DOD Financial Management
Weaknesses in Controls over the Use of Public Funds and Related Improper Payments Gao ID: GAO-11-950T September 22, 2011The Department of Defense (DOD) is required to design and implement effective internal controls, including controls over its use of public funds ("funds controls") and controls over its payment processes ("payment controls"). As a steward of the public's resources, DOD is responsible and accountable for (1) using public funds efficiently and effectively and for the purposes and within the time frames and amounts prescribed by law, (2) making payments to the right parties in the correct amount within allowable time frames and recouping any improper payments, and (3) accurately recording and reporting on its transactions and use of public funds. GAO's testimony focuses on (1) challenges DOD faces in its funds control, and their effect on the reliability of DOD's financial information, especially the budgetary information in DOD's Statement of Budgetary Resources and (2) weaknesses in DOD's payment controls that put the department at risk of making improper payments. This statement is based on our prior work and reports issued by the department's Inspector General (DOD IG). The panel requested that GAO provide its perspective on the status of DOD's process for identifying and reporting on improper payments, examples of Antideficiency Act violations within DOD along with the causes of these violations, and the effect of problem disbursements on DOD's ability to report reliable information on its financial statements..
For years, GAO and DOD IG have reported on DOD's inability to provide effective funds control and report reliable financial information, including budgetary information. In 2008, GAO reported that DOD's complex and inefficient payment processes, nonintegrated business systems, and weak internal controls impair its ability to maintain proper funds control, putting DOD at risk of overobligating or overspending its appropriations. Specifically, DOD's weak internal control environment has hindered its ability to ensure that transactions are accurately recorded, sufficiently supported, and properly executed by trained personnel subject to effective supervision. Funds control weaknesses place DOD at risk of violating the Antideficiency Act (ADA), specifically through overobligations and overexpenditures. DOD reported ADA violations from fiscal year 2007 through September 15, 2011, with a total dollar amount of $927.4 million. DOD has identified payment transactions and related accounting steps as "problem disbursements." Problem disbursements include unmatched disbursements (UMD) that represent disbursements that have been paid by an accounting office but that have not been matched to the correct obligation records. DOD reports that it has reduced overaged UMDs from $666.5 million to $109.6 million between second quarter of fiscal year 2009 to the same time in fiscal year 2011. These and other weaknesses have prevented DOD from reporting reliable financial information, including budgetary information in an auditable Statement of Budgetary Resources. Although DOD has dedicated significant resources to remediate its identified weaknesses, it faces significant challenges to address those persistent weaknesses. DOD reported for fiscal year 2010 that it made an estimated $1 billion in improper payments. However, this estimate is incomplete because DOD did not include estimates from its commercial payment programs, which account for approximately one-third of the value of DOD payments. Further, both GAO and the DOD IG have reported on weaknesses in DOD's payment controls, including weaknesses in its process for assessing the risk of improper payments and reporting estimated amounts of them. DOD's problem disbursements continue to be a concern and are a contributing factor to the department's funds control issues. The department's weak controls over payments increase the risk of inaccurate cost information and improper payments. Given DOD's stated goal of achieving audit readiness on its consolidated financial statements by the end of fiscal year 2017, it will be critical that the department continue to ensure that steady progress is being made. Moreover, for DOD to move forward, it will be important that the department resolve its problems with multiple, disparate nonintegrated systems to ensure that whatever systems solutions are chosen will provide the underlying foundation for auditable financial statements.
GAO-11-950T, DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments
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United States Government Accountability Office:
GAO:
Testimony:
Before the Panel on Defense Financial Management and Auditability
Reform, Committee on Armed Services, House of Representatives:
For Release on Delivery:
Expected at 8:00 a.m. EDT:
Thursday, September 22, 2011:
DOD Financial Management:
Weaknesses in Controls over the Use of Public Funds and Related
Improper Payments:
Statement of Asif A. Khan, Director:
Financial Management and Assurance:
GAO-11-950T:
GAO Highlights:
Highlights of GAO-11-950T, testimony before the Panel on Defense
Financial Management and Auditability Reform, Committee on Armed
Services, House of Representatives.
Why GAO Did This Study:
The Department of Defense (DOD) is required to design and implement
effective internal controls, including controls over its use of public
funds (’funds controls“) and controls over its payment processes (’
payment controls“). As a steward of the public‘s resources, DOD is
responsible and accountable for (1) using public funds efficiently and
effectively and for the purposes and within the time frames and
amounts prescribed by law, (2) making payments to the right parties in
the correct amount within allowable time frames and recouping any
improper payments, and (3) accurately recording and reporting on its
transactions and use of public funds.
GAO‘s testimony focuses on (1) challenges DOD faces in its funds
control, and their effect on the reliability of DOD‘s financial
information, especially the budgetary information in DOD‘s Statement
of Budgetary Resources and (2) weaknesses in DOD‘s payment controls
that put the department at risk of making improper payments.
This statement is based on our prior work (see Related GAO Products)
and reports issued by the department‘s Inspector General (DOD IG). The
panel requested that GAO provide its perspective on the status of
DOD‘s process for identifying and reporting on improper payments,
examples of Antideficiency Act violations within DOD along with the
causes of these violations, and the effect of problem disbursements on
DOD‘s ability to report reliable information on its financial
statements.
What GAO Found:
For years, GAO and DOD IG have reported on DOD‘s inability to provide
effective funds control and report reliable financial information,
including budgetary information. In 2008, GAO reported that DOD‘s
complex and inefficient payment processes, nonintegrated business
systems, and weak internal controls impair its ability to maintain
proper funds control, putting DOD at risk of overobligating or
overspending its appropriations. Specifically, DOD‘s weak internal
control environment has hindered its ability to ensure that
transactions are accurately recorded, sufficiently supported, and
properly executed by trained personnel subject to effective
supervision. Funds control weaknesses place DOD at risk of violating
the Antideficiency Act (ADA), specifically through overobligations and
overexpenditures. DOD reported ADA violations from fiscal year 2007
through September 15, 2011, with a total dollar amount of $927.4
million.
DOD has identified payment transactions and related accounting steps
as ’problem disbursements.“ Problem disbursements include unmatched
disbursements (UMD) that represent disbursements that have been paid
by an accounting office but that have not been matched to the correct
obligation records. DOD reports that it has reduced overaged UMDs from
$666.5 million to $109.6 million between second quarter of fiscal year
2009 to the same time in fiscal year 2011. These and other weaknesses
have prevented DOD from reporting reliable financial information,
including budgetary information in an auditable Statement of Budgetary
Resources. Although DOD has dedicated significant resources to
remediate its identified weaknesses, it faces significant challenges
to address those persistent weaknesses.
DOD reported for fiscal year 2010 that it made an estimated $1 billion
in improper payments. However, this estimate is incomplete because DOD
did not include estimates from its commercial payment programs, which
account for approximately one-third of the value of DOD payments.
Further, both GAO and the DOD IG have reported on weaknesses in DOD‘s
payment controls, including weaknesses in its process for assessing
the risk of improper payments and reporting estimated amounts of
them. DOD‘s problem disbursements continue to be a concern and are a
contributing factor to the department‘s funds control issues. The
department‘s weak controls over payments increase the risk of
inaccurate cost information and improper payments. Given DOD‘s stated
goal of achieving audit readiness on its consolidated financial
statements by the end of fiscal year 2017, it will be critical that
the department continue to ensure that steady progress is being made.
Moreover, for DOD to move forward, it will be important that the
department resolve its problems with multiple, disparate nonintegrated
systems to ensure that whatever systems solutions are chosen will
provide the underlying foundation for auditable financial statements.
View [hyperlink, http://www.gao.gov/products/GAO-11-950T]. For more
information, contact Asif Khan at (202) 512-9869 or khana@gao.gov.
[End of section]
Chairman Conaway, Ranking Member Andrews, and Members of the Panel:
[End of section]
It is a pleasure to be here today to discuss the Department of
Defense's (DOD) controls over the use of public funds and their effect
on the reliability of DOD's reported budgetary information and DOD's
efforts to account for and control improper payments.
DOD is one of the largest and most complex organizations in the world.
For fiscal year 2012, the budget requested for the department was
approximately $671 billion--$553 billion in spending authority for its
operations and an additional $118 billion to support overseas
contingency operations, such as those in Iraq and Afghanistan. DOD's
fiscal year 2012 budget request also noted that it employed over 3
million military and civilian personnel--including active and reserve
service members. DOD operations span a wide range of defense
organizations, including the military services, large defense agencies
and field activities, and various combatant and joint operational
commands that are responsible for military operations for specific
geographic regions or theaters of operation. To execute its
operations, the department performs interrelated and interdependent
business functions, including financial management, logistics
management, health care management, and procurement. To support its
business functions, DOD has reported that it relies on over 2,200
business systems,[Footnote 1] including accounting, acquisition,
logistics, and personnel systems.
