Navy Working Capital Fund
Management Action Needed to Improve Reliability of the Naval Air Warfare Center's Reported Carryover Amounts Gao ID: GAO-07-643 June 26, 2007According to the Department of Defense's (DOD) fiscal year 2007 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6 billion of funded work that will be carried over from fiscal year 2007 into fiscal year 2008. The congressional defense committees recognize that these groups need some carryover to ensure a smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine if (1) the Naval Air Warfare Center's (NAWC) reported actual carryover was reliable for fiscal years 2003 through 2006 and (2) NAWC was utilizing the required triannual review process to improve the reliability of its carryover information and underlying financial data.
GAO's analysis of NAWC reports determined that NAWC's reported carryover information was not reliable. Since DOD changed its carryover policy in December 2002, NAWC reports showed that while under the ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens of millions of dollars from fiscal year 2003 through fiscal year 2005, as shown in the following table. To the extent that carryover is too high, Congress can redirect the customers' funds for other priorities. GAO's analysis of accounting information on customer orders and discussions with NAWC officials determined that its fiscal year 2003 and 2004 carryover information was unreliable due to (1) NAWC converting to a new accounting system in fiscal year 2003 and (2) NAWC not performing reviews of obligations, including the required DOD triannual reviews. To better manage carryover and improve the reliability of carryover information, starting in fiscal year 2005, NAWC (1) issued guidance on the acceptance of orders at year end and (2) began reviewing orders to correct its old financial records. While the reliability of carryover information improved in fiscal years 2005 and 2006, GAO determined that problems still exist. For example, GAO found that funds on some customer orders totaling $19.5 million were deobligated at fiscal year end and then reobligated at the beginning of the next fiscal year on these same orders. This artificially lowered reported NAWC carryover at fiscal year end. Further, even though DOD's 1996 guidance required NAWC as well as other activities to conduct triannual reviews of its financial information, NAWC did not perform these reviews until fiscal year 2006. If implemented properly, these reviews would improve the reliability of reported carryover information and the underlying financial data. In addition, as of September 2006, the two NAWC divisions were still not fully complying with several of the 16 specific DOD tasks required as part of the triannual reviews. For example, because the two divisions were not always effectively reviewing some obligations, especially dormant obligations (obligations over 120 days old), their reported actual carryover was overstated. Also, effective triannual reviews would help NAWC validate its financial records before it implements a new system that is scheduled to be installed in October 2007.
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-07-643, Navy Working Capital Fund: Management Action Needed to Improve Reliability of the Naval Air Warfare Center's Reported Carryover Amounts
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Report to the Subcommittee on Defense, Committee on Appropriations,
House of Representatives:
United States Government Accountability Office:
GAO:
June 2007:
Navy Working Capital Fund:
Management Action Needed to Improve Reliability of the Naval Air
Warfare Center's Reported Carryover Amounts:
GAO-07-643:
GAO Highlights:
Highlights of GAO-07-643, a report to the Subcommittee on Defense,
Committee on Appropriations, House of Representatives
Why GAO Did This Study:
According to the Department of Defense‘s (DOD) fiscal year 2007 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6 billion of
funded work that will be carried over from fiscal year 2007 into fiscal
year 2008. The congressional defense committees recognize that these
groups need some carryover to ensure a smooth work flow from one fiscal
year to the next. However, the committees have previously raised
concern that the amount of carryover may be more than is needed. GAO
was asked to determine if (1) the Naval Air Warfare Center‘s (NAWC)
reported actual carryover was reliable for fiscal years 2003 through
2006 and (2) NAWC was utilizing the required triannual review process
to improve the reliability of its carryover information and underlying
financial data.
What GAO Found:
GAO‘s analysis of NAWC reports determined that NAWC‘s reported
carryover information was not reliable. Since DOD changed its carryover
policy in December 2002, NAWC reports showed that while under the
ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens
of millions of dollars from fiscal year 2003 through fiscal year 2005,
as shown in the following table. To the extent that carryover is too
high, Congress can redirect the customers‘ funds for other priorities.
Table: NAWC's Reported Carryover Amounts Over/Under Ceiling:
Dollars in millions.
Carryover amount;
Fiscal year 2003: $1,146;
Fiscal year 2004: $1,109;
Fiscal year 2005: $1,046;
Fiscal year 2006: $1,007.
Carryover ceiling;
Fiscal year 2003: 1,129;
Fiscal year 2004: 1,052;
Fiscal year 2005: 994;
Fiscal year 2006: 1,034.
Amount over or under ceiling;
Fiscal year 2003: Over $16;
Fiscal year 2004: Over $57;
Fiscal year 2005: Over $51;
Fiscal year 2006: Under $28.
Source: Navy reports.
Note: Figures may not add due to rounding.
[End of table]
GAO‘s analysis of accounting information on customer orders and
discussions with NAWC officials determined that its fiscal year 2003
and 2004 carryover information was unreliable due to (1) NAWC
converting to a new accounting system in fiscal year 2003 and (2) NAWC
not performing reviews of obligations, including the required DOD
triannual reviews. To better manage carryover and improve the
reliability of carryover information, starting in fiscal year 2005,
NAWC (1) issued guidance on the acceptance of orders at year end and
(2) began reviewing orders to correct its old financial records. While
the reliability of carryover information improved in fiscal years 2005
and 2006, GAO determined that problems still exist. For example, GAO
found that funds on some customer orders totaling $19.5 million were
deobligated at fiscal year end and then reobligated at the beginning of
the next fiscal year on these same orders. This artificially lowered
reported NAWC carryover at fiscal year end.
Further, even though DOD‘s 1996 guidance required NAWC as well as other
activities to conduct triannual reviews of its financial information,
NAWC did not perform these reviews until fiscal year 2006. If
implemented properly, these reviews would improve the reliability of
reported carryover information and the underlying financial data. In
addition, as of September 2006, the two NAWC divisions were still not
fully complying with several of the 16 specific DOD tasks required as
part of the triannual reviews. For example, because the two divisions
were not always effectively reviewing some obligations, especially
dormant obligations (obligations over 120 days old), their reported
actual carryover was overstated. Also, effective triannual reviews
would help NAWC validate its financial records before it implements a
new system that is scheduled to be installed in October 2007.
What GAO Recommends:
GAO makes six recommendations to DOD that are aimed at improving the
reliability of carryover information and the effectiveness of the
triannual review process. DOD concurred with all of GAO‘s
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-643].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact McCoy Williams at (202)
512-9095 or williamsm1@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
NAWC's Reported Actual Carryover Information Was Unreliable:
NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year
2006:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Analysis of Dormant Obligations and Accrued Expenditures:
Appendix III: Comments from the Department of Defense:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Table:
Table 1: Dollar Amount of Reported Actual Carryover, Carryover Ceiling,
and the Amount of Carryover that is Over or Under the Ceiling:
United States Government Accountability Office:
Washington, DC 20548:
June 26, 2007:
The Honorable John P. Murtha:
Chairman:
The Honorable C.W. Bill Young:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
According to the Department of Defense's (DOD) fiscal year 2007 budget
estimates, working capital fund activity groups (depot maintenance,
ordnance, and research and development) will have about $6 billion of
funded work that will be carried over from fiscal year 2007 into fiscal
year 2008.[Footnote 1] The congressional defense committees recognize
that these activity groups need some carryover to ensure a smooth flow
of work during the transition from one fiscal year to the next.
However, past congressional defense committee reports raised concerns
that the level of carryover may be more than is needed. Excessive
amounts of carryover financed with customer appropriations are subject
to reductions by DOD and the congressional defense committees during
the budget review process. To the extent that carryover is too high,
Congress may redirect the funds gained from such reductions to pay for
other priority initiatives.
In May 2001, we reported[Footnote 2] that DOD did not have a sound
analytical basis for its 3-month carryover standard, which it
established in 1996. In December 2002, DOD revised its carryover policy
to eliminate the 3-month across-the-board standard for allowable
carryover. Under the new policy, the allowable amount of carryover
(known as the carryover ceiling) is to be based on the outlay
rate[Footnote 3] of the customers' appropriations financing the work.
This means that in determining allowable carryover, the first year
outlay rate of the customers' appropriations financing the work is used
for new orders received in the current year (first year of the work
order). However, we reported[Footnote 4] in June 2006 that the military
services have not consistently implemented DOD's revised policy in
calculating carryover. Instead, the military services used different
methodologies for calculating reported actual and allowable amounts of
carryover since DOD changed its carryover policy in December 2002. We
also reported that the Naval Air Warfare Center (NAWC) exceeded the
carryover ceiling for fiscal years 2003, 2004, and 2005 by millions of
dollars each year.
As requested by and agreed to with your office, this report assesses
carryover related to NAWC. The objectives of this assignment were to
determine if (1) NAWC's reported actual carryover was reliable for
fiscal years 2003 through 2006 and (2) NAWC was utilizing the required
triannual review process to improve the reliability of its carryover
information and underlying financial data. Our review was performed
from July 2006 through April 2007 in accordance with U.S. generally
accepted government auditing standards. The carryover data used in this
report were obtained from official Navy budget and accounting
documents. To assess the reliability of the data, we (1) reviewed and
analyzed the information used to calculate reported actual carryover,
(2) analyzed the NAWC aircraft and weapons divisions' fiscal years 2003
through 2006 financial statements, (3) interviewed officials
knowledgeable about the carryover data, (4) reviewed NAWC's
implementation of the required DOD triannual review process, and (5)
reviewed selected orders to determine if the orders were adequately
supported by documentation. 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 III.
Results in Brief:
Our analysis of accounting data that provide information on customer
orders and discussions with NAWC officials determined that the reported
carryover information was not reliable for fiscal years 2003 and 2004
as a result of (1) NAWC's conversion to a new accounting system in
fiscal year 2003 and (2) the divisions not performing reviews of
obligations, including the required DOD triannual reviews. Reliable
carryover information is essential for DOD and congressional defense
committees during the budget review process since they may redirect
excessive carryover amounts to pay for other priority initiatives. For
fiscal years 2003, 2004, and 2005, NAWC reports showed that it exceeded
its carryover ceiling by $16.3 million, $57.2 million, and $51.7
million, respectively. During this 3-year period, our analysis of Navy
reports showed that NAWC had carryover amounts of $1.1 billion, $1.1
billion, and $1.0 billion, respectively, which represented over one-
third of NAWC's annual workload. However, both the NAWC aircraft and
weapons divisions' comptrollers did not certify to the accuracy of
financial information reported in their fiscal year 2003 financial
statements. To better manage carryover, improve the reliability of
reported carryover information, and avoid exceeding the carryover
ceiling, beginning in fiscal year 2005 and continuing into fiscal year
2006, NAWC (1) issued guidance on the acceptance of orders at fiscal
year end and (2) began reviewing orders to correct old financial
records and reduce carryover. For fiscal year 2006, NAWC reported that
its actual carryover was below the carryover ceiling. While the
reliability of carryover information improved in fiscal years 2005 and
2006, we determined that some data reliability problems still exist.
