Weaknesses in Management of Clubs and Other Recreational Activities

Published by the Government Accountability Office on 1971-05-07.

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


         WESTRICTFD - Mot to be re.eased outside the Generai
         Aceeo- t.- OftVce excep; o. t;_. banJs of .pecific apreRval
         by t; C ff;ce of Legistative Lraiso#, a ree.ud of which is Wpt
         by the LDstribution Section, Publications Branch, OAS

         Weaknesses In
         Management Of Clubs And
         Other Recreational Activities

         Department of Defense

                        F.e CCpY - OUMP, GENI

                                                            MAY         7, 19 7 1
                  rotiir   .   *   -   CSMAL
                                       Mn    OF Tirl   UNITEO DATEU

B- 148581

Dear Mr. Chairman:

       It yor letter of Januarryr 2, 19D7- you reque.te4 a CarnvprvBen- -
revview- advalu   ation of-the-    m     and maament     of            -    _pr

ated fund activities in the Department of Defense. In response we bm
issued several reports to you on clubs and other recreational actties
at selected installations of the Army, Navy, Marine Cors, and Air
Force around the world and at departmental headquarters. Thi report
summarizes our work at these installations and headquarters offices,
except for work relative to the exchanges and theaters which we re-
ported to you earlier.

      Although the results of our work were discussed with responsible
local officials, they were not discussed with higher officials nor did we
request their formal commnents. Because the report contains suggested
actions which should be taken by the De-artment of Defense to improve
its management of clubs and recreational activities, you may wish to
review these matters with Department of Defense officials.

      We plan no further distribution of this report lutless copies are
specifically requested, and then we shall distribute them only after your
agreement has been obtained.

                                                   Sincerely yours,

                                                   Comptroller General
                                                   of the United States

The Honorable George H. Mahon
Chairman, Committee on Appropriations
House of Representatives

              50TH ANNIVERSARY 1921- 1971
REPORT TO                                   AND OTHER RECREATIONAL ACTIVITIES
COILTTTEE ON APPROPRIATIONS                 Department of Defense B-148581



      At the request of the Chairman, House Committee on Appropriations, the
      General Accounting Office (GAO) has reviewed the management of clubs
      and other recreational activities of the Armed Forces.
      This report is one of a number made on Department of Defense (DOD) non-
      appropriated fund activities at the request of the Chairman. Previ-
      ously GAO reported on the management of military exchanges and theaters
      and on various individual recreational activities.


      Appropriated fund support of recreational activities is ;oosely con-

             --DOD's data on the amount of appropriated ftLa support for recrea-
               tional activities are inadequate. (See p. 7.)
         --Regulations provide that the Government be reimbursed for certain
           services and supplies furnished to a recreational activity by a
           military organization. Billing procedures for such reimbursement
           are inadequate. (See p. 8.)
      Many recreational activities could not operate in their present manner
      without substantial support from appropriated funds. (See p.9.)
      Policies on distribution of nonappropriated funds and other .esources
      are inequitable.
         --Each military department uses a different distribution system.
           Some activities receive a disproportionate share because the
           activities' needs are not considered. (See p. 10.)
         --Assessments made by commands on the earnings of activities
           have not been levied equitably. (See pp. 15 and 16.)
         --Large sums have been allocated to activities without a demonstrated
           need. (See p. 17.)

Tear Sheet
                                                            HAY     7,1971
When nonappropriated funds were obtained at some installations, ques-
tionable construction r        were undertaken, with ano witout re-
 irel  approvals. (See p. 25.)
Although purchasing controls prescribed appear adeqgate, widespread
vilations have occurred.
  --Required approvals have not been obtained; purchasing limitations
    have been circumvented. (See p. 18.)
  --Procurements have been made without competition.   (See p. 18.)
  -- Purchases of consumable supplies have been imprudent; money spent
     for entertainment has exceeded limits set by regulations. (See
     pp. 19 and 20.)
  --Establishment of central purchasing agencies for clubs in some
    geographic areas has not eliminated all major violations. (See
    p. 21.)
Controls over ca and other resources were ineffectively implemented
at most sites revlewed by GA.
  --Responsibilities for custody and recording of assets were not
    divided and assigned properly. (See p. 24.)
  --Concessions operating inoverseas clubs and other activities were
    poorly controlled by host installations and commands. (See p. 25.)
Controls over inventories were unsatisfactory.   (See p. 25.)
The personnel policies of nonappropriated fund activities need to be
  --Military personnel often have inadequate training in managing recrea-
    tion activities. (See p. 27.)
  --Despite international agreement, reserves were not established in
    some overseas clubs and messes for severance and retirement pay of
    employees who were citizens of the host country. (See p. 28.)
  --Controls over personnel and payroll were inadequate at many activi-
    ties. (See p. 29.)
The reporting of financial results of the operation of the activities
has been ineffective.
  --Inadequate financial statements were prepared by the activities and
    were accepted by major commands. (See p. 30.)
  --Little or no corrective action resulted From reports of unsatisfac-
    tory conditions. (See p. 31.)

         Controls were loose on slot machine operations at overseas clubs.
           -- Guidelitnes for control of cash income were inadequate. (See p. 33.)
          -- Cash revenue to the sponsoring clubs was not protected by the use
              of coin meters and other safeguards. (See p. 34.)
          -- In many countries U.S. clubs operated slot machines despite local
              laws prohibiting them. (See p. 33.)
         Improved auditinq procedures were needed.
           --Audits made have not provided the evaluations needed by the activi-
             ties or by management responsible for overseeing them. (See p. 42.)


        GAO has made a number of suggestions for improvements in DOD's manage-
        ment of military clubs and other recreational activities.  (See pp. 9,
        13, 14i 22, 26, 36, and 42.)

  IATTERS FOR CONSIDERATION BY TfE     COMaIUE                                      :
        Since DOD has not had an opportunity to prepare formal comments on this
        report, the Chairman may wish to review itwith DOD officials.
        The Committee may wish to consider directing the military departments
        to establish
             --systems for identifying the costs of appropriated fund support
               given to nonappropriated fund activities;
             --centralized purchasing agencies where appropriate; and
             --a separate centralized audit office, directly under the Secretary
               of each department, financed by nonappropriated funds, to audit
               clubs and other welfare and recreational activities and tL orovide
               them with any audit services they need.

Tear Sheet


DIGEST                                                       1


          PRIATED AND      AP7           :P
                                          R     -am          4
   2      APPROPRIATED FiUN    SUPPORT                       i7
              Conclusl                                  =    9,
              Matters for consideration by thle Co
               mittee                                        9

              Conclusion                                    13

   4      ASSESSMENTS, GRANTS,      AND LOANS               15
              Conclusion                                    17

   5      PURCHASING PRACTICES                              18
              Conclusion                                    22
              Matters for consideration by the Comn
                mittee                                      22

   6      CUSTODY AND CONTROL OVER ASSETS                   24
              Conclusion                                    26

   7      F,17'7"i47 AND USE OF PERSONNEL                   27
                 Conclusion                                 29

          LEVELS OF CO13AND                                 30
              Conclusion                                    32

                                 . MACHINE OPERATIONS       33
              Co1lus itl                                    36

  10      INTERNAL AN EXTFRNAL ALMITS                       37
              Conclusion                                    42
              Matters fc- consideration by the Com-
                mittee                                      43
CHAPTER                                                   Page

  11       SCOPE OF REVIEW                                 44


       I   Letter dated January 26, 1970, to the Comp-
             troller General from the Chairman, Commit-
             tee on Appropriations, House of Represes-
             tatives                                       47

      II   Locations visited                               49


CONUS      Continental United States

DOD        Department of Defense

FICA       Federal Insurance Contribution Act

GAO        General Accounting Office

USAFE      U.S. Air Forces in Europe
   TMCOIEPELISR :M"    'S              WAE         IN Mi         eF CLUGs
 UEPM ToQ                              ANt OTHMER MUMAA.TZV X
CO .IX                                 Department of DfenstB-148581


    At the request of the Chairman, House Committee on Appropriations, the
    General Accounting Office (GAO) has reviewed the ma'-g 'nt tof c!"~li  -
    and other recreational activities of the Armed Forces.:-
    This report is one of a nuier made on Department of Defense (DOD i--
    appropriated fund activities at the request -f theeM
    ously GAO reported on the management of wilitary exchanges and theaters
    and on various individual recreational activities.


