oversight

Need for More Effective Audits and Examinations of Military Pay

Published by the Government Accountability Office on 1971-09-20.

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

                             Illl~ll~IIllll\lilllll~lll1
                                    LM095517




Need For More Effective Audits And
Exam inations Of Military Pay           8-125037




Department   of the Wavy




UNITED STATES
GENERAL ACCOUNTING         OFFICE
                                     UNITED STATESGENERALACCOUNTP~G
                                                                  OFFICE
                                                   WASHINGTON,    D.C.   20548


DEFENSE   DIVISION




                     B- 125037



                                                         c


                     Dear      Mr.    Secretary:         ’

                           This is our             report    on the need for more         effective       audits
           I         and examinations              of military    pay in the Navy.                    !

                               Our     findings,   conclusions     and recommendations                are sum-
                     marized         in the digest.

                              This report     is subject to the provisions      of section    236
                     of the Legislative       Reorganization      Act of 1970. We will ap-
                     preciate     receiving     copies of the statements     you furnish    the
                     specified     committees       in accordance    with these provisions.

                               Copies of this report  are being sent to the Director,
                     Office     of Management    and Budget, and to the Secretary     of the
                     Navy.

                                                                  Sincerely      yours,




                                                                  Director,      Defense      Division

                     The Honor able
                     The Secretary  of Defense




                                             5QfH ANNIVERSARY 1921-1971
    GEliERAL ACCOlhVTIfG OFFICE                                   NEED FOR MORE EFFECTIVE AUDITS
    REPORT TO THE SECRETARY OF DEFENSE                            ANDEXAMINATIONS  OF MILITARY PAY
                                                                  Department    of the Navy B-125037


    DIGEST
    _-----


    WHY THE REVIEW WAS M4DE

          The Navy's military       pay system is     unusually    complex and error prone.            Each
          year thousands of      servicemen    are   overpaid    or underpaid.       In fiscal years
          1966 through 1970,      Navy examiners      found over a quarter        of a million      errors
          totaling  more than     $16 million.       Tests by the General Accounting           Office
          {GAO) in the same      period revealed      additional    errors   totaling     $1.8 million.
          Erroneous payments      and other pay      system deficiencies       have been the subject
          of many GAO reports.

          Concerned that errors       continued    at a high       rate,   GAO posed and sought       answers
          to these questions.

             --What contribution    was being made by Navy auditors  and examiners                   to
                keep erroneous   payments to a minimum and to improve the quality                    of dis-
                bursing?

             --How well   did   the Navy manage its       audit     and examination    activities?
                                                                      i- _

    FINDINGS AND CONCLUSIONS

          Under the Assistant         Secretary     of the Navy (Financial       Management)--who       also
          is the Comptroller        of the Navy--two       groups are responsible         for pay and al-
          lowance audits--the         Naval Audit Service and administrative              examiners.      The
I
          Audit Service is responsible            for making all internal        audits,     independently
          reviewing     operations,     reporting     problems,   and recommending improvements.
          Administrative       examiners also have a vital         role--checking        individual pay
          and allowance      transactions       to ensure that they are proper.             (See pp. 5 and 6.)

          Although     the Audit Service   is responsible   for evaluating    the operation     of
          the pay system and the work of the administrative          examiners,   it has not been
          instrumental     in effecting   much-needed improvements     in these areas.      Until
          recently     the Audit Service had not done sufficient      work in either     area to
          be able to recommend changes or other actions         for the consideration       of the
          Navy Comptroller      and other management officials.      (See p. 25.)

          The Navy Comptroller      has not provided   sufficient      resources and direction      to
          make the administrative      examination   an effective      management tool.     Operating
          with few examiners,     who are able to audit only a small portion           of the $5 bil-
          lion spent annually     for pay and allowances,       management has allowed many erro-
          neous payments to go undetected        each year.      Recent budget and personnel       cuts



                                                                               SEPT.ZOJ971
     Tear Sheet
                                                                                                  1
                                                                                                            I

    indicate    that this condition   may get worse.     Moreover, management has not                       1
    effectively     guided the examiners,    since their  work is not well coordinated                      I
                                                                                                            I
    and since certain      basic examination    methods are not applied uniformly.
    (See p. 7.)                                                                                             I
                                                                                                            I
    Examiners do not use statistical-sampling       techniques.      Usually   they con-                    I
    centrate  their   work in areas where there are known or suspected high error                           i
    rates.   This approach    does not provide Navy-wide error data nor tell          manage-               ,
    ment how well the pay system is working.        This searching      for errors  does                    I
    disclose  incorrect    payments but does little    to correct    the conditions    which                1
    caused the errors.      Consequently  abundant errors    continue     to be made.    (See               I
    pp. 15, 16 and 17.)                                                                                     I
                                                                                                            I

    Confronted    with insufficient  data and limited   personnel   to effect    needed                     1
    improvements,     management hopes that the Joint Uniform Military        Pay System                    ,
    (JUMPS), a computerized system under development,        will reduce errors     and                     1
    solve many management problems.       Unfortunately  JUMPSis far behind schedule                        ,
    and is not expected to be implemented before 1974. (See pp. 15 and 21.)                                 I
                                                                                                            I

RECOMMENDATIONSOR SUGGK!?TIOPJS                                                                                 I
                                                                                                                I
                                                                                                                I
    To improve      the quality and management of Navy audits                 and examinations,       GAO       I
    recommends      that the Secretary of the Navy:                                                             I
                                                                                                                I
                                                                                                                I
       --Establish       staffing    criteria   and provide     the resources   needed to make                  1
          administrative         examinations   more effective.       (See  p. 14.)                             I

       --Require    revision    of the administrative    examination   handbook           to provide            I
          for coordination      of effort   among examination   groups and for            improved              I
          examination     methods.     (See p. 14.)