For example, we found that funds on some customer orders totaling $19.5
million were deobligated at the end of the fiscal year end and then
reobligated at the beginning of the next fiscal year on these same
orders. This artificially lowered carryover at the end of the fiscal
year.
Furthermore, NAWC did not perform the triannual reviews of its
financial information until fiscal year 2006, even though DOD guidance
has been in place for about 10 years requiring NAWC and all other fund
holders[Footnote 5] to conduct these reviews of their financial data
(outstanding commitments, obligations, and accrued expenditures). If
implemented properly, these reviews would likely have improved the
reliability of reported carryover information and related underlying
financial data. DOD established its triannual review requirement in
1996 in order to improve the timeliness and accuracy of its financial
data. According to NAWC officials at the aircraft and weapons
divisions, these reviews were not done prior to 2006 because they
received guidance from the Naval Air Systems Command that stated NAWC
was not required to conduct the triannual reviews. Further, as of
September 2006, the two divisions were still not fully complying with
several of the 16 specific DOD tasks that they were required to
accomplish as part of the triannual reviews. Because the two divisions
did not always effectively review some obligations, particularly
dormant obligations (obligations over 120 days old), (1) their reported
actual carryover was overstated and (2) they sometimes returned
unneeded funds to customers after the funds had expired. Furthermore,
if effectively implemented, the triannual reviews could help NAWC
validate or correct any errors in its financial records before it
implements a new system that is scheduled to be installed in October
2007.
We are making six recommendations to DOD to (1) reiterate guidance to
NAWC that would prohibit it from deobligating reimbursable customer
orders at fiscal year end and reobligating them in the next fiscal
year, an action that artificially reduces carryover balances that are
ultimately reported to Congress; and (2) improve the effectiveness of
the triannual review process. DOD concurred with the six
recommendations and identified corrective actions it is taking to
address them. While we appreciate DOD's efforts, we are concerned with
(1) the timing of the corrective action for one of the recommendations
and (2) the completeness of DOD's planned actions related to the one
recommendation with which it "concurred with comment." First, with
regard to DOD's plans to complete its reviews and validations of
dormant obligations and accrued expenditures by September 2008, we
continue to believe that these reviews and validations should be
completed prior to the planned implementation of a new accounting
system, currently scheduled for October 2007. Second, in concurring
with our recommendation for a clarification of the DOD Financial
Management Regulation (FMR) guidance on the triannual reviews, DOD
commented the FMR is clear as currently written but it would issue a
letter directing the Navy to comply with the FMR. As noted in our draft
report, we identified varying interpretations of the FMR guidance among
the Navy officials we interviewed. Thus, while we continue to believe
that a revision to the FMR would be the most efficient means to resolve
this issue, a letter such as that proposed in DOD's response could
suffice as long as it includes clarification of the FMR guidance,
particularly with regard to the dollar thresholds for required reviews.
Background:
A working capital fund relies on sales revenue rather than direct
appropriations to finance its continuing operations. A working capital
fund is intended to (1) generate sufficient resources to cover the full
costs of its operations and (2) operate on a break-even basis over
time--that is, neither make a gain nor incur a loss. Customers use
appropriated funds to finance orders placed with the working capital
fund. According to the Navy's fiscal year 2007 budget, the Navy Working
Capital Fund will earn about $23.4 billion in revenue during fiscal
year 2007. The Navy Working Capital Fund consists of the following five
major activity groups: supply management, depot maintenance,
transportation, base support, and research and development. The Navy's
research and development working capital fund activity group is Navy's
largest activity group in terms of expected revenue with $10.1 billion
in fiscal year 2007. The activity group includes the following
subactivity groups: (1) the Naval Surface Warfare Center, (2) the Space
and Naval Warfare Systems Centers, (3) the Naval Undersea Warfare
Center, (4) the Naval Research Laboratory, and (5) the Naval Air
Warfare Center.
The Naval Air Warfare Center consists of two divisions: (1) the
aircraft division, which is located at Lakehurst, New Jersey, and
Patuxent River, Maryland; and (2) the weapons division, which is
located at China Lake, California, and Point Mugu, California. NAWC
employs about 10,300 civilian and military personnel and is expected to
have revenues of almost $3 billion in fiscal year 2007. The mission of
NAWC's aircraft division is to operate the Navy's principal research,
development, test, and evaluation; engineering; and fleet support
activity for naval aircraft engines, avionics, and aircraft support
systems, and ships, shore, air operations. The mission of NAWC's
weapons division is to operate as the Navy's full-spectrum research,
development, test, and evaluation in-service engineering center for air
warfare weapons systems (except antisubmarine warfare systems),
missiles and missile subsystems, aircraft weapons integration, and
assigned airborne electronic warfare systems. The weapons division also
operates one of the Navy's major range and test facility bases
comprising a complex of air, land, and sea test ranges.
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 completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both
the unfinished portion of work started but not completed, as well as
requested work that has not yet begun. Some carryover is necessary at
fiscal year end if working capital funds are to operate efficiently and
effectively. For example, if customers do not receive new
appropriations at the beginning of the fiscal year, carryover is
necessary to ensure that the working capital fund activities have
enough work to ensure a smooth transition between fiscal years. Too
little carryover could result in some personnel not having work to
perform at the beginning of the fiscal year. 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 optimizing the amount
of carryover, DOD can use its resources in the most effective manner
and minimize the "banking" of funds for work and programs to be
performed in subsequent years.
Decision makers, including the Office of the Under Secretary of Defense
(Comptroller) and congressional defense committees, use reported
carryover information to make decisions concerning whether working
capital fund activities, such as NAWC, have too much carryover. If NAWC
has 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) determined 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.
DOD Revised Its Carryover Policy:
In 1996, DOD established a 3-month carryover standard for working
capital fund activities. In May 2001, we reported[Footnote 6] that DOD
did not have a basis for its carryover standard and recommended that
DOD determine the appropriate carryover standard for depot maintenance,
ordnance, and research and development activity groups. According to
Office of the Under Secretary of Defense (Comptroller) officials, DOD
provided verbal guidance concerning its new carryover policy for
working capital fund activities in December 2002. Subsequently, DOD
included its revised carryover policy in its DOD Financial Management
Regulation 7000.14-R, Volume 2B, Chapter 9, dated June 2004, which
eliminated the 3-month standard for allowable carryover. Under the new
policy, the allowable amount of carryover is to be based on the outlay
rate[Footnote 7] of the customers' appropriations financing the work.
This meant that in determining allowable carryover, the first year
outlay rate of the customers' appropriations financing the work would
be used for new orders received in the current year (first year of the
work order). According to the DOD regulation, this new metric allows
for an analytical-based approach that holds working capital fund
activities to the same standard as general fund execution and allows
for more meaningful budget execution analysis.
To calculate the reported actual carryover for the Navy research and
development activity group that includes NAWC, the Navy uses the
summary-level formula shown below.
Balance of customer orders beginning of year Plus: New orders received
Equals: Total available orders Less: Revenue Less: Work-in-process
Equals: Carryover:
In accordance with DOD policy, the following orders and related work
are excluded from this calculation: (1) nonfederal orders, (2) non-DOD
orders, (3) foreign military sales, (4) work related to base
realignment and closure, and (5) major range and test facility base
work. The reported actual carryover is then compared to the amount of
allowable carryover using the above-mentioned outlay rate method to
determine if the reported actual amount was over or under the allowable
amount.
DOD Established Triannual Review Requirement in 1996:
The May 1996 memorandum from the Under Secretary of Defense
(Comptroller) that established DOD's triannual 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 the 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 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 NAWC, accept customer
orders, obligations are created in the customers' accounting records,
and the activities 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 included the triannual review requirements in its Financial
Management Regulation. DOD Financial Management Regulation 7000.14-R,
Volume 3, Chapter 8, requires fund holders, such as NAWC, to provide
written confirmation that they have completed 16 specific
tasks[Footnote 8] during their reviews. For example, the regulation
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 documentation and (2) conducted
adequate follow-up on all dormant obligations and commitments over 120
days old to determine if they are still valid.[Footnote 9]
Additionally, the regulation requires fund holders to (1) identify the
problems that were noted during their reviews; (2) advise management of
whether, and to what extent, adjustments or corrections were taken to
remedy noted problems; (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 by the department, triannual
reviews can provide a systematic process that can help fund holders not
only improve the reliability of their financial data but also identify
and correct the underlying causes of data problems.
NAWC Implemented a New System in Fiscal Year 2003 and Plans to
Implement a Different System in October 2007:
In 1998, the Navy established four separate Enterprise Resource
Planning (ERP) pilot programs to address the need for business
operations reform within the Navy. We reported[Footnote 10] in
September 2005 that (1) the Navy invested approximately $1 billion in
its four pilot ERP efforts, without marked improvements in its day-to-
day operations; (2) the lack of a coordinated effort among the pilots
led to a duplication of efforts in implementing many business functions
and resulted in ERP solutions that carry out similar functions in
different ways from one another; and (3) the pilots resulted in four
more stovepiped systems that did not enhance DOD's overall efficiency
and resulted in $1 billion being largely wasted.
One of these pilots was managed by the Naval Air Systems Command and
called SIGMA. SIGMA was to improve program management including linkage
among contract management, financial management, and workforce
management. Prior to fiscal year 2003, NAWC used the Defense Industrial
Financial Management System to account for its funds. In January 2003,
NAWC began to implement SIGMA and completed implementation of this new
system in March 2003. As discussed later in this report, NAWC
encountered significant difficulties implementing SIGMA, which affected
the reliability of the financial information for fiscal years 2003 and
2004. The Navy now plans to implement one overall ERP system, referred
to as Navy ERP, and discontinue using the four ERP systems. This
overall ERP system is planned to be implemented at NAWC in October
2007.