    Appropriated fund support of recreational actiyvities is loosely con-
       -- DOD's data on the amount of appropriated fund suppcrt for recraa-
          tional activities are inadequate. (See p. 7.)
       --Regulations provide that the Government be reimbursed for certain
         services and supplies furnished to a recreational activity by a
         military organization. Billing procedures for such reimbursement
         are inadequate. (See p. 8.)
    Many recreational activities could not operate in their present manner
    without substantial support from appropriated funds. (See p.9.)
     Policies on distribution of nonappropriated funds and other resources
    are irnequitble.
       --Each military department uses a different distribution system.
         Some activities receive a disproportionate share because the
         activities' needs are not considered. (See p. 10.)
       --Assessments made by commands on the earnings of activities
         have not been levied equitably. (See pp. 15 and 16.)
       --Large sums have been allocated to activities without a demonstrated
         need. (See p. 17.)
When nonappropriated funds were obtained at some installttloni     ques-
tionable construction projects were idertaken, with         .and re-
quired approvals. (See p. 25.)
Although purchasing controls prescribed appear adequate, widespread
violations have occurred.
  --Required approvals have not been obtained; purchasing limitations
    have been circumvented. (See p. 18.)
  --Procurements liave been made without competition. (See p. 18.)
  --Purchases of consumable supplies have been imprudent; money spent
    for entertainment has exceeded limits set by regulations. (See
    pp. 19 and 20.)
  --Establishment of central purchasing agencies for clubs n s-ome
    geographic areas has not eliminated all major violations. (See
    p. 21.)
Controls over cash and other resources were ineffectively implemented
at most sites reviewed by GAO.
  -- Responsibilities for custody and recording of assets were not
     divided and assigned properly. (See p. 24.)
  --Concessions operating inoverseas clubs and other activities were
    poorly controlled by host installations and commands. (See p. 25.)
Controls over inventories were unsatisfactory.    (See p. 25.)
The personnel policies of nonappropriated fund activities need to be
  --Military personnel often have inadequate training inmanaging recrea-
    tion activities. (See p. 27.)
  --Despite international agreement, reserves were not established in
    some overseas clubs and messes for severance and retirement pay of
    employees who were citizens of the host country. (See p. 28.)
  --Controls over personnel and payroll were inadequate at many activi-
    ties. (See p. 29.)
The reporting of financial results of the operation of the :ctiv'ties
has been ineffective.
  --Inadequate financial statements were prepared by the activities and
    were accepted by major commands. (See p. 30.)
  --Little or no corrective action resulted from reports of unsatisfac-
    tory conditions. (See p. 31.)

     Controls ?,ere loose on slot machine operations at overseas clubs.
       --Guidelines for control of cash income were inadequate.    (See p. 33.)
       --Cash revenue to the sponsoring clubs was not protected by the usa;
         of coin meters and other safeguards. (See p. 34.)
       -- In many countries U.S. clubs operated slot machines despite local
          laws prohibiting them. (See p. 33.)
     Improved auditing procedures were needed.
       --Audits made have not provided the evaluations needed by the activi-
         ties or by management responsible for overseeing them. (See-p. 42.4--


     GAO has made a number of suggestions for improvements in DOD's manage-
     ment of military clubs and other recreational activities. (See pp. 9,
     13, 14, 22, 26, 36, and 42.)


     Since DOD has not had an opportunity to prepare formal comments on this
     report, the Chairman may wish to review itwith DOD officials.
     The Committee may wish to consider directing the military departments
     to establish
       -- systems for identifying the costs of appropriated fund support
          given to nonappropriated fund activities;
       -- centralized purchasing agencies where appropriate; and
       -- a separate centralized audit office, directly under the Secretary
          of each department, financed by nonappropriated funds, to audit
          clubs and other welfare and recreational activities and to provide
          them with any audit services they need.

                         CHAPTER 1



     DOD's policy is to provide a well-rounded morale, wel-
fare, and recreational program for ensuring the mental and
physical well-being of its personnel; to acquire, operate,
and maintain adequate free-time facilities with appropriated
funds; and to supplement these efforts with nonappropriated

     Welfare and recreation activities (such as bowling cen-
ters, hobby shops, community service activities, libraries,
and youth activities) rely heavily upon appropriated fund
support in providing recreation and sports opportunities to
eligible personnel. This support is supplemented mostly by
nonappropriated funds produced by the military exchange and,
to a lesser extent. by income from the activities.

     We observed that stateside welfare and recreational fa-
cilities were used to a much lesser extent than those over-
seas. For example, an average of 6.4 percent of the base
population at Newport Naval Base used special services fa-
cilities daily in contrast to the greater use of such facil-
ities overseas by a majority of those eligible.

     Questionable criteria are applied in granting use of
some recreational facilities. For instance, the golf
course, slot machines, and bingo games at John Hay Consoli-
dated Open Mess were being used primarily by Philippine Na-
tionals, although they could not use similar facilities at
Clark Air Base. The pools and beach houses at Camp Lejeune
were inequitably divided between officers and enlisted per-
sonnel. The recreation fund operated 18 beach houses and
three swimming pools for 2,500 officers and 40,000 enlisted
personnel. All the pools were open to officers but only two
were available to enlisted personnel, and eight of the beach
houses were reserved for officers.

     Officers', noncoramissioned officers', and enlisted men's
clubs and open messes are established, under the authority
of the Secretary of Defense, to serve food and liquor and

entertain a limited, voluntary membership of military per-
sonnel, their dependents, and/or civilian personrel. Al-
though these activities receive some appropriated fund sup-
port, they rely primarily on self-generated revenue.

     Service clubs, operated with appropriated and nonappro-
priated welfare funds, have an open membership and sponsor
social activities but do not serve liquor.

     The Army Nonappropriated Funds Division, under the Dep-)
uty Chief of Staff, Personnel, is responsible for the-ad-
ministration and financial management of the welfare and
recreational activitie                                    -
                        -of--the Army. Resources flow fMrom
the Army's share of dividends declared and paid by the Army:
and Air Force Exchange Service. These dividends are allocated
quarterly by the Army Central Welfare Fund on a per capita
basis to major commands, installations, and units.

     The Army Central Mess Fund was established to lend fi-
nancial support to individual clubs and messes in the con-      X
tinental United States (CONUS) and overseas and is financed :
by the sale of alcoholic-beverage-control decals to clubs
and messes.

    On October 26, 1970, the Army contracted with a private
concern to study the Army nonappropriated fund system, to
devise a management information and decision system for mis-
sion responsibilities and command controls, and to report
the results by May 10, 1971.

     The Special Services Division of the Bureau of Naval
Personnel is responsible for the administration and opera-
tion of Navy nonappropriated fund activities. Thle Division's
Central Recreation Fund receives its revenues from a per-
centage of profits from :he Navy exchange and a percentage
of slot machine income and gross sales from open messes and

     The Air Force Welfare Board, under the Deputy Chief of
Staff, Personnel, establishes overall policies and procedures
for managing nonzkppropriated fund activities. Major commands
are responsible for the operations of these activities. The
Central Welfare Fund, like the Army's, receives a share of
dividends declared by the exchange service, allocates them

ss          roun      d     u-Sri reqimntt                       t   tttw                 Cn                  -

           The       Avca   Serwn f   viestw.i.          sle.r                                      ___           --

     a      othef P         olrnlt                  _=p==
                                                       -ic®I.                                           :-:

         Special services pscrs                   fos'Xrn                   eti- -::=td             .

tnd are. funded with profits of                            base ncha--               n-    i-
     lf geerd
            ~-;;=;        revens.                 ----      =
     Cluands and messes are established-U-      q  .   .....
     -  ant oft the Nartne-Corps :and t    a-__is-
of slot machine incom and gross income on sal-es-Vf-tc:Ot                                                --
beverages.         Athough Marine:Coqpai                                    onty
                                                                             :                                :
tions generally use Navy clubs and mei,-;       m t                                             :
they have established their own activities, such
                                               a ath                                                t
the Newport Naval Base.
                         COPTER 2

     Congressional appropriations for organizations support-
ing recreational activities are poorly controlled by DOD be-
cause the military departments do not maintain accounting
systems that identify the amount of such support    As a re-
suit, a proper accounting for resources and operationss is
not made in the financial statements of the free-time activ-
ities because ren    sare Shown tbe generat-;withoutre-
fleeting the resources applied. In addition, the mili-tary
commands' statements of appropriated funds do not sufficiently
disclose the use of these resources.

     At selected sites we obtained the following estimates
of some of the appropriated fund support provided annually
to these activities, which generated a combined gross non-
appropriated fund revenue of $47.1 million.

        Civilian and military pay          $ 1.5
        Maintenance activities and
          other unbilled support            13.8

     The appropriated fund support shown above is signifi-
cantly understated in that it excludes real estate and a
broad range of such services as management planning, inspect-
ing, auditing, and engineering which were performed for the
recreational activities by Government organizations.

     The Congress has permitted the regulations of the de-
fense components to have the force of law in the area of
nonappropriated fund activities operated within DOD. The
defense components have established through various regula-
tions that the nonappropriated fund activities may receive
almost any type of appropriated fund support considered
necessary within local discretion to provide recreational
facilities to the serviceman.