Like all executive agencies of the federal government, DOD is required
to design and implement effective internal controls,[Footnote 2]
including controls over its use of public funds ("funds controls") and
controls over its payment processes ("payment controls"). As a steward
of the public's resources, DOD is responsible and accountable for (1)
using public funds efficiently and effectively and for the purposes
and within the time frames and amounts prescribed by law, (2) making
payments to the right parties in the correct amount within allowable
time frames and recouping any overpayments, and (3) accurately
recording and reporting on its transactions and use of public funds.
Due to longstanding and pervasive weaknesses in DOD's internal
control, we have designated DOD's financial management as one of DOD's
programs at high risk of waste, fraud, abuse, or
mismanagement.[Footnote 3] DOD's past initiatives to strengthen its
internal control, become auditable, and improve its financial
management have fallen short. While current efforts offer some
encouragement, GAO and DOD auditors continue to find significant
deficiencies in internal control that contribute to DOD's inability to
achieve effective financial management capabilities and prepare
auditable financial statements. Under the DOD Financial Improvement
and Audit Readiness (FIAR) Plan, first issued by the DOD Comptroller
in 2005, DOD has begun to dedicate significant resources to remediate
identified weaknesses.
Today, I will discuss the challenges DOD faces in its funds control
and their effect on the reliability of DOD's financial information,
especially the budgetary information in DOD's Statement of Budgetary
Resources (SBR), which the department has identified as its highest
priority in achieving auditability, as well as its ability to reduce
the risk of overobligating or overexpending resources. I will also
discuss the weaknesses in DOD's payment controls that put the
department at risk of making improper payments. My statement today is
based primarily on our prior work and includes DOD-reported
information that we monitor as part of our annual audit of the
Consolidated Financial Statements of the U.S. Government.[Footnote 4]
In addition, my statement includes information from reports issued by
the department's Inspector General (DOD IG) that I present because,
while we did not independently validate the IG's methodology, the
findings are similar to ours on relevant aspects of DOD's funds and
payment controls. Our work, on which this statement is based, was
conducted in accordance with generally accepted government auditing
standards. Our previously published reports contain additional details
on the scope and methodology for those reviews. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We believe the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Background:
The Budget and Accounting Procedures Act of 1950 and the law commonly
known as the Federal Managers' Financial Integrity Act of 1982
(FMFIA)[Footnote 5] placed primary responsibility for establishing and
maintaining internal control on the head of the agency. Internal
control is an integral component of an organization's management that
when properly implemented and operating effectively provides
reasonable assurance[Footnote 6] that the following objectives are
being achieved: (1) effectiveness and efficiency of operations; (2)
reliability of financial reporting; and (3) compliance with laws and
regulations.
Within this broad framework of internal control, DOD must design and
implement effective funds control, payment controls, and internal
control over financial reporting.[Footnote 7] Auditors of DOD's
financial statements are to assess the effectiveness of these controls
as part of the financial statement audit. However, DOD has
acknowledged that long-standing weaknesses in its internal controls,
its business systems, and its processes have prevented auditors from
determining the reliability of DOD's financial statement information,
including the budgetary information included in DOD's SBR. Moreover,
we have previously reported that a weak overall control environment
and poor internal controls limit DOD's ability to prevent and detect
fraud, waste, abuse, and improper payments.
Because budgetary information is widely and regularly used for
management, the DOD Comptroller designated as one of DOD's highest
priorities the improvement of its budgetary information and processes
underlying the SBR. The financial information in the SBR is
predominantly derived from an entity's budgetary accounts, which are
used by agencies to account for and track the use of public funds, in
accordance with budgetary accounting rules.[Footnote 8] The SBR is
designed to provide information on authorized budgeted spending
authority and links to the Budget of the United States Government
(President's Budget), including the source and availability of
budgetary resources, and how obligated resources have been used.
[Footnote 9] According to the Office of Management and Budget, the SBR
was added as a basic federal financial statement so that the
underlying budgetary accounting information is audited and is,
therefore, more reliable for routine management use and budgetary
reporting, such as the President's Budget.
In the FIAR Plan, DOD states that it expects to obtain five benefits
from its planned efforts to achieve an auditable SBR. According to
DOD, its efforts will:
* improve the visibility of budgetary transactions, ensuring a more
effective use of resources;
* provide operational efficiencies through more readily available and
accurate cost and financial information;
* improve financial stewardship through reduced improper payments;
* improve budget processes and controls, thus reducing violations of
funds control laws; and:
* link execution to the President's Budget, thus providing more
consistency with the financial environment.[Footnote 10]
Serious DOD Funds Control Challenges:
For years, GAO and DOD IG have reported on DOD's inability to provide
effective funds control and report reliable financial information,
including budgetary information. In 2008, we reported that DOD's
complex and inefficient payment processes, nonintegrated business
systems, and weak internal controls impair its ability to maintain
proper funds control, putting DOD at risk of overobligating or
overspending its appropriations.[Footnote 11] Specifically, DOD's weak
internal control environment has hindered its ability to ensure that
transactions are accurately recorded, sufficiently supported, and
properly executed by trained personnel subject to effective
supervision. Further, these weaknesses impair DOD's ability to ensure
that amounts recorded as disbursements[Footnote 12] are matched to the
corresponding recorded obligations,[Footnote 13] resulting in
"unmatched disbursements."[Footnote 14] These and other weaknesses
have prevented DOD from reporting reliable financial information,
including budgetary information in an auditable SBR, which DOD's FIAR
Plan seeks to address through a multiyear effort across the military
services and defense agencies. For example, we recently reported that
inadequate processes, systems controls, and controls for accounting
and reporting prevented the Marine Corps from passing an audit of its
fiscal year 2010 SBR, the first SBR of a military service that DOD is
attempting to successfully audit since the SBR was first required in
1998.[Footnote 15] Although DOD has dedicated significant resources to
improving its financial management, including addressing known
weaknesses in its funds control, neither the department nor its
auditors have been able to verify that weaknesses have been
sufficiently corrected in order to pass an audit. These weaknesses
present challenges for DOD in: (1) reducing its risk of overobligating
and overexpending[Footnote 16] its appropriations in violation of the
law and making effective use of budgetary resources; (2) improving its
ability to eliminate unmatched disbursements and other significant
problem disbursements; and (3) producing reliable budgetary information.
Funds Control Weaknesses Can Place DOD at Risk of Overobligation and
Overexpenditure and Violations of the Law:
We have reported that the department is at risk of overobligating and
overexpending its appropriations because of its weaknesses in
identifying and training its personnel who are responsible for funds
control and carrying out supervisory duties, its challenges in
properly supporting and accounting for its transactions, and its poor
financial systems. These weaknesses have contributed to 64 DOD-
reported instances of overobligation or overexpenditure of funds in
violation of the law totaling $927.4 million from fiscal year 2007
through September 15, 2011. However, there may be other violations
that may not be detected, investigated, and reported because of the
weaknesses in DOD's funds control and financial management overall.
According to DOD, the most frequent causes of DOD's overobligations
and overexpenditures include inadequate internal controls and standard
operating procedures, not following prescribed internal controls and
standard operating procedures, lack of appropriate training, and
inadequate supervisory involvement or oversight.[Footnote 17] Examples
of reported weaknesses in DOD's funds control include:
* Inadequately trained funds control personnel. In 2008, we reported
that DOD had not effectively identified and established training
programs for departmental personnel who carry out DOD's funds control.
[Footnote 18] According to DOD, its funds control system relies
extensively on the department's ability to (1) identify individuals
who are performing key funds control roles, such as certifying
officers,[Footnote 19] contracting officers, program managers, funds
certifying officials, and other departmental accountable officials,
[Footnote 20] who incur obligations and make disbursements and perform
related duties, and (2) ensure that those individuals have received
the training necessary to fulfill their responsibilities in compliance
with the DOD Financial Management Regulation (FMR). We made
recommendations to DOD in our report to improve its process and system
of identifying and training its key funds control personnel, which DOD
agreed to implement, and last year DOD revised the policies in its FMR
on this aspect of its funds control. We have not assessed the
effectiveness of DOD's actions. However, as I testified before this
Panel in July 2011, DOD has not completed a competency analysis of its
financial management personnel and still has significant work to do to
address this challenge to achieving its financial improvement goals.
