Review of the Management of Selected Appropriated Funds at Headquarters, U.S. Army, Navy, Air Force, and Marine Corps

Published by the Government Accountability Office on 1971-02-05.

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

                             COMPTROLLER     GENERAL     OF   THE   UNITED   STATES
                                           WASHINGTON.    D.C.   2o!M

     I   Dear Mr. Chair7uan:
               In f’urther response to your letter                  of January 26, 19'70, we are
         reporting   on our review of th                                              ppropriated
.!                                                                                    rine Corps.
               Our review was directed toward an evaluation of the systems of
         accounting and internal control and the adequacy of audits of the
         funds, We examined accounting and auditing reports and records,
         performed cash tests, analyzed financial statements, reviewed applicable
         regulations, and held discussions with officials  responsible for each

               Each military department has established nonappropriated funds at
         its headquarters to provide for services commonto various tyPes of
         commandand installation   nonappropriated fund activities.   Our review
         included the following headquarters funds: (1) Army Central Welfare
         md and Army Central Mess Fond, (2) Navy Central Recreation Fund,
         (3) Air Force Central Welfare Fund and ;Qir Force Central Mess Fund,
         (4) Marine Corks Central Recreation Fund and Marine Corps Mess Fund,
         and (5) the Army and Air Force Civilian Welfare Fund.
                &t the time of our fieldwork, the combined income reported by the
         funds for their most recent fiscal years was $lll million.     Combined
         assets at the end of the respective fiscal years totaled $14.0million,
         of which $86 million was invested in Government securities.     Financial
         statements prepared from data developed by personnel of the various
         funds are included as enclosures I through X for general information
         purposes only, since the scope of our work was not designed for the
         certification    of financial statements.
              The principal source of revenue for welfare and recreation fund
         operations in the military dePartments is the Profits generated by the
         exchange services. The emount of exchange profits distributed to the
       Eepartalent                              Profits    distributed

Army                                            '8 53,4$7,~25
Air Force                                         31,552,375

@w                                                38,666,ooo

Marine Corps                                        6,14&61y

       Total                                    $129,814,619

A more detailed description of the receipt and distribution         of funds
is contained in enclosure XI.
      Grants and loans by the various funds are madeprimarily for con-
struction and renovation projects to local clubs and messes and to
recreation and welfare activities;   in some cases grants are approved
for special projects and educational assistance scholarshies.    Gen-
erally we found that grants and loans had been properly made. The
following table shows the amount of grants and loans approved by the
funds during their most recent (differing)   fiscal years.
       Fund                            Grants                 Loans

Army Central Welfare               # 686,930,        $          -
Army Central Mess                                         4,15o,500

Navy Central Recreation             4,&5,500              6,366,4oo

Air Force Central Mess                                      645,600

Marine Corps Central Recreation       232,200               346,500

Marine Corps Mess                     385.800               481.000

       Total                       $5,?70,4m         $11,990,000

     The Army acd dir Force Civilian Lklfare F.zndapproved $3.49,3Oain
grants and loans during fiscal year 1969. The fund's personnel were
unable to ider,tify the amount in each category.

      Although the Air Force Central Welfare Fund, at the time of
our fieldwork, did not make loans, it previously had conducted a
student loan program and had unpaid loans outstanding.
       Webelieve that the controls over investments and the physical
controls over the securities are adequate for their protection.    The
various military regulations restrict investments to savings accounts,
certificates   of deposit, and U. S, Government securities, The following
is a schedule of the funds* investments at the most recent balance sheet
closing dates,
                                  U.S. Government Certificates      savings
     Fund                         securities      of deposit        accounts
Amy Central Welfare               #5f$m,500         $     -         9b      -
Navy Central. Recreation           2,996,ooo
Air Force Central Welfare         18,059,100
Air Force Central Mess             6,023,lOO
Marine Corps Central Recreation     1,070,200           330,000
Army and Air Force
   Civilian Welfare                 1,005,200
      Total                       $85,971,100

      The Army Central Mess Fund has no investment program. The Deputy
Chief of Staff for Personnel, however, established a voluntary centralized
investment program to maximize the use of funds in excess of :urrent needs
at open mess activities.   These excess funds are invested, along with wel-
fare funds, in the Army Central Welfare Fund investment program and are         e
included in the above table.
        OF FIPL4I\1CIPiL
     The various funds prepare monthly, quarterly, and annual financial
statements of operations which, in our opinion, present an informative
financial picture.