     The reguJat4 ons state that the Government will be re-
imbursed when certain services and supplies are furnished
by a military organization to a recreational activity. We
noted many instances in which the required reimbursements
had not been made for transportation, food, and other sup-
plies, primarily because the providing military organiza-
tions had rendered no bill to the recreational activity.
For example, in accordance with our suggestion, the billing
procedures at Headquarters, U.S. Army, Vietnam, were re-
viewed by the responsible officials, and the Noncommissioned
Officers'/Enlisted Men's Open Mess System and the;Sigon_
Enlisted Open 1 *ss were billed $1.2 million for previously
unbilled commissary supplies.

     Many recreational activities annually receive a far
greater amount of appropriated fund support than the net
profit earned from sales or allocations received from grants-
or exchange dividends.  Our review covered activities with
a combined appropriated fund support of at least $15.3 mitl-
lion as contrasted to a combined net profit of $11.4 million
from gross revenues of $47.1 million. Thus many recreational
activities would be unable to exist without significant
changes in operations if required to reimburse the Govern-
ment in full for appropriation support.

     A few ideally situated and well-managed messes, hobby
clubs, and other recreational activities appear to report
sufficient earnings to pay their way if required. The re-
mainder would, in our opinion, be required to raise prices,
possibly reduce the scope of service, and make many changes
in management controls to make full reimbursement for Gov-
ernment resources used.


     Savings to the Government were achieved at a few loca-
tions through reductions in per diem fo: persons traveling
on official business and occupying nonappropriated fund bil-
leting facilities. For example, during calendar year 1969
the Chao Phya nonappropriated fund billeting facility in
Bangkok, Thailand, was used for about 94,000 occupancy days
by persons traveling on official business. The savings to
the Government through reduced per diem--even after allowing
for appropriated fund support of the Chao Phya--were about

$472,000 less thaiu the costs that would have been incurred
had these individuals used commercial hotels and received
higher per diem allowances.


     Many clubs and other recreational activities, could not
operate in the present manner without the substantial amount
of appropriated fund support presently being provided. The
military departnernts do not maintain adequate systems to
identify the full amount of appropriated fund support re-
ceived by recreational activities or to ensure the reimburse-
ment for supplies and services cited in regulations.

      The problems in identifying appropriated fund support
as discussed in this report emphasize the need for new pro-
cedures in this area. The military departments should es-
tabli$s systems for identifying the costs of appropriated
fund support provided to nonappropriated fund activities.

     Once such appropriated fund support costs have been
identified, the military departments should evaluate manage-
ment effectiveness, usage, benefits provided, and the need
to provide many of the recreational, morale, and billeting
activities with substantial appropriated fund support.


     As suggested in our earlier reports on nonappropriated
fund activities, the Committee may wish to consider direct-
ing the military departments to establish systems for iden-
tifying the costs of all types of appropriated fund support
given to military nonappropriated fund activities.

                            CHAPTER 3

                   ALLOCATION OF REVENUE

     The nonappropriated fund activities operated by the
defense components are supported, in part, by dividends
from the exchange and motion picture services and by grants
and loans from either the departmental headquarters or ma-
jor command mess and welfare funds. The allocation of these
dividends, the principal source of revenue for some activi-
ties, is discussed in this chapter. Grants and loans are
discussed in chapter 4.

     Each of the military departments uses a different sys-
tem for allocating exchange dividends to benefiting welfare
and recreational activities. Although the activities hav-
ing the greatest needs do not always receive the most re-
sources and others enjoy a disproportionate benefit, re-
taining a portion of the resources in central funds and dis--
tributing them as grants and loans helps to offset the in-
equitable basic allocation. The central funds have re-
tained some of the income and have accumulated large re-
serves, much of which is invested.

     The amounts of funds provided for welfare and recre-
ational activities by exchange dividends during their most
recent fiscal years follow.

              Department                (millions)

             Air Force                     $ 32
             Army                            53
             Navy                            39
             Marine Corps                     6


     The Board of Directors of the Army and Air Force Ex-
change and Motion Picture Services annually declares a div-
idend which is paid quarterly from the profits of the two
activities to the Army and Air Force central welfare funds
on the basis of the respective military personnel strengths.

The amount of the dividend is determined by the Board on
the basis of current operating needs of the two activities.
The Army and Air Force Motion Picture Service has begun an
extensive theater-rebuilding program and has declared a
5-year moratorium on payment of dividends to the two cen-
tral welfare funds.

     Of the $39 million provided by the Navy exchange,
$30 million was transferred by individual exchanges to wel-
fare and recreational activities on the installations and
$9 million was paid to the Bureau of Naval Personnel by the
exchange headquarters.

     The decentralized Marine Corps exchange paid divi-
dends of $6 million directly to recreation funds at Marine
Corps installations.

     The Army's portion of the dividends from the exchange
and motion picture services is sent to the Nonappropriated
Funds Division at Army headquarters for the Army Central-
Welfare Fund. The Division establishes rates, on the basis
of personnel strength and the amount of the expected divi-
dends, for redistribution to major commands, central post
funds, and unit funds. Commands and installations with
greater strengths receive disproportionately lower per
capita shares of the allocations. The current quarterly
rates vary from $1.45 a man for commands with less than
1,000 personnel to $1 a man for those with 25,000 and over.
Similarly central post fund allocations vary from $1 to
$0.55 a man. Unit funds receive $0.50 a man, regardless of
personnel strength. Twice each month commands are allowed
to draw funds from the central fund as needed within the
limits of the allocations but are not to accumulate more
than a mon-h's needs. The commands furnish installations
and units with necessary funds in accordance with the rates
established by headquarters.

     When the dividends from the exchange and motion pic-
ture services are received by the Air Force Welfare Board
for the Central Welfare Fund, an allocation is made to all

major commands on the basis of their average daily person-
nel strengths at the rate of $6 a man a quarter. This
amount is then paid to the major commands during the quar-
ter as needed. Unallocated funds are retained by the Board
for contingencies and operating expenses.

     The commands further distribute funds to installations
as needed but at rates not less than $1.50 a man a quarter
and to isolated units at not less than $2.25 a man a quar-

     For example, the Air Training Command received
$3,262,722 in calendar year 1969 and redistributed
$1,646,765. The balance was retained for loans and grants
to subordinate activities, for fund administration, and for
command recreation and other activities.

     Each installation receives a share of the profits
earned by the local exchange to carry on welfare and recre-
ation activitir          .le larger installations with the
larger exchang      -   .,_re funds for welfare and recre-
ation programs, whereas smaller installations may not gen-
erate sufficient revenue to support an adequate program.

      The central recreation funds obtain revenue from the
exchax.ges through assessments and dividends and attempt to
support arnd equalize installation programs, primarily
through grants and loans,
     Dues are not normally charged by Navy clubs and messes
and are permitted on an exception basis only in commis-
sioned officers' messes. The majority of the clubs and
messes we reviewed in other military departments relied
on dues systems to provide income necessary for the opera-
tion of the clubs. Some clubs reported a profit without
the use of dues, some did not show a profit until dues were
included, and others showed a loss even after dues were in-
     Examples of these variations are the Joint Services
Officers' Open Mess in Tokyo which experienced a loss of
$6,600 on operations even after collecting membership dues
and admission charges of $45,100, the Commissioned Officers'
OfTen Mess at Camp Lejeune which reported a net profit of
$128,343 after collecting $120,302 in membership dues, the
Clark Air Base Airmen's Open Mess which collected dues of
$93,700 and reported a net profit of $26,600, and the First
and Second Class Petty Officers' Open Mess at Newport which
reported a net profit of $22,958 without benefit of dues.

     In some instances dues may be the most expedient and
practical method for a club to regain financial stability.
The Subic Bay Commissioned Officers' Open Mess was having
trouble repaying an expansion loan received from the Cen-
tral Recreation Fund and had not fully funded existing l.a-
bilities for severance and retirement pay for local national
employees.   The mess was overstaffed but, because of lack
of funds for severance pay, could not discharge the excess
employees. We suggested that the commanding officer con-
sider imposing a dues system as a short-time measure to as-
sist the mess in solving its problems. He subsequently in-
formed us that, as . result of our review, he had taken
actions to establish certain controls and that, if these
steps failed to stabilize operations, he would consider
requesting authorization for imposinKr a dues system.

     The Army and Air Force depend upon the commands down
to the installation level to determine their needs for wel-
fare and recreation funds. Funds from all the exchanges
are commingled and distributed through the chain of command
within the constraints of the allocations on the basis of
personnel strength. The responsibility therefore is upon
commands at each level to weigh and judge the needs of each
lower activity.

