cid = L: m ‘- i ‘3 +=b I-. -0 : 0 x w -. - - J z h *’ 3 A V CD united States General Accounting Office Washington, D.C. 20648 Accounting and Financial Management Division B-204400 January 17,199O The Honorable Nicholas Mavroules Chairman, Subcommitteeon Investigations Committee on Armed Services Houseof Representatives Dear Mr. Chairman: Our previous report entitled, Foreign Military Sales:Redirection of Accounting hprOVeIYN?nt Efforts Is Appropriate (GAOjAFMD-88-76, Sep- tember 15, 1988), concurred with the Department of Defense’s(DO?) proposed efforts to addresslong-standing foreign military sales(FMS) accounting problems. Theseefforts included the development and imple- mentation of a new central FMS accounting and billing system and the establishment of a secondFMStrust fund. In responseto that report, the former SubcommitteeChairman requested that we evaluate DOD'S prog- ress in implementing these improvements. After meeting with your office, we agreed to take a three-step approach in responding to this request. First, we agreedto evaluate (1) DOD'S efforts to enhancethe current FMS accounting and billing system, (2) DOD'S progress in resolving the differences between billing and dis- bursement records in the current trust fund, and (3) DOD'S planned implementation of a secondFMStrust fund to isolate the errors associ- ated with existing salesand provide a “clean slate” for newly initiated sales.Second,we agreedto evaluate the Department of the Air Force’s progress in developing a new FMS accounting and billing system. Third, we agreed to monitor this system development effort and periodically brief the Subcommittee staff. This report discussesthe first of these efforts. Subsequentreports will be issued to respond to the other seg- ments of your request. We found that DOD has implemented two system enhancements,referred to as caselevel disbursements and positive transaction control, to (1) facilitate the identification and timely resolution of differences between the disbursement and billing records associatedwith FMScases and (2) help ensure the accurate and complete recording of FMSdata. The Air Force Audit Agency is currently testing these system enhance- ments. The Air Force will need to correct any system weaknessesidenti- fied through the testing. Page 1 GAO/AFMD-90-18Foreign bfilitary Sales - We also found that DOD has made progress in reconciling the differences between disbursement and billing records. The reconciliation efforts have reduced the net differences from $229 million in December1987 to $67 million as of August 1989. In June 1989, the Deputy Secretary of Defensepostponed the implementation of the secondFMS trust fund becausethe planned implementation would not have segregatedactivity associatedwith new FMS casesfrom those in the existing trust fund. The Air Force was directed to develop a plan to establish a secondtrust fund independent of the existing trust fund. The Air Force submitted its plan to the Deputy Secretary of Defenseon November 17,1989. The Arms Export Control Act (22 USC. section 2751 et seq.) gives the ckground President authority to sell defensearticles and servicesto eligible for- eign countries and international organizations, generally at no profit or loss to the US, government. The act generally requires foreign custom- ers to pay, in advance,amounts sufficient to cover costs associatedwith their sales agreements.DOD then usesthe funds, held in trust by the Department of the Treasury, to pay private contractors and to reim- burse DOD activities for the cost of executing and administering FMS agreements. As of September30,1989, there were over 17,000 open FMS sales agree- ments-commonly referred to as salescases-valued at about $156 bil- lion.’ This included undelivered goodsand servicesvalued at around $62 billion, For fiscal year 1989, new orders totaled approximately $10.6 billion. The DefenseSecurity AssistanceAgency (DsAA) has overall responsibil- ity for administering the FMSprogram. Generally, the Army, Navy, and Air Force execute salescases.The military servicesreport detailed dis- bursing and accounting data to a central activity-the Security Assis- tance Accounting Center (w)-which maintains the records of each country’s trust fund balance and issuesperiodic statements to foreign customers summarizing amounts charged to their salescases. For more than 10 years, GAO and DOD auditors have reported major accounting and internal control weaknessesimpairing DOD'S ability to properly managethe FMS trust fund and provide accurate statements to Y ‘These 17,000FMScasesare designatedopenbecauseportions of their transactionsare incomplete; that is, delivery of materiel,performanceof services,completionof financial transactions,or render- ing of the final statementof accountshas not occurred Page 2 GAO/AFMD-90-18Foreign Military Sales / B-204400 / customers, These weaknessesincluded (1) inadequate internal controls over the accuracy of data the military departments submit to