oversight

Department of Defense (DoD) Office of the Inspector General (OIG) Audit Report: Revenues and Expenses from Reimbursable Activity for other Defense Organizations, Report No. 98-029, 1997

Published by the Department of Defense, Office of Inspector General on 2019-08-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Description of document:                  Department of Defense (DoD) Office of the Inspector
                                          General (OIG) Audit Report: Revenues and Expenses from
                                          Reimbursable Activity for other Defense Organizations,
                                          Report No. 98-029, 1997

Requested date:                           15-January-2015

Release date:                             29-August-2018

Posted date:                              12-August-2019

Source of document:                       Department of Defense Office of Inspector General
                                          DoD OIG FOIA Requester Service Center
                                          ATTN: FOIA Request Office, Suite 10B24
                                          4800 Mark Center Drive
                                          Alexandria, VA 22350-1500
                                          Fax: (571) 372-7498
                                          FOIA Online




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                                    INSPECTOR GENERAL
                                     DEPARTMENT OF DEFENSE
                                     4800 MARK CENTER DRIVE
                                  ALEXANDRIA, VIRGINIA 22350-1500




                                                                                August 29, 2018
                                                                          Ref: FOIA-2015-00276

SENT VIA EMAIL




       This is in response to your Freedom of Information Act (FOIA) request for a copy of
Report No. 98-029, "Audit Report on Revenues and Expenses from Reimbursable Activity for
Other Defense Organizations." We received your request on January 15, 2015, and assigned it
case number FOIA-2015-00276.

        The Office of the Deputy Inspector General for Audit conducted a search and the
attached document is responsive to your request. We have determined that the redacted portions
are exempt from release pursuant to 5 U.S.C. § 552 (b)(6), which pertains to information, the
release of which would constitute a clearly unwarranted invasion of personal privacy; and
5 U.S.C. § 552 (b)(7)(E), which pertains to records or information compiled for law enforcement
purposes, the release of which would disclose techniques and procedures for law enforcement
investigations or prosecutions.

        Additionally, the Defense Information Systems Agency (DISA) and the National Security
Agency (NSA) reviewed the report and determined that further redacted portions are exempt
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       If you consider this response to be an adverse determination, you may submit an appeal.
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                                                                               August 29, 2018
                                                                         Ref: FOIA-2015-00276

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      If you have any questions regarding this matter, please contact Searle Slutzkin at
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                                            Sincerely,



                                            Mark Dorgan
                                            Division Chief
                                             FOIA, Privacy and Civil Liberties Office

Enclosure(s):
As stated




                                                2
                                                                      FOR OFF1CIAL USE ONLY




             OFFICE OF THE INSPECTOR GENERAL

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                                                                                                  Special Warning

Thi.r; FepoFt eon:ains eeF!Bin tur-1dassifiet:l ir,foffll:Bfien FCltJ!:i,'lg f-8 the 0,"getniMEion a.•lil fimetieR
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Repr0duai0,•1 or ,"emmw! of pages is prehibited. Safe-Ktttlrtls H1t1st he 1aken 10 pre','eRt
pl:thtictUion er impF&peF di.'it'le-st:trc f>j rhe ir,}offlt6Eion ;,, rhi.v rep0Ft.

                                                             Department of Defense

                                                                      FOR OFFICIAL USE ONLY
  Additional Copies

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Acronyms

CHAMPUS              Civilian Health and Medical Program of the Uniformed Services
DFAS                 Defense Finance and Accounting Service
DLA                  Defense Logistics Agency
FMR                  Financial Management Regulation
DoDEA                Department of Defense Education Activity
GLAC                 General Ledger Account Code
                                INSPECTOR GENERAL
                                  DEPARTMENT OF DEFENSE
                                     400 ARMY NAVY DRIVE
                             ARLINGTON, VIRGINIA 22202-28B4




                                                                                                December 5, 1997




 MEMORANDUM FOR DISTRIBUTION

 SUBJECT: Audit Report on Revenues and Expenses From Reimbursable Activity for
          Other Defense Organizations (Report No. 98-029)


        We are providing this report for review and comment. The audit was
 performed in response to the Chief Financial Officers Act of 1990 as amended by the
 Federal Financial Management Act of l 994. The Army and the Defense Finance and
 Accounting Service did not respond to the draft report. Comments from all other
 addressees were responsive, and were considered in preparing the final report.

        DoD Directive 7650.3 requires that all recommendations be resolved promptly.
 Therefore, we request that the Army and the Defense Finance and Accounting Service
 provide comments on the recommendations by January 9, l 998.



              •'
        We appreciate the courtesies extended to the audit staff. Questions on the audit
should be dire.cted to
(703) 604        (DS n n l . 1 . -
(703) 604 • • (DSN 664
                                     or
                                                   Audit Program Director, at
                                                          , Audit Project Manager, at
                                   ). See Appendix H or the report distribution. The
audit team members are listec mside the back cover.




                                                     David K. Steensma
                                              Deputy Assistant Inspector General
                                                        for Auditing




                                                   8peeiel "'arning

This repon c.mwir"s eerudn 1mc!assiftet! i~?fonnmim, relatint; w :he organiza:im, rmd
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May 29, 1959. Rcpredttction o:· FCtno·,ial of pttges is pmhibited. 8afe-guaffis muS/ he
1ttkeN ,VJ prevent pNb!irotion or impropa tlisck,.rnrc ef:he ir.ji:wmai'ion iH this rcpflrt.


                                   JrOU OFFICIAL US~ ONLY
DISTRIBUTION:

UNDER SECRETARY OF DEFENSE (COMPTROLLER)
ASSISTANT SECRETARY OF DEFENSE (HEALTH AFFAIRS)
DIRECTOR. DEFENSE FINANCE AND ACCOUNTING SERVICE
DIRECTOR, DEFENSE INFORMATION SYSTEMS AGENCY
DIRECTOR, DEFENSE LOGISTICS AGENCY
DIRECTOR, DEPARTMENT OF DEFENSE EDUCATION ACTIVITY
DIRECTOR, NATIONAL SECURITY AGENCY
DIRECTOR, WASHINGTON HEADQUARTERS SERVICES
AUDITOR GENERAL, DEPARTMENT OF THE ARMY
                        Office of the Inspector General, DoD
Report 98-029                                                          December 5, 1997
   (Project No. 7RF·2012)

            Revenues and Expenses From Reimbursable Activity
                     for Other Defense Organizations

                                Executive Summary

Introduction. Public Law 103-356, the "Federal Financial Management Act of
 1994," requires DoD to provide audited financial statements for FY 1996 and each
succeeding year to the Office of Management and Budget. Included in the consolidated
financial statements for DoD is a reporting entity entitled "Other Defense
Organizations." The entity represents a consolidation of financial data from various
Defense agencies and organizations (to include Military Departments) using Treasury
Index No. 97 (Department 97). The Office of the Secretary of Defense has
responsibility for Department 97 appropriations, funds, and accounts. FY 1996 was
the first year that DoD prepared financial statements for "Other Defense
Organizations," which were included in the consolidated financial statements for DoD.
The FY 1996 Statement of Operations and Changes in Net Position showed
$46. 7 billion in total revenues and financing sources, of which $6.3 billion was from
sales of goods and services or miscellaneous reimbursements.

Audit Objectives. The primary audit objective was to determine the reliability of
revenues and expenses from the sale of goods and services and reimbursements shown
for "Other Defense Organizations" in the DoD consolidated financial statements for
FY 1996. We also evaluated accounting policies for recording those revenues and
expenses and the consistency of accounting and reporting among the various
organizations submitting information to the Defense Finance and Accounting Service
Indianapolis Center. In addition, we also reviewed internal controls as they applied to
the audit objectives.

Audit. Results. The Defense Finance and Accounting Service and Defense agencies
needed to do additional work to provide reliable financial data for financial statements.
Our review of revenues and expenses from reimbursable activity for "'Other Defense
Organizations'' showed the following:

       o Revenues from reimbursable activity were overstated by at least
               , expenses related to reimbursable activity were overstated ~
             and the Appropriated Capital Used account was overstated b ~
(Finding A).

       o Accounting offices supporting "Other Defense Organizations" used different
general ledger account codes to record the same type of revenues and expenses from
reimbursable activity (Finding B).
As a result, the Statement of Operations and Changes in Net Position was not reliable
and did not accurately present the results of operations for FY 1996. See Appendix A
for details on the internal control program.

Summary of Recommendations. We recommend that Defense Finance and
Accounting Service establish procedures to verify that revenues and expenses from
reimbursable activity are not duplicated in the Statement of Operations and support all
other adjustments to avoid distorting financial statements. We recommend that Defense
organizations record revenues based on earnings rather than on obligations, verify the
accuracy of reimbursable activity reported, and (for appropriated funds) accrue
revenues and expenses for reimbursable activities dunng the same accounting period.
We recommend that the Army Corps of Engineers reprogram its general ledger
accounting system to record as cost of goods sold only the acquisition costs of homes
sold for the Homeowners Assistance Fund. We also recommend that the Washington
Headquarters Services reprogram its accounting system to correct an error in posting to
the Appropriated Capital Used account. In addition, we recommend that the Under
Secretary of Defense (Comptroller) clarify guidance on how to account for and report
revenues and expenses from reimbursable activity.

Management Comments. The Defense Finance and Accounting Service and the Army
did not respond to the draft of this report issued on August 28, 1997. We request those
organizations to provide com men ts to the final report by January 9, I 998.

Other organizations receiving the draft report concurred with the finding and
recommendations and stated that corrective actions have been or would be
implemented. See Part III for the complete text of management comments.




                                           11
Table of Contents

Executive Summary

Part I - Audit Results
      Audit Background                                                       2
      Audit Objectives                                                       2
      Finding A. Reliability of Revenues and Expenses on the Statement of
                  Operations                                                 4
      Finding B. Use of General Ledger Account Codes to Record
                  Reimbursable Transactions                                 15


Part II - Additional Information
     Appendix A. Audit Process
      Scope and Methodology                                                 20
       Internal Control Program                                             21
     Appendix B. Summary of Prior Coverage                                  23
     Appendix C. Other Matters of Interest                                  26
     Appendix D. Audit Adjustments to Revenues From Reimbursable Activity   28
     Appendix E. Audit Adjustments to Expenses Related to
                   Reimbursable Activity                                    30
     Appendix F. Audit Adjustments to Appropriated Capital Used             31
     Appendix G. General Ledger Account Codes Used to Record Revenues
                   and Expenses From Reimbursable Activity                  32
     Appendix H. Report Distribution                                        33

Part III - Management Comments
     Under Secretary of Defense (Comptroller) Comments                      36
     Assistant Secretary of Defense (Health Affairs) Comments               38
     Defense Jnformation Systems Agency Comments                            41
     Defense Logistics Agency Comments                                      43
     Department of Defense Education Activity Comments                      46
     National Security Agency Comments                                      49
     Washington Headquarters Services Comments                              50
     Defense Technical Information Center Comments                          51
Part I - Audit Results
Audit Background

     Public Law 101-576, the "Chief Financial Officers Act of 1990,"
     November 15, 1990, requires Federal organizations to submit audited financial
     statements to the Director, Office of Management and Budget. Public
     Law 103-356, the "Federal Financial Management Act of 1994," October 13,
     1994, requires DoD and other Government agencies to prepare consolidated
     financial statements for FY 1996 and each succeeding year. The consolidated
     DoD financial statements for FY 1996 included financial statements for a
     reporting entity entitled "Other Defense Organizations." "Other Defense
     Organizations" include appropriations, funds, and accounts using Treasury
     Index No. 97 (Department 97). Department 97 funds include "general funds"
     appropriated for Defense agencies and organizations, including Defense-wide
     funds entrusted to the Military Departments. However, revolving funds, which
     operate based on the sale of goods and services, trust funds, and special funds
     appropriated through Department 97, are also included in the "Other Defense
     Organizations" category.
     A Statement of Operations and Changes in Net Position (Statement of
     Operations) for "Other Defense Organizations" is included in the DoD
     consolidated financial statements. The Statement of Operations for FY 1996
     showed $46.7 billion in total revenues and financing sources and $46.5 billion
     in total expenses. Included in the revenues and expenses were $5.63 billion in
     "Revenues From Sales of Goods and Services," $632 million of miscellaneous
     reimbursements and other revenues, and $5.4 billion in "Cost of Goods Sold."
     Upon receipt of reimbursable authority from Congress, Defense organizations
     provide goods or services to other Governmental agencies or the public based on
     orders received. The receiving agency pays the providing agency a mutually
     agreed amount. However, the costs reimbursed to the providing agency must
     conform to pertinent laws and regulations. Revenues from reimbursable activity
     for appropriated (general) funds should equal the expenses incurred to produce
     the revenues during the same accounting period.