     This method of allocating exchange profits appears
more closely related to welfare and recreation needs than
the Navy and Marine Corps method. The Navy and Marine Corps
should consider commingling the profits of the individual
exchanges, distributing the profits that are not needed for
exchange operations to the central recreation funds, and
allowing the central funds to redistribute the profits to

the welfare and recreation activities at all levels accord-
ing to their needs.

     The clubs and messes should develop soumd, long-range,
financial plans on the basis of charges for goods and ser-
vices to be provided and should employ capable managers to
carry out those plans rather than rely on dues or grants to
achieve or maintain financial stability.

                          CHAPTER 4


     The funds for grants and loans to clubs, messes, and
other revenue-producing activities are obtained primarily
by assessments. Commands and departmental headquarters
have not levied assessments equitably in all cases and have
permitted some central funds to accumulate large reserves.

     The rates of assessments by departmental headquarters
on the operations of clubs and messes vary from 0.5 to 3 per-
cent of gross sales of food and liquor. Navy central funds
also receive 50 percent of slot machine income and Marine
Corps central funds receive 25 percent. On March 31, 1969,
the assessment imposed by the Army Central Mess Fund was
discontinued and replaced by increasing the cost of decals
which all activities selling liquor must purchase. This ac-
tion has resulted in a substantial increase of decal income
to the central fund.

     Assessments on clubs, messes, and restaurants imposed
by departmental headquarters yielded the following amounts
for the periods shown.

        Service                    Amount     For year ended

Army                          $     148,500   Dec.   31,   1969
Navy                              3,587,300   Dec.   15,   1969
Marine Corps                      1,308,900   Nov.   30,   1969
Air Force                         1,562,000   June   30,   1969
Army and Air Force
  Civilian Welfare Fund              86,000    June 30, 1969

    Total                     $6 692,700

     Inequities have resulted from extraordinary assessments
by lower comrmands. For instance, the U.S. Army, Vietnam,
entered into an agreement whereby its Central Mess Fund, ,e-
ginning July 1, 1969, would provide $50,000 a month--$40,000
from the noncommissioned officers'/enlisted men's account
and $10,000 from the officers' account--to the U.S. Army,
Pacific headquarters, to finance the construction of

officers' and enlisted men's club facilities in a new rest
and relaxation ccnter at Fort DeRussy in Honolulu, Hawaii.
(See p. 26.) This center was ostensibly for rest and rec-
reation of all military members in Vietnam. The agreement
was made with the understanding that, if there were substan-
tial troop reductions in Vietnam during the 24-month period
following the agreement, the agreement would be renegotiated.
Although substantial troop reductions have occurred, the
agreement has not been renegotiated.


     The departmental headquarters and commands make grants
(no repayment required) and loans, primarily for construc-
tion and renovation projects, to local clubs, messes, and
recreation and welfare activities. In some cases grants are
approved for special projects and educational assistance
scholarships. The following t:able shows the amounts of
grants and loans approved by the headquarters of the mili-
tary departments during the periods shown.
 Department            Grants        Loans     For year ended
Army               $  686,900    $ 4,150,500   Dec. 31, 1969
Navy                4,465,500      6,366,400   Dec. 31, 1969
Marine Corps          618,000        827,500   Jan. 31, 1970
Air Force                 -          645,600   June 30, 1969

    Total          $5,770,400    $11,990,000
      7Tne Army and Air Force Civilian Welfare Board approved
$349,300 for grants and loans during its fiscal year which
ended June 30, 1969. We did not identify the amount for
grants and the amount for loans because this determination
is not made by the Board until the funds are distributed and
such distribution had not been made at the ;time of our field-

     Although the financial condition of the receiving ac-
tivity may be considered, the approving activities did not
have clear policies on the conditions governing approval of
a grant in contrast to a loan. Large sums of money were dis-
tributed to clubs and other activities without a demonstrated
basis for need.

     For example, the officers' open mess at Ramstein Air
Base had an outstanding interest-free loan from the U.S. Air
Forces in Europe (USAFE) Mess and Sundry Loan Fund in the
amount of $37,000 on April 30, 1970. At the same time the
mess had $25,000 on deposit with the USAFE Mess and Sundry
Loan Fund, and the advisory council had approved the deposit
of an additional $25,000. The mess, therefore, is receiving
interest from the loan fund on money it had obtained inter-
est free from the fund. USAFE officials contended that (1)
the mess did not need the funds borrowed, (2) the interest
could be considered as a grant to the mess, (3) grants of
funds were authorized, and (4) the amount of the loan also
could have been in the form of a grant. They further indi.-
cated that they did not intend to request that the loan be
liquidated or repaid in advance of schedule.

     Because assessments against operations of clubs, messes,
and recreation activities often are based on the gross rev-
enues or profits, some activities have had difficulties,
even to the extent of suffering losses, in paying the as-
sessments. The assessments should be levied on the bases of
the needs of the levying fund and the ability of the activi-
ties to pay. The bases for the assessments should be re-
viewed, and consideration should be given to assessing net
profits rather than gross sales or income or to converting
to some other basis which would not create a financial hard-
ship for the paying activity.

     Large sums of money have been given to clubs and other
activities without a demonstrated need, and clear policies
have not been applied in approving grants and loans. More
effective policies should be determined by the military com-
ponents to aid in establishing guidelines to be used in ap-
proving grants or loans and in accumulating large central

                         CHAPTER 5

                   PURCHASING PRACTICES

     Purchasing is a key function of nonappropriated fuld
activities in DOD. The nonexchange activities obtain most
of their goods and services in a decentralized fashion us-
ing local merchants and the installation's 3upply system
but have made limited use of Government purchasing activi-
ties and supply sources. Many abuses have developed from
this practice and have continued because of the lack of


     The failure to properly use purchase orders was a sig-
nificant weakness in internal control in the activities we
visited. Frequently, approved purchase orders for goods and
services either were not obtained or were prepared and &p-
proved after receipt or payment.

     In each of the military departments, limitations have
been established on the size of purchases that may be made
without (1) the approval of the installation commander or
(2) the assistance of a purchasing and contracting officer.
Some activities have ignored the limitations and others have
attempted to circumvent them.


     Although nonappropriated fund activities are instru-
mentalities of the Federal Government, they are not subject
to the restrictions imposed upon appropriated fund activi-
ties by the Armed Services Procurement Regulation. Purchas-
ing policies for these activities are outlined in regulations
of the military departments which require fair and equal
consideration of all responsive offers from potential sup-
pliers. We found that competition was often discouraged or
nonexistent in nonappropriated fund purchases.

     Some of the activities we reviewed did not formally
advertise for vendor proposals and, of those that did, some
did not provide sufficient time and information for vendors

to adequately respond. At the Headquarters, 6th Army, for
example, a contract for insurance for substantially all 6th
Army nonappropriated fund activities was awarded aft, a
period of 17 days was allowed for the 10 agents who were
solicited to submit proposals. Under the circumstances,
only the agency which had previously provided the insurance
would have had the necessary information to make an adequate

     Most activities solicited small groups of vendors and
contended that these groups provided what the activities
wanted at low prices, although -rheractivities in the same
area were obtaining similar it ieAfrom other suppliers at
lower prices. This practice I      hows a disregard for reg-
ulations, (2) does not ensure Lrnat the activities concerned
will receive the lowest prices, (3) stifles competition, and
(4) provides an opportunity for rebates to fund custodians
and employees.


     Large amounts of supplies were purchased without regard
for past experience or current needs. For instance, the
July 25, 1970, inventory of the Saigon Enlisted Open Mess
included 108 of 228 line items V itch, on the basis of the
preceding 12 months' issues, ex;eeded 1 year's requirements.
The value of these 108 items was $54,000, or about 50 percent
of the total value of the supplies inventory of $109,000.

     Generally activities are limited in the amount of
money they can spend for entertainment to a percentage of
gross sales or, for the Navy enlisted men's club, to a per.
centage of profits. At many activities the amounts expended
for entertainment exceeded the limits imposed by regulations,
as shown in the examples below.

                                         Air Force
                      Officers'         officers' open          Airmen's
                      open mess                 mess           open mess

Clark Air Base
  actual in
  fiscal year 1969            97                  18%                  19%
Pacific Air Forces
  standard                 15                     15                   15

Deviation                  --6%                   +3%                  +4

                                    Officers'            officers' open
                                    open mess                  mess

Fort Lewis actual in fiscal
  year 1969                               10.9%                 9.3%
Continental Army Command
  standard                                10.0                  8.0

Deviation                                +0.9%                 +1.3%

                                                  First and
                                     Chief            second
                                     petty             class
                                   officers'           petty     Enlisted
                     Officers'      open          officers'       men' s
                     open mess      mess          open mess        club

Rota actual in
  fiscal year 1969      8.7%            5.6%            8.0%          72.6%
Bureau of Naval
  Personnel stan-
  dard                  5.0             5.0             5.0            -
Navy Resale System
  standard                               -                            70.0

Dev'.ation             +3.7%         +0.6%             +3.0%          +2.6%


     Although abuses in purchasing are difficult to elimi-
nate, they can be significantly reduced by centralized pur-
chasing. Of the club and recreation activities we reviewed,
only two had access to a central purchasing agency. There
were notable deficiencies in one such agency whicli was re-
cently established.