the central accounting system maintained by WACand (2) an inability to reconcile country level trust fund balanceswith the detailed balance of each country’s salescases.As a result, old discrepanciesremain unresolved while new errors continue to occur, and complete reconciliations are dif- ficult, if not impossible, without an extraordinary amount of research. Our June 198’7and March 1988 testimonies2describe these weaknesses in detail and provide specific examples of their effects on the accuracy of FMS accounting records. Furthermore, OMB recently identified the foreign military salesprogram on its list of “high risk” areas in the federal government. OMB stated that FMS’ long-standing problems are primarily related to financial systems and unreconciled balancesbetween disbursement from the FMS trust fund and deliveries made to FMS customers.Thus, there is no assurance that all applicable costs are charged to the customers. In 1982, after 6 years of unsuccessfulefforts to improve central MS accounting, DOD established the FMSFinancial ManagementImprovement Program under the DefenseComptroller. Under the program office’s direction, DOD initiated a comprehensiveplan to correct past deficien- cies. A new central accounting system, which also included the develop- ment of interfacing systems in each military service, was the centerpiece of this plan. In July 1988, the former Deputy Secretary of Defenseredirected DOD’S efforts to improve the financial managementof the foreign military sales program. The Deputy Secretary mandated the immediate termina- tion of the central accounting system development effort becausethe project had substantially exceededcost and scheduleestimates without achieving systemwide capability. As a result, the Deputy Secretary of Defenseappointed the Air Force as the executive agent to design, develop, implement, and operate a new central FMSaccounting and bill- ing system. The Deputy Secretary also directed the establishment of a secondFMS trust fund by October 1989. Y “DOD’sFinancial Managementof the ForeignMilitary SalesProgram(GAO/T-AFMD-87-12,June 4, 1087)and Statusof DODEfforts to ImproveAccountingfor ForeignMilitary Sales(GAO/ T-AFMD-88-9,March 31, 1988). Page 3 GAO/AFMLMO-18Foreign Militnry Sales -I The objectives of our review were to evaluate DOD'S efforts since July Objectives, Scope,and 1988 to (1) enhancethe current FMSaccounting and billing system, thodology (2) resolve differences between billing and disbursement records in the current FM$ trust fund, and (3) establish a secondFMStrust fund. To addressour objectives, we interviewed representatives of the Depart- ments of the Navy and the Air Force, the DefenseSecurity Assistance Agency, and the DOD Office of the Comptroller in Washington, D.C.; the Department of the Army in Indianapolis, Indiana; and the Security Assistance Accounting Center in Denver, Colorado. We obtained a copy of the November 1988 plan outlining DOD'S method- ology for implementing the secondtrust fund and the system enhance- ments neededto facilitate this implementation. We discussedthe actions taken by LHAA,MAC,and the military departments to test and implement the planned system enhancements.‘Wedid not evaluate the system enhancementefforts becausethe Air Force Audit Agency is in the pro- cessof conducting comprehensivetests of them. They anticipate com- pleting this system testing by January 1990, We also reviewed the SAACquarterly reconciliation reports to document the reported differences between the disbursement and billing records for the FMS program. Further, we obtained and reviewed the reconcilia- tion progress reports prepared by SAACand the military departments to ascertain the specific actions they had taken or planned to initiate in order to resolve the differences between the disbursement and billing records. We also reviewed reports prepared by GAO, the WD Inspector General, and congressionalcommittees to ascertain which specific internal con- trol and accounting system problems had been previously identified and whether corrective actions initiated by DOD adequately addressedthe problems. We conducted our review between December1988 and August 1989 in accordancewith generally acceptedgovernment auditing stan- dards. We discussedthe results of our review with Defenseofficials and incorporated their commentswhere appropriate. Page 4 GAO/AFMDWlS Foreign Military Sales : .I>,. I To more accurately account for and control the FMSprogram, DOD imple- System Enhancements mented two system enhancements:caselevel disbursements and positive Address F’undamental transaction control. As we stated in our September 1988 report3 , incom- Wegknesses I plete and inaccurate data was transmitted from the military depart- ments and recorded in the central FMSsystem. This adversely affected I, the reliability of FMS accounting data and the reconciliation of discrepan- !