Audit Objectives

    The primary audit objective was to determine the reliability of revenues
                                                                       1
                                                                             and
    expenses from the sale of goods and services and reimbursements shown for
    "Other Defense Organizations" in the DoD consolidated financial statements for

     1
     111 this report, revenues c,1 med or rci mbu rscmcnls received from the sa Jc of goods or services by
    any type of fund (that is. appropri,Hed. revolving, trust, etc.) will be referred lo as revenues from
    reimbursable activity.



                                                 2
FY 1996. We also evaluated accounting policies for recording those revenues
and expenses and the consistency of accounting and reporting among the various
organizations submitting information to the Defense Finance and Accounting
Service Indianapolis Center. In addition, we also reviewed internal controls as
they applied to the audit objectives. Appendix A discusses the audit scope and
methodology and the review of the intemaJ control program. Appendix B
provides a summary of related prior audits. Other matters of interest are
discussed in Appendix C.




                                   3
           Finding A. Reliability of Revenues and
           Expenses on the Statement of Operations
           DF AS Indianapolis Center and accountin offices overstated revenues
           from reimbursable activity by at least       million  11t#P   million by
           DF AS Indianapolis Center and          m1 10n by accounting offices) in
           the FY 1996 Statement of Operations for "Other Defense
           Organizations," and DFAS Indianapolis Center overstated expenses from
           reimbursable activity b y - billion. Also, DFAS Indianapolis Center
           overstated the Appropriated Capital Used account (a revenue account) by
           -    billion. The overstatements occurred because of the following:

                  o DFAS Indianapolis Center personnel did not determine
           whether organizations had already reported revenues and expenses in
           other general ledger accounts before adjusting the accounts to equal
           revenues from reimbursements shown in the Report on Budget
           Execution, and DFAS Indianapolis Center made other unsupported
           adjustments.

                  o Accounting offices submitting financial information for
           incorporation into the financial statements for "Other Defense
           Organizations" incorrectly recognized revenues based on obligations, did
           not review the validity of trial balances submitted to DFAS Indianapolis
           Center, or made other accounting or reporting errors.

                   o DFAS Indianapolis Center personnel incorrectly adjusted the
           Appropriated Capital Used account for reimbursable activity already
           included in other revenue accounts, and the Washington Headquarters
           Services Allotment Accounting System contained programming errors
           affecting the Appropriated Capital Used account.

           As a result, the Statement of Operations for "Other Defense
           Organizations" was not reliable and did not accurately present the results
           of operations for FY 1996.



Financial Statement Compilation Process

    DFAS Indianapolis Center Responsibility. During FY 1996, DFAS
    Indianapolis Center assumed the responsibility for preparing financial statements
    for Department 97 appropriations. To prepare the financial statements, DFAS
    Indianapolis Center required Defense agencies and DFAS accounting offices to
    submit trial balances at the end of FY 1996 using accounts from the DoD
    Standard General Ledger.




                                        4
Finding A. Reliability of Revenues and Ex1>enses on the Statement of Operations



      Procedures for Adjusting Trial Balances. After receipt of trial balances as of
      September 30, 1996, from supporting accounting offices, DFAS Indianapolis
      Center personnel compared balances of applicable general ledger accounts with
      comparable amounts shown on Accounting Report (M)l 176 ("Report on Budget
      Execution"). If the amounts in a trial balance were different than the amounts
      shown in a Report on Budget Execution for the same type of activity, DFAS
      Indianapolis Center personnel adjusted the trial balance accounts to agree with
      the Report on Budget Execution. DFAS Indianapolis Center personnel adjusted
      the trial balance to agree with the Report on Budget Execution because the
      Report on Budget Execution was "certified" by reporting Defense agencies or
      DFAS personnel. DFAS Indianapolis Center also made other adjustments to
      trial balances that reporting organizations submitted, such as adjusting the
      Appropriated Capital Used account. to try to ensure that it accurately reported
      financial information.

     Revenues and Expenses From Reimbursable Activity. To determine whether
     accounting offices correctly reported revenues and expenses from reimbursable
     activity, DFAS Indianapohs Center personnel compared reimbursements earned
     (line 3A of the Report on Budget Execution) with revenues from the sale of
     goods or services reported in general ledger account codes (GLACs) 5100
     (Revenues From Goods Sold) and 5200 (Revenues From Servio/s Provided)
     shown in trial balances submitted to DFAS Indianapolis Center-. DFAS
     Indianapolis Center personnel adkusted Revenues From Sales of Goods and
     Services (GLACs 5100 and 5200 ) to equal the amount shown on line 3A of the
     Report on Budget Execution if the amounts in the trial balance differed from
     those in the Report on Budget Execution. DFAS Indianapolis Center also
     adjusted Cost of Goods Sold (GLAC 6500) for appropriated (general) funds to
     equal the amount of reimbursements earned as shown in the Report on Budget
     Execution because reimbursements earned for general funds are generated from
     expenses that the providing organization incurs.

     Appropriated Capital Used. During the compilation process, DFAS
     Indianapolis Center personnel also compared the Appropriated Capital Used
     account (GLAC 5700) for general funds with operating expenses to ensure that
     revenues from appropriated capital provided were equal to expenses.
     Appropriated Capital Used is a revenue account that is increased when expenses




     :'-yhe Inspector General, DoD, is performing an audit on the "Compilation of the FY 1996
     Financial Statements for 'Oth<ir Defense Organi7.ations,"' Project No. 7RF-2009.02. Accor<ling
     to the au<lit, the DF AS ln<lianapnlis Center incorrectly exclud..xl account balance.~. to include
     reimhursements ~med, from appropriations that were cancele<l hy the Department of the
     Treasury on Septemher 30, 1996. The DFAS ln<lianapolis Center misstatements related to the
     exclusion arc not shown in the current audit report.
     3The DoD finam:ial statements <lid not Jifforentiate between revenues from goo<ls sol<l an<l
     revenues from seivices provided. Therefore, in this report, we will uw the term "Revenues
     From Sales of Goods and Services" to indicate revenue.-. recor<le<l in either GLAC 5100 or
     GLAC 5200.




                                                5
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      from appropriated funds are recorded. Entries to the Appropriated Capital Used
      account should generally be equal to the funded expenses recorded against the
      financing appropria ti on.



DFAS Indianapolis Center Adjustments to Revenues and
Expenses From Reimbursable Activity

      Adjustments to Revenues From Reimbursable Activity. DFAS Indianapolis
      Center personnel incorrectly adjusted revenues from reimbursable activity
      shown in trial balances by at least 11111111 million (see Appendix D). The
      overstatements were caused by the1'oiicmring:


      doublec'    •
              o In the trial balances, DF AS Indianapolis Center personnel incorrectly
              lfttt    million in revenues from reimbursable activity for appropriated
      fund organizations that were not recorded in GLACs 5100 or 5200. DFAS
      Indianapolis Center personnel expected that all organizations would report
      revenues from reimbursements in GLACs 5100 or 5200. Therefore, DFAS
      Indianapolis Center adjusted those accounts to equal the revenues from
      reimbursements shown on the Report on Budget Execution without removing
      the revenues from the Miscellaneous Reimbursements account.

              o DFAS Indianapolis Center personnel also made an error in addition in
      adjusting the trial balance that incorrectly increased revenues from
      reimbursements for the Defense Health Program by $10 million. If DFAS
      Indianapolis Center personnel had reviewed the adjustments more closely, they
      may have found the addition error.

      Adjustments to Expenses From Reimbursable Activity. DFAS Indianapolis
      Center personnel incorrectly added- billion in adjustments to expenses
      related to reimbursable activity in the trial balances submitted for "Other
      Defense Organizations." Appendix E shows the amounts overstatediDefense
      organization. Certain accounting organizations already included the         billion
      in the expenses that they submitted. DFAS Indianapolis Center personne
      expected that expenses from reimbursable activity for appropriated (general)
      funds should be equal to revenues from reimbursements. The assumption was
      correct, because Defense organizations earn reimbursements based on
      completion of customer orders. However, DFAS Indianapolis Center personnel
      incorrectly believed that accounting organizations did not report expenses from
      reimbursable activity if those expenses were not in the Cost of Goods Sold
      account (GLAC 6500). Therefore, for appropriated funds, DFAS Indianapolis
      Center adjusted the Cost of Goods Sold account to equal the revenues from
      reimbursements.

      Accounting organizations using the Washington Headquarters Services
      Allotment Accounting System, the Centralized Accounting and Financial



                                           6
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      Management System, the Defense Business Management System, the Resource
      Accounting Management System, and the College and University Financial
      System were including the expenses related to reimbursable activity in
      Operating/Program Expenses accounts (GLAC 6100 series).
      In adjusting the Cost of Goods Sold account, DFAS Indianapolis Center
      personnel also made other unsupported adjustments for $7 .5 million.
             o DFAS Indianapolis Center personnel increased the Cost of Goods
      Sold account by $4.8 million for the U.S. Special Operations Command without
      any documentation to support the entry, and
             o DFAS Indianapolis Center personnel increased the Cost of Goods
      Sold account by lfll  million for the National Imagery and Mapping Agency
      because of a posting error.



Accounting and Reporting Procedures That Affected Revenue
and Expenses From Reimbursable Activity


      and expenses from reimbursable activity b:
     1111  million (Appendix E), respectively.
                                                     •
      Accounting offices supporting Defense organizations overstated net revenues
                                                 lfttt  million (Appendix D) and


             o AccountiMfices overstated revenues and expenses by a net
     lflll million and•  •    million, respectively, because they incorrectly based
      revenue or expenses on obligations.

             o Accounting offices overstated revenues by $133 million and
      understated expenses by $4.2 million because they did not compare trial
      balances with the Report on Budget Execution.

            o Accounting offices overstated revenues from reimbursable activity by
     $39.7 million and understated expenses by $6.5 million because of various
     accounting or reporting errors.

     Recognition of Revenues From Reimbursements Based on Obligations.
     Accoi- offices overstated net revenues from reimbursable activity by at
     least • •   million and overstated expenses by at least 111111 million. Five
     organ1zat1ons 1 as shown in the fol1owing table, incorrectlyrecognized revenues
     or expenses from reimbursable activity based on obligations rather than on when
     the goods or services were provided.




                                         7
Finding A. Reliability of Revenues and Expenses on the Statement of Operations




                    Misstatements of Revenues or Expenses From Reimbursable
                             Activity Based on Use of Obligations


                                                                        Misstatements of
                                                                    Revenues      Expenses
                     Defense Organization                           (millions)    (millions)
          Defense Advanced Research Projects Agency                 $ (I 1.5)
          Defense Information Systems Agency
          Defense Intelligence Agency
          Defense Logistics Agency
                                                                        111111111111111
                                                                         9.5*       9.5
          Washington Headquarters Services                              -12.,_8
                                                                         DODIG (b)(7)(E)
            Total                                                   $

         *See footnotes to Appendix D for discussion of possible additional
          misstatements not identified.


      Recognition 4of revenues based on obligations violated key accounting
      requirement No. 5, "Accrual Accounting," which requires transactions to be
      entered into accounting records as events occur (or as adjusted at the end of the
      month). Obligations do not create revenues or expenses. Defense organizations
      should recognize revenues when goods or services are provided.

      Comparison of Trial Balances With the Report on Budget Execution.
      Accounting offices overstated revenues from reimbursable activity by
      $133 million and understated related expenses by $4.2 million. Accounting
      personnel at three organizations did not compare revenues or expenses from
      reimbursable activity shown in trial balances with information reported on the
      Report on Budget Execution.

             Department of Defense Education Activity. The Department of
     Defense Education Activity's (DoDEA) trial balance overstated revenues from
     reimbursable activity by $133.9 million. DoDEA personnel did not review the
     trial balance submitted to DFAS Indianapolis Center for FY 1996 and did not
     compare information shown on the trial balance with the Report on Budget
     Execution. At the time of our audit in April 1997, DoDEA personnel had not
     developed procedures for reconciling earned and unearned revenues from
     reimbursements shown in the Washington Headquarters Services Allotment
     Accounting System with earned and unearned revenues reported on the Report
     on Budget Execution.