       --Require  administrative          examiners       to use statistical-sampling      techniques.          1
          (See p. 23.)                                                                                          I

       --Require   installation   personnel responsible    for maintaining      these records                   I
          to review unexamined records and to correct        remaining   errors    when sta-                    I
          tistical   sampling discloses   high error rates.     (See p. 23.)                                    I
                                                                                                                I
                                                                                                                I
       --Require     the Military  Pay Staff to increase its efforts    to identify                   and           ;
          correct    causes of errors and, as needed, to provide     the additional                   re-           ,
          sources    to accomplish this.    (See p. 24.)                                                            I
                                                                                                                    I




                                                      2
I   .




                                 Contents
                                                                        Page

        DIGEST                                                            1

        CHAF'TER

          1        INTRODUCTION                                           3
                       Responsibility     for management of the
                         military     pay system                          5
                            Director,    Naval Audit Service (NAS)        5
                            Commander, Navy Accounting and Fi-
                               nance Center (NAFC)                        5
                            Director,    Military     Pay System          6
                       Role of internal       auditors   and adminis-
                         trative    examiners                             6

           2       NEED FOR IMPROVEDMANAGEMENT       OF ADMINISTRA-
                   TIVE EXAMINATIONS                                      7
                       Required examinations      not made                7
                       Lack of coordination      among examination
                         groups                                          12
                       Basic examination methods not uniformly
                         applied                                         12
                            Payroll verifications                        13
                            Comparison of pay and travel data            13
                       Conclusions                                       13
                       Recommendations                                   14

           3       BETTER DATA AND MOREMANAGEMENT        EFFORT
                   NEEDEDTO IMPROVEPAY SYSTEM                            15
                       Accomplishments and shortcomings of ad-
                         ministrative    examinations                    15
                           Many errors identified                        16
                           Assistance to disbursing       officers       16
                           Use of selective     sampling                 17
                       Need for statistical     sampling                 19
                       Need to correct basic causes of errors            20
                       Conclusions                                       23
                       Recommendations                                   23

           4       LIMITED WOREDC%REBY NAVAL AUDIT SERVICE               25
                        Conclusions                                      27
CHAPTER                                                          Page
  5        SCOPEOF REVIEW                                         28

APPENDIX

  I        List of selected GAO reports           to the Con-
              gress dealing with military          pay and al-
              lowance errors                                      31

                             ABBREVIATIONS

GAO        General Accounting        Office

JUMPS      Joint   Uniform Military       Pay System

NAFC       Navy Accounting     and Finance       Center

NAS        Naval Audit     Service

NFC        Navy Finance     Center

NRFC       Navy Regional     Finance    Center
GhERAL ACCOUNTING OFFICE                                     !JEED FOR MORE EFFECTIVE AUDITS
REPORT TO THE SECRETARY OF DEFENSE                           AND EXAMINATIONS OF MILITARY PAY
                                                             Department of the !:avy B-125037


DIGEST
__----

WHY THE REVIEW WAS MADE

    The Navy's military        pay system is     unusually    complex and error prone.            Each
    year thousands of       servicemen    are   overpaid    or underpaid.       In fiscal    years
    1966 through 1970,       Navy examiners      found over a quarter        of a million      errors
    totaling  more than      $16 million.       Tests by the General Accounting           Office
    (GAO) in the same       period revealed      additional    errors   totaling     $1.8 million.
    Erroneous payments       and other pay      system deficiencies       have been the subject
    of many GAO reports.

     Concerned that errors       continued    at a high       rate,   GAO posed and sought       answers
     to these questions.

         --What contribution    was being made by Navy auditors  and examiners                  to
            keep erroneous   payments to a minimum and to improve the quality                   of dis-
            bursing?

         --How well   did the Navy manage its        audit     and examination    activities?


FINDINGS AND CONCLUSIONS

     Under the Assistant        Secretary      of the Navy (Financial       Management)--who        also
     is the Comptroller        of the Navy--two       groups are responsible          for pay and al-
     lowance audits--the        Naval Audit Service and administrative                examiners.      The
     Audit Service is responsible            for making all internal        audits,      independently
     reviewing     operations,     reporting     problems,   and recommending improvements.
     Administrative       examiners also have a vital         role--checking        individual    pay
     and allowance      transactions       to ensure that they are proper.              (See pp. 5 and 6.)

     Although the Audit Service is responsible         for evaluating    the operation     of
     the pay system and the work of the administrative          examiners,   it has not been
     instrumental     in effecting   much-needed improvements    in these areas.       Until
     recently     the Audit Service had not done sufficient      work in either     area to
     be able to recommend changes or other actions         for the consideration       of the
     Navy Comptroller      and other management officials.      (See pa 25.)

     The Navy Comptroller      has not provided   sufficient     resources and direction      to
     make the administrative      examination   an effective     management tool.     Operating
     with few examiners,     who are able to audit only a small portion          of the $5 bil-
     lion spent annually     for pay and allowances,       management has allowed many erro-
     neous payments to go undetected        each year.     Recent budget and personnel       cuts
                                                                                               ,

    indicate    that this condition   may get worse.     Moreover, management has not                *
    effectively     guided the examiners,    since their work is not well coordinated
    and since certain      basic examination    methods are not applied uniformly.
    (See p. 7.)

    Examiners do not use statistical-sampling       techniques.      Usually they con-
    centrate  their    work in areas where there are known or suspected high error
    rates.   This approach does not provide Navy-wide error data nor tell             manage-
    ment how well the pay system is working.        This searching      for errors  does
    disclose  incorrect    payments but does little    to correct    the conditions    which
    caused the errors.      Consequently  abundant errors    continue     to be made.   (See
    pp. 15, 16 and 17.)

    Confronted    with insufficient  data and limited   personnel      to effect    needed
    improvements,     management hopes that the Joint Uniform Military           Pay System
    (JUMPS), a computerized system under development,        will    reduce errors     and
    solve many management problems.       Unfortunately  JUMPSis far behind schedule
    and is not expected to be implemented before 1974.            (See pp. 15 and 21.)


RECOMMENDATIONSOR SUGGESTIOW
    To improve     the quality and management of Navy audits             and examinations,    GAO
    recommends     that the Secretary of the Navy:

      --Establish       staffing    criteria   and provide     the resources  needed to make
         administrative         examinations   more effective.       (See p. 14.)

      --Require    revision    of the administrative   examination   handbook         to provide
         for coordination      of effort  among examination   groups and for          improved
         examination     methods.    (See p. 14.)

      --Require  administrative          examiners   to use statistical-sampling       techniques.
         (See p. 23.)