_   -


                    Wereviewed the system of financial reporting used in the
              operation of the welfare, recreation.! and mess funds and found that
              extensive reviews and analyses were not performed at headquarters on
              financial data, submitted by major commands,of clubs, messes, and
              recreation activities.   It appeared to us that generally little use
              was made of financial statements for managementpurposes in reviewing
              for any significant increases or decreases in accounts from one period,
              to another, Wewere advised by fund personnel that iri some cases there
              was not enough time to analyze, in depth, the financial condition or
              results of operations of individual activities  or of composite activities
              within a command.
                   The headquarters funds do not maintain records of appropriated fund
              support provided to them. Although in most cases we were able to obtain
              estimates of someof the support provided, we recognize that someof these
              estimates exclude a number of items, such as assistance from Inspectors
              General, internal review and audit staffs, and engineering staffs.
                   The estimated appropriated fund support provided annually to various
              funds at headquarters follows.
                   $I&                                anorooriated fund supoort

              Army Central Welfare and
         -.      Central Mess                                9b 42,&O
              Navy Central Recreation                             436,875
              Air Force Central Welfare and
                  Central Mess                                     84,378a
              Marine Corps Central Recreation and
                  Mess                                             56,000

              Army and Air Force
                 Civilian Welfare                             0

                         aAfter our review was completed, the military position
                          of custodian was converted to a norappropriated fund
                          civilian position which decreased the value of annual
                          appropriated fund support by $19,5Kl.

                         bWewere unable to obtain an e&bate of the appropriated
                          fund support provided annually to the Army and Air Force
                          Civil&n Welfare Filnd.


                                                  __, _      __
. ’


                The funds we reviewed are subject to annual audit by central
          internal  review groups (Army Audit Agency, Air Force Auditor General,
          B&&L Audit Service, and Marine Corps Field Audit Service);    Inspectors
          General; or by certified   public accountants, as in the case of the
          Army Central Welfare Fund.

                  The Army Central Welfare Fund was the only one of these funds to
          be reviewed by certified     public accountants.      We believe that the agree-
          ments by fund management for work to be performed by certified            public
          accountants gave too little      emphasis to internal    controls.    While the
          fund receives certification,      it does not receive in depth evaluations
          of rmnagement policies     and controls.    The brief letters      commenting on
          internal controls provided by the certified        public accountants with
          certified    statements generally included only a few sentences on the
          procedures implementing ltanagement policies.

                We reviewed the audit work performed at the funds by the central
          internal  review groups and found that in most cases the work had not
          been comprehensive and that appropriate tests had not been made to
          evaluate the system of internal  controls.   Recent audit reports pre-
          pared by the Marine Corps area auditors failed to show the scope of the
          audits, and working papers were not adequate to show that the stork
          indicated in the reports had been performed.
                 Our examination   of the Air   Force Auditor     General resident   auditor's
          working papers for the Air Force central funds showed that insufficient
          work had been performed by him to render an opinion on the overall fund
          operation.    Subsequent discussions         with
                                                   the Air Force auditors disclosed
          that the lack of time and insufficient  staffing had resulted in incomplete
          audits and that this inability to perform a complete audit was the result
          of the Air Force's de-emphasizing audits of nonappropriated fund activities.
               Our review at the Army and Air Force Civilian Welfare Fund revealed
          that the Army audited post restaurants and civilian welfare funds at the
          installation level about once every 12 months but that the Air Force
          averaged 27.8 months between audits.