[Footnote 21]
* Unsupported transactions. We have reported that DOD components have
significant weaknesses in their ability to properly support
transactions in order to reliably determine whether their obligations
and disbursements are being used for authorized purposes and within
the amounts and time frames established by law. For example, we
recently reported that the auditors who attempted to audit the Marine
Corps fiscal year 2010 SBR were unable to conduct the audit because,
among other internal control deficiencies, the Marine Corps lacked
documentation to support its transactions, which put the Marine Corps
at risk of not being able to verify whether payments were made in the
appropriate amount for authorized purposes, and to the appropriate
parties.[Footnote 22] In its Agency Financial Report for Fiscal Year
2010,[Footnote 23] DOD officials stated that one of 13 material
weaknesses that prevent an audit of its financial statements will be
resolved by 2017 by implementing processes and systems that can
provide necessary transaction-level supporting documentation for its
disbursements and collections.
* Inadequate recording of transactions. DOD faces challenges in
properly recording its obligations and disbursements in its accounting
and other business systems that impair its ability to track and
control the use of public funds. According to DOD's FMR, obligations
and expenditures are required to be recorded accurately and promptly,
even if the recording results in a negative amount in the
appropriation, fund, or other accounting level.[Footnote 24] Last
week, we reported that the auditors of the Marine Corps' fiscal year
2010 SBR found that the Marine Corps inappropriately used "bulk
obligations" to record estimated liabilities that the Marine Corps did
not match to actual payments due to weak internal controls.[Footnote
25] As discussed below, a similar practice by the military departments
led to overobligations in violation of the law. Further, DOD reported
in its Agency Financial Report for Fiscal Year 2010 that another of 13
material weaknesses that prevented an audit of its financial
statements relates, in part, to the department's inability to properly
record payments due from other agencies and the public.[Footnote 26]
* Ineffective business systems. In our 2008 report on DOD's funds
control, we found that DOD's nonintegrated and outdated business
systems, including its financial systems and other systems that
provide most of DOD's financial data to the financial systems, were a
key impediment to effective funds control, and we noted that DOD had
long-term plans to implement modernized, fully integrated, and
reliable business systems.[Footnote 27] However, as I stated before
this panel in July, DOD faces significant challenges in its effort to
implement these new systems over the next several years.[Footnote 28]
In its Agency Financial Report for Fiscal Year 2010 and its FIAR Plan,
DOD acknowledges the challenges related to weaknesses in DOD's
financial management systems. For example, in DOD's annual statement
on the status of its internal controls included in its Agency
Financial Report, DOD reported that the department is not in
conformance with internal control requirements because of a material
weakness in its financial management systems. DOD's FIAR Plan states
that implementing modernized, effective, and integrated business
systems that reliably support financial needs of the department are
critical to achieving the department's financial improvement and audit
readiness efforts.
DOD's ineffective funds control has resulted in overobligations and
overexpenditures in violation of the Antideficiency Act (ADA).
[Footnote 29] As we reported in 2008, weaknesses in DOD's funds
control impaired its ability to accurately detect, investigate, and
report such violations.[Footnote 30] Under the ADA, agencies are
prohibited from, among other things, incurring obligations or making
expenditures in excess or in advance of appropriations or in excess of
apportionments or formal subdivisions of those apportionments.
[Footnote 31] When DOD determines that a violation of the ADA has
occurred, the department is to immediately report to the President and
Congress all relevant facts and a statement of actions taken and
submit a copy to the Comptroller General at the same time. According
to copies of ADA violation reports received by the Comptroller
General, and as shown in table 1, DOD reported 64 ADA violations from
fiscal year 2007 through September 15, 2011, with a total dollar
amount of $927.4 million. However, due to DOD's weaknesses in its
funds control process, including the weaknesses described above
related to DOD's challenges in controlling and recording obligations
and disbursements and detecting violations, this listing may not be
complete because all ADA violations may not have been identified or
reported. For example, GAO identified a violation in June 2010
involving the Army's overobligation of its fiscal year 2008 Military
Personnel-Army (MPA) appropriation, as evidenced by a $200 million
transfer DOD made to the MPA account from DOD's working capital fund,
which has not yet been reported by DOD.[Footnote 32] Mr. Chairman,
Ranking Member Andrews, I know that you and other members of Congress
recently sent a letter to the DOD Comptroller asking for an
explanation of why DOD has not reported this and other potential ADA
violations. Such an explanation could provide greater transparency
over the accuracy of reported numbers and amounts of violations.
Table 1: Anti-deficiency Act Violations Reported by the Department of
Defense (Fiscal Year 2007 through September 15, 2011):
Military service: Army;
Reported violations: Number: 31;
Reported violations: Amount: $548.0 million.
Military service: Navy;
Reported violations: Number: 15;
Reported violations: Amount: $237.6 million.
Military service: Marine Corps;
Reported violations: Number: 3;
Reported violations: Amount: $5.1 million.
Military service: Air Force;
Reported violations: Number: 12;
Reported violations: Amount: $129.5 million.
Military service: Defense agencies;
Reported violations: Number: 3;
Reported violations: Amount: $7.2 million.
Military service: Total;
Reported violations: Number: 64;
Reported violations: Amount: $927.4 million.
Source: DOD.
Note: The data are unaudited information GAO extracted from
Antideficiency Act reports received by GAO from DOD as of September
15, 2011. Because of the time required to investigate potential
violations, the violations generally occurred 2 or more years prior to
the dates of the reports.
[End of table]
Because the ADA prohibits, and effective funds control should prevent,
overobligations and overexpenditures of public funds, the number and
dollar amount of ADA violations are an indicator of the status of
DOD's funds control. However, the nature of reported violations can
also indicate systemic weaknesses in DOD's funds control. The
following ADA violations involved systemic breakdowns in the controls
necessary to track actual amounts of obligations incurred against
amounts of available funding:
* As noted above, we found in June 2010 that the Army Budget Office
lacked an adequate funds control process to provide it with ongoing
assurance that obligations and expenditures do not exceed funds
available in the fiscal year 2008 Military Personnel-Army (MPA)
appropriation.[Footnote 33] We found that the Army's total obligations
against the fiscal year 2008 MPA appropriation exceeded the amount
available in the account, as evidenced by the Army's need to transfer
$200 million from the Defense Working Capital Fund, Army appropriation
to cover the shortfall. The overobligation likely stemmed, in part,
from lack of communication between the Army budget office and program
managers so that the Army budget office's accounting records reflected
estimates instead of actual amounts until it was too late to control
the incurrence of excessive obligations in violation of the act. Thus,
at any given time in the fiscal year, the Army budget office did not
know the actual obligation and expenditure levels of the account. The
Army budget office explained that it relies on estimated obligations--
despite the availability of actual data from program managers--because
of inadequate financial management systems.
* Similarly, in 2008, Navy officials reported an ADA violation in the
Military Personnel-Navy (MPN) appropriation in the amount of $183
million. The violation occurred when the Bureau of Naval Personnel
(BUPERS) overobligated the fiscal year 2008 MPN appropriation due to
its inability to accurately track the status of obligations and
identify the need for additional funding.
To its credit, the department has issued and periodically updated
policies that address responsibilities for preventing and identifying
ADA violations.[Footnote 34] DOD's guidance also describes frequent
causes of violations within the department and explains the actions
necessary to avoid them, including emphasizing management and
supervisory duties, training of key funds control personnel, and
effective systems and procedures.
Efforts to Address DOD's "Problem" Disbursements:
Basic controls to match payments with the obligation records and
account for and reconcile payments are not effective within the
department. DOD has identified payment transactions and related
accounting steps as "problem disbursements" and monitors them through
management tracking reports as it attempts to correct them. Problem
disbursements include unmatched disbursements (UMD) that represent
disbursements that have been paid by an accounting office but that
have not been matched to the correct obligation records. For example,
if one or more of the accounting line elements for each transaction,
such as appropriation, fiscal year, and program code do not match the
information in the accounting records, then the transaction is
considered unmatched. For a description of two examples of DOD's
problem disbursements, see appendix II.
Problem disbursements increase the risk of making fraudulent or
erroneous payments without detection. In addition, problem
disbursements impair the reliability of DOD financial statements and
DOD's ability to control its disbursements, a key aspect of funds
control. According to DOD's tracking reports, the department has made
progress in addressing problem disbursements, but the department has
not achieved its goals in this area.
