During this period of availability, the agency may incur
new obligations, for example, those for goods and services, and charge
them against the appropriation. At the end of the period of
availability, the appropriation expires, meaning that it may not be
used to incur new obligations.
[22] According to DOD's Financial Management Regulation 7000.14-R,
Volume 1, accrued expenditures represent the amount of paid and unpaid
expenditures for (1) services performed by employees, contractors,
etc., (2) goods and tangible property received, and (3) amounts owed
under programs for which no current service or performance is required.
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