/ ties in customer accounts.Recognizingthe need to improve the integrity I of the FMS data, DOD decided to implement these controls as part of its efforts to implement the secondtrust fund rather than waiting for the new FMS accounting system to be developed and implemented. The Air / Force Audit Agency anticipates completing its testing of these enhance- , ments by January 1990. Cask Prior to the implementation of caselevel disbursements,the central I Level Disbursements accounting system maintained billing and disbursement records at dif- ferent levels of detail. The billing records were recorded on a country and caselevel, while disbursementswere recorded only on a country level. Therefore, when a discrepancy between the two sets of records occurred, SAACcould not readily reconcile the disbursing and accounting transaction that causedthe difference. As of March 1989, disbursement data are recorded at the caselevel, which enablesthe military services and ~AACto have comparable data on each sales case.This control is expected to assist ~AACand the military servicesin identifying and rec- onciling differences in individual caserecords. Positive Transaction Prior to the implementation of positive transaction control, the central Coytrol accounting system operated by SAACdid not include adequate internal controls to identify or prevent errors and ensure that rejected data transactions were promptly corrected and reentered into the system. We previously identified4 the following system weaknesses: l System checkson the quality of data were nonexistent or inadequate. Data were not subjected to standard checksor edits before they were submitted to ~AAC,and edits within &IA&I system were designedto speed processingrather than ensure accuracy. . SAACdid not control transactions rejected by the accounting system to ensure that they were promptly corrected and resubmitted. %eepage1. 4DOD’sFinancial Managementof the ForeignMilitary SalesProgram(GAO/T-AFMD-87-12,June 4; l‘g87). Page 5 GAO/AFMD-90.16Fore&~ Military Sake Positive transaction control, which was implemented in October 1988, edits and validates data transmitted by the military departments prior to processingthe data into the central accounting system. Positive trans- action control will reject transactions failing the edit criteria and post them to a suspensefile for correction by the appropriate service. The implementation of positive transaction control is expected to give SAAC more accurate and timely information on FMS cases. The military’departments and SAACare making progress in resolving the jgress Is Being differences between the billing and disbursement records. Under the de in Recorkiling direction of DSAA,DOD organized a working group to coordinate this rec- ling and onciliation. This working group is comprised of DSAA, SAAC,and the mili- tary departments. The group’s efforts have concentrated on the ibursement Records reconciliations of cash deposits, by country, since the establishment of the centralized accounting system in 1980 and the disbursementsand related billing for specific out-of-balance cases. According to SAACrecords, as of August 1989, the total unreconciled dif- ference between billing and disbursement records was $247 million with a net unreconciled difference of $67 million; by contrast, the total differ- ence as of December1987 was over $1 billion with a net difference of $229 million. Cash Deposits Reviewed The working group’s initial effort was to review cash deposit data for each country. As of June 1989,SAAC had reviewed all cash transactions posted since the current accounting system was implemented in 1980. ~AACreviewed all deposits from customer countries to ensure that they were accurately recorded and that each service had an accurate cash balance for each country. Thus, each service had the baseline informa- tion neededto trace the amount of disbursementsmade for each foreign country. When a service identifies a correcting entry for its own FMS records, SAACis to make a corresponding adjustment to its records. According to SAAC, cash transactions for earlier FMS caseswill be reviewed by March 1990. Qut-Of-Balance Conditions The military services are currently reconciling differences between dol- &e Being Reduced lar amounts that have been spent from the FMS trust fund with the cost of deliveries reported to the customers.MAC’S verification of cash Page6 GAO/AFMD-90.18ForeignMilitarySales B-204400 t deposit data has assistedthe military servicesin their review of individ- ual caserecords and the resolution of out-of-balance conditions. Each military service managesthe individual sales casesand reports transactions, such as performance (delivery of goods and services) and the disbursement of cash, to MAC.In addition, resolving the differences between billings and disbursements for an individual caseand preparing the resulting adjustments are ongoing functions of each service’s FMS casemanagement.Reconciliation efforts of the servicesinclude the following. . Army officials stated that they compared billing and disbursement