As we reported in 2003, the Defense Finance and Accounting Service
(DFAS) expanded its use of existing financial management performance
metrics to include special measures for the recording of payments,
including the amount of disbursements that are not matched to the
corresponding obligations, or UMDs.[Footnote 35] DOD, in its May 2011
FIAR Plan Status Report[Footnote 36] on the implementation of its FIAR
Plan, included a metric on UMDs. This metric tracks UMDs that are over
120 days old, which DOD refers to as "overaged UMDs."[Footnote 37] As
stated in that report, DOD's goal is to have no UMD amounts greater
than 120 days old. According to the report, the benefit of reducing
UMDs, especially overaged UMDs, is greater accuracy of DOD components'
account balances on management reports and the SBR. Reduction of the
amount of UMDs will allow DOD to have more accurate information about
the obligations that have been liquidated, improving its budgetary
accounting. The presence of UMDs prevents the department from having
accurate information about the amount of funds available for
obligation and expenditure to carry out its mission, thus increasing
the risk of possible ADA violations. The following table appears in
the May 2011 status report on the FIAR Plan for overaged UMDs and
indicates that, from the second quarter of fiscal year 2009 through
the second quarter of fiscal year 2011, DOD is making progress at
reducing overaged UMDs:[Footnote 38]
Table 2: DOD Reported Unmatched Disbursements over 120 Days as of May
2011:
DOD component: Army;
Fiscal year 2009: Second quarter: $6.5 million;
Fiscal year 2009: Fourth quarter: $54.6 million;
Fiscal year 2010: Second quarter: $156.4 million;
Fiscal year 2010: Fourth quarter: $4.8 million;
Fiscal year 2011: Second quarter: $36.7 million.
DOD component: Navy;
Fiscal year 2009: Second quarter: $565.4 million;
Fiscal year 2009: Fourth quarter: $496.6 million;
Fiscal year 2010: Second quarter: $559.4 million;
Fiscal year 2010: Fourth quarter: $23.2 million;
Fiscal year 2011: Second quarter: $40.9 million.
DOD component: Air Force;
Fiscal year 2009: Second quarter: $94.6 million;
Fiscal year 2009: Fourth quarter: $68.5 million;
Fiscal year 2010: Second quarter: $3.4 million;
Fiscal year 2010: Fourth quarter: $0.5 million;
Fiscal year 2011: Second quarter: $2.8 million.
DOD component: Defense Logistics Agency;
Fiscal year 2009: Second quarter: $0.00;
Fiscal year 2009: Fourth quarter: $0.00;
Fiscal year 2010: Second quarter: $40.6 million;
Fiscal year 2010: Fourth quarter: $32.8 million;
Fiscal year 2011: Second quarter: $29.2 million.
DOD component: Total;
Fiscal year 2009: Second quarter: $666.5 million;
Fiscal year 2009: Fourth quarter: $619.7 million;
Fiscal year 2010: Second quarter: $759.8 million;
Fiscal year 2010: Fourth quarter: $61.3 million;
Fiscal year 2011: Second quarter: $109.6 million.
Source: DOD.
Note: Unaudited data are from FIAR Plan Status Report as of May 2011.
[End of table]
In the results section accompanying this table, DOD officials noted
Army's UMDs reportedly increased due to systems issues with recording
obligations and lines of accounting in its Enterprise Resource
Planning (ERP) systems.[Footnote 39]
DOD's Funds Control Weaknesses and Problem Disbursements Impair the
Reliability of DOD's Financial Information:
As we and DOD's auditors have reported, DOD's funds control and
related internal control weaknesses and problem disbursements have
impaired its ability to produce reliable financial information for
reporting, especially the reliability of the department's SBR, as well
as its other budgetary information. For example, we reported in 1999
that the reliability of DOD's budgetary information reported in its
SBR was impaired.[Footnote 40] In 2009, the DOD Comptroller directed
that the department's components focus their efforts on budgetary
information and the ability to prepare an auditable SBR as one of two
first priorities that are now being implemented through the DOD's FIAR
Plan, its FIAR Guidance, and the components' individual financial
improvement plans. As a pilot, DOD designated the Marine Corps SBR as
the first military service SBR to undergo an audit. However, as we
reported last week, the Marine Corps was unable to undergo an audit of
its fiscal year 2010 SBR due to serious control weaknesses that
prevented the auditors from performing the audit.[Footnote 41]
Although we found that the Marine Corps was able to address some of
these weaknesses, many remained unresolved. We found that the Marine
Corps did not develop an effective overall corrective action plan to
address the 70 audit findings and related 139 recommendations that
identified risks, prioritized actions, and identified required
resources needed to help ensure that actions adequately respond to
recommendations. Instead, its approach to addressing auditor findings
and recommendations for its prior and current audit efforts focuses on
short-term corrective actions necessary to support heroic efforts to
produce reliable financial reporting at year-end. Such approach may
not result in sustained improvements over the long term that would
help ensure that the Marine Corps could routinely produce sound data
on a timely basis for decision making and reporting. We also reported
key lessons learned from this pilot that, if effectively shared with
the other military services, could help them to address similar known
challenges in preparing reliable SBRs.
The SBR is designed to provide information on budgeted spending
authority reported in the President's Budget, including budgetary
resources, availability of budgetary resources, and how obligated
resources have been used. Both Congress and the administration use
this information to make decisions about the amounts of appropriations
DOD needs to carry out its operations. However, as we stated in our
February 2011 High-Risk Series: An Update, DOD's pervasive control
weaknesses adversely affect DOD's ability to, among other things,
anticipate future costs and claims on the budget.
Risk of DOD Improper Payments:
DOD, in its Agency Financial Report for Fiscal Year 2010, reported
that it made an estimated $1 billion in improper payments[Footnote 42]
under five of its programs.[Footnote 43] However, this estimate is
incomplete because DOD did not include estimates from its commercial
payment programs, which account for approximately one-third of the
value of DOD payments. Further, both we and the DOD IG have reported
on weaknesses in DOD's payment controls, including weaknesses in its
process for assessing the risk of improper payments and reporting
estimated amounts of them. DOD's payment controls are hindered by
problems related to inadequate payment processing, poor financial
systems, and inadequate supporting documentation.
Weaknesses in DOD's Payment Controls:
In our February 2011 High-Risk Series: An Update, we identified
various DOD high-risk areas, including contract management (designated
in 1992) and financial management (designated in 1995), that we have
previously reported make the department vulnerable to improper
payments.[Footnote 44] DOD's contract management weaknesses, such as
ineffective oversight, increase the risk that DOD will pay more than
the value of the goods delivered or services performed. Financial
management deficiencies have adversely affected the department's
ability to control costs, to ensure basic accountability, and to
prevent and detect fraud, waste, and abuse, and represent a
significant obstacle to achieving an unqualified opinion on DOD's and
the U.S. government's consolidated financial statements. In addition,
the DOD IG recently reported their assessment that DOD's risk of
making improper payments is high.[Footnote 45] This assessment was
based on control deficiencies identified by the Defense Finance and
Accounting Service (DFAS) as well as prior assessments made by GAO and
DOD IG.
Our prior work and reports issued by DOD IG have highlighted the
department's long-standing and significant problems with estimating
and preventing improper payments. Specific weaknesses in DOD's payment
controls include inadequate payment processing, inadequate supporting
documentation for expenditures, financial system deficiencies, and
weak contract audit and payment controls. For example:
* Inadequate payment processing. The DOD IG reported that the U.S.
Marine Corps Forces Special Operations Command did not have effective
controls over the reporting and processing of baseline and contingency
funds, resulting in improper payments. [Footnote 46] Specifically, the
DOD IG reported that the command did not have effective controls over
the recording and processing of 35,699 transactions.[Footnote 47] Of
the 320 sample transactions,[Footnote 48] 245 had one or more
deficiencies. In addition, of the 29 travel vouchers with deficiencies
or unsupported expenses, the payments made on 10 vouchers were
improper payments. According to the DOD IG report, the improper
payments occurred because the certifying officers and departmental
accountable officials approved the travel vouchers with deficiencies
and unsupported expenses without thoroughly reviewing them.
* Inadequate documentation. As we reported last week, we continue to
find that the Navy and Marine Corps have issues with maintaining
adequate documentation for their transactions.[Footnote 49] On the
basis of the sample of items we tested for an ongoing audit, the Navy
did not maintain adequate documentation for us to independently
validate its efforts to research and resolve differences between its
Fund Balance with Treasury balances with the records of the Department
of the Treasury, which is a process similar to reconciling a checkbook
with a bank statement. Some payments are considered improper payments
due to insufficient or missing documentation. In July 2011, the DOD IG
reported that DFAS made potentially improper payments of $4.2 million
from January 2005 through December 2009 related to active duty
military personnel.[Footnote 50] According to the report, DOD did not
ensure that the Defense Joint Military Pay System-Active Component
contained only valid active-duty military accounts. For example, the
DOD IG found that this system contained military personnel that
received payments after their reported date of death.