      --Require   installation   personnel responsible    for maintaining     these records
         to review unexamined records and to correct        remaining   errors when sta-
         tistical   sampling discloses   high error rates.     (See p. 23.)

      --Require     the Military  Pay Staff to increase its efforts    to identify            and
         correct    causes of errors and, as needed, to provide     the additional            re-
         sources    to accomplish this.    (See p. 24.)
                               CHAPTER1

                            INTRODUCTION

      The Navy's present pay system, established          in 1944,
provides pay and other allowances to over 600,000 Favy mem-
bers and their dependents,         Annually this involves many mil-
lions of payments by over 600 disbursing         officers   on ships
and at shore installations        in the United States and over-
seas.   Expenditures    in fiscal    year 1970 totaied    $5 billion,
about one fourth of the Navy's total budget.

       Because of the continuing      introduction     of new entitle-
ments, the Navy's pay system has become increasingly             complex.
In addition   to receiving   basic pay, servicemen are entitled
to receive numerous allowances that depend on marital             status,
number of dependents, length of service,           types of jobs,
availability    of 'housing, and other circumstances.         These
have resulted    in many regulations,       legal decisions,    manuals,
and forms, which are difficult        to interpret     and apply when
making payments.

        The complex system presents an imposing challenge to
management. As could be expected, many incorrect               payments
are made. Reviewing only a small portion of the payments,
Navy administrative       examiners detected over a quarter of a
million    errors totaling      $16 million    in fiscal  years 1966
through 1970. The following          graph shows that the examiners
have consistently      identified    tens of thousands of errors
each year which have increased in value from $2.2 million               in
fiscal year 1966 to $4 million           in fiscal   year 1970.
                              ERRORS     FOUND     BY ADMINISTRATIVE                            EXAMINERS

NUMBER                                                                                                        DOLLAR
                                                                                                               VALUE
ERORO’RS                                                                                                    (MILLIONS)
90,000




                                                                             LEFT HAND
                                                                             SIDE SCALE




                                                                                 \




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                                 SlDE SCALE

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                         19 66                IS                      19 68               19c
                                                     FISCAL                   YEARS
        Our tests during the same period revealed 13,000 addi-
tional errors totaling     $1.8 million.    Over the years we have
identified     many pay and allowance errors and problems, some
of which have been subjects of reports to the Congress.        A
partial    list of these reports is included as the appendix.

RESPONSIBILITY FOR MANAGEMENT
OF THE MILITARY PAY SYSTEM

       Under the Accounting and Auditing Act of 1950 (31 U.S.C.
66a), agency heads are responsible             for establishing  and
maintaining     sound financial       management systems, including
internal    audits,    to effectively      control and account for pub-
lic funds.      The Comptroller       General reminded all Federal
agencies on August 1, 1969, that control              systems should in-
clude adequate administrative            procedures for systematic
examinations     of financial      transactions    for verifying   their
legality,    propriety,    and correctness,        These examinations
should be made prior to payment or shortly thereafter.

       The Assistant Secretary of the Navy (Financial        Manage-
merit)--who is also the Comptroller     of the Navy--is respon-
sible for managing the Navy's military      pay system.      It is
his job to (1) establish    appropriate   regulations     and proce-
dures, (2) determine how well the system is working, and (3)
make needed improvements.     Various officials      assist him.

Director,   Naval Audit   Service   (NAS)

      The Director   is responsible     for making all internal
audits in the Navy.     The   NAS  mission  is to independently   ap-
praise Navy activities,     including    the operation   of the pay
system and the work of administrative         examiners.

Commander, Navy Accounting      and Finance   Center   (NAFC)

       The Commander manages the administrative      examination
program--monitors   manpower requirements    and utilization,
establishes   and evaluates examination policies       and proce-
dures, and provides guidance and assistance      to examiners.
Director,   Military   Pay System

       The Director    develops policies      and procedures for mili-
tary pay operations,       evaluates the results      of audits and ad-
ministrative    examinations,     and provides technical      guidance
and assistance      to disbursing   officers.

ROLE OF INTERNAL AUDITORS
AND ADMINISTRATIVE EXAMINERS

       An internal  auditor is expected to be a dynamic force
in any effective    financial   management system.       He should
make independent and objective         reviews, analyses, and eval-
uations of operations      and activities;     report on conditions
found; and, w'henever necessary, recommend changes or other
actions to management. NAS, the Navy's internal             auditor, is
intended to be the eyes and ears of management, constantly
striving    to help the Navy do a more effective       job.

        In contrast   to the broad role of NAS auditors,        admin-
istrative    examiners specialize     in auditing military      pay and
allowances.      Their examinations are designed to detect and
correct errors and to assist disbursing          officers    in improv-
ing their operations.       Examinations are made centrally         by
resident    examiners at the Navy Finance Center (NFC), Cleve-
land, Ohio, and at various Navy Regional Finance Centers
 (NRFCs). Onsite examiners, assigned to NRFCs, make examina-
tions on ships and at shore installations.             In fiscal year
1970 the Navy had a total.of       115 administrative       examiners
checking on military      pay'and allowances.

       Our review was made to find out how the Navy managed
internal   audits and administrative  examinations and to de-
termine how effective   these had been in bringing  about im-
provements in the Navy's military    pay system.




                                  6
                               CHAPTER2

                 NEED FOR IMPROVEDMANAGEMENT
                                           OF

                   ADMINISTRATIVE EXAMINATIONS

       The Navy Comptroller   has not provided sufficient    re-
sources and direction     to make the administrative   examination
an effective   management tool.    Operating with few examiners,
who are able to audit only a small portion of the $5 billion
spent annually for pay and allowances,      management has al-
lowed many erroneous payments to go undetected each year.
Recent budget and personnel cuts indicate        that this condi-
tion may get worse.     Moreover, management has not effectively
guided the examiners, since their work is not well coordi-
nated and since certain basic examination methods are not
applied uniformly.

REQUIREDEXAMINATIONSNOT MADE

       The Navy Comptroller's     administrative       examination hand-
book contains schedules and guidelines           for examination of
military   pay and allowances.      The handbook, consistent         with
legal and Comptroller     General requirements,         specifies   that
examinations   be made on a continuing        basis to (1) ensure
quality,   (2) strengthen     the system of internal       control,    and
(3) provide assistance      to disbursing     officers.