     4
      Volume I of the FMR shows lJ key accounting requirements. Key accounting requirements arc
     a composite of General Accounling Office. Office of Management and Budget, Department of lhe
     Trcasm)'. and DoD regulations. All DoD accounting sy.!iiems must comply with the key
     accounting requirements.




                                              8
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      Before FY 1996, DoDEA did not use a general ledger accounting system.
      However, during FY 1996, DoDEA transferred, on a test basis, accounting data
      maintained in its accounting records to the Washington Headquarters Services
      Allotment Accounting System. Washington Headquarters Services accounting
      personnel transferred the test data trial balance to DFAS Indianapolis Center.
      However, DoDEA personnel did not know that DFAS Indianapolis Center
      would use the data to prepare a financial statement for DoDEA. The trial
      balance with the test data incorrectly include.d $139.9 million in revenues from
      reimbursements earne.d during prior years. 5

             Defense Contract Audit Agency. DFAS Indianapolis Center
      understated revenues and expenses from reimbursements for the Defense
      Contract Audit Agency by $0.9 million in adjusting the revenues from the trial
      balance to agree with the Report on Budget Execution. However, revenues
      from reimbursements on the trial balance were correct. The Report on Budget
      Execution was understated by $0. 9 million beca.use of a key-stroke error that
      DFAS-Columbus Center personnel made in preparing the Report on Budget
      Execution. Personnel at the DFAS-Columbus Center did not find the
      discrepancy because the OFAS-Columbus Center had not established procedures
      to compare the trial balance submitted to DFAS Indianapolis Center with the
      Report on Budget Execution.

             National Security Agency. National Securit A enc personnel
     inadvertently omitted from the trial balance the                in revenues from
     reimbursable activity when they transferred information rom the general ledger
     to a manually prepared trial balance that they submitted to DFAS Indianapolis
     Center. DFAS Indianapolis Center personnel corrected that error when
     comparing the trial balance with the Report on Budget Execution. However,
     DFAS Indianapolis Center personnel were unable to correctly adjust another
     error that National Security Agency accounting personnel made related to the
     Cost of Goods Sold account. National Security Agency personnel overstated the
     Cost of Goods Sold account submitted to DFAS Indianapolis Center by
     ~ because of posting errors. DFAS Indianapolis Center personnel
     n ~ r o r s in reviewing the trial balance, but incorrectly adjusted the
     Appropriated Capital account rather than~xpenscs. Therefore,
     operating expenses were understated by ~ in the FY 1996 Statement
     of Operations. National Security Agency accountmg personnel could have
     found and corrected the error if they had compared the trial balances that they
     submitted to DFAS Indianapolis Center with the Report on Budget Execution
     submitted.

     Other Accounting Procedural Concerns. Accounting procedures or
     programming errors at four accounting offices or organizations caused

     7'he "kst" data contained other significant errors also. Comparison of tot;tl operating expenses
     in the trial halance suhmitted for DoDEA with net accrued expenditures on line 16 of the Reporl
     on Budget Execution showed that the operating expen:.es and Appropriated Capital Usl~J in the
     trial balance (and reported on the Statement of Operations) were $2.5 hi Ilion more than accmed
     expenditures shown in the Report on Budget Execution. Comparison of information on thl.' trial
     balance with information in the Rl.'port on Budgd Execution would lrnve shown the Jiscrep:mcy.



                                               9
                        FOR OFFICIAJ.., USE ONLY
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      misstatements of revenues or expenses. Accounting offices overstated revenues
      from reimbursable activity by $39.7 million and understated expenses included
      in the cost of goods sold by $6.5 million (consisting of an $1 l .1 million
      understatement and a $4.6 million overstatement).

              U.S. Special Operations Command. The DFAS Rock Island Office
      overstated revenues from reimbursable activity that it reported to DFAS
      Indianapolis Center for the U.S. Special Operations Command by $29 million in
      FY 1996. Accounting personnel were properly recording expenses related to
      reimbursable activity when they recorded liabilities. However, they did not
      recognize revenues based on accrual of expenses, but recorded revenues when
      they established accounts receivable. Because the accounting personnel did not
      establish accounts receivable simultaneously when the expenses were recorded,
      they did not report $29 million in revenues from reimbursable activity earned
      during FY 1995 until FY 1996. The DF AS Rock Island Office should establish
      procedmes to ensure that it recognizes revenues and expenses from reimbursable
      activity during the same accounting period.

              Civilian Health and Medical Program. Revenues from reimbursable
      activity of the Civilian Health and Medical Program of the Uniformed Services
      (CHAMPUS) exceeded expenses by $ I 0. 7 million. (Administration of the
      CHAMPUS program was transferred to the Tricare Support Office. That office
      was formerly known as CHAMPUS.) Accounting personnel for CHAMPUS
      reduced expenses from reimbursable activity when they recorded refunds
      receivable from the health service provider based on overcharges. However,
      they did not reduce revenues until they collected the refunds, which could have
      been during a later accounting period, or never, in which case the refunds
      receivable were written off as a bad debts expense. As a result, revenues and
      expenses related to reimbursable activity for FY 1996 did not match. During
      discussions with Tricare Support Office accounting personnel, they proposed
      changes to their accounting procedures that would record overcharges in an
      unearned revenues account unti] the refunds receivable were collected or written
      off as a bad debts expense. That procedure would ensure that the reported costs
      (expenses) for reimbursable activity plus bad debts expense equaled the reported
      revenues for the same period.

              Homeowners Assistance Fund. Army Corps of Engineers personnel
      accounting for the Homeowners Assistance Fund (a revolving fund) incorrectly
      programmed its accounting systems to make revenues from the sale of homes
      equal the cost of homes purchased. The trial balance showed the gain or loss
      from the sa1e of the homes in GLACs 7110 and 7210 (Gain [or] Loss on
      Disposition of Assets), and DFAS Indianapolis Center reported it as such in the
      Statement or Operations for "Other Defense Organizations." That procedure
      caused the Cost of Goods Sold account to be understated by $11. l million for
      FY 1996 because the homes were sold for $11.1 million less than they cost.

            The Homeowners Assistance Fund buys and sells homes as part of its
     ordinary course of operations. Therefore, the cost of those homes should
     appropriately be shown in a Cost of Goods Sold account. The Army Corps of




                                         10
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      Engineers should reprogram its accounting system to show the actual cost of
      goods sold (acquisition cost of homes) rather than forcing the Cost of Goods
      Sold account to equal the sales price with the difference shown in a gain or loss
      account.
              Applied Overhead. Included in the cost of goods sold shown on the
      Statement of Operations for FY 1996 for "Other Defense Organizations" was
      $4.6 million from the Applied Overhead account (GLAC 6600). DFAS
      Indianapolis Center included GLAC 6600 with the cost of goods sold based on
      instructions in "DoD Guidance on Form and Content of Financial Statements
      for FY 1996 Financial Activity," November 8, 1996, that the Under Secretary
      of Defense (Comptroller) issued. However, our review of the account for
      "Other Defense Organizations" indicated that the expense was not related to the
      cost of goods sold by the reporting organizations. The costs were applied
      overhead that the Army Corps of Engineers Revolving Fund charged various
      organizations for services that it provided.
      The Army Corps of Engineers should discontinue reporting expenses charged to
      other funds in GLAC 6600 or should provide DFAS Indianapolis Center with
      instructions to charge the operating expenses of the applicable funds with the
      amount reported in GLAC 6600.



Accounting and Reporting of Appropriated Capital Used

     The Appropriated Capital Used account was overstated by Ifill billion:
     lfBl.___hlllion from improper DFAS Indianapolis Center adjustments and
     -       million from a programming error in the Washington Headquarters
     Services Allotment Accounting System. Appendix F contains the Defense
     organizations affected.

     DFAS Indianapolis Center Adjustments to Appropriated Capital Used.
     DFAS Indianapolis Centei.;sonnel overstated the Appropriated Capital Used
     account (GLAC 5700) by • • billion as a result of incorrect adjustments.
     DFAS Indianapolis Center personnel adjusted the Appropriated Capital Used
     account on each trial balance for general funds submitted to equal funded
     operating expenses (GLAC 6100 series) and Other Interest Expense (GLAC
     6330). However, as previously discussed, DFAS Indianapolis Center personnel
     did not transfer the reimbursable expenses inc1uded in the operating expense
     accounts to the Cost of Goods Sold (GLAC 6500) account before adjusting to
     the Appropriated Capital Used account. Therefore, approQriated capital used
     reported on the Statement of Operations was overstated b y - billion, which
     was the amount of expenses from reimbursable activity included in program or
     operating expenses.




                                         11
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      Use of the Appropriated   Cit{ifhUsed
      accounts were overstated by • •
                                               Account. Appropriated Capital Used
                                          million for Defense organizations shown in
      Appendix F because Washington Headquarters Services personnel incorrectly
      programmed the Washington Headquarters Services Allotment Accounting
      System to adjust the Appropriated Capital Used account for expenses for
      reimbursable activity. Revenues provided for expenses from reimbursable
      activity were also shown in the Miscellaneous Reimbursements account
      (GLAC 5910) in the Washington Headquarters Services Allotment Accounting
      System.



Recommendations and Management Comments

      A.1. We recommend that the Director, Defense Finance and Accounting
      Service Indianapolis Center, establish procedures to:

              a. Verify that the Defense Finance and Accounting Service
      Indianapolis Center only includes revenues and expenses from reimbursable
      activity once for each organization included in "Other Defense
      Organizations."

            b. Review and support adjustments to revenues and expenses from
      reimbursable activity.

            c. Verify that Appropriated Capital Used accounts included in trial
      balance submissions from Defense Organizations does not. include funds
      from reimbursable activity.

      Management Comments Required. The DFAS did not comment on a draft of
      this report. We request that DPAS provide comments on the final report.

      A.2. We recommend that the Director, Defense Finance and Accounting
      Service Indianapolis Center, Customer Support Division; the Director,
      Defense Information Systems Agency; the Director, Defense Logistics
      Agency; and the Director, Washington Headquarters Services, account for
      and report revenues from reimbursable activity when they provide goods or
      services rather than when they record obligations.

      Management Comments. All organizations, except DFAS, responded,
      concurred, and stated that they would recognize revenues from reimbursable
      activity when goods or services are provided.

      Management Comments Required. The DFAS did not comment on a draft of
      this report. We request that DFAS provide comments on the final report.




                                        12
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



      A.3. We recommend that the Director, Department of Defense Education
      Activity; the Director, Defense Finance and Accounting Service Columbus
      Center; and the Director; National Security Agency, establish procedures
      to verify that revenues and expenses from reimbursable activity for
      appropriated funds reported on trial balances to the Defense Finance and
      Accounting Service Indianapolis Center equal the amounts reported on the
      "Report(s) on Budget Execution."

      Management Comments. The DoDEA, the National Security Agency, and the
      Washington Headquarters Services concurred and stated that they will verify
      that revenues and expenses from reimbursable activity reported in trial balances
      will equal the amounts reported on the "Report(s) on Budget Execution."

      Management Comments Required. The DFAS did not comment on a draft of
      this report. We request that DFAS provide comments on the final report.

      Under Secretary of Defense (Comptroller) Comments. Although the
      recommendation was not addressed to the Under Secretary of Defense
      (Comptroller), the Under Secretary stated that revenues and expenses from
      reimbursable activity should not be necessarily equal for revolving (working
      capital) funds because reimbursement rates are fixed, and revenues are not
      likely to equal the expense amounts that are not fixed.

     Audit Response. We agree with the Under Secretary's comments and have
     clarified the recommendation in the final report to show that revenues and
     expenses from reimbursable activity should be equal for organizations operating
     on appropriated funds.

     A.4. We recommend that the Director, Defense Finance and Accounting
     Service Rock Island Operating Location, and the Director, Tricare Support
     Office, establish procedures to require that. they recognize and accrue
     revenues and expenses from reimbursable activity during the same
     accounting period.

     Management Comments. In responding for the Tricarc Support Office, the
     Assistant Secretary of Defense (Health Affairs) concurred and stated that
     procedures to correct the problems recording revenues and expenses from
     reimbursable activity were corrected in September 1997.