information transmitted from the Army to SAAC. This effort involved matching the reported disbursements from status reports to actual case files. An Army Finance Center representative stated that for specific Saudi Arabia casesthey identified about $8.3 million that should have been reported as a DSAAdisbursement for Saudi Arabia but was errone- ously reported as an Army disbursement. By correcting the accounting records, the overall effect of the DOD out-of-balance condition for Saudi Arabia was reduced by about $8,3 million. This effort also identified another $29 million that should have been reported as an Army dis- bursement rather than a D~AA disbursement. l In October 1987, the Air Force assumedthe accounting and reconcilia- tion responsibility for all Air Force FMS cases.Prior to this time, these responsibilities were split between SAACand the Air Force. An Air Force representative stated that centralizing the accounting for Air Force caseshas consolidated controls for accounting and reporting, which facilitates reconciliation of FMScases.As part of this reconciliation effort, Air Force identified a total of $562 million of disbursements and adjustments erroneously recorded in its accounting system. The Air Force corrected these disbursements and made the appropriate adjust- ments after it researchedthese casesand found the necessarysupport- ing documentation. According to an Air Force official, these accounting adjustments most likely would not affect the total cash balance; how- ever, they resulted in correcting individual country and caseaccounting records. l The Navy’s reconciliation efforts included comparing the disbursements reported to SAACwith Navy source documents.One comparison identi- fied 100 valid casedisbursementsvalued at about $26 million that did not identify the specific country and casethe disbursement should have been applied to, due to a system interface problem. According to Navy Page7 officials, this problem has been corrected. At the January 1989 reconcil- iation meeting, the Navy reported that its reconciliation of disburse- ments had identified $60 million of disbursementspreviously not reported and corrected $47 million of erroneously reported disburse- ments. The Navy has also initiated other reconciliation activities. It is in the processof having FMSaccounting data currently stored on microfiche transferred to computer diskettes. This transfer of archived data will assist in comparing actual disbursements for FMScasesto reported disbursements. DSAA,MAC,and the military servicesface a difficult challenge in recon- ciling the remaining $67 million in differences between billing and dis- bursement records. To date, the reconciliation efforts have centered on activity that occurred since the establishment of SAACin 1980. The remaining reconciliation efforts, however, must addresserrors that pre- date 1980 and may well have occurred 10 to 15 years ago. Supporting documentation may no longer be available. If SAACand the military service are not able to completely reconcile spe- cific differences, the related casesare to be forwarded to the Reconcilia- tion and CaseClosure Board. According to its charter, the Board’s primary purpose is to examine unreconcilable imbalances in individual casesand determine what action-such as additional billings to cus- tomer countries-should be taken. The Board members consist of the DSAAComptroller, DOD’S Director of Accounting Policy, and a representa- tive of the military service involved in the caseunder review. The Board’s decisionsmust be completely documented becausethey could result in the expenditure of government money to cover any dis- bursement of customer funds that cannot be supported by billing records. In these cases,DODmay have to request additional funding from the Congress.Conversely, if the Board’s decisionsresult in additional billings to the foreign countries, the Board must be able to fully support those billings, Page 8 GAO/~9048 Foreign Miliw salea 0204400 I , I Reconciling the differences between DOD’S foreign customer billing FIL$Reports and OMB records and trust fund disbursements has been a long-standing problem Idebtified FMS and has precluded DOD from providing an accurate accounting for FNS Webknesses customer funds. In their fiscal year 1988 I?ederalManagers’ Financial I Integrity Act” (FI@ report, the military departments identified the fol- 1I lowing FMS accounting weaknesses: . The Army attributed its problem to the lack of positive transaction con- trol. As a result, its logistical and financial records are not in agreement and &UC’s and the Army’srecords are not in balance. An Army Finance Center official stated that, to help alleviate this problem, the Director of Finance and Accounting issued a policy letter in June 1988 requiring that each casemanager be responsible for (1) the accuracy of the accounting and logistical data for the assignedcaseand (2) initiating the necessaryactions to ensure that all errors receive