                The joint regulation    regarding the operation of civilian    non-
          appropriated   funds requires that the civilian     funds at Army installations
          be audited annually,    but the Air Force leaves the frequency of audit to
          the discretion    of the Auditor General.   The Army and Air Force Civilian


                                         .,       ..          .
    ’   .

              ,    B-148581

                   Welfare Board has been informed by the Auditor General that audit
                   coverage of restaurants and civilian welfare funds should be limited
                   and that a specific level of audit effort cannot be established.
                         Webelieve that in general, the officials responsible for the
                   central funds have established adequate procedures for the receipt
                   and distribution of funds and that adequate control to safeguard the
                   resources of the funds is exercised over cash and investments.
                         The problems in identifying appropriated fund support discussed in
                   this report emphasize the need for new procedures in this area. As
                   suggested in our earlier reports on nonappropriated fund activities
        -j         of the Army, &vy, Air Force and Marine Corps, the Committee may wish
                   to consider directing the military departments to establish systems
                   for identifying the costs of all types of appropriated fund support
                   provided to nonappropriated fund activities.
                          Wehave not discussed the results of our review with officials  of
                   Headquarters, U.S. Army, Navy, Air Force, and Marine Corps, or with
                   officials  of the Office of the Secretary of Defense, nor have we re-
                   quested their formal comments.
                        We plan to make no further distribution of this report unless copies
                   are specifically requested, and then we shall make distribution only after
                   your agreement has been obtained or public announcementhas been madeby
                   you concerning the contents of the report,
                        Wetrust that the results of our review at Headquarters, U.S. Army,
                   Navy, Air Force, and Marine Corps are responsive to your request.

                                                                   Comptroller General
                                                                   of the United States
                   Enclosures - 11

                   The Honorable George H. Khan
                   Chairman, Committee on Appropriations !-! _: l-Z
             cr    House of Representatives


                            OF FINANCIXLCOXDITION
                       DaBBE 31, 1969 (note a)

                                              Central          Central
                                            Welfare Fund      Mess Fund
Cash                                       $ 456,CO          8 135,700
Loans receivable                             3,078,330        4,994,OOO
Accounts receivable                              7,300           66,100
Securities on loan                           3,000,000
Investments                                 56,817,500
Nonappropriated fund group insurance
  and retirement premiums receivable           &.7,2X~
Decal inventory
Advanced allocation of exchange and motion
  picture dividends and other assets           111,9C3
       Total assets                        $63,918.203

                        LIABILITIES ANDNETWORTH
Accounts payable                           $       -         $   6,300
Loans payable to Army Central Welfare
  Fund                                                        2~68,200
Dividend and grant credits payable          37,957,200            1,500
Trust accounts                               5,654,200           33,800
Accrued liabilities                             14,800
Net worth                                   20.292,OXI        2,390,.&O
      Total liabilities  and net worth     $63,918,200       $5,200,2OC

aCondensedfrom statements prepared by fund personnel.
        . .                                                                ENCLOSURE

.   ’
              *       .

                                                    OF INCOMEANDEXPENSE
                                                          31, 1969 (note a)

                                                                    Central              Central
                                                                  Welfare Fund          Mess Fund

                  &change service dividend                       ti &998,000        t        -
                  Motion picture service dividend                     914,700
                  Openmess assessments                                                   14&500
                  Residual assets of dissolved funds                   4;,000                98,100
                  Excess funds--U.& Army, Vietnam                  10,900,000
                  Profit on sale of decals                                               502,700
                  Interest on securities and loans                  2,101,200            149,900
                  Accounting service fee                               16,700
                          Total income                             60.973.600            899,200

                  Distribution of exchange and motion
                    picture dividends:
                         CONUS(note b)                             2?,313,400
                         Overseas                                  31,173,OCO
                  Grant credit allocation                             333,700
                  Student scholarship grants                          353,200
                  Interest expense                                      2,000
                  AdmLnistrative expense                              357,700
                  Accounting fee to Army Central
                     Welfare Fund                                                            8,500
                  Other expense                                          20,800          -