     Management Comments Required. The DFAS did not comment on a draft of
     this report. We request that DFAS provide comments on the final report.
     A.5. We recommend that the Commander, U.S. Anny Corps of Engineers:

            a. Reprogram its general ledger accounting system for the
     Homeowners Assistance Fund to record in general ledger account code 6500
     (Cost of Goods Sold) only the acquisition costs of homes sold.




                                         13
Finding A. Reliability of Revenues and Expenses on the Statement of Operations



             b. Discontinue reporting expenses charged to other funds in general
      ledger account code 6600 (Applied Overhead) or provide the Defense
      Finance and Accounting Service lndianapo1is Center with instnactions to
      charge the operating expenses of the applicable funds with the amounts
      reported in the Applied Overhead account.

      Management Comments Required. The Anny did not comment on a draft of
      this report. We request that the Army provide comments on the final report.

      A.6. We recommend that the Director, Washington Headquarters
      Services, reprogram the Washington Headquarters Services Allotment
      Accounting System to exclude revenues recognized from reimbursable
      activity from being posted to the Appropriated Capital Used account.

      Management Comments. The Washington Headquarters Services concurred
      and stated that it completed reprogramming on October 17, 1997, to exclude
      reimbursable activity from the Appropriated Capital Used account.




                                       14
           Finding B. Use of General Ledger
           Account Codes to Record Reimbursable
           Transactions
           Accounting offices supporting "Other Defense Organizations" used
           different GLACs to record revenues and expenses from reimbursable
           activity. The inconsistencies occurred because DoD and the DFAS
           Indianapolis Center issued guidance on the use of GLACs that was not
           clear or consistent. As a result, the Statement of Operations for "Other
           Defense Organizations" for FY 1996 showed the same type of revenues
           and expenses in different places, making the Statement of Operations
           unreliable.



DoD and DFAS Indianapolis Center Guidance

    DoD Guidance. DoD 7000.14-R, "Financial Management Regulation,"
    volume 4, "Accounting Policy and Procedures," provides guidance on
    recording revenues and expenses related to reimbursable activity.

            Revenues From Reimbursable Activity. The Financial Management
    Regulation (FMR) states that revenues from goods sold or services provided
    should be recorded in GLACs 5100 or 5200 (Revenues Prom Sales of Goods or
    Services). The FMR does not prohibit appropriated funds from using GLACs
    5100 or 5200. However, when discussing how to use GLACs 5100 and 5200,
    the FMR states that the accounts "relate to DoD business operations fund
    activities." The f'MR further st.ates that GLAC 59 IO (Miscellaneous
    Reimbursements) "is used to record the amount of revenues earned from
    miscellaneous sources not specifically provided for in other revenues accounts
    as reimbursable to DoD appropriations." The FMR also indicates that
    appropriated funds (general funds) are authorized to use GLACs 5100, 5200,
    and 5910. However, business operations funds (revolving funds) and specific
    trust funds are not authorized to use the GLAC 5900 series.

            Expenses From Reimbursable Activity. According to the FMR, DoD
    organizations should use GLAC 6100 series accounts to record
    "Operating/Program Expenses." The FMR also states that GLAC 6500 is used
    to record the cost of goods or services sold from stock or by other DoD
    organizations authorized to provide services or material to Government
    organizations. The only examples in the FMR on pro-forma, or standard,
    accounting entries for GLAC 6500 show it being used to record costs previously
    accumulated in inventory or work-in-process accounts. The FMR indicates that




                                      15
Finding B. Use of General Ledger Account Codes to Record
Reimbursable Transactions



      al! types of funds can use GLAC 6500 to include appropriated fund
      organizations, which "shall use this account to support reimbursable programs
      when necessary."

      DFAS Indianapolis Center Guidance. Guidance in DFAS Indianapolis Center
      Regulation 37-1, "Finance and Accounting Policy Implementation,"
      September 18, 1995, is6similar to the FMR in defining GLACs 5100 and 5200.
      In defining GLAC 5900 , DFAS Indianapolis Center Regulation 37-1 states that
      the accounting offices should use the account to "record revenues from
      reimbursable work performed using appropriated funds." Although the
      definition of GLAC 5900 is clear in DFAS Indianapolis Center Regulation 37-1,
      none of the pro-forma accounting entries shown in DFAS Indianapolis Center
      Regulation 37-1 indicates use of GLAC 5900. Revenues from reimbursable
      activity are always shown in DFAS Indianapolis Center Regulation 37-1 to be
      recorded in GLAC 5100 or GLAC 5200.

      DFAS Indianapolis Center Regulation 37-1 states that accounting offices should
      use GLAC 6500 to record expenses related to customer orders for the
      reimbursable program. The regulation also shows pro-forma entries using
      GLAC 6500 lo record the cost of goods or services related to reimbursements.



Procedures Used by DoD Accounting Offices

     Accounting for Appropriated Funds. Accounting offices supporting "Other
     Defense Organizations" did not account for or report revenues and expenses
     from reimbursable activity consistently because DoD and DFAS Indianapolis
     Center guidance was not clear or consistent on the GLACs to use to record
     revenues and expenses from reimbursable activity. Accounting offices using
     DFAS Indianapolis Center accounting systems designed for appropriated
     (general) funds reported revenues from reimbursable activities in GLACs 5100
     and 5200 (Revenues From Sales of Goods or Services) and related expenses in
     GLAC 6500 (Cost of Goods Sold). Also, accounting offices submitting
     information from the DFAS centers performing accounting for the Air Force
     and Navy organizations, DFAS Denver Center and DFAS Cleveland Center,
     generally reported revenues from reimbursable activity in GLACs 5100 and
     5200 with equal costs shown in GLAC 6500.




     ''DFAS Indiunapolis Center Regulation 37•1 does not show GLAC 5910. DFAS Indi,mapolis
     Cenkr Regu [ation 37- I 1..lt:fines GLAC 5900 as "M iscd laneous Rei mburscmen L<;," which is the
     same title as shown in volume I, FMR, for GLAC 5910.




                                                16
                     Finding 8. Use of General Ledger Account Codes to Record
                                                   Reimbursable Transactions



     However, other DoD accounting organizations submitting trial balances used a
     variety of accounting and reporting procedures, as shown in Appendix G.

            o Five accounting systems or information from those systems supporting
     nine organizations included in this audit recorded or reported revenues from
     reimbursable activity as Misce11aneous Reimbursements.

             o Five accounting systems or information from those systems supporting
     nine organizations included in this audit recorded expenses related to
     reimbursable activity as operating or program expenses (GLAC 6100 series)
     rather than as a cost of goods sold.

    Even if DFAS Indianapolis Center had not made the mistakes shown in
    Finding A in adjusting revenues and expenses from reimbursable activity, the
    inconsistencies in accounting for and reporting revenues and expenses made the
    Statement of Operations unreliable.

    Accounting for Revolving and Tmst Funds. DFAS Indianapolis Center
    accounting personnel were not consistent in compiling revenues and expenses
    for revolving and trust funds. DFAS Indianapolis Center personnel adjusted
    revenues reported by the Washington Headquarters Services for two revolving
    funds in GLAC 5910 to GLAC 5200. However, for the Commissary Surcharge
    Collection Fund, DFAS Indianapolis Center personnel adjusted the revenues
    from goods sold that the DFAS-Columbus Center reported in GLAC 5200 to
    GLAC 5910 (Miscellaneous Reimbursements) because no costs of goods sold
    were reported. DFAS Indianapolis Center personnel left revenues that a DFAS
    accounting office in Europe reported for the fund in GLACs 5 I 00 and 5200.
    As a result, revenues from the same type of operations were shown on the
    Statement of Operations in two different places--revenues from sales of goods
    and services and miscellaneous reimbursements.

    A lack of guidance by DoD regulations on where to report revenues by the
    Commissary Surcharge Collection Fund and the use of two different accounting
    systems contributed to reporting the same type of revenues in two different
    places.



Conclusion

    We agree with the procedures used by most accounting offices under control of
    DFAS Indianapolis Center in recording revenues from reimbursable activity as
    Revenues From Sales of Goods and Services (GLACs 5100 or 5200) and
    recording the expenses to generate those reimbursable revenues as Cost of
    Goods Sold (GLAC 6500). However, DFAS Indianapolis Center Regulation
    37- l directly contradicts that procedure in defining GLAC 5900 (but shows no
    pro-forma entries on when to use GLAC 5900). The lack of definitive guidance




                                       17
Finding B. Use of Gcnernl Ledger Account Codes to Record
Reimbursable Transactions



      from the Under Secretary of Defense (Comptroller) and conflicting guidance
      from DFAS Indianapolis Center to account for and report revenues and
      expenses related to reimbursable activities contributed to the varied ways that
      Defense organizations reported revenues and expenses. The Under Secretary of
      Defense (Comptroller) needs to issue specific guidance to Defense organizations
      on when and how they should use GLACs 5100, 5200, 5910, and 6500 for
      appropriated, revolving, and trust funds.



Recommendation and Management Comments

      B. We recommend that the Under Secretary of Defense (Comptroller)
      clarify guidance on the general ledger account codes that Defense
      organizations should use for recording revenues and expenses for
      reimbursable activity for all appropriated, revolving, and trust funds.

      Management Comments. The Under Secretary of Defense (Comptroller)
      concurred with the recommendation and stated that a revision to the fMR is in
      process to show the revenue and expense accounts that should be used for
      reimbursable activity.




                                        18
Part II - Additional Information
Appendix A. Audit Process

Scope and Methodology

    We reviewed DoD and DFAS Indianapolis Center regulations discussing policy
    and procedures for recognizing and reporting revenues and expenses from
    reimbursable activity. We also discussed policy interpretation with personnel at
    DFAS Indianapolis Center and at the Office of the Under Secretary of Defense
    (Comptroller). In addition, we discussed the reasons for adjustments to
    revenues and cost of goods sold general ledger accounts that DFAS Indianapolis
    Center personnel made.

    We verified that the following accounts shown in the adjusted trial balance for
    "Other Defense Organizations" equaled the amounts shown in the Statement of
    Operations for FY 1996.

            Revenues and Expense Account,; Reviewed During the Audit

    GLAC                  Account(s)                                 Amount
                                                                     (millions)

    5100/5200     Revenues From Sales of Goods and Services          $5,630.2
    6500          Cost of Goods Sold                                  5,362.3
    6600          Applied Overhead                                        4.6
    5910          Miscellaneous Rei mburscments                         627.4
    5900          Other Revenues                                          4.3
    We reviewed revenues and expenses on the FY 1996 trial balances submitted for
    "Other Defense Organizations" in sales of goods or services or miscellaneous
    revenues. We visited accounting offices and organizations reporting at least
    $10 million in revenues and expenses from reimbursable activity to determine
    general policies and procedures for recognizing and reporting revenues and
    expenses from reimbursable activity, except for the numerous DFAS offices
    accounting for reimbursable activity for the Defense Health Program and the
    U.S. Special Operations Command. We only visited those DFAS accounting
    offices at which DPAS Indianapolis Center personnel adjusted revenues or
    expenses from reimbursable activity.

    We performed on-site reviews by taking small exploratory samples of
    FY 1997 reimbursable sales and expense transactions and requesting special
    queries to reconcile information recorded. We also reviewed and discussed
    accounting procedures with accounting personnel and reviewed selected
    supporting information used to prepare trial balances submitted to DF AS
    Indianapolis Center. We also reviewed and evaluated the propriety and effect of
    journal vouchers that DFAS Indianapolis Center prepared that affected




                                       20
                                                         Appendix A. Audit Process



     Revenues From Sales of Goods and Services (GLACs 5100 and 5200),
     Miscellaneous Reimbursements (GLAC 5910), Appropriated Capital Used
     (GLAC 5700), and Cost of Goods Sold (GLAC 6500).

     Although we performed limited judgmental sampling of FY 1997 revenues and
     expense transactions, we limited our reviews of the reliahility of reported
     information for r,y 1996 and revenues and expenses related to reimbursable
     activity to an evaluation of accounting procedures used. This audit was not
     intended to provide an overall opinion of the reported balances in financial
     reports. Therefore, we did not perform comprehensive reviews or select
     statistical samples of transactions supporting revenues and expenses related to
     reimbursable activity.