NAWC's Reported Actual Carryover Information Was Unreliable:
Our analysis of accounting data that provide information on customer
orders and discussions with NAWC officials determined that the reported
carryover information was not reliable for fiscal years 2003 and 2004
as a result of (1) NAWC's conversion to a new accounting system in
fiscal year 2003 and (2) the divisions not performing reviews of
obligations including the required DOD triannual reviews--as discussed
later in this report. Reliable carryover information is essential for
DOD and congressional defense committees during the budget review
process since they may redirect excessive carryover amounts to pay for
other priority initiatives. Both the NAWC aircraft and weapons
divisions' comptrollers did not certify to the accuracy of financial
information reported in their respective fiscal year 2003 financial
statements. To try to better manage carryover, improve the reliability
of the carryover information, and avoid exceeding the ceiling,
beginning in fiscal year 2005 and continuing into fiscal year 2006,
NAWC (1) issued guidance on the acceptance of orders at year end and
(2) started to review orders to correct its old financial records and
reduce carryover. While the reliability of carryover information
improved in fiscal years 2005 and 2006, we determined that data
reliability problems still exist. For example, we found that funds on
some customer orders totaling $19.5 million were deobligated at the end
of the fiscal year and then reobligated at the beginning of the next
fiscal year on these same orders. This artificially lowered carryover
at the end of the fiscal year.
NAWC Reports Showed that It Exceeded Its Carryover Ceiling from Fiscal
Year 2003 through Fiscal Year 2005:
Since DOD changed its carryover policy in December 2002, NAWC exceeded
its carryover ceiling by tens of millions of dollars from fiscal year
2003 through fiscal year 2005. During this 3-year period, Navy reports
showed that NAWC had carryover amounts of $1.1 billion, $1.1 billion,
and $1.0 billion, respectively, which represented over one-third of
NAWC's annual workload. Table 1 shows the dollar amount of the
carryover ceiling, the dollar amount of the Navy-reported actual
carryover for NAWC, and the dollar amount of carryover that was over or
under the ceiling for fiscal years 2003 through 2006.
Table 1: Dollar Amount of Reported Actual Carryover, Carryover Ceiling,
and the Amount of Carryover that is Over or Under the Ceiling:
Dollars in millions.
Carryover amount;
Fiscal year 2003: $1,146;
Fiscal year 2004: $1,109;
Fiscal year 2005: $1,046;
Fiscal year 2006: $1,007.
Carryover ceiling;
Fiscal year 2003: 1,129;
Fiscal year 2004: 1,052;
Fiscal year 2005: 994;
Fiscal year 2006: 1,034.
Amount over or under ceiling;
Fiscal year 2003: Over $16;
Fiscal year 2004: Over $57;
Fiscal year 2005: Over $51;
Fiscal year 2006: Under $28.
Source: Navy reports.
Note: Figures may not add due to rounding.
[End of table]
Implementation of New System Affected Reliability of Carryover
Information:
NAWC reports showed that it exceeded the carryover ceiling in fiscal
year 2003 by $16.3 million. NAWC reports showed that the weapons
division exceeded the ceiling by $31 million, while the aircraft
division was $14.7 million under the ceiling. NAWC aircraft and weapons
division officials stated that their fiscal year 2003 carryover
information was unreliable as a result of NAWC's conversion to SIGMA in
fiscal year 2003. According to NAWC aircraft and weapons division
officials, immediately after the conversion to SIGMA between January
and March 2003, NAWC personnel began experiencing problems with the
reliability of the data. This resulted from the lack of subject matter
expertise and user training on the new system, and system configuration
problems between the previous system, called the Defense Industrial
Financial Management System, and SIGMA. Further, due to the system not
operating for approximately 3 months and system-related problems, NAWC
experienced significant backlogs in processing financial documents
during fiscal year 2003. For example, NAWC weapons division officials
noted that their personnel spent the first 2 months of fiscal year 2004
processing fiscal year 2003 customer bills. Due to the delays in
processing billing transactions, NAWC's work-in-process balances at the
end of fiscal year 2003 (a key component in the carryover calculation)
were about 10 times (aircraft) and 8 times (weapons) higher than its
fiscal year 2002 reported amount. As a result of these system problems,
both the NAWC aircraft and weapons divisions' comptrollers would not
certify to the accuracy of financial information reported in their
fiscal year 2003 financial statements.
For fiscal year 2004, the aircraft and weapons divisions reported that
their carryover exceeded the ceiling by $35.7 million and $21.5
million, respectively, for a total of $57.2 million. According to NAWC
aircraft and weapons division officials, several data fixes were made
to SIGMA in fiscal year 2004 that improved its processing times and
data integrity issues. However, some data reliability problems
continued to exist. The NAWC aircraft and weapons divisions'
comptrollers noted problems with the reliability of some of their
financial information presented in the fiscal year 2004 financial
statements. In fiscal year 2004, NAWC aircraft and weapons division
officials stated that, at the request of the Naval Air Systems Command
Comptroller, a team of consultants and analysts conducted a review of
SIGMA's processes to address its multitude of data integrity issues and
its inability to provide accurate financial statements. The team
developed a detailed plan of action and milestones to fix these
problems with timelines that extended into fiscal year 2006. Further,
for most of fiscal year 2003 and 2004, NAWC aircraft and weapons
division officials stated that SIGMA lacked carryover management
reports that would allow NAWC program managers to monitor the status of
each order (funding document) and make informed decisions to control
its carryover. In the executive summary to the NAWC aircraft division's
fiscal year 2004 financial statements, the division reported that the
implementation of SIGMA resulted in the nonavailability of specific
carryover reports necessary for managing carryover at the program
level. NAWC aircraft and weapons division officials stated that while
the reports became available late in fiscal year 2004, they were of
limited utility because of continuing data integrity issues and NAWC's
inability to review and validate both aged and current financial
records.
NAWC Took Steps to Better Manage Carryover and Improve the Reliability
of Carryover Information:
Beginning in fiscal year 2005 and continuing into fiscal year 2006,
NAWC issued guidance on the acceptance of orders at fiscal year end in
an attempt to better manage carryover and avoid exceeding its carryover
ceiling for the third straight year. Specifically, in an August 2005
memorandum that contained fiscal year 2005 NAWC carryover guidance,
NAWC estimated that its year-end carryover balance would be $95 million
over its authorized level. The memorandum placed strict controls over
acceptance of year-end orders including (1) the rejection of
noncritical new orders, (2) the acceptance of requests for reversion of
funds back to customers, and (3) before the NAWC accepts any critical
workload that would result in additional unexpended carryover, the
division must obtain approval from the NAWC aircraft division or
weapons division commander and offset the outstanding carryover amounts
by reversions of funds to the customer of an equal or greater amount.
Further, the NAWC comptrollers were directed to provide program
managers with a list of projects or tasks that had 25 percent or less
of authorized funding executed as a potential source for reversion or
offsets. Finally, the NAWC weapons division provided its business
financial management community with tools to give them the capability
to better manage carryover. For example, one tool provided the business
financial managers (BFM)[Footnote 11] with the capability to compare
planned carryover data to actual carryover data for individual orders
and at the summary level on a weekly basis to determine if actual
carryover may exceed the carryover ceiling at year end. If actual
carryover may exceed the ceiling at year end, the weapons division can
use the tool to identify problems--such as a significant delay in a
major program's start date--and begin working on solutions to mitigate
them. Even with these stronger management controls over new orders and
the increased efforts to validate old accounts, NAWC's reports showed
that it still exceeded the carryover ceiling in fiscal year 2005 by
$51.7 million. The aircraft division exceeded the ceiling by $52.4
million while the weapons division was under the ceiling by $0.7
million.
For fiscal year 2006, NAWC's reported actual carryover amount was below
the carryover ceiling for the first time since DOD revised its
carryover policy in December 2002. The aircraft and weapons divisions
were under the ceiling by about $10 million and $18 million,
respectively. NAWC officials informed us that they continued to
emphasize the management of carryover during fiscal year 2006 by
reviewing orders and issuing additional guidance. Key elements of this
guidance include the following.
* The aircraft division issued additional carryover guidance in
September 2006 to reiterate several requirements cited in fiscal year
2005. Furthermore, an aircraft division official noted that the
increased focus resulting from the prior GAO report recommending that
the research and development subactivity groups report their carryover
balances separately in the Navy's annual budget encouraged NAWC
management to more closely monitor and manage its carryover.
* The weapons division issued carryover guidance in August 2006, which
continued to stress the reviews of customers' orders that are financed
with appropriations that are canceling or expiring. The guidance states
that such reviews would (1) improve the quality of the year-end
carryover and (2) validate the records, which is an essential task for
accomplishing a smooth financial conversion to the new Navy ERP system
planned for October 2007. The guidance further provided that funds
accepted during the remainder of the fourth quarter should not
negatively impact the division's carryover position. Otherwise, the
division should notify the customer that the order cannot be accepted
and renegotiate, if possible, the amount of the order that can be
accomplished using the DOD carryover guidance on outlay rates.
Furthermore, starting primarily in fiscal year 2005, the aircraft and
weapons divisions began reviewing certain types of orders to validate
old financial records and reduce carryover. According to NAWC aircraft
and weapons division officials, most of these reviews were not done in
fiscal years 2003 and 2004 because of NAWC's conversion to SIGMA and
the problems, mentioned earlier, it encountered with implementing the
system and the reliability of the data in the system. Some of the
reviews performed by the aircraft or weapons divisions include (1)
reviews of funding documents (orders) citing appropriations that are
canceling[Footnote 12] at the end of each fiscal year (such reviews
have been done since the 1990s), (2) reviews of funding documents
citing accounts that were to expire at the end of the fiscal year
(these reviews started in fiscal year 2005), and (3) a fiscal year 2006
review of unused funds with work completion dates of September 30,
2005, and before. According to NAWC officials, these reviews resulted
in correcting millions of dollars in unsupported or unneeded funds on
orders, and greatly improved the reliability of the financial data. For
example, according to a NAWC aircraft division official, as of August
2005, this division had 14,353 orders that were still open on its books
when it converted to SIGMA in fiscal year 2003. As a result of the
aircraft division's review of these orders from August 2005 through
November 2006, this number was reduced to 7,053 open orders--a
reduction of about 50 percent--and $10 million of unneeded funds were
removed from its books.
Some Customer Orders Were Reduced at Year End, which Artificially
Lowered Carryover:
While we are encouraged by NAWC's actions to review and validate its
financial records and better manage its carryover, we identified some
cases where NAWC deobligated millions of dollars of funds at fiscal
year end on orders for work it still planned to perform. NAWC then
reobligated funds at the beginning of the next fiscal year to perform
the work. This action artificially lowered NAWC's actual year-end
carryover balances in fiscal years 2004 and 2005 that were reported to
DOD and congressional decision makers. We analyzed fiscal years 2004
and 2005 year-end orders where amendments or adjustments were made to
deobligate funds on these orders at the end of the fiscal year. We
found a total of $19.5 million was deobligated at the end of fiscal
year 2004 or 2005 and reobligated at the beginning of the next fiscal
year. These actions had the effect of reducing carryover even though
the requirement for the funds still remained at the time the funds were
returned to their customers. We reported[Footnote 13] on a similar
problem in fiscal year 2003 on our review of the Space and Naval
Warfare Systems Command. The following examples illustrate the orders
that were deobligated at the end of fiscal year 2004 or 2005, which had
the effect of reducing reported carryover even though the requirement
for the funds still remained but the work could not be completed by the
end of the fiscal year.