       When the Comptroller     General reminded all Federal agen-
cies of their fiscal      responsibilities     on August 1, 1969,
Navy onsite and resident examiners were auditing,             in detail,
less than 5 percent of the pay records.             On July 1, 1970,
revised fiscal    procedures were included in GAO's guidance
manual for Federal agencies.           These procedures provided
that examinations     be in balance in terms of their cost and
effectiveness   in preventing      or correcting     illegal,   improper,
or incorrect   payments and that agencies not dilute            the ef-
fort considered necessary to validate           transactions.     When
these procedures were issued, less than 3 percent of the
Naty@s pay records were being examined.             There since has
been a further    reduction    of effort.




                                    7
          This     sharp     downward trend                   in examinations                is illustrated
by the following              tables.

                                            Onsite     Examinations

                                                                                                        Percent
                                                                                                       of total
                                                       Pay records               Pay records         pay records
                                Onsite                available   for               examined           examined
         Period              gxaminations              examination                in &tail            in detail

7-l-68    to 12-31-68              320                    844,100                   26,655                    3.15
l-l-69    to 6-30-69               332                    824,500                   28,701                    3648
7-l-69    to 12-31-69              297                    829,800                   31,250                    3.76
l-l-70    to 6-30-70               288                    763,600                   20,367                    2.67
7-l-70    to U-31-70               233                    741,100                   14,361                    1.94


                                         Resident      Examinations

                             Pay records                                                              Percent  of
                            available    for     Pay records        Pay records          Total pay    total  pay
     Pay record              examination          examined          examined by           records      records
       cycle                   (note a)            by NE'C              NEECS             examined     examined
l-l-68    to 6-30-68           737,600               34,248             5,886              40,134         -5.44
7-l-68    to 12-31-68          726,200               34,166             4,854              39,020          5.37
l-l-69    to 6-30-69           752,100               31,790             5,381              37,171          4.94
7-l-69    to 12-31-69          704,700               17,764             5,862              23,626          3.35
l-l-70    to 6-30-70           669,400               10,607             5,771              16,378          2.44

aExcludes    pay records    of personnel       released    from service         during   period.


        Administrative      examiners, although few in number (115
in fiscal     year 19701, have compiled an impressive record of
error detection--       tens of thousands of erroneous payments are
identified     annually,      Unfortunately  many errors are not de-
tected since a high percentage of records are never examined.
Error detection        without an accompanying program for the cor-
rection    of basic causes is not a solution       to the Navy's
problems in this area.          (See ch. 3.)
          Examples illustrating                   the void            in the examiners'                   work
follow.

         Example        A
         NRFC  onsite teams are to examine transactions                                              of each
          ship and large domestic station once a year.
In calendar year 1969 onsite teams made 629        examina-       1
tions and found errors totaling    $1.4 million;      in 1970
they made 521 examinations   and found errors      totaling
$1.2 million.   The teams did not examine the       accounts
of 126 ships and stations  in 1969 and 103 in        1970.

&ample   B

Onsite teams, when they find a high incidence   of error,
are required to make semiannual examinations  on ships.
We noted at least 200 cases from July 1969 to December
1970 where such examinations were not made. Usually
the examination was made a year later.

Example C

NFC is responsible    for final examination of pay records
of servicemen released from active duty.       In 1969 over
189,000 accounts were closed; however, NFC limited
its examinations    to records of 6,600 servicemen who
transferred   to the Fleet Reserve.

In August 1970, at our suggestion,   NFC began to review
records of additional  servicemen.   Through July 9, 1971,
NFC, at a cost of $7,650, detected 536 errors totaling
$46,300.  NFC only scratched the surface,    since the
examiners reviewed only 3,800 additional    pay records
during the period.

NAS recently made a review at NFC. In its report,
issued in August 1971, NAS estimated that $1 million
in errors might be identified  if NFC were to review        all
pay records.

Example D

Each 6-month pay cycle, NFC is required to examine pay
records of all ships and overseas stations  not visited
by an onsite team during the last 3 months of the cycle.
NFC has not examined such records with the prescribed
frequency,  and those it does examine are not examined
thoroughly.



                           9
     As a test we examined the accounts of five ships and
     six stations    that did not receive an onsite examination
     during the last half of the pay cycle ended December 31,
     1969.    We found 527 erroneous payments, totaling
     $18,100 and 369 leave and tax errors which eventually
     could lead to losses to the servicemen or to the Gov-
     ernment.    NFC did not examine the pay records of seven
     of the 11 accounts.     Its limited  examination of the re-
     maining four accounts disclosed     only one erroneous pay-
     ment of $32.

         NAFC is responsible    for monitoring   manpower require-
ments and utilization        but has not established   criteria    for
the number of examiners needed.          NAFC controls  the number of
examiners through the budget review process, but the Com-
manders of NRFCs and NFC decide what tasks the examiners will
perform.      Since NRFCs and NFC have a number of other respon-
sibilities,     employees are shifted from one job to another,
with the examination function's        being given low priority.

      An NAFC official      told us that at least nine'more ex-
aminers were needed for making required onsite examinations.
Twice in fiscal year 1971, NAFC requested funds for addi-
tional personnel,      informing  the Navy Comptroller  of the ef-
fects of cutbacks in the examination program.
     "Personnel retrenchments    accomplished during FY 1970
     have necessarily   resulted   in 23% reduction  in area
     of internal  review ,and records examination    in order
     to sustain basic functions,     such as meeting pay day
     schedules.   These reductions    have resulted  in ex-
     amining a smaller percentage of documents and
     stretching  on-site visit   schedules.tt
     l'Due to shortage of funds the NRFC's have reduced
     personnel in the Examination Departments.          This
     has resulted   in a severe cutback in the On-site
     Examination program as well as a reduced exami-
     nation effort   on payments made by Central Dis-
     bursing Officers    and Associate Disbursing     Officers.
     Failure to receive funds to augment existing         Exami-
     nation Departments of the NRFCs will mean that the
     capability   of early detection   or prevention     of
     errors will be impaired with the result       that

                                 10
     sizable overpayments to vendors,   members or civil-       I
     ian employees could result."