                          Total expense                            59.553.800             103.800

                  Net profit                                     $ l,L+l9,800       $    795,-@0

                  8Condensedfrom financial statements prepared by fund personnel.
                  bContinental United States

..                                DEFAR'INZNTOF THEl 14AV-Y
                                'CXWRAL RECREATIOHFUND -
                           STArnJW OF FDJANCLN; CONDriTOfT
                               DECENBER  15, 1969 {note a}

                                              General            Ships' Store       Officers'   Ness
                                              Account              Account              Account


     Cash                                   $ ;,g,;g             $    458,7GO        s; 1,723,800
     Receivables                                                      124,300           2,=9,5m
     Investments                               2:420:700              569,300
     Decal inventmy                           -~-          .~                               -5,300

              Total assets                  $16,yjg,m            :; l&52,300         $ 3,858,6Oo

            LIABILITlZ3 Am IuxP
     Current liabilities                                                             $      516,100
     r& WC&h                                                                              3,342,500

              Total liabilities     axi
                net worth                   ~16,753,200          $ 1,1,52,3OG        :i; 3,858,6co

     a Condensed fro= fiixmcial       ;;tatenents       yqared       by fund personnel.

                                       OF THXf?AVY
                          STAmm OF INCOMEANI, EXPE!YSE.
                                        15, 1969 (note a)

                                                   Ships' Store       Officers1 Mess
                                                    Account               Account
Assessments                                        $ 67o,oo
Slot machine income
Reimbursement--fleet movies                           212,800
                                                                      $ :?g
Interest income                                        68,200             8&700
Miscellaneous income                                   24.800             46,000
             Total income                             975,800          1,359,700
Motion picture    service             4,oo3,100     1,000,000
Grants                                3,8%,000        241,600            329,000
DLSlEUlCe                               655,000          -               474,400
Nonapgropriated Fund Accounting
  Unit and Bureau of Naval
  Personnel representatives             253,600          -
Mess managementtraining facility           -                              71,800
Sports program                          176,500
Miscellaneous expenses                  426,300        36:400             27,500
             Total. expense            9,409,500    1,278,ooo            902,700
Het profit    or loss (0)          $ 2,336,000     $- 302,200         $ 457,000

a Condensedfrom financial     statements prepared by fund personnel,

                            Dl!ZFYlRBbmmOF 'JXZ AIR FORCE
                           ST4TEME3flOF FLTUW3X.LCONDITION
                               JUNE30, 1369 (note a>

                                                  Ct?ntral                Central
                                                 Welfare Fund            Mess Fund

Cash                                              $   597,100       $       1.38$x1
Investments                                        18,o5g,loo             6,023,loo
Loans receivable                                      ?@,a0               1,717,900
Accounts receivable                                    18,700                 3,800
ArnlJr and Air Force Exchange
  Service dividends receivable                     12~8'7,500
                Total assets                      $3l,651,600       $ 7,883,200

Liabilities                                       $20,560,500       $
Het worth                                          11,09L,lOO              7,@32,g
       Total liabilities    and
         net worth                                $31,652,600       ii     7,883,200

a Condensed from financial        statements   preparer! by fund personnel.

                                            Central             Central
                                           Welfare lhnd        Mess Fund

Exchange service dividend
Notion picture service dividend
Assessments                                                    1,562,~
Interest on investments                       1,105,3w           326,500
Other income                                     15,200            2,200

             Total income                     3~833 ,goo       1,8go,700

ClW                                                              104,500
Allocations of exchange and
  motion picture dividends                    27,175,500
Advances                                         545,900
Construction and other spcciaJ. projects         698,200
Other expenses                                   505,300           29,200

             Total expense                    29,124,yOO          133,700
Net profit                                   $ 1,759,OOO      $ 1,757,ooo

    Condensedfrom financial   statements p,reDared by fund _nersonnel.
                                                                                 i3!KxJosw VII

.   1

                                            U.S.   MARm   CORPS
                                           OF FINANCIALCONDITION(mte a)