* Financial system deficiencies. In 2009, we reported that DOD traced
the root cause of many improper payments in its military and civilian
pay to the inaccurate or untimely reporting of entitlement data to
DOD's automated systems on such areas as time and attendance,
personnel actions, and pay allowances.[Footnote 51] We reported that
DOD had described steps to monitor and track these improper payments;
however, it was unclear whether these actions would address the root
causes of these deficiencies. In August 2011, the DOD IG reported that
the Army's controls over its Deployable Disbursing System[Footnote 52]
(DDS) payments were inadequate and resulted in, among other things,
improper payments.[Footnote 53] The DOD IG found that the Army was at
risk of improper payments because its Financial Management Centers did
not effectively review user access to DDS or oversee the payment
process. The DOD IG reported that the Army's disbursing personnel made
nine duplicate payments to vendors and did not collect on these
improper payments. Two of the duplicate payments were referred by the
DOD IG to the Defense Criminal Investigative Service because of the
suspicious and potentially fraudulent nature of the payments.
* Weak contract audit and payment controls. As we testified in
February 2011, our 2009 audit work identified, among other weaknesses
in DOD's contract payment controls, weaknesses in contract auditing,
which increase the risk of improper payments.[Footnote 54] In 2009, we
reported on audit quality problems at Defense Contract Audit Agency
(DCAA) offices nationwide, including compromise of auditor
independence, insufficient audit testing, and inadequate planning and
supervision.[Footnote 55] In addition, DCAA's management environment
and quality assurance structure were based on a production-oriented
mission that put DCAA in the role of facilitating DOD contracting
without also protecting the public interest. At that time, we found
serious quality problems in the 69 audits and cost-related assignments
we reviewed, resulting in DCAA rescinding over 80 audit reports and
removing over 200 DOD contractors from direct billing privileges,
which allow them to submit invoices for payment without review by the
government.
Concerns over Incomplete DOD Reviews and Reporting on Improper Payments:
The Improper Payments Information Act of 2002 (IPIA)[Footnote 56]
requires DOD to annually identify programs and activities susceptible
to significant improper payments, estimate amounts improperly paid
under those programs and activities, and report on these estimates and
the actions to reduce improper payments. In July 2009, we reported
that DOD did not conduct risk assessments on all of its payment
activities, as $322 billion in agency outlays were excluded from the
amounts DOD assessed.[Footnote 57] While DOD components conducted risk
assessments for six payment activities totaling about $493 billion in
fiscal year 2007, we identified an additional $322 billion in outlays
reported in DOD's SBR[Footnote 58] that had not been assessed. Also,
the DOD IG recently reported that DOD's First Quarter FY 2010 High
Dollar Overpayments Report[Footnote 59] (Overpayments Report) did not
accurately portray the department's risk of high-dollar overpayments.
[Footnote 60] The DOD IG reported that the Overpayments Report was
incomplete because not all DOD payments were examined. DFAS reviews
for high dollar overpayments excluded approximately $167.5 billion or
55 percent of DOD's total $303.7 gross outlays.[Footnote 61] DOD's
inability to identify and reconcile total payments to its SBR affected
the reliability and completeness of its estimates for and reviews of
improper payments.
In addition to not conducting risk assessments for all of its agency
outlays, we reported that DOD had neither established a methodology to
estimate nor had it estimated the amount of improper payments for
commercial pay--its largest payment activity.[Footnote 62], [Footnote
63] At the time of our report, DOD officials stated that reporting
commercial improper payments under both IPIA and the Recovery Auditing
Act[Footnote 64] would create duplicative reporting. We disagreed with
DOD officials stating that the department could leverage the results
from its existing Recovery Auditing Act processes identifying actual
commercial under-and overpayments to develop its statistical sampling
methodology and enhance the reported estimate.
The DOD Comptroller testified in May 2011 that DOD had not estimated
the amount of improper payments for commercial pay because the
department uses prepayment screening, both automated and manual, to
prevent improper payments.[Footnote 65] He added that one especially
important tool to prevent commercial pay improper payments is the
department's Business Activity Monitoring (BAM)[Footnote 66] software
program introduced in August 2008. However, the DOD IG reported, among
other things, that the BAM tool had a false positive[Footnote 67] rate
of more than 95 percent and that the BAM review methodology was not
standardized across payment systems or even within the same office.
The large number of payments flagged for review (false positives) made
it difficult to conduct the appropriate research in a timely manner
without delaying payment. The IG reported that the lack of a
standardized methodology could lead to DFAS not detecting and
preventing improper payments due to poor quality review. The
Comptroller stated, in his May 2011 testimony, that in view of
legislative changes and more recent OMB guidance, DOD plans to do
postpayment statistical sampling for commercial payments for those
systems not currently covered by the BAM tool to supplement its
prepayment measures.
Concluding Observations:
Although DOD has dedicated significant resources under its FIAR Plan
to remediate its identified financial management weaknesses, it faces
significant challenges in addressing those persistent weaknesses.
DOD's large number of nonintegrated business systems, complex and
inefficient payment processes, and weak internal controls put the
department at risk of overobligating or overspending its
appropriations. DOD has been addressing its problem disbursements, but
they are a contributing factor to the department's funds control
issues. The department's weak controls over payments increase the risk
of inaccurate cost information and improper payments. Given DOD's
stated goal of achieving audit readiness on its consolidated financial
statements by the end of fiscal year 2017, it will be critical that
the department continue to ensure that steady progress is being made.
Moreover, for DOD to move forward, it will be important for the
department to resolve its problems with multiple, disparate
nonintegrated systems and to ensure that whatever systems solutions
are chosen will provide the underlying foundation for auditable
financial statements.
Mr. Chairman and members of the panel, this concludes my prepared
statement. I would be pleased to respond to any questions that you or
other members of the panel may have at this time.
For further information regarding this testimony, please contact Asif
A. Khan, (202) 512-9869 or khana@gao.gov. Key contributors to this
testimony include F. Abe Dymond, Assistant Director; Daniel Egan;
Maxine Hattery; Robert Sharpe; and Sandra Silzer.
[End of section]
Appendix I: Requirements and Standards for Federal Agencies' Internal
Controls:
Congress has long recognized the importance of internal control,
beginning with the Budget and Accounting Procedures Act of 1950, over
60 years ago. The 1950 act placed primary responsibility for
establishing and maintaining internal control squarely on the
shoulders of agency management. In 1982, Congress enacted the law
commonly known as the Federal Managers' Financial Integrity Act
(FMFIA), and the Office of Management and Budget (OMB) issued Circular
No. A-123 to require each agency to establish and maintain internal
control systems that would enable obligations and costs to be recorded
in compliance with applicable law; funds, property, and other assets
to be safeguarded; and revenues and expenditures applicable to agency
operations to be properly recorded and accounted for. Within this
broad framework of internal control required by FMFIA, the Department
of Defense, like other executive-branch agencies, must also design and
implement effective systems of funds control, payment controls, and
internal control over financial reporting. Auditors of DOD's financial
statements assess the effectiveness of these four types of internal
controls in varying degrees as part of the financial statement audit.
Further, one financial statement, the Statement of Budgetary
Resources, was designed for the purpose of reporting on agencies' use
of federal funds and to subject agencies' funds control to audit.
Listed below is a brief description of the four types of controls.
Internal Control:
Internal control represents an organization's plans, methods, and
procedures used to meet its missions, goals, and objectives and serves
as the first line of defense in safeguarding assets and preventing and
detecting errors, fraud, waste, abuse, and mismanagement. Internal
control is to provide reasonable assurance that an organization's
objectives are achieved through (1) effective and efficient
operations, (2) reliable financial reporting, and (3) compliance with
laws and regulations. Safeguarding of assets is a subset of all these
objectives.
Funds Control:
The purpose of funds control is to implement controls that restrict
both obligations[Footnote 68] and disbursements[Footnote 69] from
exceeding appropriations and supporting the proper preparation and
execution of the budget. Funds control systems must be able to
accurately record obligations, collections, and disbursements against
appropriations and the accounts established to track the status of
appropriations. An agency's fund control system is the primary tool
for ensuring that the agency complies with congressional spending
mandates, and is, therefore, central to Congress's ability to exercise
its constitutional power of the public purse. In the executive branch
of the federal government, funds control requirements are implemented
by executive agencies consistent with policies and guidance issued by
OMB, the Department of the Treasury (Treasury), and the head of each
executive agency. According to OMB Circular No. A-11, proper funds
control should include the following elements:
* agency regulations that are required by, and designed to ensure
compliance with the prohibitions contained in, the Antideficiency Act
(ADA), which are described below;[Footnote 70]
* the purpose of funds control is to implement controls that restrict
both obligations and expenditures from exceeding appropriations and
related administrative accounts, as well as hold officers and
employees accountable when they violate the restrictions; and:
* the funds control systems must operate within the internal control
systems, including the objective of complying with laws and regulations.