NAFCs attempts to obtain funds for additional    examination
personnel were unsuccessful.

      The Commander, NFC, told us, and later told NAS, that
NFC was unable to make required examinations   because of the
lack of personnel.   NAS recommended in its August 1971 re-
port that the Navy Comptroller  review the entire area of
administrative  examination of pay records and accounts to
determine how and if resources could be applied to improve
the situation.




                              11
LACK OF COORDINATIONAMONGEXAMINATIONGROUPS

       When records of the same activity    are examined by res-
ident and onsite examiners at different      locations  and at
different    times, their work should be coordinated    and the
results    of prior work should be considered when scheduling
and performing     examinations.  Such coordination,   however,
has been limited.      Although NFC examiners are furnished
with listings     of onsite examinations made, they do not re-
ceive copies of onsite team reports so that they can tailor
their work appropriately.

      Because NFC examiners are unaware of onsite team find-
ings, they give equal-- but limited--coverage   to each ship
and overseas station   account.   For example, we selected at
random 10 ship accounts-- five with high error rates and
five with low error rates --examined by onsite teams. NFC
examined 72 of 1,600 pay records for high error ship ac-
counts, and 74 of 1,400 pay records of low error ship ac-
counts.

      Similarly NFC normally does not advise onsite teams of
its findings.   Such information obviously would be of value
to onsite teams in scheduling their work. NFC examiners
cannot always determine why mistakes occur, but onsite
teams could zero in on the reasons and could advise disburs-
ing personnel accordingly.

      Coordination     also is lacking among NFC examination
groups.    For example, one group examines pay records and
another group examines travel vouchers.         The two groups,
however, do not inform each other of the results of their
examinations,      Since disbursing   personnel who make numerous
errors in travel payments probably make errors in pay--and
vice versa --the groups would benefit from knowing the re-
sults of each other's work.
BASIC EXAMINACIONMETHODS
NCYIUNIFORMLYAPPLIED
        Some examiners do not use basic examination methods to
detect common-type errors.      These methods involve verifying
payroll    payments to pay records and comparing data on pay
records to data on travel vouchers.      Onsite examiners have
successfully    used these methods for some time, but NFC

                                12
examiners do not make similar tests, apparently   because
they are not required by the administrative   examination
handbook.

Payroll   verifications

     Each time a      serviceman receives his pay and allowances,
they are recorded      on a "money list.'V  The payment, in turn
is posted to his      pay record.   If the payment is not posted,
he could receive      a duplicate payment at a later date.

       Onsite examiners are required to verify      money-list
postings to pay records.      This has resulted   in identifica-
tion of numerous errors.      During fiscal year 1970 the exam-
iners detected 304 posting errors totaling       $28,090.      As
onsite examiners usually examine few payroll        transactions
at an installation    in a year and do not visit      all installa-
tions, NFC should fill    this void.
Comparison of pay and travel data
      When an examiner examines a pay record but not a travel
voucher, all transactions    may look correct.    If the examiner
concurrently    examines the pay record and travel voucher,
however, a number of questions may arise.      For example, a
pay record may not show that leave was taken, but the
voucher may show that the serviceman took several days'
leave while en route between stations.      Despite potential
inconsistencies    between pay and travel transactions,    NFC and
NRFC resident    examiners do not compare the two records.
      We made such comparisons while reviewing accounts of
nine stations  and found 222 errors totaling     $7,700. Fur-
ther, our comparison revealed 64 nonmonetary errors involv-
ing leave and tax reporting.     A total of 370 days of leave
had not been charged to the servicemen whose records were
included in our tests;   this could result in overpayments at
the time of their separation   from the service.
CONCLUSIONS
       Navy management has not provided the necessary re-
sources and direction     for effectively     implementing the ex-
amination program.    NFC-and NRFCs, with limited         resources,
have been attempting    to satisfy     the work schedules and ob-
jectives   in the administrative      examination handbook.      Since


                                 13
they examine only a small portion of the millions          of pay
and allowance transactions,  however, a significant         number
of errors remain undetected.

      With many serious weaknesses in the examination
program-- overall   reduction    of effort, gaps in coverage,
lack of coordination,      and insufficient  examination methods--
management is unable to appraise the integrity         and accuracy
of the current pay and allowance system. Management is
aware that the examination program is not working as in-
tended but, even though the situation       appears to be worsen-
ing, has done little     to effect needed improvements.

RECOMMENDATIONS

     We recommend that    the Secretary     of the Navy:

     --Establish  staffing criteria       and provide the resources
        needed to make administrative       examinations more ef-
        fective.

     --Require revision   of the administrative   examination
        handbook to provide for coordination    of effort   among
        examination groups and for improved examination
        methods.




                                14
                             CHAPTER3

        BETTER DATA AND MOREMANAGEMENT
                                     EFFORT NEEDED

                      TO IMPROVEPAY SYSTEM

      NAS is responsible   for evaluating   the operation  of the
pay system but has done only limited work in this area.
(See ch. 4.) Management therefore       must look to the exam-
iners for information    on how well the system is working,
since they do the bulk of the military      pay and allowance
audits.

      By concentrating   on error detection   and correction,
rather than on error prevention,     examiners have been find-
ing numerous errors in areas of known or suspected weak-
nesses.    This approach, however, does not provide Navy-
wide error data nor tell management how well the pay system
is working.    This search for errors does disclose      incorrect
payments, but it does little     to correct the conditions      which
caused the errors.     Consequently abundant errors continue
to be made.

      Confronted with insufficient data and limited personnel
to effect needed improvements, management hopes that a new
computerized pay system, JUMPS, currently   under development,
will solve many management problems.    Unfortunately  this
system is not expected to be implemented before 1974.

ACCOMPLISHMENTS AND SHORTCOMINGS
OF ADMINISTRATIVE EXAMINATIONS
      Because the examiners make most military     pay and al-
lowance audits,  they play a crucial   role.   By continuously
checking disbursements,   they could provide vital     information
to management on how well the pay system is working, what
problem areas demand attention,    and what corrective     action
is needed.