prompt clearance. Prior to this, the casemanager was only responsible for the accounting data. . The Air Force recognized&at, as a result of its inability to resolve the differences between its billing and disbursement records, the Congress might have to supplement the FMS trust fund. The Air Force’s corrective action plan centers on the implementation of the caselevel disbursement and positive transaction control system enhancementspreviously discussed. . The Navy identified weaknessesin the timeliness and usefulness of information produced by the system; inadequate system interfaces, hardware and software, and reporting; and overall systems control problems. To correct these problems, the Navy implemented a new FMS system in October 1989. A Navy official stated that the DOD Office of Accounting Policy has identified somesystem weaknesses.As a result, the Navy Finance Center internal auditors are planning an audit of the system in early 1990. Becauseof the significant dollars involved and the long-standing nature of the problems in the FMS program, we believe it is appropriate for the respective military departments to continue to report this problem in their annual Financial Integrity Act reports. Y “The FederalManagers‘Financial Integrity Act of 1982(31 USC, section3612(b)and (c)) gives agencymanagementthe primary responsibility for maintaining adequatesystemsof internal control and accounting..Theact requiresagencyheadsto report annually to the Presidentand the Congress on the status of thesesystems,and it holds managersresponsiblefor correctingidentified deficiencies. Page 9 GAO/AFMD-90-18Foreign Military Sake I B-204400 OMB has also recognizedFMS weaknesses.As mentioned previously, OMB has recently included FMSon its list of “high risk” areas in the federal government. Becauseof this action, the Deputy Secretary of Defense will be required to pay special attention to the FMS area. For example, the Deputy Secretary is to receive reports at least quarterly that high- light and explain the progress or delays in correcting FMS' problems. Fur- thermore, OMB requires that the Department of Defense’sbudget identify efforts being made to correct the problems so that adequate resources can be allocated for those efforts. In June 1989, the current Deputy Secretary of Defensepostponed the h/nplementation of the establishment of the secondtrust fund. He took this action becausethe second Trust Fund fund could not be implemented as originally intended by the October 1989 deadline that the former Deputy Secretary of Defenseset in his July 1988 memorandum. DOD'S Director of Accounting Policy stated that the purpose of the sec- ond trust fund was to segregateactivity associatedwith new FMS cases from those in the existing trust fund. In this way, the unresolved dis- crepanciesin casesin the current trust fund would be isolated from the balancesrelated to new cases.As a result, DOD would be better able to (1) research and resolve discrepanciesin the current trust fund, (2) avoid the creation of discrepanciesfor new cases,and (3) reconcile country level trust fund balances.However, instead of creating a sepa- rate trust fund, DOD planned to use the current trust fund as a “carrier account.” That is, DOD was planning to processall FMS transactions through the existing trust fund and only record in the secondtrust fund those transactions that were free from error. Becausenew casetransac- tions with errors would remain in the current trust fund until corrected, the plan to use the secondtrust fund to segregateall new caseactivity for additional control purposes would not be met. As a result, any dis- crepanciesfrom new caseswould be added to those already in the existing trust fund. According to Air Force officials who participated in planning the imple- mentation of the secondtrust fund, the carrier account approach was selecteddue to the limited time allowed for this implementation. DOD had about 15 months from the time of the Deputy Secretary’s memorandum in July 1988 until October 1989. During the initial 4 months, DOD examined alternative approaches.In November 1988, it was estimated that implementing the secondtrust fund as intended would require about 14 months, which exceededthe October 1989 time frame by Page10 GAO/AFMD-gO-l8ForeignMilitary8ales B-204400 3 months. These extra months were deemednecessarydue to the com- plexity involved in changing DOD'S multiple financial and logistical sys- tems to adequately account for a secondtrust fund. Therefore, Air Force officials told us that using the current trust fund as a carrier account was seenas the most feasible way to implement the secondtrust fund in the remaining 11 months. This plan also identified the previously dis- cussedsystem enhancementsthat would facilitate implementation of the secondtrust fund and addressfundamental weaknessesaffecting the reliability of FMS data. The DOD Inspector General’s examination of the secondtrust fund’s implementation plan concluded that