     Use of Computer-Processed Data. We perfonned limited reviews of
     computer-processed data to determine how accounting systems were designed to
     record revenues and expenses from reimbursable activity. We determined that
     revenues from reimbursable activity were not reliable for organizations that
     based revenues on obligations rather than on actual reimbursements earned.
     Our review of computer-processed adjustments to the trial balances showed that
     DFAS Indianapolis Center assumptions on the trial balances that non-DFAS
     Indianapolis Center organizations prepared were not correct. Therefore, the
     balances of revenues from sales of goods and services. other revenues, cost of
     goods sold, and the appropriated capital used as shown on the Statement of
     Operations for "Other Defense Organizations" were not correct.

     Audit Period and Standards. We performed this financial-related audit from
     f-ebrnary through June 1997, in accordance with auditing standards issued by
     the Comptroller General of the United States, as implemented by the Inspector
     General, DoD, based on the objectives of the audit and the limitations in the
     scope described in this appendix. According Iy, we included tests of internal
     controls considered necessary.

     Audit Contacts. We performed audit work at accounting offices supporting
     Defense organizations and contacted Defense agencies and other individuals
     during the audit. Further details are available upon request.



Internal Control Prograrn

    DoD Directive 5010.38, "Management Control (MC) Program," August 26,
    1996, requires DoD organizations to implement a comprehensive system of
    management controls that provides reasonable assurance that programs are
    operating as intended and to evaluate the adequacy of the controls.

    Scope of Review of the Internal Control Program. We performed general
    reviews of the adequacy of the Dr AS Indianapolis Center internal control
    program over receiving, compiling, adjusting, and reporting for "Other Defense
    Organizations" during the audit of internal controls and compliance with laws


                                        21
Appendix A_. Audit Process



      and regulations, Report No. 97-155 (See Appendix B). We reviewed internal
      controls and procedures at DFAS Indianapolis Center relating to adjusting and
      reporting revenues and expenses from reimbursable activity. Audit work at
      accounting offices providing financial data to DFAS Indianapolis Center were
      limite.d to reviews of general accounting procedures for recognizing and
      recording revenues.

      Adequacy of Internal Controls. We identified a material internal control
      weakness, as defined by DoD Directive 5010.38, at DFAS Indianapolis Center.
      Internal controls at DFAS Indianapolis Center for departmental financial
      reporting were not adequate to ensure that DF AS Indianapolis Center
      adjustments to trial balances submitted to support financial statements were
      needed or that the information was not already reported elsewhere.
      Recommendation A. l., if implemented, will correct the deficiency. A copy of
      the report will be provided to the senior DFAS official responsible for internal
      controls at DFAS.

      Adequacy of Management's Self-Evaluation. Management's self-evaluation
      did not detect and report the internal control weakness identified in this report
      because DFAS Indianapolis Center did not assess the reconciliation and
      adjustment process for "Other Defense Organizations" as part of the DFAS
      Indianapolis Center internal control program.




                                          22
Appendix B. Summary of Prior Coverage
   The Inspector General, DoD, has published numerous audit reports in response
   to the requirements of the Chief Financial Officers act. The following four
   reports include specific information related to this audit.

   Report No. 97-155, "Internal Controls and Compliance With Laws and
   Regulations for the FY 1996 Financial Statements of the 'Other Defense
   Organi7.ations' Receiving Department 97 Appropriations," June 11, 1997.
   The report states that the consolidated principal statements for "Other Defense
   Organiz.ations" were not accurate and reliable representations of the financial
   operations of the Defense organiz.ations and funds within Department 97.
   Financial information produced and reported for "Other Defense Organizations"
   was not in full compliance with regulatory and statutory requirements, and
   improvements in management controls were needed. Of specific interest to this
   audit, DFAS Indianapolis Center lacked internal controls needed to ensure that
   it thoroughly documented the process used to receive, adjust, and consolidate
   Defense organizations' financial information from trial balances and certified
   budget execution reports. The report recommended that DFAS Indianapolis
   Center maintain audit trails of adjustment transactions and document the review
   process used. DFAS concurred with the recommendations and stated that
   DFAS wi II work with organizations preparing trial balances to ensure that it has
   reconciled data received and that they are accurate to minimize the need to make
   adjustments.

   Report No. 97-131, 11 Financial Management at the Department of Defense
   Education Activity," April 17, 1997. Included in the report is a finding
   related to reporting tuition collections. The report states that DoDEA did not
   report tuition collections in the fiscal year collected. DoDEA personnel did not
   promptly deposit tuition checks received in the Okinawa district, and in the
   Europe area, they deposited advanced tuition collections in a suspense rather
   than in the accounting records for the appropriate reimbursable appropriation.
   As a result, DoDEA applied FY 1995 funds of $7.3 million to FY 1996
   Operation and Maintenance funds.

   The report recommended that DoDEA report all tuition in the fiscal year
   collected. DoDEA nonconcurred with the recommendation and appealed to the
   Under Secretary of Defense (Comptroller) for a waiver to the requirement. The
   Deputy Director for Accounting Policy stated that DoD policy is to record
   collections in the accounting period collected and earnings in the accounting
   period earned. However, the unearned portion of collections received during a
   fiscal year should be transferred to the following year's appropriation because a
   significant portion of the related services are to be performed in the following
   fiscal year.




                                      23
Appendix B.   Summary of Prior Coverage



      The report also recommended lhat:

              o DoDEA train employees to ensure that they deposit tuition collections
      in a timely manner, and

            o DoDEA establish controls to hold European and Pacific areas
     accountable for processing tuition co11ections in accordance with DoD and
     DoDEA guidance, including abandoning the use of suspense accounts.

     DoDEA concurred with those recommendations and stated that it would direct
     European and Pacific areas to deposit and report tuition collections in a timely
     manner, in accordance with the Under Secretary of Defense (Comptroller)
     guidance, and would abandon the use of suspense accounts.

     Report No. 97-117, "Eliminating Entries," March 31, 1997. The report
     states that DoD generally did not report or properly report eliminating entries in
     the FY 1995 financial statements of entities to be included in the FY 1996 DoD-
     wide Consolidated Financial Statements. The most material and widespread
     types of transactions that DFAS should eliminate from DoD financial statements
     are reimbursable sales and purchases that include transactions between DoD
     Components and transactions within the same appropriation, account, or entity.
     The report recommended that DFAS:

            o Establish requirements for new and interim migratory accounting
     systems that wiJ\ identify sellers and purchasers in reimbursable transactions.

             o Develop procedures for DFAS centers to extract reimbursable
     transactions from databases that support the Report on Reimbursements.

     DFAS concurred with the recommendations and stated that it will award a
     contract to review and analyze eliminating entry requirements for the new
     departmental reporting system being developed. Also, DFAS will prepare
     guidance on identification of eliminating entry amounts to be reported in
     financial statements of DoD entities, DoD consolidated financial statements, and
     Government-wide financial statements.

     The report also recommended that the Under Secretary of Defense
     (Comptroller) issue policy requiring that sellers and purchasers in reimbursable
     transactions be identified and that selling DoD Components be required to
     report annual sales to purchasing DoD Components. The Deputy Chief
     Financial Officer concurred and stated that FY 1997 guidance scheduled for
     release in late FY 1997 will reinstate the requirement for identifying sales
     between DoD reporting entities.

     Rep011 No. 97-045 1 "Financial Accounting at the Defense Intelligence
     Agency,U December 12, 1996. The report states that Defense Intelligence
     Agency accounting records did not contain accurate financial information, and
     information reported to DFAS for the FY 1995 financial statements was
     incorrect. Included in the specific problems identified, the report states that the
     Defense Intelligence Agency recognized revenues and accounts receivable from
     reimbursements when funds were obligated rather than when the reimbursement


                                          24
                                   Appendix B. Summary of Prior Coverage
        -------------=-=----

was earned. The report recommended that the Defense Intelligence Agency
record revenues and accounts receivable from reimbursable activity based on
actual or constructive performance of reimbursable orders. The Defense
Intelligence Agency requested and received a limited waiver from the Under
Secretary of Defense (Comptroller) to continue to record revenues from
reimbursable activity for selected sensitive operations based on estimated
accrued expenditure data. (Defense Intel1igence Agency personnel stated that
use of that estimated information would affect reimbursable revenues less than
l percent.) However, for all other reimbursable activity, Defense Intelligence
Agency personnel stated that they were now recording reimbursable earning
based on performance.




                                  25
--· - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Appendix C. Other Matters Of Interest


Intrafund Eliminations

     The Under Secretary of Defense (Comptro11er) issued "DoD Guidance on Form
     and Content of Financial Statements for FY l 996 Financial Activity,"
     November 8, 1996. The guidance required organizations to prepare Note 29,
     "lntrafund Eliminations," to the financial statements. Among the requirements
     for Note 29 is a Schedule E. In Schedule E, the selling DoD reporting entity
     identifies sales, expenses, receivables, collections and disbursements, and other
     transactions between various DoD Components and between DoD and other
     Government reporting entities.

     The purpose of identifying intrafund eliminations is to prepare eliminating
     entries to be made on consolidating financial statements for DoD as well as on
     the Government-wide consolidated financial statements. The most material and
     widespread types of transactions that should he eliminated from DoD financial
     statements are reimbursable sales and purchases between DoD Components and
     transactions within the same DoD appropriation, account, or entity.

     The FY 1996 financial statements for "Other Defense Organizations" did not
     include eliminating entries. As stated in Note 29 of the "Other Defense
     Organizations" financial statements, "Current DoD Accounting Systems do not
     permit adequate identification of interdepartmental transactions at a level
     sufficient to accurately report these type transactions." Inspector General,
     DoD, Report No. 97-117, "Eliminating Entries," (see Appendix B) also found
     limitations in current DoD systems, in DoD guidance, and in DPAS procedures
     to extracl reimbursable transactions from databases. DFAS concurred with the
     report's recommendation to develop procedures to extract information on
     reimbursable activity from account report (M)725, "Report on
     Reimbursements," and report the information in Note 29. Also, in its response,
     DFAS acknowledged that it did not obtain eliminating entries for "Other
     Defense Organizations" but "will address this issue for FY 1997 CFO [Chief
     Financial Officers] statements."

     Although detailed, complete, and reliable information is not available to show
     all required eliminating entries, our review of information from (M) 725 reports
     for "Other Defense Organizations" showed that much information was
     available. Of lhe -     billion in reimbursable sales included on the Statement
     of Operations (after adjustments for errors as shown in Appendix D), the
     (M) 725 report shows that $4.6 billion was reimbursable sales to "Other
     Defense Organizations," $100 million was intrafund sales (within
     Depai:t1nent 97), and $4 I 7 million was reimbursable sales to other Federal
     agencies.



                                        26
                                            Appendix C. Other Matters Of Interest



    Failure to report such eliminating transactions in the consolidating DoD-wide
    financial statements overstated and distorted the overall activity of DoD. Based
    on the DFAS response to the report, Note 29 should at least show the
    information on eliminations available from the (M) 725 report in the FY 1997
    financial statements for "Other Defense Organizations."



Revenues From Reimbursable Activity Reported for the
Defense Logistics Agency

    During our audit of the $265 million in reported revenues from reimbursable
    activity at the Defense Logistics Agency (DLA) for FY 1996, we noted two
    reporting entities within DLA that reported a total of $97 million in revenues
    from reimbursable activity that were not part of the DLA general fund.

            Defense National Stockpile Center. The Defense National Stockpile
    Center accounts for transactions for the Defense National Stockpile Transaction
    Fund, a revolving fund, treasury fund symbol 97X4555 (Stockpile Fund).
    Separate financial statements for the Stockpile Fund are included as one of the
    nine major reporting entities for the DoD consolidating financial statements.
    However, instead of paying operating expenses directly from the fund, expenses
    are paid by DLA Operation and Maintenance appropriations, which receive
    reimbursement from the Stockpile Fund. During FY 1996, DLA reported
    $42 million in reimbursable revenues from the Stockpile Fund. The revenues
    from that reimbursable activity were actually transfers of funds to pay for the
    operating expenses recorded in the Operation and Maintenance appropriations
    for DLA. The unnecessary use of the DLA general fund as a transfer account
    distorts operations reported in DLA financial statements.