* Aircraft division officials stated that they did not know why
adjustments totaling $10.5 million on 14 orders were made to deobligate
customer funds at the end of fiscal year 2004 or 2005 and why the funds
were reobligated at the beginning of the next fiscal year on these same
orders. They said that lack of documentation, turnover of personnel,
and difficulties implementing SIGMA hindered their ability to determine
why these year-end adjustments were made. For example, from December 1,
2003, to September 23, 2004, the NAWC aircraft division accepted a work
order and related amendments from the Naval Air Systems Command
totaling approximately $2.1 million for engineering support for the CH-
53E helicopter program. Accounting records showed that $404,435 was
deobligated in September 2004--at the end of the fiscal year--and that
this same amount was reobligated 1 month later in October 2004--at the
beginning of the next fiscal year. According to an aircraft division
official, "no documentation for reason of the deobligation has been
located."
* In April 2005, the NAWC weapons division accepted two orders from the
U.S. Army Space and Missile Defense Command totaling $5.5 million for
range instrumentation services and missile flight safety support for
two separate tests of the Missile Defense Agency Target
Intercontinental Ballistic Missiles. The tests were originally
scheduled to be completed in fiscal year 2005, but were delayed into
fiscal year 2006 due to weather and instrumentation problems. Due to
program delays and expenditure rates that were 25 percent or less of
authorized funding on the orders, NAWC identified these orders as
potential funds that could be returned to the customer. According to a
BFM, the NAWC weapons division needed to have these funds "off the
books" to relieve the carryover problem. The NAWC weapons division's
comptroller officials stated that the return of funds to customers is
appropriate when mission support requirements slip from one fiscal year
to the next and the tasking to be accomplished is severable, as in this
case. On September 23, 2005, the U.S. Army Space and Missile Defense
Command issued an amendment to each order deobligating a total of $4.85
million. Approximately 1 month later, the command issued amendments on
the orders returning the $4.85 million--the exact amount that was
deobligated in September 2005. The two tests were performed in fiscal
year 2006.
* In January 2005, the NAWC aircraft division accepted an order from
the Naval Air Systems Command totaling $100,000 for the research and
development of a low-cost, automated fiber optic cable. In September
2005--8 months later--the Naval Air Systems Command issued an amendment
to the order deobligating the entire amount. In October 2005--
approximately 1 month later--the command issued another amendment to
the order returning funds to the program totaling $110,000. Work on the
order began in November 2005 and was completed in September 2006.
According to a BFM, delays in completing work in fiscal years 2003 and
2004 on other jobs delayed the start of fiscal year 2005 work. NAWC
aircraft division accounting officials said, and we agree, that work
should have been started within a reasonable amount of time after
accepting the order in January 2005--within 90 days. Otherwise, the
funds should have been deobligated when the delays caused the work to
commence beyond a reasonable amount of time as specified in the DOD
financial management regulation.
NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year
2006:
NAWC did not perform the triannual reviews of its financial information
until fiscal year 2006, even though DOD guidance had long required NAWC
and all other fund holders[Footnote 14] to conduct these reviews of
their financial data (outstanding commitments, obligations, and accrued
expenditures). These reviews would likely have improved the reliability
of carryover information and the underlying financial data. DOD
established its triannual review requirement in 1996 in order to
improve the timeliness and accuracy of its financial data. However, the
aircraft and weapons divisions did not conduct their first reviews
until January 2006--about 10 years later. Further, as of September
2006, the two divisions were still not fully complying with several of
the 16 specific DOD tasks that they were required to accomplish during
their reviews. Because the two divisions did not always effectively
review some obligations, particularly dormant obligations (i.e., those
over 120 days old), (1) their reported actual carryover was overstated
and (2) they sometimes returned unneeded funds to customers after the
funds had expired. Further details on dormant obligations and accrued
expenditures are included in appendix II. Furthermore, if effectively
implemented, the triannual reviews could help NAWC validate its
financial records before it implements a new system that is scheduled
to be installed in October 2007.
NAWC Did Not Properly Implement DOD's Triannual Review Guidance:
NAWC did not properly implement DOD's triannual review guidance cited
in DOD Financial Management Regulation 7000.14-R, Volume 3, Chapter 8.
Specifically, (1) NAWC did not perform the required triannual reviews
prior to fiscal year 2006 although these reviews were required in a May
1996 memorandum from the Under Secretary of Defense (Comptroller) and
in the November 2000 DOD Financial Management Regulation and (2) NAWC
did not review all obligations at least once during fiscal year 2006 as
required by the November 2000 DOD regulation. In addition, the November
2000 DOD regulation (triannual guidance) on the dollar threshold for
reviewing obligations was unclear.
NAWC Did Not Perform Required Triannual Reviews Prior to Fiscal Year
2006:
Prior to fiscal year 2006, NAWC did not perform triannual reviews, even
though these reviews were required by the DOD Financial Management
Regulation. According to NAWC officials at the aircraft and weapons
divisions, these reviews were not done because they received e-mail
guidance from the Naval Air Systems Command that stated the NAWC
divisions were not required to submit the triannual review confirmation
report because this requirement was only for general funds. In October
2005, the Naval Air Systems Command provided guidance to the NAWC
aircraft and weapons divisions that they were now required to perform
the triannual reviews and complete the confirmation statements.
Officials from the NAWC aircraft and weapons divisions stated that the
first time they completed a triannual review and confirmation statement
was for the period ending January 31, 2006.
NAWC Did Not Review All Obligations in Fiscal Year 2006 as Required by
DOD Regulation:
Although the DOD regulation requires that all obligations be reviewed
at least annually in order to substantiate year-end triannual review
requirements, the NAWC aircraft and weapons divisions only reviewed
obligations, including dormant obligations, over a certain dollar
threshold--$50,000 or $200,000. The weapons division did not review all
the obligations because guidance received from the Naval Air Systems
Command dated June 2, 2006, and September 28, 2006, and guidance issued
by NAWC weapons divisions dated September 29, 2006, did not require a
review of all of them. Officials from Naval Air Systems Command and the
NAWC weapons division informed us that they did not require the review
of all obligations at least once a year because they did not realize
that the DOD regulation required such a review. NAWC aircraft division
officials told us that although the DOD regulation required such
reviews, they did not have the time or resources to perform the
reviews. If effectively implemented, the triannual reviews could help
NAWC validate its financial records before it implements a new system
that is scheduled to be installed in October 2007.
DOD Triannual Review Guidance on Dollar Threshold for Reviewing
Obligations Is Unclear:
We also found that DOD's triannual review guidance regarding the dollar
threshold for reviewing outstanding obligations was unclear. The DOD
Financial Management Regulation 7000.14-R, Volume 3, Chapter 8,
guidance states that during the January and May reviews, obligations of
(1) $200,000 or more for investment appropriations (e.g., procurement
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. However, the Naval Air Systems Command and
the NAWC weapons division 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. The
NAWC weapons division conducted its triannual reviews accordingly. In
discussing this issue with accounting and budgeting officials from the
Office of the Under Secretary of Defense (Comptroller), they stated
that customer orders received by working capital fund activities are
part of the operating portion of the working capital fund regardless of
the appropriation financing the order. Thus, the January and May
triannual reviews should have included all obligations over $50,000.
NAWC Continues to Refine Its Triannual Review Process:
Our review of the process that the NAWC aircraft and weapons divisions
used to conduct their triannual reviews identified several areas that
need improvements. The aircraft and weapons divisions developed their
own separate processes for performing the triannual reviews. For fiscal
year 2006, the weapons division used a decentralized process that
relied on both the accounting department and the BFMs to conduct its
reviews, while the aircraft division used a centralized process that
relied on the accounting department to conduct its reviews. During our
review, we identified problems with the two divisions' triannual
reviews of obligation and accrued expenditure balances. Based on the
results of our review and discussions with NAWC officials, the aircraft
and weapons divisions issued written guidance on performing the
triannual reviews and are now including the BFMs in the process. If the
process is implemented properly, the aircraft and weapons divisions'
decision to include the BFMs in its triannual review process should
result in better reviews and more reliable financial information,
including carryover information, in the future.
NAWC Weapons Division Improved Its Decentralized Review Process
throughout 2006:
The NAWC weapons division accomplished its triannual reviews on a
decentralized basis. During the first step of the process, the Office
of the Comptroller for the NAWC weapons division, which has overall
responsibility for the reviews, developed computer lists that contain
information on the division's outstanding commitments, obligations, and
accrued expenditures. The Comptroller's office then placed these lists
on the Business Financial Management Community shared server so that
the BFMs could access the data and conduct their triannual reviews.
When the BFMs finished their reviews, the competency[Footnote 15] heads
certified that their reviews had been completed and then forwarded
their certifications to the Comptroller's office. On the basis of the
technical department's certifications, the Comptroller then certified
that the division has completed its review.
We found problems with the weapons division's implementation of the
triannual review process. The NAWC weapons division performed its first
triannual review for the period ending January 31, 2006. The review was
performed on a limited basis by the Comptroller's office since no
formal triannual review procedures had been developed by the weapons
division. For the second triannual review performed for the period
ending May 31, 2006, the Comptroller's office modified its process to
place primary responsibility for reviewing its division's commitments,
obligations, and accrued expenditures on the BFMs within the division's
technical departments. NAWC weapons division officials stated that the
BFMs had information that was not immediately available to the
Comptroller's office on whether work was performed on its orders.
Consequently, they were in the best position to determine whether
outstanding obligations and accrued expenditures were valid and whether
the funds were still needed to perform the work.
While the May 2006 process was better than the one used for the weapons
division's January 2006 review, our analysis and discussions with
technical department and Comptroller's office officials found that (1)
no written procedures had been developed by the weapons division, (2)
not all BFMs that were responsible for reviewing the transactions
participated in the training offered by the Comptroller's office, (3)
the Comptroller's office did not specifically identify which
transactions the technical departments were required to review, (4) the
weapons division did not have a standard methodology for reporting the
results of its technical departments' reviews to the Comptroller's
office in order to ensure that all required transactions were
certified, (5) not all BFMs that reviewed transactions were maintaining
documentation for 24 months on their reviews as required by the DOD
Financial Management Regulation, and (6) the division did not have a
procedure in place to ensure the technical departments were performing
the triannual reviews properly. For example, many of the technical
departments' BFMs that we interviewed stated that the lists provided by
the Comptroller's office contained hundreds of commitment, obligation,
and accrued expenditure transactions for review, but the lists did not
contain enough information to identify the specific transactions that
the BFMs were responsible for reviewing. As a result, some BFMs did not
perform the May 2006 triannual review at all because they could not
identify the transactions that they were responsible for reviewing.