                                                            Recreatim Fund          Ness F'und
                                                            January 31, 1970     Nwember 30, 1969

        Cash                                                 $       551,700     $   3,729,OCO
        Accounts receivable                                           18,500              18,500
        L3an.sreceivable                                             539,800         1,378,100
        Advances 1                                                       1,700
        Investments                                               1,070,200
        Other assets                                                   74,500           26,800

                !ihtal assets                                                    $   59375,400

                                        LUBILITIiB    ANDNXT WOR!Bl
        Curr&t liabilities                                   $         12,600    $         -
        Long te%il IiziJ3ility                                         74,500           249,800
        nTetwarth                                                 2,169,300          5,=5,600

                Total liabilities      and net wxth          $ 2,2'j6,400        $   5,37-5,400

            Condensedfrm        financial   statements prepared by fmd persxnsl.

, .

                                            U.S. MAFUN CORPS
                                  STAmfl   OF INCOMr:AND WINS%       (note a)

                                                                 Recreation Fund       Idess Fund
                                                                 January 31, 1970   Nwemher 30, 1969


              -change dznatian                                   $     500,000~     $
              Assessments and lz~an payments                                            W&V+
              Interest. on investments                                                    161,431
              Other inwme                                                                  13,402

                    T3talinc3me                                        553,700          l&74,707


              Varsity spxts and recreation                             141,500
              bans and grants                                                             9$;
              Fund administration                                                               9
              Marine Carps Districts   suppart                          56,700
              State Dept., security guards                              16,100
              Insurance and retirement   programs                       90,900
              Other expense                                             92,800             13,402

                    Total   expense                                    400,000          LOO&O57
              Net pr=lfit

              a Condensed fram fTnanciz1    statements   prepared by 3n.d persDnne1.

                                    ARMY AND AIR FORCE CIVILIAN WSLFARXFUND
                                       STAmMT OF FINANCIAL CONDITION
                                             JUNE 30, 1969 (note a>


                cash .I                                                                $       82,200
                Investments                                                                1,005,200
                Loans receiva5l.e                                                             413,900
                      !btal   assets                                                   $ 1,501,300

                                               LIB3ILITI3S   AND NET WOR'IE

                Liabilities                                                            $        4,300
                Ne% worth                                                                  1,497,000
                       Btal    liabilities   and net worth                             $ 1,501,300

                    Condensed from statements     prepared by the Army arid Air   Force Civilian
                    Welfare Fund.
    .                   1

                    n       *

            .                   .      .

                                                 AEMYANDAIRFORCECIVILIANWELF'ARE  FIJND
                                                    S!lMEMENTOFIKOMr:AIlD EXPXNSE
                                                   YEARENDEDJUNE30, 1969 (note a)

                                Restaurant dividends
                                Interest 3n securities
                                Dissolved funds
                                Other incame
                                       T3tal incame

                                Salaries                                                           98,-
                                Rnplayer's share Df taxes and insurance                             7,100
                                Other expense                                                        -200
                                       T&al. expense                                              130,400
                                Net profit                                                      $ 6300

                                    Condensedfram statements prepared by the Army and Air Fxce Civilian
                                    Welfare Fund.
                                                                                                    Page 1
-        .
    .-       -       .