            Deferto;;e Technical Information Center. The Under Secretary of
    Defense (Comptroller) issues direct funding and reimbursable authority through
    the DLA general fund to the Defense Technical Information Center (the
    Center). However, the Center was transferred from DLA to the Under
    Secretary of Defense (Acquisition), now the Under Secretary of Defense for
    Acquisition and Technology, in 1991. During FY 1996, the Center received
    $40 million in direct funding and reported $55 million in revenues from
    reimbursable activity. Including financial information for the Center in
    financial statements for the DLA general fund will distort those financial
    statements. The Under Secretary of Defense (Comptroller) may wish to provide
    funding directly to the Center to make DLA financial statements more accurate.




                                       27
     Appendix D. Audit Adjustments to Revenues From
                 Reimbursable Activity
                                                                                               Audit Adjustments           Total Adjusted
                                                                       Financial        DFAS-IN      Other                  Revenue From
                                                                       Statement         Errors      Errors      Total     Reimbursements
                 Affocted Department 97 Ornanizations                  (millions}      (mil\ions} (millions} (mjlliQDS)       (millions)
     Buildings fvfaintenance Fund                                      $ 28.0           $ -         $ -        $ -             $    28.0
     Civilian   Health and Medical Program of the Uniformed Services    3.713.3            (4.2)      (10.7)      (14.9)         3,698.4
     Defense    Advanced Research Projects Agency                           34.0          (17.0)             1     (5.5)
                                                                                                       t 1.5                        28.5
     Defense    Commissary Agency (Surcharge Collections)                 282. I                                                   282.1
     Defense    Contract Audit Agency                                       45.1                         0.9       0.9              46.0
                              2                                           584.8                                  (IO.I)            574~7
     Defense Health Program                                                                 (10.1)3
     Defense Information Systems Agency                                   147.9             (42.3)      (8.3)    (50.6)             97.3
                                                                         DODIG (b)(7)(E)
     Defense Intelligence· Agency
     Defense Logistics Agency                                             265.4                         (9.5/     (9.5)          255.9
tv
00   Defense Special Weapons Agency                                        75.2             (37 .6)              (37.6)           37.6
     Department of Defense Education Activity                             222.6             (44.3)    (133.9)   (178.2)           44.4
     Homeowners Assistance Fund                                            85.6                                                   85.6
     Kirtland Air Force Base                                               10.9                                                   10.9
                                                                          DODIG (b)(7)(E)
     National Imagery and Mapping Agency
                                                                          NSA (b)(3)
     National Security Agency
     Pentagon Reservation Maintenance Revolving Fund                      237.7                                                  237.7
     U.S. Special Operations Command                                      181.8                        (29.0)    (29.0)          152.8
                                  6
     Survivor Annuity Deposits                                             17.8                                                   17.&
     Uniformed Services University of the Health Sciences                                   (29.7)               (29.7)           29.7
     Wa.<.hington Headquarters Services                                                     (44.5)     (12.8)    (57.3)           31.9
          1
     Other
        Total

     Note: See the footnotes on following page.
Footnotes to Appendix D.

1
The Defense Accounting Office for DefenSe agencies within the Directorate for Defense Accounting, Customer Support
Division, DFAS Indianapolis Center, pe-rforme.d accounting for the agency. DFAS lndianapolis Center personnel recorded
revenues based on obligations in accordance with instructions from the Defense Advanced Research Projects Agency.


1be organization does not include CHAMPUS and Uniformed Services University of the Health Sciences, which are
shown separately.


'A S10 million error in addition by DF AS lndianapolis Center personnel caused most of the overstatement.

4we included only readily identifiable misstatements of revenue from reimbursable activity because of recent audit
coverage identifying incorrect procedures in reporting earnings from reimbursable activity. The total misstatement
may be larger. The Defense lntdligence Agency corw:ted procedures for recognizing earnings from reimbursable activity
at the beginning of FY 1997 based on lnspector General, DoD, Report No. 97-045 (See Appendix B).


sThe $9.5 million overstatement in revenues was related only to accounting performed for the Defense National Stockpile
Center, which showed $42.5 million in revenues from reimbursable activity for FY 1996. AJso included in revenue from
reimbursable activity by the Defense Logistics Agency was about $55 million from the Defense Technical [nformation
Center. The Center incorrectly reeognize<l revenues based on obligations. We did not obtain infonnation on the
correct amount of revenues and expenses that the Center should have reported because it had archived the accounting reeords.


<>-rhe deposits were reported as Miscellaneous Reimbursements on the Statement of Operations. It represents funds received
that were transferred to the Treasury. The amount is offset on line 7 (Taxes or Receipts Transferred to the Treasury or Other
Agencies) of the Statement of Operations.

7
    "Other" consists of agencies or funds showing less than $10 million in revenue from reimbursable activity.


~e amount agrees with the Statement of Operations, line 2 ( Revenues From Sales of Goods and Services) pl us Miscellaneous
Reimbursements and Other Revenue sho\\11 in Note 22.
    Appendix E. Audit Adjustments to Expenses Related to
                Reimbursable Activity
                                                                                         Audit Adjustments
                                                                                                      Other
                                                                                     DFAS-IN       Accounting
                                                                                      Errors         Errors             Total
                 Affected Department 97 Organizations                                (millions)     (millions)       (millions)
    Civilian Health and MedicaJ Program of the Uniformed Services                    $(3,709.1)       $ -            $(3, 709. l)
    Defense Advanced Research Projects Agency                                             (17.0)                          (17.0)
    Defense Contract Audit Agency                                                         (45.1)          0.9             (44.2)
    Defense Health Program                                                                  (0.2)                          (0.2)
    Defense Information Systems Agency                                                    (42.3)                          (42.3)
                                                                                       DODIG (b)(7)(E)
    Defense Intelligence Agency
w   Defense Logistics Agency                                                              (265.4)            (9.5)      (274.9)
0
    Defense Special Weapons Agency                                                         (37.6)                        (37.6)
    Department of Defense Education Activity                                               (44.3)                        (44.3)
    Homeowners Assistance Fund
                                                                                       DODIG (b)(7)(E)
    National Imagery and Mapping Agency
                                                                                      NSA (b)(3)
    National Security Agency                                                          !
    U.S. SpeciaJ Operations Command                                                       (157.7)3                      (157. 7)
    Uniformed Services University of the Health Sciences                                    (29.1)                        (29.1)
    Washington Headquarters Services                                                        (44.5)                        (44.5)
    GLAC 6600 (Applied Overhead)                                                                                            4.
        Total
    1
     The amount includes a -million error in addition by D FAS Indianapolis Center personnel.
    2Toe cost of goods sold was correctly stated in the Statement of Operations. However, operating expenses
     were understated by ~Ilion because of errors related to reimbursable activity.
    3The amount includes $4.8 million in adjustments that DFAS Indianapolis Center made without any documentation.
    '7ne expenses were reported both as program operating expenses and as cost of goods sold.
Appendix F. Audit Adjustments to Appropriated Capital
            Used
                                                                            OverstatemenL<; From
                                                                   DF AS-IN           WHS Programming
                                                                  Adjustments               Error         Total
             Affected Department 97 Organizations                  (millions)             (millions)    (millions)
Civilian Health and Medical Program of the Uniformed Services       $3,697.1             $    -         $3,697.1

Defense Advance'd Research Projeets Agency                                                   28.4            28.4

Defense Contract Audit Agency                                            (IO.I)                             ( 10.1)

Defense Information Systems· Agency                                        12.6              46.6            59;2

Defense Logistics Agency                                                 265.4                              265.4

Defense Special Weapons Agency                                            30.0                               30.0

Department of Defense Education Activity                                 178.2                              178.2
                                                                DODIG (b)(7)(E)
National Imagery and Mapping Agency

U.S. Special Operations Command                                          123.5                              123.5

Uniformed Services University of the I-leallh Sciences                     29.7                              29.7

Washington Headquarters Services                                                             31.9            31.9
                                                                DODIG (b)(7)(E)
  Total
Appendix G. General Ledger Account Codes
Used to Record Revenues and Expenses From
Reimbursable Activity
                                                                GLACs Used For Reporting
                  Accounting System                             Revenues       Ex12enses
   !Army, Navy, and Air Force                                    5100/5200         6500

   2
       WHS Allotment Accounting System                           5910              6100 Series
   3
       Delcnse Business Management System                        5100              6100

   "Centrnlizi;J Accounting an<l Financial
    Management System                                            5910              6100 Series

   'Resource Accounting Management System                        520015900         6120
   6
       College and University Financial System                   5910              6100 series

   'General Accounting and Reporting System                      5910              6500


   1
    Accounts that DFAS generally used to report rewnue and expense.~ from reimbursable activity
   for Army, Navy, and Air Force organizations using Department 97 appropriated funds. We did
   not specifically review the accounting systems that DFAS usoo for transactions from the three
   Milit,uy Departments. The OF AS Rock Island Offict:, which accountt!d for certain reimbursablt:
   activity for the U. S. Special Operations Command, used a business operations accounting
   system before FY I997. That system did not use GLAC 6500, but reported expenses in the
   GLAC 6100 series. The DFAS Ro1,;k Island Office discontinued using the business operations
   accounting system for appropriatoo funds in FY l 997.

   ~Used by WHS, DoDEA, Dcft:nse fnformation Systems Agency (headquarkrs only), Defense
   Advance<l Rest¼irch Projects Agency, and other agencies with less than $1 million in
   reimbursable revenues not included in the audit.

   JUsed by the Defense Logistics Agency an<l the Defense Contract Audit Agency.
   4
    Use<l by the Dt:fense Special Weapons Agency (and the On-Site Inspection Agency not included
   in the m1dit).

   ~Used by the Tricare Support Office (formerly CHAMPUS). The system records reimbursable
   revenues in GLAC 5400, but Tri1,;are Support Office personnel manually changi;: the revenues to
   GLAC 5200 when reporting to DFAS Indianapolis Center. A small amount of revenue from
   reimbursable activity was reported in 5900.
   6
    U:-;e<l by the Uniformed Services University of the Health Sciences. The trial balance was
   prepared from the general le<lger with non-standard DoD general ledger accounts.

   'Used by the National Security Agency and the Defense Intelligence Agency. However, they
   manually prepared their trial balances using GLACs 5100 and 5200 based on infonnation in the
   general ledgt:r.


                                                 32

                           FOR OFFICIAL USE ONLY
Appendix H. Report Distribution


Office of the Secretary of Defense
Under Secretary of Defense for Acquisition and Technology
  Director, Defense Logistics Studies Information Exchange
Under Secretary of Defense (Comptroller)
  Deputy Chief Financial Officer
  Deputy Comptroller (Program and Budget)
Assistant Secretary of Defense (Health Affairs)


Department of the Army
Auditor General, Department of the Army
Co1nmander, U. S. Army Corps of Engineers


Department of the Navy
Assistant Secretary of the Navy (Financial Management and Comptroller)
AL1ditor General, Department of the Navy


Department of the Air Force
Assistant Secretary of the Air Force (Financial Management and Comptroller)
Auditor General, Department of the Air Force


Other Defense Organizations
Director, American Forces Information Service
Director, Ballistic Missile Defense Organization
Director, Defense Advanced Research Projects Agency
Director, Defense Contract Audit Agency
Director, Defense Finance and Accounting Service
   Director, Defense Finance and Accounting Service Indianapolis Center
    Director, Defense Finance and Accounting Service Rock Island
       Operating Location
   Director, Defense Finance and Accounting Service Columbus Center


()ther Defense ()rganizations (Cont'd)
Director, Defense Information Systems Agency


                                         33
Appendix H. Report Distribution



Director, Defense Intelligence Agency
   Inspector General, Defense Intelligence Agency
Director, Defense Investigative Service
Director, Defense Logistics Agency
Director, Defense Special Weapons Agency
Director, Department of Defense Education Activity
Director, National Security Agency
   Inspector General, National Security Agency
Director, On-Site Inspection Agency
Director, Tricare Support Office
Director, Washington Headquarters Services
President, Uniformed Services University of the Health Sciences


Non-Defense Federal Organizations and Individuals
Office of Management and Budget
Technical Information Center, National Security and International Affairs Division,
   General Accounting Office
Chairman and ranking minority member of each of the following congressional
  committees and subcommittees:
  Senate Committee on Appropriations
  Senate Subcommittee on Dcfcn:-.c, Committee on Appropriations
  Senate Committee on Armed Services
  Senate Committee on Governmental Affairs
  House Committee on Appropriations
  House Subcommittee on National Security, Committee on Appropriations
  House Committee on Government Reform and Oversight
  House Subcommittee on National Security, International Affairs, and Criminal
    Justice, Committee on Government Reform and Oversight
  House Committee on National Security




                                          34
Part III - Management Comments
Under Secretary of Defense (Comptroller)
Comments

                              UNDER SECRETARY OF DEFENSE
                                     1100 DEFENSE PENT.-.GON
                                    WASHINGTON. CC 20301·1100

                                                                               rm ,.