Further, several of the BFMs that did perform reviews stated that they
did not report their results to the Comptroller's office because a
clearly defined procedure for reporting the results did not exist.
In August 2006, we met with weapons division officials to discuss the
division's triannual review process. Based on those discussions, we
pointed out internal control weaknesses we identified in the May 2006
process. The officials agreed that the weapons division's triannual
review process could be improved and the division needed to document
its triannual review procedures. Shortly after our meeting, the
division established a team to develop guidance on its triannual review
procedures. The team decided to use a phased approach to achieve
compliance with the DOD triannual review regulation. On September 29,
2006, the weapons division issued interim guidance containing the
triannual review procedures for reporting on the period ending
September 30, 2006. The weapons division made a number of improvements
to the May 2006 process. The weapons division (1) modified the process
to clearly identify which technical departments were responsible for
the transactions, (2) directed the department heads who were
responsible for the transactions assigned to their departments to
certify that these transactions were reviewed, and (3) established a
procedure for reporting results to the Comptroller's office.
Our discussions with several weapons division technical departments'
BFMs found that these officials thought the September 2006 triannual
review process was a significant improvement over the May 2006 review
process because the computer lists provided by the Comptroller's office
contained sufficient information to identify the technical department
and BFM responsible for reviewing the September 2006 transactions.
Further, the interim guidance contained clear instructions for
reporting their results to the Comptroller's office through their
technical department managers. Our analysis showed that while the
guidance for the September 2006 triannual reviews was an improvement,
the guidance (1) did not comply with all the requirements of the DOD
Financial Management Regulation to review all outstanding commitments,
obligations, and accrued expenditures at least once annually; (2) did
not require training for all the technical departments' BFMs involved
in the review; (3) did not require all BFMs that were responsible for
performing triannual reviews to maintain documentation for 24 months on
their reviews; and (4) did not establish a procedure for ensuring that
the technical departments are completing their reviews in compliance
with the September 2006 interim guidance.
On December 21, 2006--about 3 months later--the NAWC weapons division
issued additional guidance containing instructions for performing all
future triannual reviews beginning with the review period ending
January 31, 2007. The guidance stated that the triannual reviews are a
critical factor in the NAWC weapons division efforts to eliminate
problem disbursements, reduce potential violations of the Anti-
Deficiency Act, and improve obligation and expenditure rates. The
guidance requires all commitments and obligations to be reviewed at
least annually in compliance with the DOD Financial Management
Regulation and requires the technical departments' BFMs to attend
mandatory annual triannual review training. While the new guidance
addresses many of our concerns, it still does not establish procedures
for ensuring that the technical departments are completing their
reviews in compliance with the new guidance. Without these procedures,
the Comptroller's office does not have a sound basis for providing
written confirmation that the NAWC weapons division's transactions are
complete and accurate.
NAWC Aircraft Division Did Not Generally Involve BFMs in Its Triannual
Reviews:
Unlike the weapons division, the NAWC aircraft division accomplished
its triannual reviews on a centralized basis within the accounting
department and the BFMs were generally not included in the process.
During the first step of the aircraft division process, the accounting
department generated computer lists that contained information on the
division's outstanding commitments, obligations, and accrued
expenditures. The accounting department then forwarded these lists to
the various team leaders within the accounting department to conduct
the needed research to ensure that the outstanding obligations,
accruals, or commitments are still valid. For example, the accounting
department reconciled the disbursements recorded in SIGMA to the
disbursements recorded in the DOD payment system called the
Mechanization of Contract Administration Services (MOCAS). In
performing the triannual reviews, the accounting department involved
the BFMs on an as-needed basis. When the accounting department team
leaders finished their reviews, they sent the completed lists back to
the cost accounting supervisor, who then coordinated with the
accounting officer to certify that the reviews were completed and
forwarded these certifications to the Comptroller's office. On the
basis of these certifications, the Comptroller certified that the
division had completed its review and the transactions reviewed were
accurate.
NAWC aircraft division did not complete its first triannual review
until January 2006. Our analysis and discussions with NAWC aircraft
division officials determined that the aircraft division had not (1)
developed and implemented written procedures for performing the
triannual reviews and (2) developed or provided training to the BFMs on
how to conduct the triannual reviews since they have not been
specifically involved in performing these reviews. The accounting
officer stated that they were unable to review all outstanding
obligations, as required by the DOD regulation at least annually, due
to time and resource constraints.
In addition to the triannual reviews, the accounting officer stated
that the aircraft division accounting department reviews commitments,
obligations, and accrued expenditures as part of its routine
operations. Specifically, the accounting department is to take the
following actions.
* Identify outstanding orders funded with appropriations that are
canceling at the end of the fiscal year and perform detailed analyses
to resolve these transactions in order to get them off the books prior
to the end of the fiscal year.
* Forward information to the budget department, which coordinates with
the BFMs to review outstanding commitments over 90 days old on a
monthly basis and respond back to the accounting department as to
whether the commitments on the list are valid or invalid.
* Perform research on outstanding accrued expenditures. The first
accrued expenditure data file was produced as of the end of fiscal year
2005. According to a NAWC aircraft division official, throughout fiscal
year 2006, the accrued expenditure information improved. The aircraft
division now compares the information in this file to information
received from MOCAS. The accounting department had not provided the
accrued expenditure file to the BFMs for review prior to January 2007.
However, beginning in January 2007, the Comptroller's office began
generating files that identified which accrued expenditure records
belonged to which BFMs. In addition, one of the data elements
identifies the person in the accounting department who performed the
initial research and what research had been performed to date to
alleviate the duplication of efforts between accounting and BFM
personnel. This will enable the accounting department to begin using
the BFMs in researching the accrued expenditures.
Even though the procedures provide for some BFM involvement, our review
of 21 dormant obligations involving 17 different BFMs disclosed that
they had not reviewed the specific transactions in our sample prior to
our visit. This is an indication that the aircraft division's routine
reviews of obligations were not always effective. Additionally, our
analyses identified that the aircraft division's current process did
not provide an adequate review of its obligations and accrued
expenditures. We found that:
* As of September 30, 2006, $43 million (or 23 percent) of the NAWC
aircraft division's obligations were over 120 days old and $20 million
(or 11 percent) were over 1 year old. The accounting officer stated
that they were unable to review all the obligations as required by the
DOD regulation at least annually, due to time and resource constraints.
Accordingly, this item was not certified on the September 30, 2006,
triannual review confirmation checklist.
* As of June 30, 2006, $70 million (or 62 percent) of the NAWC aircraft
division's accrued expenditures were over 120 days old and $35 million
(or 31 percent) were over 1 year old. The accounting officer stated
that accrued expenditures were only reviewed within the accounting
department and that they had not developed policies or procedures for
reviewing the accrued expenditures.
In February 2007, NAWC aircraft division officials stated that they
were developing a new draft instruction for conducting their triannual
reviews. These officials added that they started with the December 2006
NAWC weapons division guidance and are revising it to better reflect
the aircraft division's operations. A month later, on March 20, 2007,
the NAWC aircraft division issued written procedures that (1) require
the division to review all outstanding obligations and accrued
expenditures at least annually in order to substantiate the year-end
certification process, (2) clearly delineate the responsibilities of
the individuals performing the review, (3) require the BFMs to
participate in performing the triannual reviews, (4) clearly describe
the process for reporting the triannual review results to the
division's Comptroller office, and (5) require the division to maintain
all documentation related to the transactions reviewed for a period of
24 months following the review to ensure that independent
organizations, such as the Office of Inspector General, can verify that
the reviews were accomplished as required. While we agree with the
aircraft division's issuance of written triannual review procedures
that increase the involvement of the BFMs in the triannual review
process, we note that the division had not yet developed and
implemented training that provides detailed instructions to the BFMs on
performing the triannual reviews. Although this may require a short-
term increase in resources to provide this training, the long-term
benefit will be a more complete review of obligations, commitments, and
accrued expenditures. This, in turn, should improve the reliability of
the aircraft division's financial information, including carryover.
Conclusions:
Reliable carryover information is essential for Congress and DOD to
perform their oversight responsibilities, including reviewing and
making well-informed decisions on DOD's budget. Moreover, by improving
the reliability of the underlying data used to calculate carryover,
NAWC's financial data, such as obligation and accrued expenditure
balances, will also be more reliable. Management accountability at the
divisions for the accuracy of reported carryover and the timely
identification of unneeded funds will be a key factor in improving
these data. This includes increased management attention to help assure
that the divisions are effectively conducting their triannual reviews,
including reviewing funded orders. Further, in light of NAWC's planned
conversion to a new Navy accounting system in October 2007, it is
especially important for NAWC to review and correct any errors in
recorded obligations and accrued expenditures, particularly dormant
ones. If not corrected prior to conversion, any such errors could cause
additional resource-intensive research to fully resolve them and these
problem transactions could potentially remain unresolved for years.
Recommendations for Executive Action:
In order to improve the reliability of carryover information at NAWC,
we are making the following six recommendations to the Secretary of
Defense.
We recommend that the Secretary of Defense direct the Secretary of the
Navy to take the following actions.
* Reiterate its guidance that clearly prohibits Navy working capital
fund activities from deobligating reimbursable customer orders at
fiscal year end and immediately reobligating them in the next fiscal
year, a process that results in artificially reducing the carryover
balances that are ultimately reported to Congress.
* Develop and implement procedures for the Naval Air Warfare Center's
aircraft and weapons divisions to provide assurance that triannual
reviews of obligation and accrued expenditure balances are performed in
accordance with the DOD Financial Management Regulation.
* Develop and implement a required training course for BFMs that
provides instructions on performing the triannual review requirements
for the Naval Air Warfare Center's aircraft division.
* Require individuals, including BFMs responsible for performing the
reviews at the Naval Air Warfare Center's aircraft division, to attend
the training to ensure that they are aware of the triannual review
requirements.
* Review and validate the accuracy of NAWC's aircraft and weapons
divisions' reported outstanding obligations and accrued expenditures,
especially those that have remained outstanding since the conversion to
SIGMA, prior to its conversion to a new accounting system in October
2007.
