oversight

Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of Resources

Published by the Government Accountability Office on 1990-02-23.

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

__
____._._
  __._
   ..-...
     ._...^     .1--..
         .-.-...-.
GAO
____,_l_“..,_., .._._..._ .__._..-....-.._...._
                             l__i           _. -__-...--___   ._--       .._   I~   ....,ll_--.-l___-l_l-.-.   I .-__-   -   __________-




I+‘c~l,IYl;l I’\’ 1 !l!)O
                                                                     FINANCIAL AUDIT
                                                                     Air Force Does Not
                                                                     Effectively Account
                                                                     for Billions of Dollars
                                                                     of Resources
I
    I
        ,                                                                                                    I
        I
        /
        /

            United States
            General Accounting Office
            Washington, D.C. 20648

            Comptroller  General
            of the United States

            B-234326

            February 23,199O

            To the President of the Senate and the
            Speaker of the House of Representatives

            This report presents the results of our review of the Air Force’s financial management
            operations and its efforts to prepare consolidated financial statements. W h ile the financial
            statements, included as appendix I, purport to show the Air Force’s financial position and
            results of operations for fiscal year 1988, our audit work demonstrates that the Air Force
            does not have accurate cost data for almost all of its non-cash assets.

            Air Force managers are accountable for $276 billion in weapons systems, inventories, and
            other assets and for annual appropriations of over $90 billion. However, the Air Force’s
            financial management systems and internal controls are not sufficient to provide adequate
            and reliable financial information for effective management of the Air Force’s diverse and
            complex operations. Our report discusses these problems and contains recommendations for
            corrective actions.

            W e are sending copies of this report to the Secretaries of the Air Force and Defense, the
            Director of the Office of Management and Budget, interested congressional committees, and
            other interested parties.

            This report was prepared under the direction of David M . Connor, Director, Defense
            Financial Audits, who may be reached on (202) 27.59406 if you or your staff have any
            questions.




            Charles A. Bowsher
            Comptroller General
            of the United States
Qecutive Summq


             Through the 1980s there have been mounting concerns over the federal
Puipose      government’s declining fiscal condition and the ineffective management
             and control over its financial operations. While various reforms are
             being considered and others are under way, more urgent and decisive
             actions are needed to deal effectively with these concerns and problems.

             Over the last several years, GAO has conducted a number of financial
             audits of major federal civilian agencies and departments which show
             that government managers do not adequately (1) control their costs and
             resources, (2) provide the Congress and the public a true accounting for
             the assets entrusted to them, and (3) consider financial information in
             making decisions.

             There is no better way to gain an understanding of the problems and
             required corrective actions associated with the financial management
             operation of an agency than to do a full scale audit of its financial state-
             ments. To begin to gain a perspective on the quality of the information
             and systems available in the Department of Defense (DOD), the largest
             department of government, GAO attempted to conduct a financial audit
             of the Air Force. The Air Force is the only military service which has
             tried to prepare a set of financial statements in accordance with gener-
             ally accepted accounting principles for federal agencies.


             The Air Force is responsible for weapons systems, inventories, and other
Background   assets reportedly valued at $275 billion and, as of September 30, 1988,
             had thousands of outstanding contracts valued at over $250 billion. The
             Air Force annually receives appropriations of about $90 billion. It oper-
             ates over 130 bases located throughout the world, representing about 16
             percent of the real property held by the government and employs about
             900,000 civilian and military personnel.

             The Air Force dwarfs the largest organizations in the private sector as
             well as most other federal agencies. Being a government agency, the Air
             Force is not a profit making organization, but as one of the world’s larg-
             est organizations, it needs to be concerned about, and should be held
             accountable for controlling its costs, operating efficiently, and protect-
             ing its resources. Accountability for its extensive operations can only
             flow from integrated systems that accurately capture, process, and
             report day-to-day financial transactions and provide firm control over
             costs and resources.




             Page 2                                   GAO/AFMD-90-23   Air Force Financial   Audit
                  ExecutiveSummary




                  The integrity of these data and the systems that process them, as well as
                  the reports used within and outside the organization, are best ensured
                  by regular, periodic independent financial audits, Such audits provide
                  the discipline needed to ensure that bad data, systems, and reports are
                  highlighted for improvement.

                  To its credit, the Air Force attempted to produce a set of financial state-
                  ments for 1988 and submitted them to GAO for audit.