       Errors detected by both onsite and resident    examiners
are reported to the Director,     Military Pay System, who ad-
ministers    the Navy's Error Detection and Reduction Program,
This program, established     by the Navy Comptroller  in 1955,
is intended to reduce, and maintain at a minimum, errors

                                  15
in pay and allowances.       By analyzing statistical         and narra-
tive reports from the examiners, the Director             is supposed
to identify     trouble areas so that corrective        actions,     such
as simplification      of regulations,      can be taken.     The mate-
rial gathered also is to be used for training             disbursing
personnel and for assisting         individual   commands by calling
attention    to weaknesses in local procedures.

     Although the administrative   examination program has
had some success, we believe that its accomplishments have
been overshadowed by its shortcomings,

Many errors    identified

       Traditionally   examiners have concentrated       on known or
suspected problem areas and have examined records and trans-
actions most likely     to contain errors.      By being highly
selective     they have compiled an impressive record; each
year they have identified       tens of thousands of erroneous
payments which run into millions       of dollars.     In this re-
spect, the examinations      are worthwhile   since the'amounts
recovered more than offset the cost of the examinations.

Assistance    to disbursinp    officers

       Examiners, particularly     onsite examiners, also assist
disbursing    officers   by giving on-the-spot     advice when errors
are disclosed      and by making recommendations in their re-
ports to installation      commanders, Hopefully       the recommen-
dations and advice are heeded and the same errors are not
made again.      This, however, is not always the case.            For
example, in reviewing the results         of consecutive     onsite
examinations     of 15 disbursing   officers'   accounts that were
selected at random, we noted eight cases in which more er-
rors were disclosed      in the second examination       than in the
first.
       The value of the onsite examiner's work is often short
lived due to the Navy's practice     of frequently  rotating    its
personnel.     Thus, even when examiners help disbursing     per-
sonnel improve their performance,     the personnel are shortly
replaced by new personnel and the error-producing       process
begins anew.



                                    16
Use of selective    sampling

      It is obviously    impracticable      to examine every one of
the millions    of pay and allowance transactions        made each
year.    Yet the Director,    Military     Pay System, must be able
to decide whether the overall         system is good or bad. Exam-
iners do not provide the answer to this vital           question.
Because the examiners apply selective-sampling           techniques,
instead of statistical-sampling         techniques,   in choosing
records to be reviewed, the examiners' work does not present
a true picture    to management of the types and extent of
errors at each installation        or, more importantly,     Navy-
wide.

       Examiners' reports showed that errors had been made
in various items of pay and that a certain number and dollar
value of errors had been found on those records examined.
This information,    however, could mislead the Director   into
believing   that these conditions   were representative  of the
overall   condition  of the pay system, whereas, at best, it
showed the situation     only in the areas and records reviewed.

       Further,   this information      can give the Director    and
the disbursing     officer     a false sense of security    by implying
that the unexamined records are "clean,"' when, in reality,
many more errors undoubtedly          are never detected.     For ex-
ample, we examined, for a 6-month period, all transactions
of two disbursing       officers    whose records had been selec-
tively   audited also by onsite examiners.          We found 351 ad-
ditional    errors --significantly      more than those found by the
onsite examiners.        Moreover, we found several types of er-
rors that had not been reported by the examiners.

      By choosing records that they believe are more suscep-
tible  to error, examiners do not provide management with
data that can be used to answer such basic questions  as:
      --How well   is the pay system working?

      --What is the Navy's     error   rate?

      --How do various ships,      stations,   and commands compare
         in performance?



                                  17
     --Which   activities           need the most attention?

     --What problem         areas     are most worthy   of management's
        attention?

     --What progress         has been made in resolving        problem
        areas?

       Good management of the pay system demands that the
Director    know the answers to these questions so that he can
direct   his efforts  accordingly,




                                        18
.

    NEED FOR STATISTICAL SAMPLING

          Years ago the Navy Comptroller,        being aware of the
    shortcomings   in administrative      examination techniques,
    turned to statistical     sampling, a technique widely accepted
    as a means of obtaining     more accurate and meaningful data
    than those provided by the selective         sampling.   He realized
    that reliable    Navy-wide statistics     were needed to provide
    him with a true measure of the quality          of Navy disbursing.
    Also the success of the Error Detection and Reduction Pro-
    gram required better data than those provided by selective
    sampling.

          Starting    in July 1956, the statistical-sampling       concept
    was tested for about 3 years by onsite examiners.           Records
    for that period show that statistical        sampling was superior
    to selective    sampling because it provided a more objective
    and reliable    basis for management action.       For the first
    time management was advised of the full extent and types of
    errors in all records,     including those unexamined, and could
    accurately    assess the activity's  military     pay operation.

          The apparent success of statistical sampling was
    brought out in a 1959 report to the Navy Comptroller   on the
    test program.

          "Prior to the introduction    of random [statisti-
          cal] sampling techniques,   examiners selected
          records which they believed to be most subject
          to error.   This selective  technique tended to
          pick up a disproportionate    number of erroneous
          payments for items where there was a history       of
          such payments but understated    the introduction
          of new types of erroneous payments.

          "The difficulty     of introducing     random sampling
          resulted    largely  from the fact that accounting
          personnel were not familiar        with scientific    sam-
          pling and hesitated      to substitute     it for meth-
          ods based on personal judgment.           Jwlc*Tests were
          conducted to determine whether data derived from
          random sampling differed       from judgment sampling
          and whether information       was omitted through the
          use of one type of sampling.


                                       19
      "Based on results   obtained through December 1958,
      it is now generally   accepted that the estimate
      of the number of erroneous payments is more ac-
      curate and that this estimate is obtained at a
      lower cost because of the smaller sample size.
      Comparability   from year to year is now possible
      because of the use of random sampling.    The re-
      sults **J; are considered as objective  because
      the personal element has been removed."

       Despite its apparent success, the statistical-sampling
technique was dropped after the trial           period and has not
been revived.      A sharp reduction      in funds influenced      the
decision to use only the selective          approach which was being
followed concurrently       with the statistical       technique.    Also
responsible    for the rejection     of statistical       sampling was
the attitude     of NAFC and NRFC personnel that the selective
approach, with its emphasis on assisting            activities    by timely
detection    and correction     of specific    errors,    was more in
tune with the purpose of the onsite program.