     Regulations of the U.S. Army Support Command in
Thailand require that all open messes submit their purchase
orders to the Central Procurement Agency for the purchase of
essential equipment, supplies, food, and liquor; they pro-
hibit the transaction of buIsiness between open messes and
commercial vendors, unless specifically approved by agency
officials. Nevertheless, the Bangkok Officers' Open Mess
located in the Chao Phya Hotel frequently placed orders di-
rectly with commercial vendors and submitted purchase orders
to the Central Procurement Agency for approval after the
goods and services had been received.

     As a result of the widely publicized irregularities in
contracting and purchasing by the Vietnam open messes, a
central purchasing agency recently was established by the
U.S. Army, Vietnam. This agency is responsible for central-
ized purchasing, ordering, and requisitioning for all Mili-
tary Assistance Command, Vietnam, and U.S. Army, Vietnam,
nonappropriated fund activities. We identified several
weaknesses in controls over purchasing at this agency;
namely, inadequate negotiation and administration of con-
tracts, a contract award to an ineligible firm, and permis-
sion for an ineligible contractor to continue performing.

     In an earlier report on the nonappropriated fund ac-
tivities at Lackland Air Force Base, we discussed several
purchasing weaknesses and suggested that the Army and the
Air Force establish a joint, consolidated purchasing office
in the San Antonio, Texas, area. The activities should ben-
efit from (1) broader competition because of consolidated
requirements, (2) quantity discounts, (3) professional pur-
chasing agents (not now available in the messes), and (4)
better quality control over merchandise purchased.


      Although prescribed purchasing controls for the clubs,
messes, and recreation activities appear adequate, wide-
spread violations have occurred, chiefly among the clubs and
messes. The more significant of these are the absence of
required prior approvals of purchases and the failure to
seek competition among vendors. The establishment of cen-
tralized purchasing offices has not completely corrected
these conditions. The difficulty lies in the failure of
supervisor;s and overseers to ensure that re. ations are

     RequiL,:ig the use of, or establishing, centralized pur-
chasing activities--combined with increased supervision in-
cluding audit to ensure that regulations are followed--
should do much to eliminate purchasing irregularities and
to realize the benefits cited above. Relieving the activity
managers of the purchasing burden would permit them to give
greater attention to the operations of the activities. En-
tertainment procurement has been a continuing problem. In
addition to having the problems highlighted in recent public
disclosures alleging the acceptance of bribes and kickbacks
by club and other officials, the clubs have difficulty in
finding and hiring talented performers. We believe that the
obtaining of entertainment should also be accomplished by a
central agency. This would result in benefits to both the
entertainers and the clubs through auditioning and scheduling
and through reducing the number of contacts between club
personnel and entertainers. Package deals also could be
arranged to make well-known performers available to smaller

     Sorme centralized entertainment agencies have been es-
tablished but have not been in operation long enough for us
to give a fair evaluation. Air Force officials in Europe
also are considering establishing a central entertainment
booking agency.


     In view of the irregularities encountered through in-
dependent purchasing by nonappropriated fund activities,

the Committee may wish to consider directing that the mil-
itary services establish and use centralized local purchas-
ing agencies when appropriate.

                         CHAPTER 6


     Each of the military services has prescribed procecdures
in regulations and manuals which are generally adequate for
control over the assets of nonappropriated fund activities.
The prescribed procedures were essentially adhered to by
headquarters activities but were violated by installation

     Cash control, particularly involving slot machines, was
the weakest area of internal control at installation activi-
ties. Control over slot machine operations is discussed in
chapter 9. Some cash procedures could be improved and others
were not being followed. Responsibilities for custody and
recording of assets were not adequately divided; cash regis-
ters and receipts were not always used; concessionaire income
was not controlled; cash was not deposited on time; and inad-
equate procedures were used to estimate expected cash re-
ceipts from bar operations. At two Army clubs in Germany,
the noon cashiers were not ringing up sales on the cash reg-
isters upon receipt but instead were waiting until business
slowed and then were ringing up all receipts at one time.

     Assignment of related duties to the same employee was
a common problem. At the Lackland Noncommissioned Officers'
Open Mess, for instance, the same employee was responsible
for extending credit, receiving cash, posting accounts re-
ceivable, and performing other duties. At other activities,
the responsibility for preparing payrolls and disbursing pay-
roll checks was given to a single employee.

     An important problem in bar operations is the determina-
tion of expected receipts as part of the control over cash
and inventory. To achieve good control, inventories should
be taken when bartenders are changed, or at least daily.
Not all clubs took inventories within these time limits.
Various inventory methods were used. Some methods were ade-
quate, but others were inadequate because the inventories
were commingled or because inventory teams did not indepen-
dently verify and price the stock on hand.
     Concessions operated in the overseas activities were
poorly controlled by officials of the host installations and
major commands. This lack of control was characterized by a
failure to

     -- audit concessionaires' financial statements,
     -- review concessionaires' internal controls,
     -- review concessionaires' pricing structure, and
     -- validate commissions paid to clubs by concessionaires.


     Control over inventory at many activities was poor.
This was evidenced by ineffective controls over the issuance
of merchandise, unrestricted access to warehouses by activity
employees, exposure of inventory to the weather, and poorly
conducted periodic inventories.

     Count techniques and conditions at many of the activi-
ties did not result in reliable inventory figures. For ex-
ample, the accuracy of the counts of inventories in Vietnam
was questionable because supervisors failed to check the
counts made by local national employees and did not recon-
cile variances between recorded balances and the counts.
The physical condition and location of one of the mess ware-
houses did not provide adequate flood protection after rains.


     In some instances when nonappropriated fund resources
became readily obtainable, questionable construction projects
were undertaken, both with and without the approval required
by regulations.

     As an illustration, we question the propriety of the
approved undertaking of two projects at the Newport Naval
Base. A boathouse was repaired, by using nonappropriated
fuids, at a cost amounting to 77 percent of the replacement
value established in 1966. Further, boats had to be trans-
ported overland to where they were to be used. In another
project the chief petty officers' mess expects to construct
a new, larger facility and has received the approval of the
Bureau of Naval Personnel which was given on the basis of a
population estimate that was overstated with the apparent

knowledge of the installation commander. Furthermore the
military strength of the base is being reduced, thus the
need for a facility as large as the one planned by the club
is further diminished.

     The Army has initiated a project to construct a 15-story
high-rise facility for recreational purposes at Fort DeRussy,
Hawaii, at a cost of about $19 million in nonappropriated
funds. The project was submitted in fiscal year 1969 for
consideration under the military construction program, in ac-
cordance with a suggestion in the 1968 House Committee on Ap-
propriations military construction report. The Secretary of
Defense elected to defer it until fiscal year 1970 since the
project had not been properly planned. In March 1969 the
project was approved by the Deputy Assistant Secretary of De-
fense (Properties and Installations) with the stipulation
that it be financed with nonappropriated funds. The project
recently was temporarily suspended pending a revision of
plans to incorporate changes recommended by the President's
Property Review Board.

     Many of the construction projects we examined were not
properly approved. At Clark Air Base the patio area and a
snack bar counter for the officers' open mess were constructed
without proper supporting documentation and authorizations.
A sports facility was constructed by the Rota Special Services
Department upon the verbal request of the station commander;
approval for the construction had not been obtained from the
Bureau of Naval Personnel as required by regulations.


     The deficiencies in controls over cash and other re-
sources described in this chapter represent violations of
procedures in existing manuals and regulations of the mili-
tary departments. Special attention should be given by re-
sponsible officials at all levels to ensure that the pre-
scribed procedures are followed in operating the nonappro-
priated fund activities.

                             CHAPTER 7


     Military personnel with little training or experience
in managing clubs have been assigned to manage, operate,
and maintain command supervision over open messes and clubs.
Payments to these personnel from nonappropriated funds for
overtime work have been poorly controlled. Certain clubs
and messes have not established adequate reserves for re-
tirement and severance pay for local national employees.


     Many of the clubs and messes have assets valued in the
millions of dollars and generate revenues of millions of
dollars annually. Nevertheless, the inadequate training of
other than Navy club and mess management personnel at the
sites we reviewed is evident from the summary below.