      MEMORA..\IDUM FOR DIRECTOR, READINESS AND OPERATIONAL SUPPORT,
                           OFFICE OF THE INSPECTOR GENERAL. DEPARTMENT OP
                           DEFENSE

      SUBrocT: Draft Audit Report on Revenuu and Expenses From Reimbur111ble Activity for
               Other Derense Organizations (Project No. 7RF-2012)


            Your office forwarded lhe subject draft report for review and comment, and requested
      management comments for your office to consider in preparing lhe final report.

             This office has reviewed the 511.bject draft report, The draft report, wb.ich conlainw om:
      recommendation addressed to th.is office, recommends lhat this office clarify policy guidana on
      revenue and expense general ledger accounts applicable to reimbursable activity for all
      appropriated, revolving and trust funds.

             This office generally agrees wilh the finding and lhe re.commcndation addressed to iL
      However. a recommendation addressed to other Defense organizations i, not technic.a.lly correct.
      Attached are this office's detailed comments on this maner.

                                                                       He ma.y be reached by e-mail:




                                     Acting Under Secretary of Defense
                                              (Comptroller)

     Attachment




                                                      36
                             Under Secretary of Defense (Comptroller) Comments




                                                                                                    Final Report
                                                                                                     Reference




       Of'HCB OF THE UNDER SECRETARY OF DEFENSE (CO~OLLER)
    COMMENTS ON AN OFFICE OF 11IE INSPECTOR GENERAL, DEPARTMENT OF
      DEFENSE DRAFT' AUDIT REPORT, uREVENUES AND EXPENSES FROM
      REIMBURSABLE ACTIVITY FOR OTHER DEFENSE ORGANIZATIONS,"
               (PROJECT NO. 7RF-2012) DATED AUGUST 28, 1997


RECOMMENDATION A.J: The Office of the Inspector General rccommende<J thar the
Director. Department of Defense Education Activity; tl1e Director. Defense Finance and
Accounting Service Columbus Cemcr; and the D~or. National Security Agency, establish
pr(M:edurcs to verify that revenues and e:-;penses from reimbursable activity reponed on trial
balances to the Defense Finance and Accounting Service Indianapolis Center equal the amounts
repone<J on the Rcpon on Budget Execution.                                                          Revised

OUSD(C) Comment: Although the recommendalion is generally correct, ir docs not necessarily
apply to revolving fund (i.e., Working Capital Fund) •ctivitics. The recommendation implies
that revenues and expenses from reimbursable activity should be equal to each other. Addition-
ally. the recommendation st.ates that revenue recorded in proprieiary account,; should equal
collections and receivables rcponed on the Rcpon on Budger E11ecution. Working Capital Fund
activities charge stabilized (fixed) reimbursement ra((:s to irs customers. Since the reimburse-
ment rates 111e fixed, it is improbable that revenue amount5 that arc fixed will equal e11pensc
amO\lnts that 111c not fixed. Also, within the Supply Management t»1sincss an:a of the Working
Capillll Fund, proprietary revenues can include payments in the fonn of trade-ins. Since trade-
ins are not a budgetary resource, they arc no1 included in the Rcpon on Budget Execution.

RECOMMENDATION B: The Office of the Inspector General recommended that the USD(C)
clarify guidance on the general ledger account codes that Defense organizations shou Id use for
recording revenues and e11pc11ses from reimbursable activity for all appropriated, revolving, and
tnJ st funds.

OUSD(C) Response: Concur. A revision to the "DoD Financial Management Regulation" is in
process. The revision will contain a matrix that shows the applicability of the various revenue
accounts to appropriated, revolving, and Ilic various trust funds. Chapter 17, Eipenses and
Miscellaneous Items, of Volume 4 will be revised to clarify 1uidance on the use of general
ledger accoum code (Gl..AC) 6500.




                                                                             Attachment




                                              37
Assistant Secretary of Defense (Health Affairs)
Comments

                              Tl-IE ASSISTANT SECRETARY OF DEFENSE'




  •
                                       WASHINGTON. 0. C. JOlCl·IZ00




                                                                          IBV t t 1997



    Ma.1ORAf.'DUM FOR INSPECTOR GENERAL. DEPARTMENT OF DEFENSE
                                  DODIG (b)(6)
                      (ATTENTION:

     SUBJECT: OoDlG Audi! Report on Revenues and E.,;pcnscs from Reimbursable Activity for
                   Other Defense O(gar,izatlons (Projet! No. 7RF-2012)

            This is in response to your memorandum dated August 28. 1997, subject as above. Our
     response 10 the draft report is attached. II you have any quescions, please contact
    1•f•!EMP         .the point of contact for this audit a1 the iRICARE Suppon Office. a :·1·1rm:rr
    1·1·1rm
                                                       ~ot0:7r1~
                                                      Edward D. M.»tin. M.D.
                                                Acting AnisWlt Secrcrary of Dt.fense
     Au.ichment:
     A.5 stated




                                                       38
                        Assistant Secretary of Defense (Health Affairs) Comments




                               DEPARTMENT OF DEFENSE




•
                                 TRICARE SUPPORT OFFICE
                               AUAOAA. COLORADO 80045-6900




                                                   October 20, 1997




MEMORANDUM FOR THE DIRECTOR, BENEFICIARY AND PROVIDER SER VICES

SUBJECT: DoDIG Report on Revenues and Expenses From Reimbursable Activity for Other
         Dd'ensc Organizations (Projec1 No. 7RJl-2012)


        The Resource Man.agemcm Direaorue concun with Finding A and !he DoDIG's
recommcodatioM for corr11ctive action (4.A). Co,m:tive action hN bttn taken and iJ refll!Cted
in the Fillcal Yea.rend 1997 rq,oning Ste 11tacbed rttponsc and September 1997 Consolicwed
Trial 811,mce Report.

       If you have any questio~. pleue contact   1•f /ft"i!PW 11 extcn5io11 number !Ill
                                                   1




                                           Director, Resource Management




                                                 39
    Assistant Secretary of Defense (Health Affairs) Comments




             DODIG REPORT ON "REVENUES AND EXPENSES FROM REIMBURSABLE
             ACTIVTIY FOR OTHER DEFENSE ORGANIZATIONS

             PROJECT NO. 7RF-20l2

             Findini:; A. - Rdiab;lity of RevHuei and E1pense1 on the Statement o(Opuation1

            Page 10 - CiviUan Beallh and Medical Procram.
            Page I 3 - Recommendation1 for Corrective Action, A.4.

                    Procell~ IO record overcharges in an unearned revenue account and rcirobunabh:
            cxpcn.ses io the cost of goods sold account were implemented by the Tricare Support Office,
            Rcsouicc Ma.Jiagement Ditectome, in September 1997. The Fiscal Ycarcnd 1997 Trial Balance
            submitted 10 Defense FioolllCC and Accounting Service Indianapolis Center included these
*           chang~. See attached Consolidated Trial Balance Report for Period Endint 09-30-97, Account
            Number 2311. I and Account Numba' 6500.0. The uneamed revenue (Account 231 l.1) i5 equal
            to the difference io the uncollected reimbuuable debts (Account NUtDbtr 1316. i) iUld the
            reimbursable boo debt ~lowance (Account lJ 19. I). Tbe rai.robunable o.petiSe (Account
            Number 6500.0) plus the bad deb1 cxpclUe (Account Number 6129.1) are equal IO lhe revenue
            (Account Number 5400.0) reported for the Sll!le period.




     *Attachment omitted. Copies will he provided upon request.
                                                                                         _                _J
                                                         40
Defense Information Systems Agency Comments


                              DEFENSE INFORMATION SYSTEMS AGENCY




   •
                                                JOI S, COJlffi10U$l AQl,O
                                              AALNn'ON. Y1AGNol -.zltt




   =~   Inspector General                                                   2B October 1997

        MEMORANDUM FOR INSPECTOR GENERAL, DEPARTMENT OF DEFENSE
                       ATTN: Director, Readiness and Operational Support
        SUBJECT:              Draft Audit Report on Revenues and Expenses
                              From Reimbursable Activity for Other Defense
                              Organizations (Project No. 7RF-2012J
        Refer:ence:           OODIG Report, subject as above, 29 Aug 97

        We reviewed the subject draft report and concur with the finding

        and recommendation addressed to the Agency.                         Our detailed
        management comments are contained at the enclosure.                           The point of
        contact i.s   DISA (b)(6)


        !'HIW!tW
        FOR THC DIRECTOR:



        l Enclosure a/s                                 '1(1..... RICHARD T. RACE
                                                        V         Inspector General




                                    QuaUi, ln/tmnalionfor ti Strong Dtftn1t




                                                     41
Defense information Systems Agency Comments




                 MANAGEMENT CONNEN1'S TO DOOIG ORAl'T AUDIT U:PORT ON
                 REI/ENUZS AND EXPENSES J1lOk lUtDIBURSABLB ACTIVITY ON
                 OTHER DEFENSE ORGANIZATIONS (PROJECT NO, 7RF-2012)



                             Recommend thAt the Director, Defense Finance
         lloo......ndat:ion A2:
         and Accounting Service Indianapolis Center, Customer Support
         Division: the Director, Defense Information Syste~s ll.gency; the
         Director, Defense Logistics Agency; and the Director, Washington
         Head~uarters s~rvices, accour.t for and report reven~es from
         reimbursable activity when th•Y provide goods or services rather
         than when they record obligations.

         Response:   Concur. We concur that action is needed to correct
         the deficiencies noted in the draft report. However, successful
         implementation of these corrections relies upon the Washington
         Headquarters Services' completion of necessary program changes to
         its Allotment Accounting System. Presently, these system changes
         are planned for completion by 30 November 1991. Upon completion
         of the changes, DISA will begin accounting !or and reporting
         revenues from reiml:lursa~le activity when goods and services are
         provided rather than ~h•n obligations are recorded.




                                                                   Enclosure




                                         42
Defense Logistics Agency Con1ments


                                 DEl'ENSE LOGISTICS AGENCY
                                           HEADQUARTERS
                               8725 JOHN J. KINGMAN ROAD. SUITE ,2533
                                  FT. 8£LVOIA. VIRGINIA 22060-6221
                                                                                           ls OCT   1m

      MEMORANDUM FOR ASSISTANT INSPECTOR GENERAL FOR AUDITING
                         DEPARTMENT Of DEFENSE


      SUBJECT: Draft Report, "Rtlleriues and Expenses frorn RelrnbuHablt Activity.for Othi:r
                                 Dtferis1t Orgariuations ", (P1'11Jttt No. 7RF-2012)


             lltis is in response to the August 2S, 1997 requcsL ff you have any qucs1ions. plce.sc
      conrac1 Ms L.aVaeda Coulter, (703) 767-6261.




      Encl
                                                               \•F~
                                                                C'hi · Acting) lntc        I Review




                                 •••11 Roc.,c""9 PooO'•'"   0 ,..,. ,   on   "°"""""' ,_




                                                    43
Defense Logistics Agency Comments




        Subj~ct: RevcnlK"S and Expenses From Reimbursable Activity for Olhcr Defense Organillttions
                    (Proj«t No. ?RF-2012)


        Finding A: Reliability of Rc:ve11uts a11d Eipra,eJ oa the Statement ot'Openlllons
        DFAS-IN 11J1d accounting offices overstated revenues from reimbursable activity by at least
        111111 million    11111million by DFAS-TN and-million by accounting offices) in the
        FY 1996 Statement of Operations for Other Defense Organii.arions, and DFAS-IN overstated
        expenses: from reimbursable activity by8iillion. Also, OFAS-rN overstated the
        Appropriated Capital Used account (a revenue account) by-illion. The overstatements
        occWTed because of the following;

                o DFAS-IN p.:rsonnd did not detemune whether organizations had already reported
        revenues and expenses in other general ledger accounts before adjusting the accounts to equal
        rcv1:nues froni reimbursements shown in lhc Report on Budget Execution. und DFAS-JN made
        o!hcr wisupported ndjus1mcms.

                o Accounting offices submitting fmancial information for incorporation in10 the Other
        Defense Organiwcions' financial statements incorrectly recognized revenues based on
        obligations, did nol review the validity of trial balances submined lo DFAS-JN, or mwe other
        accounting or rcporting errors.

               o DFAS-IN personnel incorrect!)· adjusted the Appropriated Capital Used account for
        reimbur.;ablr ac1ivi1y already included in other revenue accounts. and the Washington
        l·kadquartcrs Services Allotment Accounting System contained programming errors affecting the
        Appropriated Capital Used account.