                                                          FtJZEIt'T ANDDISTRIBUTIONOF FUNDS

                                The Army and Air Force Central Welfare Funds were established as
                         central depositories of nonappropriated funds from which redistributions
                         are made to help maintain welfare, recreation, and morale programs for
                         military personnel.
                               The Board of Directors of the Army and Air Force &change and
                         Motion P'icture Services annually declares a dividend which is paid
                         quarterly from the profits of the two services to the central funds
                         on the basis of the respective military service personnel strengths.
                         Because of an extensive rebuilding program, the motion picture service
                         recently discontinued distributing  profits to the central welfare funds.
                         The dividends paid by the exchange service during its last 3 fiscal years
                 .       were $75 million in both 1968 and 1969 and '$85 million in 1970.
                               The Army welfare fund establishes rates at which resources will be
                         allocated quarterly to major commands,central post funds, and unit funds
                         on the basis of the expected dividend from the exchange service and
                         personnel strengths,    Commandsand installations  with greater strengths
                         receive disproportionately  lower per capita shares of the allocations
                         than those with lesser strengths.    The most recent quarterly command
                         rates vary from $1.45 a man for commandswith less than 1,Oc)Cpersonnel
                         to $1 a man for those with 25,000 and over. Similarly, central post
                         fund allocations vary from $1 to $3.55 a man. Unit funds receive $0.50
                         a man, regardless of personnel strength.
                               The Air Force welfare fund allocates resources to all major commands
                         quarterly on the basis of their average daily strength and a rate of $6
                         a man. The major commandsredistribute      a portion of this allocation
                         through applicable nonappropriated fund channels at not less than $1.50
                         a man a quarter to central base funds and $2,25 a man a quarter to
                         isolated unit funds.      * .                                .
                               The Army and Air Force Central Mess ??u.nds  were established to provide
                         financial assistance to open messes through the issuance of loans for the
                         establishment and maintenance of adequate facilities.      The Army mess fund
                         also makes grants to open mess activities.
                              The Army mess fund's principal source of revenue is the profits
                         generated from the sale of alcoholic-beverage-control  decals to the open
                         messes. Until March 31, 1969, it was the Army's policy to levy assess-
                         ments on gross profits of messes within the continental Uz-Lted States.
                         Since this assessment was not sufficient to provide operating resources
                         for       the   fund,   the   cost   of   alcoholic-beverage-control   decals   xas   increased
                         from '$!,O5 a thousand to $53 a thousand and the assessment on gross profits
                         was discontinued.
                                                                            Page 2
r   rs   ‘VA

                     The Air Force mess fund assesses major commands quarterly for
               one half of 1 percent of the gross income of all clubs and messes
               within the command.

                     The Navy Central Recreation Fund provides a means of supporting
               and equalizing  the various recreation   funds of the Xavy. The fund
               consists of a General Account, a Ships' Stores Account, and an Officers'
               Mess Account.   The Ships' Stores Account was established    separately
               from the General Account so that ships' store profits    would be used
               only for Bavy personnel and not for other service personnel or for
               dependents of Navy personnel.    The Officers'  Mess Account was estab-
               lished to ensure that the funds used to support ccm...issionad officers'
               messes are provided only by commissioned officers.

                       General Account income is derived from assessments of up to 4.C
               percent of Navy exchange sales (depending on sales volume), 1.25 percent
               of gross sales of enlisted open messes, and 53 percent of slot machine
               profits    of enlisted men's clubs and messes. The Officers'  Mess Account
               receives the same type of income from officers'    open messes. An assess-
               ment of from 1 to 2 percent of total sales of ship stores afloat    (depend-
               ing on ship personnel allowances) provides income to the Ships' Stores

                     The Marine Corps Central Recreation and Mess Funds are monetary
               reserves which provide financial   assistance to local recreation programs
               and to clubs and messes, respectively.

                       The primary source of income for the recreation     fund is an annual
               donation, in varying amounts, from the &Marine Corps Exchange Fund. The
               exchange fund donated $!+.5~,003 in 1569 and $503,033 in 1972. The re-
               creation fund subsidizes local recreation activities        if the local
               activity    has no independent source of nonappropriated      funds or if the
               local activity        cannot bear the entire costs. The recreation     fund also
               provides grants and loans for the construction       and rehabilitation     of
               recreation     facilities.

                      The mess fund assesses clubs and messes at the rate of 3 percent
               of gross income on alcoholic   beverage sales and 25 percent of net
               profit   from slot machine operations.  The mess fund provides individual
               clubs and messes with grants and interest-free   loans.

                     The Army and Air Force Civilian Welfare Fund receives a 5-percent
               assessment from post and base restaurants   and provides grants and loans
               for rehabilitation  and expansion of restaurant  facilities.