                        Total number of     Specialized
                          management      nonappropriated
        SeIrvice           personnel       fund training

     Army                      78                 32%
     Navy                      13                 92
     Air Force                 39                 59
     Marine Corps              17                 3_

         Total                147                 45Z

     A majority of managers of Army and Marine Corps clubs
and other recreation activities we visited possessed little
or no training for their positions. For example, at one
overseas Army installation, the managers of the officers'
open mess and the enlisted men's club had been trained pri-
marily in weapons and combat engineering, respectively, and
had worked exclusively in these areas prior to assignment
as mess managers. The officer in charge of the officers'
club annex at one of the Marine Corps activities we re-
viewed was trained only in auto maintenance and had no back-
ground relating to the management of nonappropriated funds.

     The Army Audit Agency annual report for fiscal year
1970 points out the need to ensure that the responsibility
of custodians and managers for monitoring operations of non-
appropriated fund activities is assigned to those possess-
ing the necessary experience and training.


     Under an agreement between the U.S. Armed Forces and a
Philippine civilian association, severance pay and retire-
ment benefits will be paid to all eligible employees whose
employment is terminated involuntarily and, in the case of
retirement benefits, voluntarily.

     Open messes are required by regulations to fund the
costs of all their nonappropriated fund payroll, including
severance pay and retirement benefits. Nevertheless, the
open messes on U.S. bases in the Philippines had not es-
tablished adequate reserves to fund existing liabilities
for these benefits for Philippi le Nationals employed by the
messes and, as a result, had substantially overstated past

     The amount of funds set aside in a given month had
varied with the profitability of operations for that month.
Such a system resulted in a distortion of reported profits
and a correspondingly erroneous picture of operational effi-
ciency and financial condition.

     For instance, the open messes at Clark Air Base had es-
timated their liability for severance pay and related re-
tirement benefits at about $760,000 on July 1, 1970. By
February 1970 only $30,356 had been reserved for these

     Had the necessary allocations been charged against op-
erations in the past, management probably would have in-
curred an operating deficit and might have been faced with
the need to adjust prices and operations. The need for es-
tablishing reserves for severance pay and retirement bene-
fits has been recognized by command officials.


      The major weakness in internal controls was an inade-
 quate division of timekeeping and payroll duties. Also,
 limitations on the amount of hours that assigned military
 personnel may work overtime and be paid for from nonappro-
 priated funds were being exceeded.

      The payrolls of some of the activities amounted to
 thousands of dollars monthly, yet one club official at
 activity kept track of time, certified time cards, and
 salaries by cash or check. under these conditions, activ-
 ity funds easily could be misappropriated.

     DOD directives st,. -e that officers and civilian per-
sonnel are not to be employed by U.S. Government instrumen-
talities during their off-duty hours but permit the hiring
of enlisted personnel. In many instances the managers
custodians, usually enlisted military personnel assigned
full time to the clubs and messes, work overtime and
ceive additional compensation f oim~ nonappropriated funds,
wVereas other enlisted personnel assigned to appropriated
fund activities do not receive additional compensation
required to work overtime.

      The Federal Insurance Contribution Act (FICA) (26 U.S.C.
 3122) leaves the decision of what constitutes wages of Fed-
eral employees up to the department heads. Service
taries have determined that, under proper delegation
the Secretary of Defense, the amount of remuneration
ceived from nonappropriated fund activities by off-duty
military personnel does not constitute wages for FICA
poses, although wages paid to full-time and part-time
ian employees are considered wages and FICA taxes are
held from their pay.


     The various military components shculd establish poli-
cies and procedures so that civilian personnel with
                                                    the re-
quired training and expertise are assigned to responsible
positions with nonappropriated fund activities.

      The messes should recognize the existing and future
liability for severance pay and retirement benefits by
charges to operations on the basis of a percentage
                                                    of wages
                         CHAPTER 8



      Each of the military components requires that individ-
uals in a custodial capacity provide a periodic accounting
of their activities. In accordance with this policy, fi-
nancial reports on nonappropriated fund operations are for-
warded through the military commands to the headquarters of
each of the departments. Although the frequency of report-
ing apparently is adequate, many of the reports contain in-
£Lccurate and misleading data. Headquarters officials make
little use of financial statements and tend to leave the
management review of them to the lower commands.


     Except in the Marine Corps, inadequate financial state-
ments on nonappropriated fund activities were prepared at
the installation level and were accepted by major commands.

     Army regulations state that financial statements will
be prepared by the individual nonappropriated fund activi-
ities--monthly by open messes and quarterly by welfare ac-
tivities--and transmitted to the appropriate major command.
The major commands then submit interim summary statements
and annual statements to Headquarters, U.S. Army. Some of
the financial statements we reviewed contained significant
inaccuracies that misrepresented the financial position of
the activity. For example, the inaccurate accounting records
of the Saigon Enlisted Open Mess negated any possible use
of the balance sheet as a management tool for highlighting

     The Navy's open messes prepare and transmit monthly
financial statements to the Chief of Naval Personnel. The
appropriate major command and/or area coordinators receive
an infornation copy and make comments regarding the overall
operations to the installation commander and the Chief of
Naval Personnel.

     Reports on welfare and recreational activities are pre-
pared monthly by the Bureau of Naval Personnel Nonappropri-
ated Fund Accounting Unit, Brooklyn, New York, and are sent
to the installation commander for review before being trans-
mitted through channels to the Chief of Naval Personnel.

     The Navy Resale System Office prepares monthly state-
ments for enlisted men's clubs and sends them to the exchange
officer and the installation commander, who are responsible
for the club, and to the Commander of the Naval Supply Sys-
tems Command.

     Monthly financial statements for Air Force activities
are prepared by each installation's fiscal control office.
Because of the Air Force policy of decentralization, the
responsibilities for reviewing and consolidating these
statements were delegated to the major commands. The commands
send consolidated statements to Air Force headquarters.

     In many cases the financial statements prepared by Navy
activities and by Air Force fiscal control offices were sig-
nificantly distorted by the lack of disclosure and by im-
proper accounting. For example, open messes at Clark Air
Base and at the Naval Station, Subic Bay, in the Philippines,
failed to disclose in financial statements, and establish
reserves for, contingent liabilities of $760,000 and $50,000,


     The inaccurate reporting of results of operations, the
failure of some commands to take the necessary corrective
action when unsatisfactory conditions were disclosed, and a
lack of follow-up to ensure that the corrective action was
implemented resulted in an ineffective use of financial

     In the Army, Navy, and Air Force, financial reports are
sent up the pyramid of command and each level reviews, com-
ments, and, in some cases, consolidates the reports before
sending them to the next echelon or headquarters. Recom-
mendations for corrective action within the Army and Navy
are made by major commands and follow-up action is taken

through inspections by inspectors general. In the Air
Force corrective action is recommended by the resident audi-

     At the headquarters, with the exception of the Air
Force headquarters, financial reports from both major com-
mands and installation levels are reviewed and comments are
made. Headquarters, U.S. Air Force, has delegated all re-
sponsibilities to the major commands for the review of non-
appropriated fund activities.


     The reporting of financial results of operations of
many nonappropriated fund activities to the various levels
of command has been deficient, and command reviews and
follow-up have not always been effective. The data contained
in financial statements must be reliable fox the statements
to be an effective tool in monitoring nonappropriated fund
operations. They then can be effective if they are used to
indicate trouble spots, if corrective action is recommended,
and if follow-up action is taken.

                        CHAPTER 9

                   LOOSE CONTROLS OVER


     On the basis of their interpretation of Public Law 906,
81st Congress (15 IU.S.C. 1171 through 1177),the military
departments have prohibited the operation of slot machines
on military installations in the United States and its
territories. Conversely, we have learned during our review
that slo machines are operated (1) on U.S. military bases
in many foreign countries where their use by citizens is
prohibited, (2) where special permission, not obtainable by
citizens, had been obtained, and (3) in a few places where
local laws permit.

     Slot machines have been an important factor in the
generation of income in overseas nonappropriated fund activ-
ities and in some cases have made the difference between a
profit and a loss on overall operations. We obtained the
following data on amusement machine income generated annually
worldwide by the military services.
                                   Annual amount
             Military service        (millions)

               Army                     $27.1
               Navy                       4.3
               Marine Corps               2.1
               Air Force                 26.0


     At the time of our review, the Navy and Marine Corps
had issued detailed departmental guidelines on the acquisi-
tion, operation, and disposal of slot machines, but the
Army and Air Force had delegated this responsibility to
overseas commands. Substantial improvement could be made in
the guidelines from the overseas command and the guidelines
from departmental headquarters.

     Chiefly lacking among the guidelines were established
payout percentages, prescribed limitations on deviations
from the percentages, and a reliable method for determining
whether the actual amount paid out was reasonable when com-
pared with an expected, computed payout.