                  The Air Force does not have accurate cost data for almost all of its non-
Rehlts in Brief   cash assets such as inventory, equipment, aircraft and missiles.
                  Accounts for over 70 percent of the assets on its consolidated statement
                  of financial position were unauditable, and GAO was, therefore, unable to
                  express an opinion on the financial statements for fiscal year 1988.
                  Also, because of these weaknesses, the financial information produced
                  by the Air Force and reported to the Office of Management and Budget
                  and the Department of the Treasury is not reliable. In contrast, the fund
                  control procedures, that is, making sure spending limits are not
                  exceeded, generally operate effectively.

                  There are many reasons why the accounts were unauditable. The Air
                  Force does not have financial systems that produce reliable financial
                  data. A number of large dollar items-aircraft     and accounts payable,
                  for example-are not included in its accounting systems. A double-entry
                  set of books with a general ledger system is not maintained to establish
                  full accountability over costs and assets. To balance its accounts, the Air
                  Force made a large number of adjustments-some over $1 billion-but
                  the bases for these adjustments could not be explained by Air Force offi-
                  cials The inventory systems do not provide reliable data to support
                  either the quantities or the values of inventories on hand. There is not
                  an accounting for the full cost of its weapons systems-the cost of the
                  B-l bomber system alone is understated by at least $7.1 billion in the
                  financial statements.

                  The Air Force needs better historical cost data to improve its budgeting
                  and planning processes and it needs better financial systems to establish
                  accountability over the billions of dollars of assets entrusted to it.

                  The Air Force is not unmindful of some of its problems and has taken a
                  number of actions to correct these problems on a case-by-case basis.
                  That it took the initiative to prepare financial statements and have them
                  audited is an important step. The Air Force also has long-term projects


                  Page 3                                  GAO/AFMD-90-23   Air Force Financial   Audit
                             Executive   Summary




                             under way that are intended to address several of its financial manage-
                             ment weaknesses. But more needs to be done. It is evident that cost
                             effectiveness and efficiency need to become an Air Force priority and an
                             important part of the organization’s culture if meaningful and lasting
                             improvements in its financial management are to be achieved.



Pr&pal     Findings

Financial Systems Do Not     The Air Force accounting and financial management systems can neither
Prdvide Reliable Financial   provide complete and reliable financial data nor be depended upon to
                             report accurately on the resources entrusted to its managers. Much
Data                         information that is produced is not timely. Financial reports cannot be
   /                         developed without extensive, manual, time-consuming efforts to compile
                             data from a variety of sources. These conditions adversely affect finan-
                             cial reporting and management at all levels, ranging from the Air Force
                             consolidated financial statements down to base-level financial reports.

                             The General Accounting and Finance System was to serve as the Air
                             Force’s general ledger, but a number of very significant accounts were
                             not included. Certain data, such as aircraft values ($82 billion) and
                             accounts payable amounts ($18 billion) had to be derived from property
                             systems or from extracts of budgetary data rather than from a properly
                             designed financial management system.

                             Financial reports to the Office of Management and Budget and the Trea-
                             sury are also inaccurate and unreliable. In recent years, some Air Force
                             components failed to submit financial data in time to be included in the
                             year-end Treasury reports. As a result, March 31 data was used in lieu
                             of missing September 30 data. Furthermore, over $25 billion of Air
                             Force assets were not included in financial reports to the Treasury, and
                             an additional $10 billion in transactions were counted twice.

                             Financial information requires constant analysis to ensure its validity.
                             GAO'S  analysis of selected accounts revealed obvious problems, such as
                             negative values for certain inventories. As a minimum, these warranted
                             further investigation so that appropriate actions could be taken and cor-
                             rections made. In many instances, Air Force officials simply have
                             allowed obvious erroneous data to remain in the accounting records, and
                             these data are ultimately included in agency financial statements and
                             other financial reports.


                             Page 4                                 GAO/AFMD-90-23   Air Force Financial   Audit
                         Emcutlve   Summary




                         As early as November 1983, the Air Force recognized weaknesses in the
                         current systems and reported its general ledger accounting system as
                         deficient to the Secretary of Defense. The Air Force subsequently con-
                         tracted for the development of requirements for a new general ledger
                         accounting system and currently is in the early stages of soliciting con-
                         tracts to develop and implement it. However, this system does not
                         directly cover the major portion of Air Force assets, and the Air Force
                         does not expect it to be operational before 1994.