the carrier account approach would not achieve the intent of the secondtrust fund. We agree with this assessment.In June 1989, the Deputy Secretary of Defenseissued a memorandum postponing the implementation of the secondtrust fund. This memorandum specified that the Air Force, as executive agent, had 120 days to develop a viable plan to establish a secondtrust fund inde- pendent of the existing trust fund. The plan was submitted on’Novem- ber 17, 1989. Someservice representatives believe that the newly implemented sys- tem enhancements-case level disbursements and positive transaction control-may preclude the need for a secondtrust fund. They believe these enhancementswill reduce the potential for the types of errors that created unreconciled discrepanciesand that it will enable reconciliation of country level trust fund balances. The results of the Air Force Audit Agency’s comprehensivetest of these enhancementsshould indicate if caselevel disbursements and positive transaction control are working as intended and are addressingthe sys- tem weaknessespreviously identified and reported upon by GAOand the DOD Inspector General. The testing results may also identify issuesthat DOD will need to addressin order to improve the accounting and billing for the foreign military salesprogram. DOD has implemented enhancementsto the central FMSaccounting sys- Conclusions tern that are intended to improve FMS accounting. Until now, the services and SAACwere maintaining data at different levels of detail, which has Y precluded an accurate accounting to the foreign countries and hindered the reconciliation process.The caselevel disbursement and positive transaction control enhancementsto the central accounting system Page 11 GAO/AFMD-90.18Foreign Military Salea should help ensure that central FMSrecords are accurate and that dis- crepanciesbetween disbursement and billing records are promptly iden- tified and corrected, To do so, DOD needsto ensure that the reconciliation efforts remain an integral part of improving the FMS accounting data. DOD's decision to postpone the implementation of the secondtrust fund was appropriate becausethe planned implementation of the secondtrust fund would not have segregatedactivity associatedwith newly initiated FMScasesfrom the cumulative balancesassociatedwith casesin the existing trus’t fund. The Air Force was directed to develop a plan to establish a secondtrust fund, in accordancewith the intent of the July 1988 memorandum. As part of this process,the Air Force was also to determine the need for a secondtrust fund. The Air Force Audit Agency is in the processof evaluating the caselevel disbursements and positive transaction control enhancements.The sys- tem testing may identify issuesthat need to be corrected. To improve the overall accounting for the Foreign Military Salesprogram, we believe the Secretary of the Air Force will need to correct any system weaknessesidentified by the Air Force Audit Agency’s current system testing. We are not making any recommendationsat this time. However, as part of our ongoing work for the Subcommittee,we will continue to monitor DOD'S efforts to improve FMS accounting. Specifically, we will monitor whether DOD'S top managementcontinues to focus attention on the reconciliation efforts, DOD takes action to correct the system weaknessesidentified by the Air Force Audit Agency’s current testing of the FMS system, and the decisionsof the Reconciliation and CaseClosure Board are sup- ported by adequate documentation. As requested by your Subcommittee,we did not obtain written agency comments on a draft of this report. However, the results of our review were discussedwith responsible agency officials and their comments were incorporated where appropriate. We are sending copies of this Y report to the Secretary of Defense;the Secretariesof the Air Force, Army, and Navy; the Director of the DefenseSecurity Assistance Agency; and the Director of the Security AssistanceAccounting Center. Copies will also be made available to others upon request. Page12 GAO/AFMD-IW)-18Forei~plMilltarySales * . - This report was prepared under the direction of Jeffrey C. Steinhoff, Director, Financial ManagementSystemsIssues,who may be reached at (202) 275-9454 if you or your staff have any questions. Other major contributors to this report are listed in appendix I. Sincerely yours, Donald H. Chapin Assistant Comptroller General Page 13 GAO/AFMD-9@18 Foreign Military Sale6 AppebndixI M ‘or Contributors to This Report P ! Darby W. Smith, Assistant Director, (202) 275-9482 Ac4ounting and Fi&ncial Management ision, Washington, David E. Flores, Evaluator-in-Charge Debver Regional Diane L. Sanelli, Reports Analyst Off/ice (001478) Page 14 GAO/AFMD-90-M Foreign Military Sales f 3 -. -. = ;: c: =-. T % 3 i- I
Foreign Military Sales: Defense Efforts Are Improving Program Accounting
Published by the Government Accountability Office on 1990-01-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)