     Only Navy headquarters had set a minimum payout percent-
age; certain Army and Air Force local cormmands had prescribed
target minimum and maximum payout percentages.   Commanders
or headquarters had not established payout percentages and
prescribed acceptable deviations from the standard percent-
ages. We have been advised by a manufacturer of slot ma-
chines that a maximum deviation of 2 percent from the estab-
lished payout percentage is usually allowed by commercial
gambling casinos in CONUS for fully broken-in and properly
maintained slot machines.


     There were weaknesses in controls over cash income from
slot machines at virtually every overseas installation we
visited. Contributing to the weaknesses were the use of
coin meters that could be reset without appropriate control,
the failure to use coin meter readings in verifying cash
collections, the lack of control over slot machine keys, and
improper coin collection practices.


     The military services generally have supported the use
of slot machines to provide a means of amusement and relaxa-
tion, to provide additional funds for improved facilities
and social programs, to maintain the low prices for food and
beverages in the clubs and messes, and to provide additional
funds for welfare and recreation purposes. The military
services have reaffirmed their positions withini the past
1-1/2 years, although we understand that military components
very recently were considering the removal of slot machines
from norappropriated fund activities. The major reason
given by the military components for retaining slot machines
is that, to make a profit if slot machines were removed,
clubs and messes would have to either increase prices of
food and beverages or reduce service and entertainment.

      However, the financial management of many of the over-
seas messes, particularly those in Vietnam, has been less
than satisfactory and has resulted in poor financial condi-
tion of the messes. Even if slot machines are removed from
a mess, the financial condition of the mess can be main-
tained and perhaps improved through more intensive manage-

     For instance, during our fieldwork at the 1st Air Cav-
alry Division, Bien Hoa, Vietnam, we noted the absence of
slot machines in the messes. Representatives of the base
comptroller and mess officials informed us that the command-
ing general was dissatisfied with the handling of proceeds
from the slot machines and took the positicii that proper
monitoring of the machines would require too great an effort
and therefore directed their removal.

     Mess officials said that, without the income from the
slot machines, they had to concentrate on improving the
management of the messes. They worked at improving meals,
bar service, and entertainment. By doing so, they hoped to
increase patronage and improve the financialpositions of the
messes. Although we were not furnished supporting data,
mess officials stated that the messes showed profits for the
first time. They concluded that slot machines were not nec-
essary to ensure a successful mess operation and the lack
of slot machines encouraged them to run a better mess. They
advised us that they would not recommend reinstallation of
slot machines in their messes.


     Control over slot machine operations at overseas instal-
lations was grossly inadequate chiefly because departmental
guidelines were lacking and local guidelines needed substan-
tial improvement. Further, we have learned that slot ma-
chines are operated in foreign countries where the laws of
the host countries prohibit their use by citizens.

     There was a lack of adequate criteria for evaluating
slot machine operations, and the payout limitations we en-
countered during our review were too liberal to be of much
value to management personnel for controlling income.

     Since completion of ur fieldwork, the military depart-
ments have issued new regulations and directives which, if
strictly adhered to, should do much to strengthen controls
over cash collections from machines and keys to the machines
in which we found many weaknesses.

     The Office of the Secretary of Defense should (1) under-
take a study of slot machine and other amusement machine
operations and their effect on nonappropriated fund activities
and (2) determine whether, in the light of the problems ilen-
tified and the benefits to the activities, the continued use
of such machines to pay out money or prizes is in the best
interest of the members or customers of the activities.

     If the overseas installations are to be allowed to con-
tinue operating slot machines and other amusement machines
which pay out cash prizes, the military departments should

     -- devise an objective method for computing expected
        collections from slot machines on the basis of the
        number of coins played and predicted payouts,

     -- prescribe restrictive limitations on the extent to
        which the actual collections may vary from computed
        collections, and

     -- require that slot machines be operated only in con-
        sonance with the laws of the respective foreign coun-
        tries in which the military installations are located.

                         CHAPTER 10


     Nonappropriated fund activities at military installa-
tions are usually audited by Army internal review staffs,
Navy audit boards, Air Force Auditor General resident audi-
tors, and Marine Corps Field Audit Service staffs. Nonap-
propriated fund activities at departmental headquarters are
audited by central audit agencies or certified public ac-
countants. At all echelons these activities are subject to
audit by central audit agencies, which devote comparatively
little effort to this work, and to reviews and inspections
by inspector general and other investigating staffs. This
total audit effort has proven to be unsatisfactory because
much of the work has not been broad enough or deep enough to
evaluate systems of internal control.


     The Air Force Auditor General periodically audits non-
appropriated funds at the installation level. The Army and
Navy central audit agencies perform such work on an excep-
tion basis, i.e. when requested or as need indicates. The
central audit agencies, also, audit headquarters funds ex-
cept for the Army Central Welfare Fund which is audited by
a certified public accountant.

     The Marine Corps, on the other hand, has established the
Marine Corps Field Audit Service which audits only nonappro-
priated funds but excludes exchanges. The number of persorn-
nel assigned to the Marine Corps Field Audit Service for
fiscal years 1967, 1968, and 1969 were 136, 132, and 145, re-
spectively. The other central audit agencies spent very
little effort in auditing nonappropriated funds as shown in
the following table.

                                Man-years              on
                                     Nonappro-      nonappro-
                                      priated        priated
                            Total      funds          funds

U.S. Air Force Auditor
    Fiscal year 1967        807.0         52.4         6.5
    Fiscal year 1968        787.0         37.7         4.8
    Fiscal year 1969        724.3         25.0         3.4
U.S. Army Audit Agency:
    Fiscal year 1967        571.5          5.9         1.0
    Fiscal year 1968        583.7          3.9          .7
    Fiscal year 1969        535.7          4.3          .8
U.S. Naval Audit Ser-
  vice (note a):
    Fiscal year 1967          -            -           1.3
    Fiscal year 1968                                    .7
    Fiscal year 1969                -                  1.6

aMan-year information not available.    Percentages provided
 by U.S. Naval Audit Service.

     The Army and Air Force jointly audit the Army and Air
Force Civilian Welfare Board and its civilian restaurants.
The governing joint regulation provides that the Army an-
nually audit restaurants located on Army installations but
the Air Force left the frequency of audits of Air Force
restaurants to the resident auditor. As a result the Army
was auditing its restaurants annually but the frequency of
Air Force restaurants audits averaged 27.8 months.


     The auditor general's policy is to concentrate audits
on the bulk of Air Force resources although he recognizes
the morale effect of well-managed nonappropriated funds.
His resident auditors are assigned to most major Air Force
installations and are responsible for allocating their own
audit efforts.

     Because of the auditor general's emphasis on auditing
the application of greater resources (appropriated funds),

the headquarters audits, althea gh performed annually, did
not include sufficient tests of internal controls and most
of the nonappropriated fund activities at Air Force installa-
tions we visited had not been audited in 2 years.

      On April 29, 1970, the auditor general issued a report
on a special audit of the management of open messes under-
taken in November 1969 at the direction of the Air Force
comptroller. The audit, covering 138 open messes at 116 in-
stallations, appears to have been competently performed.
The deficiencies found in this audit are similar to those
we found during our review. The emphasis in the 31 recomn-
mendations made to Air Force headquarters was on improvement
of open mess directives and the quality of the mess manage-

     At the request of the Secretary of the Army, the U.S.
Army Audit Agency conducted, during the period October 1969
to March 1970, a worldwide survey of the various means of
auditing Army clubs and messes. A substantial portion of
this survey was devoted to the audit of 32 officers' and
noncommissioned officers' open messes in order to evaluate
the effectiveness and efficiency of their operations. The
agency concluded that the irregularities they found were not
the result of inadequate audit coverage in the past, but
were the result of deficient open mess management coupled
with inadequate command and staff supervision.
     The agency normally audits nonappropriated funds only
at installations in Europe, the Army Central Mess Fund, and
the Army and Air Force Civilian Welfare Board. On the bases
of the system of internal control, reports, and working pa-
pers we examined, the agency's reviews appeared appropriate
and competently performed.

     In response to a DOD instruction dated November 3, 1970,
regarding audits of nonappropriated funds (see p. 42), the
Army Audit Agency has undertaken the audit of 60 selected
clubs and messes worldwide. Tlie estimated completion date
for this undertaking is June 30, 1971. This increased work
load cannot be met effectively without an increase in staff-
ing. The agency anticipates problems in obtaining sufficient

capable staff members, either U.S. citizens or local na-
tionals, to satisfactorily carry out this assignment, par-
ticularly in Germany where many of the clubs are located.
Whatever alternatives are applied, the agency believes thav
this undertaking will appreciably decrease audits of appro-
priated funds.