The ADA prohibits federal officers and employees from:
* making or authorizing an expenditure from, or creating or
authorizing an obligation under, any appropriation or fund in excess
of the amount available in the appropriation or fund unless authorized
by law, 31 U.S.C. § 1341(a)(1)(A);
* involving the government in any obligation to pay money before funds
have been appropriated for that purpose, unless otherwise allowed by
law, 31 U.S.C. § 1341(a)(1)(B);
* accepting voluntary services for the United States, or employing
personal services not authorized by law, except in cases of emergency
involving the safety of human life or the protection of property, 31
U.S.C. § 1342; and:
* making obligations or expenditures in excess of an apportionment or
reapportionment, or in excess of the amount permitted by agency
regulations, 31 U.S.C. § 1517(a).
Once it is determined that there has been a violation, the agency head
"shall report immediately to the President and Congress all relevant
facts and a statement of actions taken," and they shall transmit a
copy to the Comptroller General at the same time. OMB has issued
further instructions on preparing the reports, which may be found in
OMB Circular No. A-11, Preparation, Submission, and Execution of the
Budget, § 145.
Internal Control over Financial Reporting:
Internal control over financial reporting should assure the
safeguarding of assets from waste, loss, unauthorized use, or
misappropriation as well as assure compliance with laws and
regulations pertaining to financial reporting. Financial reporting
includes annual financial statements of an agency as well as other
significant internal or external financial reports. Other significant
financial reports are defined as any financial reports that could have
a material effect on a significant spending, budgetary, or other
financial decision of the agency or that is used to determine
compliance with laws and regulations on the part of the agency. An
agency needs to determine the scope of financial reports that are
significant, that is, which reports are included in the assessment of
internal control over financial reporting. In addition to the annual
financial statements, significant reports might include: quarterly
financial statements; financial statements at the operating division
or program level; budget execution reports; reports used to monitor
specific activities such as specific revenues, receivables, or
liabilities; reports used to monitor compliance with laws and
regulations such as the Anti-Deficiency Act.
Payment Controls:
Payment controls, as a discrete subset of internal controls and funds
control, establish an effective system of internal controls needed to
maintain accountability over resources, including identifying,
reporting, and reducing improper payments and problem disbursements,
and recouping improper payments when they are made. Controls should
ensure payments and collections are timely and accurate and that
public funds are used properly for the payments. Managers are
responsible for ensuring that internal controls are established and
functioning properly. Managers with responsibilities for determining
entitlement, authorizing and executing payments and collections shall:
* create, document, and maintain an organizational structure and
business processes that appropriately segregates assigned duties,
emphasizes adherence to policies and procedures, and employs sound
internal accounting and system access controls;
* implement finance and accounting systems that comply with the
federal financial management systems requirements, keep disbursement
(entitlement), and accounting records accurate and in balance from
contract execution through closeout, and monitor the causes of late
payments and interest penalties incurred;
* establish systematic controls that capture adequate audit trails to
allow the tracing from source documents of financial events to general
ledger account balances through successive levels of summarization and
financial reports/statements;
* ensure data is processed using accurate coding and errors are
researched and corrected;
* employ systems that ensure the authenticity of data that are
electronically transmitted, including the electronic signature and
ensure controls provide reasonable assurance that deliberate or
inadvertent manipulation, modification, or loss of data during
transmission is detected; and:
* validate cash management and payment performance quality and
effectiveness on an annual basis: and periodically test effectiveness
of internal controls, document results of testing, and take necessary
corrective actions.
[End of section]
Appendix II: DOD "Problem Disbursements:"
The Department of Defense's (DOD) disbursement posting policy is in
Chapter 11 of Volume 3 of its Financial Management Regulation (FMR).
[Footnote 71] According to Chapter 11, DOD's policy is that a
disbursement be matched to its corresponding, detail-level obligation
and be recorded as promptly as current systems and business practices
reasonably permit. DOD recognizes that while most obligations and
disbursements are matched automatically, some obligations and
disbursements are required to be manually matched, mainly due to
nonautomated processes or the rejection of transactions by automated
systems.
As defined by DOD, problem disbursements include unmatched
disbursements and negative unliquidated obligations. The definitions
for these terms are also in Volume 3, Chapter 11 of the DOD FMR.
Unmatched Disbursement (UMD):
* An unmatched disbursement is defined as a disbursement transaction
that has been received and accepted by an accounting office, but has
not been matched to the correct detail obligation. This includes
transactions that have been rejected back to the paying office or
central disbursement clearing organization by an accounting office.
Negative Unliquidated Obligation (NULO):
* A negative unliquidated obligation is a disbursement transaction
that has been matched to a cited detail obligation (unlike unmatched
disbursements), but the total recorded disbursement(s) exceed the
recorded obligation.
Chapter 11 also prescribes the requirements for researching UMDs and
NULOs. For example, prevalidation is defined as a procedure that
requires a proposed payment be identified/matched to its applicable
proper supporting obligation that has been recorded in the official
accounting system and that the line(s) of accounting cited on the
payment match the data recorded in the accounting system. As stated in
Chapter 11, prevalidation procedures help better ensure that contracts
are not overpaid.
[End of section]
Related GAO Products:
DOD Financial Management: Ongoing Challenges in Implementing the
Financial Improvement and Audit Readiness Plan. [hyperlink,
http://www.gao.gov/products/GAO-11-932T]. Washington D.C.: September
15, 2011.
DOD Financial Management: Marine Corps Statement of Budgetary
Resources Audit Results and Lessons Learned. [hyperlink,
http://www.gao.gov/products/GAO-11-830]. Washington, D.C.: September
15, 2011.
DOD Financial Management: Numerous Challenges Must Be addressed to
Achieve Auditability. [hyperlink,
http://www.gao.gov/products/GAO-11-864T]. Washington D.C.: July 28,
2011.
Improper Payments: Recent Efforts to Address Improper Payments and
Remaining Challenges. [hyperlink,
http://www.gao.gov/products/GAO-11-575]. Washington D.C.: April 15,
2011.
Contract Audits: Role in Helping Ensure Effective Oversight and
Reducing Improper Payments. [hyperlink,
http://www.gao.gov/products/GAO-11-331T]. Washington, D.C.: February
1, 2011.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-11-278]. Washington, D.C.: February
2011.
Defense Health: Management Weaknesses at Defense Centers of Excellence
for Psychological Health and Traumatic Brain Injury Require Attention.
[hyperlink, http://www.gao.gov/products/GAO-11-219]. Washington, D.C.:
February 28, 2011.
DCAA Audits: Widespread Problems with Audit Quality Require
Significant Reform. [hyperlink,
http://www.gao.gov/products/GAO-09-468]. Washington, D.C.: September
23, 2009.
Improper Payments: Significant Improvements Needed in DOD's Efforts to
Address Improper Payment and Recovery Auditing Requirements.
[hyperlink, http://www.gao.gov/products/GAO-09-442]. Washington, D.C.:
July 29, 2009.
DOD Financial Management: Improvements Are Needed in Antideficiency
Act Controls and Investigations. [hyperlink,
http://www.gao.gov/products/GAO-08-1063]. Washington, D.C.: September
26, 2008.
Financial Audit Guide: Auditing the Statement of Budgetary Resources.
[hyperlink, http://www.gao.gov/products/GAO-02-126G]. Washington,
D.C.: December 2001.
Financial Management: DOD's Metrics Program Provides Focus for
Improving Performance. [hyperlink,
http://www.gao.gov/products/GAO-03-457]. Washington, D.C.: March 28,
2003.
Department of Defense: Status of Financial Management Weaknesses and
Actions Needed to Correct Continuing Challenges. [hyperlink,
http://www.gao.gov/products/GAO/T-AIMD/NSIAD-99-171]. Washington,
D.C.: May 4, 1999.
[End of section]
Footnotes:
[1] DOD excludes from its business systems those designated as
national security systems under section 2222(j) of Title 10, United
States Code. National security systems are information systems where
the function, operation, or use of which involves intelligence
activities, cryptologic activities related to national security,
command and control of military forces, equipment that is an integral
part of a weapon or weapon system or is critical to the direct
fulfillment of military or intelligence missions (unless used for
routine administrative and business applications), or is protected at
all times by classification procedures in the interest of national
defense or foreign relations, as authorized by law or executive order.