NEED TO CORRECTBASIC CAUSESOF ERRORS

        The Director, Military  Pay System, is assisted by a
small group of experts known as the Military     Pay Staff.
This group (1) provides services required to maintain an ef-
fective    pay system, (2) reviews, evaluates,  and takes ap-
propriate    action on reports received from various sources,
and (3) analyzes the performance of the pay system and de-
velops improvements.
      The staff      has devoted much of its         efforts     to

      --rendering      advice   to disbursing       officers     upon request;

      --suggesting     that administrative  examiners increase
         their efforts     in areas where GAO and others have
         identified    problems;

      --developing      regulations    to implement         new legislation;
      --responding  to congressional            inquiries      regarding   mil-
         itary pay matters; and


                                      20
      --preparing,   as part of the Error Detection and Reduc-
         tion Program, semiannual reports on the types, num-
         bers, and dollar amounts of errors identified  by ex-
         aminers.

      A practice     which apparently     had helped to improve dis-
bursing operations       of installations    having poor performance
records was curtailed       by the staff.     This practice,    started
in 1961, consisted of sending warning letters            to individual
disbursing    officers    whose pay records were found to be in
poor shape by onsite examiners.           It was decided at the out-
set that from 25 to 30 such letters          would be sent each year.
Recipients   were limited to those disbursing         officers    who
were found to have the most unsatisfactory           performance rec-
ords.
      Examinations at activities      whose disbursing  officers
had received such letters      during the last 10 years showed
that the.impact    of these warnings had been significant.         Of
the 130 activities     admonished by the staff for poor perfor-
mance, 98 (75 percent) showed improvement on subsequent ex-
aminations,     Despite its apparent success, this practice        had
been deemphasized to the point where the staff sent only
five letters    in 1970, even though more than 100 activities
had been listed    in a suspense file as potential     recipients,

       The staff has devoted little   effort to independently
researching    causes of errors and to making improvements to
the system which has become increasingly     more cumbersome as
additional    benefits have been provided to servicemen.      Ac-
curacy has not kept pace with complexity,      and thousands of
errors continue to occur each year,
      Military   Pay Staff members told us that from 1966 they
had concentrated    on developing JUMPS--a computerized pay
system intended,    in part, to reduce errors.

      On the basis of our evaluation        of JUMPS to date, we
agree that JUMPS, if properly        implemented, should eventually
reduce errors.    How significant      a reduction this will be,
no one knows. Expectations        are high, but we envision sev-
eral problems.



                                   21
     --JUMEYS, conceived in 1966, was to be implemented by
        the Navy in 1969. Its timetable     now calls for full
        implementation    no earlier than 1974, but further  slip-
        page is possible.

     --JUMPS will not include    travel   payments,   a source of
        abundant errors,

     --Many of the current errors result from inaccurate   and
        untimely data used in making disbursements.   This
        problem could continue under JUMPS since the same
        people will be providing computer input data.
       Although JUMPS may help improve the situation   to the
extent that a computerized system is mathematically     more ac-
curate than a manual system, we believe that more effort      is
urgently    needed to identify and correct basic causes of er-
rors.




                                22
CONCLUSIONS

       Navy management has been relying             on administrative       ex-
aminers     to keep erroneous       payments to a minimum, and the
examiners      have compiled     an impressive      record.     However,    the
basic question      persists:     Why doesn't      the incidence      of error
decrease?       We believe    that the use of selective,           rather
than statistical,        sampling    by these examiners       and manage-
ment's    limited   action    to identify     and correct     causes of er-
rors are two significant          factors   contributing      to the prob-
lem.

      Selective-sampling            techniques      used by examiners     have
not provided      answers to some very basic questions                about the
pay system,     not the least          of which is: Just how good or bad
is the system?         We believe        that a more scientific       approach
is needed.       Statistical        sampling,     in our opinion,     would
give management more meaningful                and reliable     data on which
 to base effective         corrective       measures.

      In the past the Navy has confronted           system problems       on
a piecemeal   basis-- counseling   individual      disbursing    offi-
cers when they have problems,       suggesting      to examiners     that
they increase    their efforts   in problem areas,         and warning     a
few officers   having poor performance        records.      This ap-
proach for improving     the system resulted        from the insuffi-
cient   data and too few people.

      The Navy is relying      on JUMPS to cure many of the cur-
ent system's    ills.    When fully     implemented,     JUMPS should
help reduce many recurring        problems.      We believe,   however,
that greater   efforts    should be made in the interim         to sim-
plify  the current     pay system.

RECOMMENDATIONS

      We recommend      that    the Secretary       of   the Navy:

      --Require     administrative      examiners        to use statistical-
         sampling    techniques.

      --Require  installation        personnel   responsible      for main-
         taining these records         to review unexamined       records
         and to correct      remaining    errors   when statistical

                                       23
  sampling    discloses   high   errors   rates.
--Require    the Military    Pay Staff to increase its ef-
   forts  to identify     and correct    causes of errors and,
   as needed,   to provide    additional    resources to accom-
  plish   this.




                            24
                                 CHAPTER 4

           LIMITED    WORK DONE BY NAVAL AUDIT SERVICE

     Although NAS is responsible             for evaluating   the pay sys-
tem and the work of administrative              examiners, it has not
been instrumental      in effecting
                                needed improvements.     (See
chs. 2 and 3.)       Until   recently
                                NAS had not done sufficient
work in either area to be able to recommend changes or other
actions for the consideration  of the Navy Comptroller    and
other   management officials.

      That NAS has placed a low priority        on pay and allowance
audits is indicated    by the little    time that it has spent in
this area --less than 7 percent of NM's total audit efforts
in fiscal   years 1969 and 1970. Our analysis        of NM's index
of audit findings   for the 3-l/2-year      period ended December31,
1970, revealed few references       to pay system deficiencies.