We recommend that the Secretary of Defense direct the Under Secretary
of Defense (Comptroller) to clarify the triannual 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.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report. DOD concurred
with our six recommendations and plans to complete actions on five of
the six recommendations by the end of fiscal year 2007. We appreciate
DOD's efforts and find them generally responsive to our
recommendations. For example, DOD stated that it would complete the
following actions.
* Direct the Navy to reiterate its policy on handling reimbursable
customer orders in its fiscal year end closing guidance.
* Direct the Navy to develop and implement procedures that provide
assurance that the required triannual reviews are properly performed.
* Direct the Navy to develop and implement a training course or courses
for all Naval Air Warfare Center employees involved with the triannual
reviews and require these employees, including the business financial
managers, to attend the training.
However, we are concerned with the timing of the corrective action for
one of the recommendations and also with the completeness of DOD's
planned actions related to the one recommendation with which it
"concurred with comment." Specifically, in its written comments, DOD
stated that the Navy would emphasize reviewing and validating
outstanding obligations and accrued expenditures that have remained
outstanding since the conversion to SIGMA and estimated that this
action would be completed by September 2008. As noted in our draft
report, we believe that it is critical that such reviews and
validations be completed prior to the planned conversion to a new
accounting system in October 2007. While we appreciate that the Navy
has already started these reviews, validating these transactions prior
to the system conversion is a best practice that would help avoid some
of the problems that were encountered when NAWC implemented its current
accounting system in 2003.
Further, in response to our recommendation that the triannual review
guidance in the FMR be clarified, DOD "concurred with comment" and
stated that a letter would be issued directing the Navy to comply with
the FMR concerning the dollar thresholds for performing the triannual
review. DOD commented that the FMR was clear as currently written. As
noted in our draft report, officials from the Naval Air Systems
Command, the NAWC weapons division, and the NAWC aircraft division had
varying interpretations of the FMR requirements. Thus, while we
continue to believe that a revision to the FMR would be the most
efficient means to resolve this issue, a letter such as that proposed
in DOD's response could suffice as long as it includes clarification of
the FMR guidance, particularly with regard to the dollar thresholds for
reviewing outstanding commitments and obligations for the capital
budget and operating portion of the working capital fund.
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; and the
Subcommittee on Readiness, House Committee on Armed Services. 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 McCoy Williams, Director, at (202) 512-9095 or
williamsm1@gao.gov, or William M. Solis, Director, at (202) 512-8365 or
solisw@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Key contributors to this report are listed in appendix IV.
Signed by:
McCoy Williams:
Director, Financial Management and Assurance:
Signed by:
William M. Solis:
Director, Defense Capabilities and Management:
[End of section]
Appendix I: Scope and Methodology:
To determine if the Naval Air Warfare Center's (NAWC) reported actual
carryover was reliable for fiscal years 2003 through 2006, we obtained
budget and accounting documents that provided information on reported
actual carryover and the carryover ceiling for fiscal years 2003
through 2006. We analyzed the carryover information to determine if the
NAWC aircraft or weapons divisions' reported actual carryover exceeded
the ceiling for fiscal years 2003 through 2006. We (1) discussed with
NAWC officials the reliability of the carryover information, (2)
obtained and analyzed the NAWC aircraft and weapons divisions'
financial statements for fiscal year 2003 through 2006 to determine if
NAWC certified to the reliability of the information, and (3) discussed
with NAWC officials actions they were taking to improve the reliability
of the carryover information. We also reviewed year-end transactions
that reduced the dollar amount of reported actual carryover. For these
transactions, we obtained data on orders from August through December
for 2004 and 2005. We identified orders that showed deobligated amounts
in August or September and matched them to the same orders that showed
obligated amounts in October through December. We analyzed the orders
and any amendments to the orders and met with officials from the NAWC
aircraft and weapons divisions to determine why these transactions
occurred at the end of the fiscal year. We also discussed with NAWC
aircraft division and weapons division officials actions they were
taking or have taken to help ensure that the reported actual carryover
amount stays below the ceiling.
To determine if NAWC was utilizing the required triannual review
process to improve the reliability of its carryover information and
underlying financial data, we reviewed the policies and procedures the
Naval Air Systems Command and NAWC used to implement the Department of
Defense's (DOD) triannual review guidance. Specifically, we (1)
reviewed the DOD, Navy, Naval Air Systems Command, and NAWC triannual
review guidance and discussed it with cognizant individuals; (2)
requested the triannual review confirmation statements that NAWC
submitted since fiscal year 2003, and discussed these statements with
cognizant individuals; (3) discussed NAWC's triannual review procedures
with cognizant individuals, including those who completed the reviews;
and (4) reviewed documentation on the results of the review. We also
reviewed obligations and accrued expenditures to identify problems and
actions that could be taken to fix these problems if NAWC had performed
the triannual reviews.
* We obtained data on the status of obligations related to carryover
(contracts between NAWC and contractors) at the end of fiscal year
2006. From these data, we selected and analyzed 41 obligations that had
outstanding carryover balances at the end of fiscal year 2006 to
determine if the carryover balances accurately reflected the amount of
work that remained to be performed. We selected obligations that were
old (over 120 days) and did not have any recent financial activity (no
activity for at least 1 year) since these obligations were more likely
to have unneeded funds and because a review of these obligations was,
therefore, more likely to identify problems with the triannual review
procedures.
* We obtained data on accrued expenditures related to carryover at the
end of fiscal year 2005 and June 2006. From these data, we selected and
analyzed 17 accrued expenditures to determine if the accrued
expenditure balances were correct. Accrued expenditures are critical in
the computation of carryover since NAWC recognizes revenue and bills
customers based on the accrued expenditures, which in turn, reduces its
amount of carryover. We selected accrued expenditures that were over 1
year old and showed no financial activity for at least 1 year since
these accrued expenditures were more likely to have unneeded funds and
because a review of these orders was, therefore, more likely to
identify problems with the triannual review procedures.
We performed our work at or obtained information from headquarters
offices of the Under Secretary of Defense (Comptroller) and the
Assistant Secretary of the Navy (Financial Management and Comptroller),
Washington, D.C; the Naval Air Systems Command, Patuxent River,
Maryland; the Naval Air Warfare Center, Aircraft Division, Patuxent
River, Maryland and Lakehurst, New Jersey; and the Naval Air Warfare
Center, Weapons Division, China Lake and Point Mugu, California. To
assess the reliability of the data used in this report, we (1) reviewed
and analyzed the factors used in calculating carryover, (2) analyzed
the NAWC aircraft and weapons divisions' fiscal years 2003 through 2006
financial statements, (3) analyzed the NAWC aircraft and weapons
divisions' fiscal year 2006 triannual review confirmation statements,
(4) interviewed NAWC officials knowledgeable about the carryover data,
and (5) reviewed obligations and accrued expenditures to determine if
they were adequately supported by documentation.
The carryover information in this report was obtained from official
Navy budget and accounting documents. We conducted our work from July
2006 through April 2007 in accordance with U.S. generally accepted
government auditing standards. We requested comments on a draft of this
report from the Secretary of Defense or his designee. The Under
Secretary of Defense (Comptroller) provided written comments, which are
presented in the Agency Comments and Our Evaluation section of this
report and are reprinted in appendix III.
[End of section]
Appendix II: Analysis of Dormant Obligations and Accrued Expenditures:
Our analysis of the Naval Air Warfare Center (NAWC) aircraft and
weapons divisions' fiscal year 2006 dormant obligations and accrued
expenditures showed the two divisions had tens of millions of dollars
of obligations and accrued expenditures that went unresolved for more
than 1 year. For the transactions we reviewed, we determined that the
two divisions did not perform adequate reviews on some of their dormant
obligation and accrued expenditures. If the aircraft and weapons
divisions had performed adequate triannual reviews as required, NAWC
could have significantly improved the reliability of the carryover
balances reported to the Department of Defense (DOD) and congressional
defense committees.
More Effective Reviews of Dormant Obligations Could Result in Better
Use of Customer Funds and Reduce Reported Carryover:
A key element of the triannual 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. The task is one of the 16
DOD triannual review requirements and is important because it will
facilitate the (1) identification and recording of work performed on
these orders, thereby reducing NAWC's reported carryover and, in turn,
the likelihood of customers' budget cuts; and (2) identification and
return of unneeded funds to customers so that the customers can reuse
the funds for other purposes if they are returned before they expire.
Furthermore, this task is especially important for NAWC as it is
scheduled to convert to a new system--Navy Enterprise Resource Planning
(ERP)--in October 2007, and reviewing and validating its records to
help ensure they are accurate before converting to the new system would
help ensure a smooth transition.
The task of validating obligations to determine if they are still
needed is especially important for NAWC's aircraft and weapons
divisions. NAWC's September 30, 2006, report on obligations related to
carryover showed that $252 million was associated with orders received
from customers. Our analysis of the obligation report showed that about
$59 million of the $252 million, or 23 percent, was over 120 days old
as of September 30, 2006, and $27 million of the $252 million, or about
11 percent, was over 1 year old.
As previously discussed, NAWC's aircraft and weapons divisions did not
perform the required triannual reviews of obligations to determine
their validity prior to fiscal year 2006. Even though the two divisions
did not begin reviewing dormant obligations until fiscal year 2006,
both divisions certified that adequate follow-up was conducted on all
dormant obligations over 120 days old in the January and May 2006
reports. However, after we began our review, the two divisions did not
provide written confirmation that adequate follow-up reviews of dormant
obligations over 120 days old to determine if they were valid were
conducted in their respective September 2006 reports.
To identify problems and actions that could be taken to fix these
problems if the NAWC had performed the triannual reviews, we selected
and reviewed 41 outstanding obligations totaling about $4.1 million
that were more than 120 days old and had not had any recent financial
activity (sometimes no activity for years). For the obligations we
reviewed, we determined that the aircraft and weapons divisions did not
perform adequate reviews on some of their obligations. In addition,
obligations were overstated, which means that the year-end carryover
for this work was also overstated by varying amounts for several years.
In reviewing the 41 obligations, we found that 14 obligations totaling
about $3 million were valid, and 27 obligations[Footnote 16] totaling
about $1.1 million overstated carryover. The following provides a
breakout of the obligations that overstated carryover.
* Eight obligations totaling $467,786 were for work that had been
performed but (1) no payments had been made to liquidate the
obligations and (2) no accrued expenditures were recorded for the work
that was performed.
* Eleven obligations totaling $273,628 had no work completed on them or
NAWC was in the process of deobligating the funds.
* Ten obligations totaling $312,727 were for work that had been
performed and paid for but (1) the payment had either not been
correctly recorded or matched to the obligations in order to liquidate
the obligations and (2) no accrued expenditures were recorded for the
work performed.