[2] Internal control represents an organization's plans, methods, and
procedures used to meet its missions, goals, and objectives and serves
as the first line of defense in safeguarding assets and preventing and
detecting errors, fraud, waste, abuse, and mismanagement.
[3] GAO High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February
2011).
[4] See a list of Related GAO Products at the end of this statement.
[5] 31 U.S.C. § 3512(c), (d).
[6] The concept of reasonable assurance recognizes that no matter how
well designed and operated, internal control cannot provide absolute
assurance that an entity's objectives will be met. Management should
design and implement internal control based on the related costs and
benefits.
[7] Additional information about requirements and standards for funds
and payment controls, and internal control over financial reporting is
provided in appendix I.
[8] Budgetary accounting rules are incorporated into generally
accepted accounting principles (GAAP) for the federal government. For
additional information on the two methods of tracking the use of
public funds, see app. III to GAO, A Glossary of Terms Used in the
Federal Budget Process, [hyperlink,
http://www.gao.gov/products/GAO-05-734SP] (Washington, D.C.: September
2005).
[9] Budgetary resources include the amount available to enter into new
obligations and to liquidate them. Budgetary resources are made up of
new budget authority (including direct spending authority provided in
existing statute and obligation limitations) and unobligated balances
of budget authority provided in previous years.
[10] DOD, Office of the Under Secretary of Defense (Comptroller)/CFO,
Financial Improvement and Audit Readiness (FIAR) Plan Status Report
(May 2011).
[11] GAO, DOD Financial Management: Improvements Are Needed in
Antideficiency Act Controls and Investigations, [hyperlink,
http://www.gao.gov/products/GAO-08-1063] (Washington, D.C.: Sept. 26,
2008).
[12] A disbursement is an amount paid by a federal agency, by cash or
cash equivalent, to liquidate obligations, such as payment for goods
received under a contract. Disbursements often are referred to as
"expenditures" or "outlays."
[13] An obligation is a definite commitment that creates a legal
liability of the government for the payment of appropriated funds for
goods and services ordered and received, or a legal duty on the part
of the United States that could mature into a legal liability by
virtue of actions on the part of the other party beyond the control of
the United States. Obligations include, for example, the awarding of
contracts and grants.
[14] Unmatched disbursements refer to disbursements and collections
that have been received by the accounting station, attempted to be
matched to an obligation in the accounting system, but were not
matched because an obligation was not identified in the accounting
system.
[15] GAO, DOD Financial Management: Marine Corps Statement of
Budgetary Resources Audit Results and Lessons Learned, GAO-11-830
(Washington, D.C. Sept. 15, 2011.), Department of Defense: Status of
Financial Management Weaknesses and Actions Needed to Correct
Continuing Challenges, [hyperlink,
http://www.gao.gov/products/GAO/T-AIMD/NSIAD-99-171] (Washington,
D.C.: May 4, 1999).
[16] Overobligation or overexpenditure of an appropriation or fund
occurs when an officer or employee of the United States has made or
authorized an obligation, such as a contract, or an expenditure,
respectively, in excess of the amount available in the applicable
appropriation account or fund.
[17] DOD Financial Management Regulation 7000.14-R (DOD FMR), Vol. 14,
Ch. 2, Antideficiency Act Violations, Para. 020301 (November 2010).
DOD's FMR also describes common types of overobligations and
overexpenditures, such as the improper use of operations and
maintenance funds by program and contracting officials for military
construction or procurement activities. Id. at para. 020402.B.
[18] [hyperlink, http://www.gao.gov/products/GAO-08-1063].
[19] Disbursements may be made only on vouchers certified by the head
of an agency or a certifying officer designated by the head of the
agency. 31 U.S.C. § 3325(a). By law, certifying officers are
responsible for, among other things, (1) the correctness of the facts
in the certificate, voucher, and supporting documentation; (2) the
correctness of computations on the voucher; and (3) the legality of a
proposed payment under the appropriation or fund involved. 31 U.S.C. §
3528.
[20] A departmental accountable official is an individual who is
responsible in the performance of his/her duties for providing a
certifying officer with information, data, or services that the
certifying officer relies upon in the certification of vouchers for
payment. Departmental accountable officials may include resource
managers, fund holders, and funds certifying officials, who are
responsible for the proper assignment of funding on an obligation
document before the obligation is incurred and for maintaining a
system of positive funds control. Departmental accountable officers
also may include officers and employees who enter into obligations,
such as contracting officers, and who make payment eligibility
determinations.
[21] GAO, DOD Financial Management: Numerous Challenges Must Be
Addressed to Achieve Auditability, [hyperlink,
http://www.gao.gov/products/GAO-11-864T] (Washington, D.C.: July 28,
2011).
[22] [hyperlink, http://www.gao.gov/products/GAO-11-830].
[23] DOD, Agency Financial Report for FY 2010, addendum A, table 2a-1
(Nov. 15, 2010).
[24] DOD FMR, Vol. 14, Ch. 2, Para. 0203 (November 2010).
[25] [hyperlink, http://www.gao.gov/products/GAO-11-830].
[26] DOD, Agency Financial Report for FY 2010, addendum A, table 2a-1.
[27] GAO-08-1063. The DOD FMR describes requirements and assigns
responsibilities for implementing financial management systems as part
of DOD's funds control. DOD FMR, Vol. 14, Ch. 1, Administrative
Control of Funds, Para. 010210 (Jan. 2009).
[28] [hyperlink, http://www.gao.gov/products/GAO-11-864T].
[29] 31 U.S.C. §§ 1341-42, 1349-51, 1511-19.
[30] [hyperlink, http://www.gao.gov/products/GAO-08-1063].
[31] Under law, an apportionment is the action by which the Office of
Management and Budget (OMB) distributes amounts available for
obligation, including budgetary reserves established pursuant to law,
in an appropriation or fund account. An apportionment divides amounts
available for obligation by specific time periods (usually quarters),
activities, projects, objects, or a combination thereof. The amounts
so apportioned limit the amount of obligations that may be incurred.
An apportionment may be further subdivided by an agency into
allotments, suballotments, and allocations. In apportioning any
account, some funds may be reserved to provide for contingencies or to
effect savings made possible pursuant to the Antideficiency Act. Funds
apportioned to establish a reserve must be proposed for deferral or
rescission pursuant to the Impoundment Control Act of 1974 (2 U.S.C.
§§ 681-688).
[32] GAO, Department of the Army--The Fiscal Year 2008 Military
Personnel, Army Appropriation and the Antideficiency Act, B-318724
(Washington, D.C.: June 22, 2010). OMB policy requires DOD to report
violations found by GAO. OMB Cir. No. A-11, section 145.8. Further, on
March 30, 2011, we issued a legal opinion in which we concluded that
an Enhanced Use Lease entered into by the U.S. Army violated the ADA
by including a clause in the escrow agreement whereby the government
indemnified an escrow agent against all liabilities arising under the
escrow agreement. GAO-B-321387, Department of the Army--Escrow
Accounts and the Miscellaneous Receipts Statute (Mar. 30, 2011). DOD
has not yet reported this violation to GAO. For additional information
on this lease and the related ADA violation, see GAO, Defense
Infrastructure: The Enhanced Use Lease Program Requires Management
Attention, GAO-11-574 (Washington, D.C.: June 30, 2011). For
additional information on this lease and the related ADA violation,
see also GAO, Defense Infrastructure: The Enhanced Use Lease Program
Requires Management Attention, [hyperlink,
http://www.gao.gov/products/GAO-11-574] (Washington, D.C.: June 30,
2011).
[33] B-318724.
[34] DOD FMR, Vol. 14, Ch. 2 (November 2010). The guidance also
describes common types of violations, including the use of
appropriations for improper purposes, such as the use of operations
and maintenance funds for military construction and procurement
activities, which cannot be corrected by adjusting DOD's accounts to
charge the correct appropriation.
[35] GAO, Financial Management: DOD's Metrics Program Provides Focus
for Improving Performance, [hyperlink,
http://www.gao.gov/products/GAO-03-457] (Washington, D.C.: Mar. 28,
2003). We monitor the DFAS tracking reports as part of our annual
audit of the Consolidated Financial Statements of the U.S. Government.
[36] DOD FIAR Plan Status Update, app. I (May 2011).
[37] For this metric, UMDs are defined as disbursements that cannot be
matched to an obligation in the accounting system. According to DOD's
Financial Management Regulation 7000.14-R, vol. 3, ch. 11,
"collocated" offices have a total of 90 days to research and resolve a
UMD and "noncollocated" offices have a total of 120 days to research
and resolve a UMD.