       When NAS performs periodic      audits of disbursing    activi-
ties, it is supposed to examine into pay transactions           and
ascertain     whether entitlement   regulations    are being inter-
preted and applied correctly.        NAS has been relying    on ad-
ministrative      examiners to make these verifications.       Their
reports inform NAS of the many erroneous payments made each
year.     This information,    however, has not triggered    any sig-
nificant     action by NAS, namely, recommendations to improve
the pay system and the quality        of disbursing.

       NAS is responsible   for reviewing the work of examiners,
but its audits have been infrequent      and limited   in scope.
The normal frequency for such audits is every 3 years, but
NAS has not always adhered to this schedule.         In fact, the
intervals    between audits ranged from about 3 to 5 years, as
shown'below.




                                        25
                                         Prior         Latest
                                         audit          audit
            Activity                    report         report

         NFC                               8-68           8-71
         NRFC, Brooklyn                  lo-65         ,ll-69
         NRFC, Norfolk                     1-67          (a>
         NRFC, Washington, D.C.            8-66         l-70
         NRFC, San Francisco             11-65          3-70
         NJXFC,Pearl Harbor                8-66          (a>
         NRFC, San Diego                   7-63         4-66
         NRFC, Great Lakes                 8-66         5-71
         NRFC, Philadelphia                3-68         l-71

aAudit    in process   at the time of our review.

      We examined several NAS reports and working papers and
noted that the auditors were not checking individual              trans-
actions to evaluate the quality      of the examiners' work. We
noted also that major deficiencies        identified      were not al-
ways reported.   For instance,     in its 1968 audit at NFC, NAS
noted (in its working papers) that the examiners were not
checking certain   types of transactions,         contrary to require-
ments. The NAS supervisor      told us this had not been re-
ported because it was anticipated       that the problem would be
resolved with the implementation      of JUMPS. In another in-
stance NAS was told that onsite examiners were falling               be-
hind schedule in their examinations        of certain      ships' ac-
counts.   This was not mentioned in the NAS report.

        Being aware of our concern and criticism        of the high
number of pay errors and of the importance we place on ad-
ministrative      examinations,    NAS recently  spent considerable
effort    reviewing the NFC administrative       examination function.
In its August 1971 report,         NAS noted some of the same prob-
lems that we identified         and recommended that the Navy Comp-
troller    review the examination       area to determine if and how
resources could be applied to improve the situation,
       In a further   attempt to provide more meaningful ap-
praisals   to management, NAS plans a new approach to its au-
dits of pay and allowances.       Instead of being done as part
of disbursing     and other work at installations,   most audits
will be done on a regional      basis.   An audit team at one of

                                  26
the six NAS area offices will audit pay and allowances,
starting  with fiscal  year 1972, at a number of installations
in its area.    The team will be required to consider the work
of the administrative   examiners and to include an appraisal
of their performance in its reports.     We believe that this
new approach may be more responsive to management needs.

CONCLUSIONS

      NAS is responsible    for keeping the Navy Comptroller       in-
formed of the condition     of the pay system and of the ade-
quacy of administrative     examinations    but, until recently,
has not been doing sufficient     work in either area to be able
to make meaningful appraisals.         NAS has placed low priority
on pay and allowance audits and has relied on examiners to
do this work; however, it has not satisfactorily         evaluated
the examiners' work.      As a result,    NAS's efforts  have not
produced significant     improvements in the error-prone      pay
system or in the administrative        examination program.
        Although the new audit approach may be a step in the
right    direction,  it is too early to tell whether desired re-
sults    will be achieved.    We plan to follow up on this effort.




                                  27
                               CHAPTER5

                           SCOPEOF REVIEW

        At NAS headquarters      and at NAN, we appraised the man-
agement of internal        audit and administrative      eiramination
activities.     While visiting      various field offices,      we re-
viewed and tested the application          and effectiveness      of pol-
icies and procedures for examining and auditing              pay and al-
lowances.     Specifically      we:

      --Examined audit plans, programs, schedules, and
         reports at selected NAS Area Audit Offices to
         evaluate the scope and frequency of audits,
         methods and procedures,  and results.
      --Inquired    into the NRFC onsite and resident  ex-
          aminers' duties and responsibilities,   work loads
         and staffing    levels, error detection and cor-
         rection methods, and accomplishments.

      --Tested transactions,      at NFC, in the accounts of
         various disbursing    officers  to evaluate the ex-
         tent and quality    of the examiners' work; checked
         whether all accounts were being examined as re-
         quired; and inquired into the development of
         JUMPS. We also inquired into the operations      and
         accomplishments of the Military     Pay Staff.




                                  28
APPENDIX




  29
                                                                                APPENDIX I i    c


                             LIST      OF SELECTED GAO REPORTS

                             TO THE CONGRESS DEALING WITH

                          MILITARY       PAY AND ALLOWANCE ERRORS



                                                                                  Date
                                      Report                                    issued

Review of Causes of                    Overpayments        of Military
  Pay and Allowances                    (B-125037)                       Apr.     16,    1963

Illegal     Per Diem Payments to Military   Per-
    sonnel of the Navy and Marine Corps Ser-
    ving as Military   Inspection Representa-
    tives   in Tokyo, and Osaka, Japan
    (g-146822)                                                           Oct.     31,    1963

Improper or Unnecessary     Payments of Pay,
  Travel and Other Allowances      to Crew Mem-
  bers of the U.S.S.    KITTY HAWK (B-146889)                            May      19,    1964

Unnecessary               Payments      of Basic Allowance     for
  Quarters              to Military       Personnel   (B-125037)         July     28,    1964

Unnecessary     Payments for                   Temporary     Lodging
  Allowances     to Military                   Personnel     in Na-
  ples,   Italy    (B-146912)                                            July       7, 1964

Illegal     Payments of Hazardous    Duty Subma-
    rine Pay to Military   Personnel     Assigned
    to Submarine Force Command Staffs
     (B-154092)                                                          Dec.     22,    1964

Follow-up     Review of Causes of Erroneous
  Payments of Military     Pay and Allowances
   (B-125037)                                                            Apr.       2, 1968

Cessation  of Unauthorized   Payments of Pro-
  ficiency  Pay and Variable   Reenlistment
  Bonuses to Candidates    in Officer   Training
  Programs   (B-160096)                                                  Aug.       6,   1969

U.S. GAO. Rsh..   kc.
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