     Air Force fiscal control offices at most installations
daily monitor nonappropriated fund activities and conduct
periodic reviews of their internal controls and operations.
These reviews were not comprehensive and follow-up action
was weak. At Lackland the fiscal control off'ce did not
spend sufficient time in reviewing activities and did not
adequately document the nature or scope of its work.

     Army nonappropriated fund activities are periodically
reviewed primarily by internal review staffs. These inter-
nal review staffs devote inadequate attention to nonappro-
priated funds. For instance, the internal review staff at
Fort Lewis had assigned only one man to audit such activities
at the fort and its satellite installations. Consequently,
the reviewer spent very little time at some activities and
did not visit the satellites.

     In Vietnam the internal review division auditors lacked
qualified personnel and adequate time to perform reviews.
Furthermore agencies failed to adequately respond to recom-
mendations made in the division reports.

     Navy nonappropriated fund activities are audited quar-
terly by boards appointed by the installation commander.
Our review of the working papers and reports of these boards,
and our discussion with board members indicated that the
limited scope of these audits did not provide an adequate
basis for reviewing the operations and resources of nonappro-
priated fund activities. The boards'efforts were unsatisfac-
tory because board assignments were additional rather than
primary duties, too few persons were assigned to some of the
boards, and many of those assigned did not have accounting
or auditing backgrounds. These deficiencies have resulted
in the boards' consistent inability to effectively assist
mess management.


     On October 17, 1969, a DOD memorandum was issued which
required that, in general, all clubs and messes be audited
annually by public accountants. No actions were taken in the
field to comply with this memorandum.

     On November 3, 1970, a DOD instruction was issued which
requires that all clubs and messes be audited annually on
either an individual or system basis and that at least 25 per-
cent of the clubs and messes be audited by public accountants,
the cost of which is to be borne by the audited activity.
The remainder are to be audited by military components.

     Of the nonappropriated fund activities we reviewed (ex-
cluding the exchange and motion picture services), only the
Army Central Welfare Fund had been audited by a public accoun-
tant. We reviewed the accountant's working papers and found
that the audit work was fairly comprehensive and that appro-
priate tests had been made. Nevertheless we believe that the
agreements with fund management for work by a certified pub-
lic accountant gave insufficient emphasis to internal con-
trols. Although the fund receives a financial statement cer-
tification, it does not receive in-depth evaluation of man-
agement policies and controls. The brief letters commenting
on internal controls, provided along with certified state-
ments, generally included only a few sentences on the very
broad and complex procedures used to implement management


     The audits performed by the internal review staffs, by
the central audit agencies, and by the certified public ac-
countant have not provided the evaluations needed by the non-
appropriated fund activities and management responsible for
overseeing them. We suggest that a separate office be estab-
lished directly under the Secretary of each military depart-
ment for the purpose of auditing the clubs and other recre-
ational activities at headquarters and at field locations.
These offices should be adequately staffed with competent au-
ditors who meet professional standards and should be supported
with nonappropriated funds contributed by the central funds.
Thus, the individual activities would be relieved of the fi-
nancial burden of localized audit effort, and central audit
agencies which are supported with appropriated funds could
concentrate on auditing activities using appropriated funds.


     In order that the military departments may provide the
audit services needed by officials responsible for nonappro-
priated fund activities, the Committee may wish to consider
directing that they establish directly under each Secretary
separate centralized audit offices financed by nonappropri-
ated funds, that would conduct financial and management au-
dits of the clubs, messes, and welfare and recreational ac-
tivities of the military departments.

                        CHAPTER 11

                      SCOPE OF REVIEW

      The purpose of our review was to evaluate systems of
internal control and internal audit and identify management
procedures for controlling appropriated fund support and
nonappropriated fund support used by morale, welfare, and
recreational activities of the Department of Defense. Al-
though we reviewed the management of many recreational ac-
tiv!.ties including those which produced revenues, we con-
cenltrated our efforts on military enlisted and officer clubs
and open messes at the installation level.

     During the period January 1970 to August 1970, we ex-
amined accounting and administrative records, analyzed fi-
nancial reports, reviewed audit reports and applicable reg-
ulations and tested internal controls including cash and
inventory tests at headquarters of the military components
and various commands and at selected installations. (See
app. II.) We also reviewed and evaluated the work of in-
ternal auditors located stateside and overseas.


                                                                                                  APPENDIX I

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                                                           rFYFTyV           -.- HICLAH   CALIF          AL.STAFiF DIRECTOR
                                                                                                   CLEM AND
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                 , VA.
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                     r.~l~Y                                                                                      iT.
FA(   IL EVAL. OLO.                                                                                              on

                            Honorable F/mer B. Staats
                            Comptroller General of the United States
                            General Accounting Office
                            Washington, D. C. 20548

                            Dear Mr. Staats:

                                 The Committee is concerned with the management and
                            operation of non-appropriated fund activities operated by the
                            Department of Defense. In reporting the Department of
                            Defense and Military Construction Appropriation Bills for
                            1970, the Committee voiced its concern with the policies and
                            practices of the military services for the reporting and
                            use of non-appropriated funds. The Committee is also interested
                            in the support furnished non-appropriated fund activities from
                            appropriated funds and in whether these activities are being
                            properly managed to insure that there is no waste or other
                            inappropriate use of such funds.

                                 Accordingly, the Committee requests that the General
                            Accounting Office make a comprehensive review and evaluation
                            of the operation and ranagement of non-appropriated fund
                            activities. The review should include an investigation of the
                            services' operating practices, procedures and management

                                 The Committee would appreciate a complete report as soon
                            as possible. However, in view of the various types of non-
                            appropriated activities and the extensive operations of the
                            larger ones, individual reports may be submitted as the work

on each type of activity selected is completed.

      The review should include, but not necessarily be limited

      1. The extent to which various types of non-appropriated
         fund activities rely on support from appropriated
         funds, including such areas as personnel, facilities,
         transportation, and supply. The information obtained
         should be used as the basis for further detailed
         studies into selected areas to determine whether
         such support is necessary and should be more
         closely delineated in budget requests.

      2. The procedures, guidelines, and controls established
         by each of the military services and the Department
         of Defense to insure that the collection of funds
         from various non-appropriated fund activities and
         the reallocation of these funds arc in the best
         interest of the military personnel involved.

      3.   The adequacy of procurement practices and policies
           for the acquisition of facilities, materials, goods,
           and services.

      4. The custody and control of all assets including
         facilities .

      5.   The control of the sale, donation, awar4, or other
           distribution of materials, goods, services, assistance,
           or other property acquired with non-appropriated

      6. The reporting of financial results 0 operations of
         non-appropriated fund activities to various levels
         of command in each of the military departments.

                                          Si   rely,

                                                APPENDIX II



   Headquarters, Washington, D.C.

   Headquarters, Air Training Command,
     Randolph Air Force Base, Texas:
       Lackland Air Force Base, Texas

   Military Personnel Center,
     Randolph Air Force Base, Texas

   Headquartels, U.S. Air   Forces in Europe,
     Wiesbaden, Germany:
       Ramstein Air Base,   Germany
       U.S. Air Forces in   Europe Class VI Fund, Mainz-
         Kastel, Germany,   and selected activities

    Headquarters, Pacific Air Forces, Hawaii:
        Clark Air Base, Philippines
        John Hay Air Base, Philippines


    Headquarters, Washington, D.C.

    Headquarters, 6th U.S. Army,
      Presidio of San Francisco, California:
        Fort Lewis, Washington

    Headquarters, U.S. Army, Europe, Heidelberg, Germany:
        U.S. Army, Europe Class VI Agency, Heidelberg,
          Germany and selected activities
        Selected subcommands and activities

    U.S. Army Special Services Agency, Munich, Germany

    Armed Forces Recreation Center, Garmisch, Germany



    Headquarters, U.S. Army, Pacific, Fort Shafter, Hawaii:
        U.S. Army, Ryukyu Islands/Fort Buckner, Okinawa
        Sanno Hotel, Tokyo, Japan
        Chao Phya Hotel, Bangkok, Thailand
        Headquarters, U.S. Army, Hawaii
        Headquarters, U.S. Army, Vietnam, and selected activ-


    Headquarters, Washington, D.C.

    Headquarters, U.S. Marine Corps, Washington, D.C.

    U.S. Naval Station, Newport, Rhode Island

    U.S. Naval Station, Rota, Spain

    U.S. Naval Station, Subic Bay, Philippines

    U.S. Marine Corps Base, Camp Lejeune, North Carolina


    Army and Air Force Civilian Welfare Fund, Washington, D C.

    Stars and Stripes, Darmstadt, Germany

                                                  U.S. GAO Wash., D.C.