        As a resuh, the Statement of Opera!ions for Other Defense Organii.a1ions was nol reliable and
        did no! accurately present th.: results of operations for FY J996.

        DLA Cc,mmcou: Concur



        Aclion Officer: Lanier 8. McCaskill, FOXS, 767-7235
        Review/Approval; Jim O'Laughlin/Bil!ic B l a ~ k m
        Coordination: LnVaedaG. Couher, DDAI, 767-          -




        ~'£.I. C!-WlBERUN
          lte.11" Admiral, SC,.1.!t51'il
         Dt:puv,[)ln11ll(Dl"
             rer   29 !!Sr




                                                                                                        _ _I


                                                      44
                                                 Defense Logistics Agency Comments




Subjcd: Revenues and Expenses From Rcimbunablc: Acti,·i1y for Olh.:r Defense Organi:rotions
        (Project No. 7Rf-2012)

Rccommend•tiou A.2.: We recommend that lhe Director, Defense Finnnce and Accounting
Service Indianapolis Center, Customer Support Division; the Director, DefeMe Information
Sysccms Agency; the Dim::tor, Defense Logistics Agency; and the Director, Washington
He.ulguartcr Services, a=unt for and rqio11 revenues from reimbursable activity when tl1cy
provide goods or services ralher than when they record obligations.

DLA Comments:
We Concur with the recommencla1ion that revenues from rcimbu.rsable activity be accoU11ted for
when goods/services are provided. Training has been provided to correct this praclice.

OiJpodlioo:
  Action is considered complete.


Action Officer: Lanier B. McCaskill, FOXS, 767-7235
Review/Approval: Jim O'L.iughlinlBillic B l a c k m a n ~ -
Coordination: LaVaeda G. Coulter, DDAI, 767-62~-    · -..  .>
                                                 •-   -
DLA Appro,_;v:;a~l:~~---:r_7




                                       45
Department of Defense Education Activity
Comments

                                     DEPARTMENT OF DEFENSE




   •
                                       EDUCATION ACTIVITY
                                      4040 NORTI-I FAIRl"AJ( ORIIIE
                                     ARLINGTON. Vt~GINIA 22203•1639



                                                NOV     A f991



     MEMORANDUM FOR DIRECTOR, READINESS AND OPERATIONAL SUPPORT
                                 DlRECT~ERAL,DOD
                                 (AlThl:~

     SUBJECT: Dnft. Audit Rep0rt on Revaiues Uld Expenses From Rdinbursable Activity for
              Other Dtfcll.se Organizations., Project No, TRF-201:?, August 28, 1997


            This is ill reply to your nmoramlum of August 21, 1997, requuting ma.tlagtmcnt

     coraments to the findbJgs and rcc,.,u:mendations ohbe Sllbjccl audit report. The al1aChcd

     f"POIUe by DoDEA fiscal managers, provides concurrence      with the draft report's finding and

     rccommeodatfon. If you have any questions., plea.lie cont.act Mr. George E. Hanby, Auditor,

     DoDEA lnlemal Review and Aud.it Ovusight Of&ce, at 696-9051, extension 2443.




                                                   46
                        Department of Defense Education Activity Comments




         Draft Audit Report on Re,,enues and Expenses from Reimbursable
                     Activity for Other Defense Organizations
                                  Project No. 7RF-2012
                                     August 28, 1997



FjpdiDI: A. Rdiabilky of R,;yaipg and EJpemes op tile Statffllr,pt or Opcntious

lkplU'tlllmt ofDf.ft.GM Eduutioa Activity. Tbe DoDEA's ttial balan« overnaied
revenues from reimbursable activities by 11 H.9 mill.ion. DoDEA persoJlllel did not
review the trail balance submitted to DF AS-IN for FY 1996 and did not eompare
information shown on the trail balance witli the Report on Budget Execution.

At the time of the audit, in April 1997, DoDEA persoMel had not developed procedures
for reconciling un:icd and wieamed revenues from reimbursoncnts shown in the
Wasbinglon Headquamn Service AHotmelll Ac«iunlin& Syrcem with earned and
unearned revenues reported oo the Report on Budget Execution.

Before 'fY 1996, DoDEA did oot use a general ledger accoUl'lting system However,
during FY 1996, Do DEA l:ramfernd, oo a test bas.is, ac<:owuing data maiolaincd in iu
a«owrting records to the Washillgtoo Headquarten Services Allotmtut AccoWlling
System. Washington UeadquartffS StNic.es aa-oUOliDa personnel transfencd the lest dala
trial balance to D1.'AS·TN. Howf'\let, DoDEA personnd did not know tll3! DFAS•TN
would use the da1a to p-epue a financial StaterDl!:flt fur Do DEA. The trial balance v.ith 1he
test da1a iw:orreclly illcluded $139.9 million in rC\lt'fl'Ud &om reimbursemeIII& earned
during prior years.


Mapagaqent RcsMnu At lbe end or FY 1996, and at the request of Defense Finance
and Aceollll1iog Service-~lis (DFAS-IN), DoDEA provided a genenil ledger trial
balance wbicb was • cros.,.walk &om the DoDEA Report on Budget faecution. This data
was accur.ue with respect 10 DoDEA's ~imbursahle revenues and was DoDEA's only
official oppommity to provide dala fur the CbiefFinanc.ial Officer (CFO) reports_
Although tbe eudit ,pe,cijic.alty addresscJ tht eircwMtanees $W'!Ounding DoDEA 's 1.e11
daia being tnn:IIDitted by the Wa.shiogtoo ~quarteu Services Allotment Accounting
System (WAAS) to tht DFAS-TN ceruer, it should be noted that DoDEA 's financial
IDIIDllien were under tbe assumption that the proper blllanc:es were being used !.sed on
the cross-wallc. or data provided by DoDEA.




                                                                                   Attachment
                                                                                         Page    1




                                             47
               Department of Defense Education Activity Comments




Final Report
 Reference




                           Kecotpmmdatju: A.J. We (the DoD Impec1or Oeucral) reQOmme:Jld lhat the Director,
                           DoDEA; the Diroctor, Defense Finance• Accouor.ing Service Columbus Ccoter; and
                           the Dirtttor, National Security AgCDCy, CJlablish procedures 10 verify 1har reveoues and
                           expenses &om reimbursable activity ~porud on trail balancu to DFAS-IN equ.ah the
Revisecl                   acnounu rcporud on the Report on Budget Exeeution.


                           M•m,r;m:,t ComJU.ents- Concur. Effective Ociobcr 22, 1997, fin lhc reporting momh
                           of Septffllber 1997, DoDEA was USll1(l the Washington Headquarters Services Allotment
                           Accounting System (WAAS) daubut tbr all accounting transattlom generated withiD the
                           DoDDS/OoDEI\ optftling environrnenr. At thi5 juncture, lhc: WAAS produce5 11 gmmu
                           ledger trail baJan«, whlch i.s lwd dirccUy to DoDE.A •, ~port on Budget Execulioo.
                           Th.is new process will substaatially reduoe the po1 ecrial for aay mareri.a.l l!U$$Wemeot or
                           reimbursable revenues or eXpmSes. ln addition, DoDEA will review the copy of the trial
                           balance file proVided by Defense Fina.nee and Accounting Strvice-ladianilpolis 10 providt!
                           reasonable usurance thlt the conec;i aceouoting iafurn:iation was u.,ed.




                                                                                                             Attachment
                                                                                                                  Page2




                                                                       48
National Security Agency Comments


                                   NATIONAL SECURITY AGENCY
                               ll"OfllT GEOlltOC G,. Mll:Atll:, .. AfllYl.AND 2075115-GOOO


                                                                       Seriul: coill'-060-97
                                                                       23 Septc~ber 1997




    MEMORANDUM FOR THE DIRECTOR, READINESS AND OPERATIONAL SUPPORT
       DIRECTORATE

    SUBJECT: DoD JG Draft Audit Report on Revenues and Expenses from Reimbursable Activity
             for Other Defense Organizalions - INFORMATION MEMORANDUM




        NS.A has n:vicwcd the subject draf1 reporl daled 211 Ausu~t !997. We concur in
    Recommcndi!.lion A.3. and will be reil.dy to verify that revenues and expenses from reimbursable
    activity reported on the trial balance to the DFAS Indianapolis Center equal the amounts reported
    on the ReporL of Budget E:xecution (1176) 111 the end of the Ciscal year (30 September 1997).

       Responses arc not provided for the other Rcconm1enda1ion.~ us they arc not addressed to this
    Agen~)'.

       Please contact!Hffi             ,
                                  Audit Liaison,            1f~ff@               , if you have any questions or
    need additional information. ( / .


                                  ( ~{~ 1/i.. ~
                                    ..,. ROB:Jf J. LIBERATORE
                                             Comptroller




                                                        49
Washington Headquarters Services Comments


                                    DEPARTMENT OF DEFENSE


                                                                                                 G)
   •
                              WASHINGTON HEADQUARTERS SERVICES                                              '
                                          I 15$ DEFENSE H"ITAG.ON
                                         WASHINGTON, 0C 2030 I· I I 55                                  .

   (Budget & Finance)

                                                                                    October 21, l 997


             MEMORANDUM FOR DEPARTMENT Of DEFENSE INSPECTOR GENERAL
                            FINANCE AND ACCOUNTING DIRECTORATE

             SUBJECT: Audit Report on Revenues and Expenses From Reimbuuab!e Activity for
                      Other Defense Organi7Jltion~ {Projec1 No. 7RF-2012)


                    We concur in the subject draft audit 1cport. As recommended, the WHS
             Allotment Accowiting System was rcprogr.a.mmcd on October 17, 1997, to exclude
             rrimbwS11blc activity for the AJ1J1JOpria1cd Capital U~d (5700) account.

                     As for recommendation A.2, procc:durcJ are being devc)optd and will be
              implemented by Decembtr 31, J997 to ensure that re11~ues for reimbunablc activity are
              recognized when expenses are accrued and a.re not based on obligationll being recorded.

                                                       DODIG (b)(6)



                                                                  ,l
                                                          Dire.:tor




                                                      G


                                                      50
Defense Technical Information Center
Comments


                    OFflCf OF THE U~OEII IECRETAAY OF DEFENSE (ACQI.USfTIOH • TECHNOLOGY}
                                   DEl'BISE TI:CHNICAL. ltFOAIIATION carrtR




  •
                                       1725 JOMN J ll'.INGIWI RD STE~
                                             •
                                          FT UYOIR VA 2.20CM21•


                                                                                l, OC1 llU
     OTIC-R

     SUBJECT:          Audit Report 0n Revenues and txpenses from
                       Reimbursable Activity for Other Defense
                       Organizati0ns (Project No. 7RF-2012)

     TO,               OAIG-AUD
                       Inspector General, Department of Defense
                       400 Army Navy Drive
                       Arlington, VA 22202-2884

     l.    Reference proposed audit report, subject as above, 28 Aug 97.
     z.   The audit finding specific to the Defense Technical
     Infot'lllat1on Center IDTIC), which includes the IAC reimbursable
     program at the Defense Supply Center, Columbus, in footnote 5,
     page 29, states Kthe Center incorrectly recognized revenue based
     on obligations." Partially concur - DTIC recogniicd part of its
     revenue based on expenses. Procedures are now in place to ensure
     that all revenues wlll be recogni~ed based on expenses. These
     procedures are effective 1 Oct 97.
     3. 3uestions may be addressed to                    DODIG (b)(6)

     1•W•Jr!HIIIP
     fOR rHc ADMINISTRATOR:



                                                 4lro1/,
                                                  Director o! Administration
                                                    and Resource Management




                                                    51
Audit Team Members

This report was prepared by the Finance and Accounting Directorate, Office of
the Assistant Inspector General for Auditing, DoD.
FOR OFFICIAL USE ONLY




FOR OFFICIAL USE ONLY