The following are some examples of the problems we identified with the
dormant obligations that we reviewed.
* In March 2004, the NAWC aircraft division obligated $172,552 for the
inspection of flight test propellers. Since May 2004, no financial
activity occurred for this obligation (such as payments made or accrued
expenditures recorded for work performed). According to NAWC aircraft
division officials, the accounting department reviewed this obligation
prior to our visit and confirmed that this appeared to be a valid
outstanding obligation since they had not received a bill for this
work. As part of our review, we requested that the business financial
manager (BFM) review the status of the dormant obligation. Further
research performed by the BFM disclosed that while the work had been
completed by July 15, 2004, the vendor had not submitted a bill. At the
time we performed our work, the NAWC aircraft division was in the
process of paying the contractor and liquidating the obligation. If the
triannual review had been effectively performed, this problem could
have been identified years earlier and NAWC could have reduced its year-
end obligations and carryover by $172,552 for fiscal years 2004, 2005,
and 2006.
* In February 2004, the NAWC aircraft division obligated $25,000 for
ship installation drawings for an aircraft carrier. Since that time, no
financial activity had occurred. Due to a schedule change regarding the
availability of the aircraft carrier, the shipyard was unable to gain
access to the ship in order to develop the technical drawings.
Consequently, the NAWC aircraft division was unable to perform the work
and use the funds. NAWC officials agreed that this obligation should
have been closed out several years ago and the funds returned to the
customer. According to these officials, they did not review this
obligation as part of the division's triannual review because they
lacked the time and resources to review all transactions below $50,000.
As a result of not deobligating the funds from the records, the NAWC
aircraft division overstated its reported year-end obligations and
carryover by $25,000 for fiscal years 2004, 2005, and 2006.
* In fiscal year 2002, the NAWC weapons division obligated $30,000 for
updating electronic software in EP-3 planes. As of September 2006, the
weapons division's accounting records showed that $22,798 of the
obligation remained on the accounting records. As part of our review of
NAWC carryover, we requested that the BFM review the status of this
dormant obligation. The BFM found that (1) the work was completed in
2002, (2) the contractor processed about $18,986 in invoices but only
$7,305 in invoices were recorded as being paid, and (3) about $11,014
of the original $30,000 was not used by the contractor. The BFM agreed
that the accounting records were in error and, as a result of our
inquiry, NAWC weapons division officials are researching the invoice
difference of $11,681 ($18,986 less $7,305) and plan to return the
remaining unused amount of $11,014 to the customer. As a result of this
failure to match invoices with the obligation and revert unused funds
back to the customer in a timely manner, the NAWC weapons division
overstated reported year-end obligations and carryover by $22,798 in
fiscal years 2003, 2004, 2005, and 2006 while also precluding the
customer from using some of these funds for some other purpose because
the funds had expired.
More Effective Reviews of Dormant Accrued Expenditures Could Improve
Reliability of Reported Carryover:
At the conclusion of their triannual reviews, fund holders are required
to provide written confirmation that they have conducted adequate
research on all accrued expenditures[Footnote 17] that are more than
120 days old to determine if they are valid. This task is important
because:
* large accrued expenditures 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 expenditures can, therefore, cause reported
carryover to be understated.
The task of validating accrued expenditures is especially important for
the aircraft and weapons divisions because NAWC's report on accrued
expenditures related to carryover showed that it had about $138 million
of accrued expenditures as of June 30, 2006, that were associated with
orders received from customers over the years. Accurately accounting
for accrued expenditures is important from a carryover standpoint since
NAWC recognizes revenue and bills customers based on accrued
expenditures. The Office of the Under Secretary of Defense
(Comptroller) has also recognized the importance of accrued
expenditures in its review of Navy working capital fund activities.
During its review of the Navy's working capital fund research and
development fiscal year 2008 budget, the Comptroller's Office
questioned the large amount of recorded accrued expenditures. As a
result, the Office of the Under Secretary of Defense (Comptroller)
reduced the Navy's working capital fund research and development fiscal
year 2008 budget for three research and development subactivity groups,
including NAWC, by $214.7 million.
Our analysis of NAWC's accrued expenditures report showed that about
$85 million of the $138 million of accrued expenditures, or 62 percent,
were over 120 days old as of June 30, 2006. Further, $45 million of the
$138 million, or about one-third of the reported accrued expenditures,
were over 1 year old. NAWC officials informed us that when NAWC
implemented SIGMA in fiscal year 2003, the system did not produce an
accrued expenditure report.[Footnote 18] Since the new system did not
produce a report, the NAWC aircraft division designed and developed its
own accrued expenditure report. The first report was issued in
September 2005--over 2 years after the implementation of the new
system. As a result, comprehensive reviews of accrued expenditures were
not performed for fiscal years 2003, 2004, and 2005. The two divisions
began performing reviews of accrued expenditures during fiscal year
2006 but they did not have any written procedures for such reviews. The
following summarizes the fiscal year 2006 results.
* The aircraft division provided written confirmation that adequate
follow-up was conducted on all dormant accrued expenditures over 120
days old in its January, May, and September 2006 triannual review
reports. Our analysis of the aircraft division's accrued expenditure
report as of June 2006 showed that $70 million of the $113 million of
the accrued expenditures--or 62 percent--were over 120 days old and
about $35 million of the $113 million, or 31 percent, were over 1 year
old.
* The weapons division provided written confirmation that adequate
follow-up was performed in its January and May 2006 reports but it did
not provide written confirmation that adequate follow-up reviews were
done of dormant accrued expenditures over 120 days old in its September
2006 report. Our analysis of the weapons division's accrued expenditure
report as of June 2006 showed that $14.7 million of the $24.5 million
of the accrued expenditures--or 60 percent--were over 120 days old and
$10.6 million of the $24.5 million, or 43 percent, were over 1 year
old.
To identify problems and actions that could be taken to fix these
problems if the NAWC had performed the triannual reviews, we selected
and reviewed 17 accrued expenditures totaling about $4.4
million[Footnote 19] that were over 1 year old as of June 30, 2006, and
did not have any recent financial activity (sometimes no activity for
years). Since accrued expenditures represent the amount of paid and
unpaid expenditures for services performed by employees or contractors,
accrued expenditures that remain outstanding for long periods of time
are an indication of a potential problem with the accuracy of recorded
accrued expenditure data because the work should have already been
performed and payment made. In most of the cases we reviewed, we
determined that the aircraft and weapons divisions did not perform
adequate reviews of their accrued expenditures. Specifically, we found
that:
* no work was performed on 10 accrued expenditures totaling about $2.2
million (about half the dollar amount reviewed);
* work was performed for 4 accrued expenditures totaling about $1
million and while the contractor had billed NAWC, the payment was not
correctly recorded in the accounting system to liquidate the accrued
expenditure;
* for 4 accrued expenditures totaling about $1 million, the accrued
expenditures were so old that neither we nor NAWC officials could
determine their status; and:
* documentation for 2 accrued expenditures totaling about $100,000
showed they were correctly recorded.
The following are examples of the problems we identified with the
accrued expenditures that we reviewed including their impact on
reported NAWC carryover balances.
* On July 7, 2003, the NAWC weapons division obligated $232,318 on a
contract with Northrop Grumman Field Support Services to provide
engineering services in support of the F-14 Weapons System Support
Activity. On September 29, 2003, the weapons division recorded an
accrued expenditure in its system totaling $201,651--the balance
remaining unpaid to the contractor that was obligated in fiscal year
2003. As part of the weapons division's May 2006 triannual review, the
BFM that had responsibility for this contract determined that the
accrued expenditure recorded in fiscal year 2003 was unsupported. NAWC
weapons division officials stated that the final invoice for this
contract was processed on September 20, 2006. In October 2006, the
administrative contracting officer issued an amendment to the contract
that deobligated these funds which had expired. One month later, the
weapons division reversed the accrued expenditure and returned the
funds to its customer. As a result of the erroneous accrued
expenditure, our analysis showed that the weapons division understated
its carryover in fiscal years 2003, 2004, 2005, and 2006 by $201,651
and billed its customer for work that was not performed.
* As of March 2002, the NAWC aircraft division obligated $226,901 on an
order with Northrop Grumman to provide engineering design data
services. In fiscal year 2003, the contractor billed and received
payment of $5,626, leaving a remaining balance of $221,275. Our
analysis of the aircraft division's June 2006 accrued expenditure
report indicated that the aircraft division recorded accrued
expenditures in its accounting system for $221,275--the outstanding
balance--over 3½ years ago. Although no further work was performed on
this order, the accrued expenditure of $221,275 remained outstanding
until August 2006. In August 2006, NAWC reversed the remaining accrued
expenditure of $221,275 and deobligated the funds because the customer
appropriation financing the order was canceling at the end of the
fiscal year. By not performing the triannual reviews prior to fiscal
year 2006 which would have identified this problem, the aircraft
division recognized revenue and billed its customer $221,275 for work
that was not performed and understated its carryover by this amount in
fiscal years 2003, 2004, and 2005.
* In March 1996, the NAWC weapons division issued an order to the
Electronic Proving Ground totaling $333,000 to provide funding for
Global Positioning System test support. On September 18, 1996, the NAWC
weapons division recorded an accrued expenditure for the full amount of
the obligation in its financial management system. In February 1997, a
payment totaling $123,195 was processed against these funds. The
remaining accrued expenditure amount ($209,805) has been outstanding
since it was recorded in 1996. These transactions were recorded in a
financial management system that has been replaced twice. Many details
associated with these transactions are no longer available. Because of
the limited data available, we could not determine the validity of the
accrued expenditure amount. However, if the weapons division had
performed the triannual reviews as required by DOD regulation, the
records may have been available to either reverse the outstanding
accrued expenditure amount or liquidate the accrued expenditure amount
against vendor payments.
* In July 2003, the NAWC aircraft division increased funding on a task
order by $126,477 to provide software support services for the Navy's
HE-2K aircraft tactical systems program. In July 2004, the NAWC
aircraft division recorded an accrued expenditure in its accounting
system totaling $126,477--the entire balance for the software support
services to be performed. According to a BFM, the work for the software
support services was never performed. In January 2006, an amendment to
this task order decreased excess funds for the entire $126,477 that was
previously obligated for the additional software support services.
However, the NAWC aircraft division did not reverse the accrued
expenditure until August 2006--about 2 years after it had recorded the
accrued expenditure. As a result, we determined that the NAWC aircraft
division recognized revenue and billed its customers $126,477 for work
that was not performed and understated its carryover by this amount in
fiscal years 2003, 2004, and 2005.