[38] DOD's corrective actions have included the implementation of a
process to match proposed disbursements with corresponding obligations
before making payments, which Congress has required by law since 1995
for certain large disbursements. This process, known as prevalidation,
checks whether DOD organizations have recorded obligations properly in
an official accounting system as well as reserved sufficient funds in
accounting records to cover the proposed disbursement before payments
are made.
[39] An Enterprise Resource Planning (ERP) solution is an automated
system using commercial off-the-shelf (COTS) software consisting of
multiple, integrated functional modules that perform a variety of
business-related tasks such as general ledger accounting, payroll, and
supply chain management. ERP systems represent a critical element of
DOD's FIAR strategy.
[40] [hyperlink, http://www.gao.gov/products/GAO/T-AIMD/NSIAD-99-171].
[41] [hyperlink, http://www.gao.gov/products/GAO-11-830].
[42] An improper payment is defined as any payment that should not
have been made or that was made in an incorrect amount (including
overpayments and underpayments) under statutory, contractual,
administrative, or other legally applicable requirements. It includes
any payment to an ineligible recipient, any payment for an ineligible
service, any duplicate payment, payment for services not received, and
any payment that does not account for credit for applicable discounts.
OMB guidance also instructs agencies to report payments for which
insufficient or no documentation was found as improper payments.
[43] DOD, Agency Financial Report for FY 2010, addendum A. In its
improper payment reporting, DOD identifies the primary causes of
improper payments for each of the five programs. For example, DOD
reports that underpayments accounted for $338.8 million (67 percent)
of the $505.9 million in improper payments for the Military Pay
program. According to the information provided by DOD, most of these
underpayments ($207 million) occurred within the Army Reserve and Army
National Guard, most of which involved unpaid leave not used before
members were discharged or deactivated back to Reserve from Active
duty status.
[44] [hyperlink, http://www.gao.gov/products/GAO-11-278].
[45] DOD, Inspector General, DOD Needs to Improve High Dollar
Overpayment Review and Reporting, D-2011-050 (Arlington, Virginia:
March 16, 2011).
[46] DOD, Inspector General, U.S. Marine Corps Forces Special
Operations Command Needs to Improve Controls Over Financial
Transactions, D-2011-086 (Arlington, Virginia: July 20, 2011).
[47] The 35,699 transactions were valued at $131.8 million in
obligations and $54.1 million in expenditures from October 1, 2008 to
October 16, 2009.
[48] The 320 sample transactions included obligations valued at $83.8
million and expenditures of $20.6 million.
[49] GAO, DOD Financial Management: Ongoing Challenges in Implementing
the Financial Improvement and Audit Readiness Plan, [hyperlink,
http://www.gao.gov/products/GAO-11-932T] (Washington, D.C.: Sept. 15,
2011).
[50] DOD, Inspector General, Active Duty Military Personnel Accounts
Were Generally Valid and Secure, but DOD May Have Made Improper
Payments, D-2011-093 (Arlington, Virginia: July 27, 2011).
[51] GAO, Improper Payments: Significant Improvements Needed in DOD's
Efforts to Address Improper Payment and Recovery Auditing
Requirements, [hyperlink, http://www.gao.gov/products/GAO-09-442]
(Washington, D.C.: July 29, 2009).
[52] DFAS developed the Deployable Disbursing System to fulfill a need
for a tactical disbursing system and to maintain accountability of
U.S. Treasury funds.
[53] DOD, Inspector General, Controls Over Army Deployable Disbursing
System Payments Need Improvement, D-2011-101 (Arlington, Virginia:
Aug. 17, 2011).
[54] GAO, Contract Audits: Role in Helping Ensure Effective Oversight
and Reducing Improper Payments, [hyperlink,
http://www.gao.gov/products/GAO-11-331T] (Washington, D.C.: Feb. 1,
2011).
[55] GAO, DCAA Audits: Widespread Problems with Audit Quality Require
Significant Reform, [hyperlink,
http://www.gao.gov/products/GAO-09-468] (Washington, D.C.: Sept. 23,
2009).
[56] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), as amended
by the Improper Payments Elimination and Recovery Act of 2010, Pub. L.
No. 111-204, 124 Stat. 2224 (July 22, 2010).
[57] [hyperlink, http://www.gao.gov/products/GAO-09-442].
[58] DOD's SBR for fiscal year 2007 reported gross outlays of about
$815 billion.
[59] Executive Order 13520, Reducing Improper Payments (Nov. 20,
2009), requires that the head of each agency report quarterly on high
dollar overpayments identified and recovered. The report is also to
include the actions taken to prevent high dollar overpayments.
[60] A high-dollar improper payment is defined as any overpayment that
is in excess of 50 percent of the correct amount of the intended
payment where (1) the payment to an individual exceeds $5,000 as a
single payment or in cumulative payments for the quarter or (2) the
payment to an entity exceeds $25,000 as a single payment or in
cumulative payments for the quarter.
[61] DOD's Comptroller reported gross outlays of $303.7 billion for
the first quarter of fiscal year 2010 in DOD's SBR.
[62] [hyperlink, http://www.gao.gov/products/GAO-09-442].
[63] DOD separates its payment of commercial invoices into two
business lines--(1) contract pay--which pays invoices for larger, more
complex contracts and (2) vendor pay--which processes payments for
smaller, less complex contracts, purchase orders, and other
miscellaneous payments.
[64] At the time of our report, agencies were required to report on
their efforts to recover overpayments made to contractors under
section 831 of the National Defense Authorization Act for Fiscal Year
2002, formerly codified at 31 U.S.C. §§ 3561-67, commonly known as the
Recovery Auditing Act. This provision was repealed and replaced by the
Improper Payments Elimination and Recovery Act of 2010 with a more
comprehensive recovery audit program requirement. Pub. L. No. 111-204,
§ 2(h), 124 Stat. 2224, 2228 (July 28, 2010). For more details on
these requirements, see GAO, Improper Payments: Recent Efforts to
Address Improper Payments and Remaining Challenges, [hyperlink,
http://www.gao.gov/products/GAO-11-575T] (Washington, D.C.: Apr. 15,
2011).
[65] DOD, Statement of The Honorable Robert F. Hale, Under Secretary
of Defense (Comptroller) before the Subcommittee on Federal Financial
Management, Government Information, Federal Services, and
International Security, Committee on Homeland Security and
Governmental Affairs, U.S. Senate (Washington, D.C.: May 25, 2011).
[66] BAM is a tool that runs a discrete number of tests to identify
potential improper payments before disbursement.
[67] A false positive is a payment flagged as a potential improper
payment that after review is determined to be proper.
[68] An obligation is a definite commitment that creates a legal
liability of the government for the payment of appropriated funds for
goods and services ordered and received, or a legal duty on the part
of the United States that could mature into a legal liability by
virtue of actions on the part of the other party beyond the control of
the United States. Obligations include, for example, the awarding of
contracts and grants.
[69] A disbursement is an amount paid by a federal agency, by cash or
cash equivalent, during the fiscal year to liquidate obligations, such
as payment for goods received under a contract. Disbursements often
are referred to as "expenditures" or "outlays."
[70] The ADA is one of the major laws in the statutory scheme by which
the Congress exercises its constitutional control of the public purse.
Despite the name, it is not a single act, but rather a series of
related provisions that evolved over a period of time in response to
various abuses. As late as the post-Civil War period, it was not
uncommon for agencies to incur obligations in excess, or in advance,
of appropriations. Perhaps most egregious of all, some agencies would
spend their entire appropriations during the first few months of the
fiscal year, continue to incur obligations, and then return to the
Congress for appropriations to fund these "coercive deficiencies."
These were obligations to others who had fulfilled their part of the
bargain with the United States and who now had at least a moral--and
in some cases also a legal--right to be paid. The Congress felt it had
no choice but to fulfill these commitments, but the frequency of
deficiency appropriations played havoc with the United States' budget.
The Congress expanded the ADA several times throughout the 20th
century to require and enforce apportionments and agency subdivisions
of apportionments to achieve more effective control and conservation
of funds. The ADA contains both affirmative requirements and specific
prohibitions. For a more detailed description of the requirements for
funds control systems under the Antideficiency Act and other fiscal
statutes, see GAO, DOD Financial Management: Improvements Are Needed
in Antideficiency Act Controls and Investigations, GAO-08-1063
(Washington, D.C.: Sept. 28, 2008).
[71] DOD Financial Management Regulation 7000.14R, Vol. 3, Ch. 11,
Unmatched Disbursements, Negative Unliquidated Obligations, and In-
Transit Disbursements (November 2010).
[End of section]
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