* Between March 1997 and April 1998, the NAWC weapons division issued
an order and three amendments totaling $505,000 to the 46th test group
at Holloman Air Force Base for work on the radar cross section of the
QF-4E range targets. Between September 1997 and August 2001, the NAWC
weapons division recorded accrued expenditure amounts totaling $505,000
in its financial management system--the full amount obligated on the
order. In the late 1990s, Holloman Air Force Base and the Defense
Finance and Accounting Service Denver paid the 46th test group the full
amount obligated on the order. However, the NAWC weapons division
records showed that only $151,074 was recorded in the financial
management system as paid. Thus, an accrued expenditure totaling
approximately $353,926 remains outstanding. If the NAWC weapons
division had performed its triannual review as required by DOD
regulation, the weapons division could have reduced its end of fiscal
year outstanding accrued expenditures by $353,926 for fiscal years 2001
through 2006. NAWC weapons division officials stated that in this case,
the carryover amount was accurately reported but the accrued
expenditure amount was distorted by $353,926.
[End of section]
Appendix III: Comments from the Department of Defense:
Under Secretary Of Defense:
1100 Defense Pentagon:
Washington, DC 20301-1 100:
Comptroller:
Jun 12 2007:
Mr. McCoy Williams:
Director:
Financial Management and Assurance:
Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Williams:
This is the Department of Defense response to the Government
Accountability Office draft report 07-643, "Navy Working Capital Fund:
Management Action Needed to Improve Reliability of the Naval Air
Warfare Center's Reported Carryover Amounts," dated April 26, 2007,
(GAO Code 195095). We have received and reviewed the draft report.
Specific comments on the draft report are enclosed.
The Department appreciates the GAO pointing out that the reliability of
the Navy's Warfare Centers FY 2005 - FY 2006 carryover reporting has
improved. Further improvement will result as these recommendations are
implemented.
Sincerely,
Signed by:
Tina W. Jonas:
Enclosure:
As stated:
GAO Draft Report Dated April 26, 2007 GAO-07-643 (GAO Code 195095):
"Navy Working Capital Fund: Management Action Needed To Improve
Reliability Of The Naval Air Warfare Center's Reported Carryover
Amounts"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy to reiterate its guidance that clearly
prohibits Navy working capital fund activities from de-obligating
reimbursable customer orders at fiscal year-end and immediately re-
obligating them in the next fiscal year, a process that results in
artificially reducing the carryover balances that are ultimately
reported to Congress. (p. 35/GAO Draft Report):
DOD Response: Concur. The Department will direct the Secretary of the
Navy to reiterate its guidance on handling reimbursable customer orders
in its fiscal year end closing guidance. Although Navy's actions
artificially reduced the FY 2006 carryover balances, there is no
evidence to suggest that the Navy deliberately intended to underreport
its carryover balance. Estimated Completion Date: July 2007:
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy to develop and implement procedures
for the Naval Air Warfare Center's aircraft and weapons divisions to
provide assurance that the triannual reviews of obligation and accrued
expenditure balances are performed in accordance with the DoD Financial
Management Regulation. (p. 35/GAO Draft Report):
DOD Response: Concur. The Navy currently issues specific guidance to
its Budget Submitting Offices directing the triannual reviews be
performed in accordance with the Department's Financial Regulations.
Beginning with the FY 2007 review, the Department will direct the Navy
to develop and implement procedures that provide assurance that the
required reviews are properly performed. Estimated Completion Date:
July 2007:
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy to develop and implement a required
training course for business financial managers that provides
instructions on performing the triannual review requirements for the
Naval Air Warfare Center's aircraft division. (p. 35/GAO Draft Report):
DOD Response: Concur. The Secretary of Defense will direct the Navy to
develop and implement a required training course or courses for all
Naval Air Warfare Center employees that are involved in the management,
oversight and execution of the triannual review requirements.
Estimated Completion Date: July 2007:
Recommendation 4: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy to require individuals including
business financial managers responsible for performing the reviews at
the Naval Air Warfare Center's aircraft division to attend the training
to ensure that they are aware of the triannual review requirements. (p.
18/GAO Draft Report):
DOD Response: Concur. The Secretary of Defense will direct the Navy to
make its triannual review training course mandatory for all Naval Air
Warfare Center employees that are involved in the management, oversight
and execution of the triannual review requirements, including its
business financial managers. Estimated Completion Date: July 2007:
Recommendation 5: The GAO recommends that the Secretary of Defense
direct the Secretary of the Navy to review and validate the accuracy of
Naval Air Warfare Center's aircraft and weapons divisions' reported
outstanding obligations and accrued expenditures, especially those that
have remained outstanding since the conversion to SIGMA, prior to its
conversion to a new accounting system in October 2007. (p. 36/GAO Draft
Report):
DOD Response: Concur. The Navy has already been directed to review and
validate the accuracy of Naval Air Warfare Center's outstanding
obligations and accrued expenditures, and report to the results to the
Office of the Under Secretary of Defense (Comptroller). The first of
these reviews took place in April 2007. The Department will direct the
Navy to place special emphasis on those outstanding obligations and
accrued expenditures that have remained outstanding since converting to
the new accounting system.
Estimated Completion Date: September 2008:
Recommendation 6: The GAO recommends that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) to clarify the
triannual review guidance for the January and May reviews in the DoD
Financial Management Regulation (DoDFMR) 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. (p.
36/GAO Draft Report):
DOD Response: Concur with comment. The Under Secretary of Defense
(Comptroller) will issue a letter directing the Navy to comply with the
DoDFMR. The DoDFMR is clear as currently written. The FMR provides
guidance to the Defense Working Capital Fund (DWCF) fund holder as to
the dollar threshold for performing the triannual review in January and
May. The DWCF has two thresholds, one for operations and one for its
capital program. Commitments and obligations in support of the DWCF
capital program are segregated and the threshold is defined. For all
other commitments and obligations, when a DWCF activity enters into an
agreement, whether it is in support of a funded project or activity
overhead, it is categorized as DWCF operations and that threshold
applies. On the other hand, the fund holder for the general fund
activities is responsible for validating their own commitments and
obligations.
Estimated Completion Date: September 2007:
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
McCoy Williams, (202) 512-9095 William M. Solis, (202) 512-8365:
Acknowledgments:
Staff who made key contributions to this report were Richard Cambosos,
Francine DelVecchio, Steve Donahue, Mary Jo LaCasse, Keith McDaniel,
Greg Pugnetti, Chris Rice, and Hal Santarelli.
FOOTNOTES
[1] The carryover amount includes both work for which obligations have
been made by requesting organizations but that has not yet started and
the cost to complete work that has been started.
[2] GAO, Defense Working Capital Fund: Improvements Needed for Managing
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30,
2001).
[3] The amount of allowable carryover using the outlay rate follows.
For example, customers order $100 of work, which is financed with a
specific appropriation. If the outlay rate for this appropriation at
the appropriation level is 60 percent, then this would result in the
working capital fund activity group being allowed to carry over $40
($100 - $60 [$100 x 60 percent] = $40).
[4] GAO, Defense Working Capital Fund: Military Services Did Not
Calculate and Report Carryover Amounts Correctly, GAO-06-530
(Washington, D.C.: June 27, 2006).
[5] The fund holder is the organization on whose accounting records a
commitment, obligation, and/or accrued expenditure is recorded.
[6] GAO, Defense Working Capital Fund: Improvements Needed for Managing
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30,
2001).
[7] The amount of allowable carryover using the outlay rate follows.
For example, customers order $100 of work, which is financed with a
specific appropriation. If the outlay rate for this appropriation at
the appropriation level is 60 percent, then this would result in the
working capital fund activity group being allowed to carry over $40
($100 - $60 [$100 x 60 percent] = $40).
[8] In June 2006, the Navy added 2 additional tasks, resulting in Navy
activities being required to perform 18 specific tasks in their
triannual reviews and to certify that they have completed them.
[9] All obligations and commitment balances are required to be reviewed
at least annually in order to substantiate year-end certification
requirements. However, for those balances that are greater than a
certain amount, these transactions are required to be reviewed during
each of the 4-month periods ending January 31, May 31, and September 30
of each fiscal year (e.g., for customer-order-related obligations and
commitments, the amount is $50,000).
[10] GAO, DOD Business Systems Modernization: Navy ERP Adherence to
Best Business Practices Critical to Avoid Past Failures, GAO-05-858
(Washington, D.C.: Sept. 29, 2005).
[11] BFMs are responsible for pre-and postcontract functions and
contract management, including resource management, manpower
management, and material management.
[12] An appropriation enacted for a fixed period of time is available
for incurring and recording new obligations during such fixed period of
time after which the appropriation account expires. The expired
appropriation account remains available for the period of 5 years to
record adjustments to obligations properly incurred prior to its
expiration and to liquidate such obligations. At the end of the 5-year
expired account period, the appropriation balance is canceled and the
account is closed. Once closed, the expired appropriation account
ceases to be available to adjust or liquidate obligations.
31 U.S.C. §§ 1552(a), 1553(a), 1553(b) (1). For further discussion see
GAO, Principles of Federal Appropriations Law, vol. 1, 3rd ed., GAO-04-
261SP, pp. 5-71 through 5-75 (Washington, D.C.: January 2004) and
Principles of Federal Appropriations Law: Annual Update of Third
Edition, GAO-06-534SP, pp. 5-3 and 5-4 (Washington, D.C.: April 2006).
[13] GAO, Navy Working Capital Fund: Backlog of Funded Work at the
Space and Naval Warfare Systems Command Was Consistently Understated,
GAO-03-668 (Washington, D.C.: July 1, 2003).
[14] The fund holder is the organization on whose accounting records a
commitment, obligation, and/or accrued expenditure is recorded.
[15] Competencies represent different departments aligned to perform
specific functions such as engineering, contracting, and financial
management. Throughout the rest of this report, we will refer to the
competencies as technical departments.
[16] Portions of two obligation amounts were included in two different
categories.
[17] 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) items such as
annuities and insurance claims for which no current service or
performance is required.
[18] In our report entitled DOD Business Systems Modernization: Navy
ERP Adherence to Best Business Practices Critical to Avoid Past
Failures, GAO-05-858 (Washington, D.C.: Sept. 29, 2005), we reported
that because the pilots were stovepiped, limited within the scope of
their respective commands, and not interoperable, they did not
transform the Navy's business operations. As a result, under the
leadership of a central office, the Navy decided to start over and
undertake the development and implementation of a single ERP system.
[19] The dollar amount for the four categories may not total due to
rounding. Further, portions of three accrued expenditures are included
in two categories.
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