                         With the current and foreseeable budget constraints and changing mili-
                         tary threat, 1994 is not soon enough to show major improvements. The
                         Air Force will need to make major decisions in the near term and will
                         need accurate data to make them. What the Air Force needs to do now is
                         to take interim steps to improve the quality of data it derives from
                         existing systems as well as undertake steps to upgrade and replace those
                         systems. The choice between upgrading, replacing, or both should be
                         based, in part, on the time it takes to achieve substantial improvement
                         in the available financial management data.


Air Force Has Basic      The Air Force has significant internal control weaknesses, some of
Internal Control         which it disclosed in its 1988 Federal Managers’ Financial Integrity Act
                         report, and others which GAO noted in its audit work. The Air Force
Weaknesses               reported that two of its accounting systems, including the General
                         Accounting and Finance System, did not conform to prescribed princi-
                         ples and standards.

                         GAO  identified other material control weaknesses. Unsupported and arbi-
                         trary adjustments totalling billions of dollars were made to account bal-
                         ances and records throughout fiscal year 1988. The Space Systems
                         Division trial balance for March 31, 1988, differed from its subsidiary
                         records by $2.4 billion. In order to get agreement, records were adjusted
                         without support. By not performing reconciliations and by making
                         unsupported adjustments, accountability was lost and the opportunity
                         to determine and address the causes of possible instances of mismanage-
                         ment, fraud, or abuse was missed.


Full Costs of Weapons    The Air Force financial systems do not provide its managers with com-
Systems Not Identified   plete and reliable information on either the acquisition or operating
                         costs of its aircraft and missile systems. For example, the procurement
                         cost for each B-l bomber is reported by the Air Force to be $150 million;
                         GAO found that the cost is, in fact, about $219 million. The total reported




                         Page 6                                  GAO/AFMD-90-23Air   ForceFinancialAudit
                           Executive   Summary




                           cost of the B-l system- $21 .Q billion-is understated by at least $7.1
                           billion. Similar understatements exist for the F-16 aircraft ($6.8 billion)
                           and the F-16 aircraft ($6.3 billion). The gaps are even wider if all the
                           government-furnished materials provided to contractors for aircraft
                           production and related research and development are considered.

                           Air Force property systems do not track military hardware in the hands
                           of contractors. For example, $630 million of satellites and $5.7 million of
                           engines for C-20A cargo planes were paid for by the Air Force and held
                           by contractors but not recorded in any Air Force property or accounting
                           system.


                           Selected Acquisition Reports sent to the Congress include more accurate
                           actual costs on weapons systems, but these costs were also not complete.
                           As a result, actual cost information is not available in the accounting
                           systems for reporting to top Air Force and DOD officials, the Congress,
                           and the public, nor are such data available to Air Force managers for
                           decisionmaking at any level.


Inventory Systems Do Not   The Air Force maintains a reported $63.8 billion in inventories of sup-
Provide Accurate Data      plies and spare parts, eight times the inventories reported by General
                           Motors, one of the largest corporations in the United States. However,
                           the systems used to provide accountability over these immense invento-
                           ries do not provide reliable data supporting either their quantities or
                           value.

                           GAO'S current audit work, other recent GAO reports, and work by the Air
                           Force all confirm that long-standing Air Force problems in controlling its
                           inventories have not been resolved. Records of quantities on hand at Air
                           Logistics Centers, which reflect about $40 billion in inventory items, are
                           often inaccurate. Recordkeeping deficiencies contribute to $10 billion of
                           unrequired inventory. In addition, over 50 percent of the dollar value of
                           investment-item inventory at the Air Logistics Centers needs repair,
                           overhaul, or extensive maintenance to become serviceable, yet such items
                           are valued the same as usable items.




                           Page 6                                   GAO/AFMD-90-23   Air Force Financial   Audit
                                 Executive   Summary




Los4 of Accountability and       When accountability and accurate cost information are not maintained,
                                 the following conditions result:
Inadcurate Cost
Infojrmation
                             l   Financial information needed for top management’s or the Congress’
                                 analysis of Air Force trends is unreliable.
                             .   Operating costs of air wings, bases, depots, and commands cannot be
                                 compared and evaluated.
                             l   Losses can occur from fraud, waste, abuse, and mismanagement yet not
                                 be identified and their causes dealt with.
                             .   Inventories cannot be managed effectively to avoid shortages or exces-
                                 sive stocks.
                             .   Cost cannot be properly considered when deciding to replace or upgrade
                                 existing weapons systems.
                             .   The basis for evaluating procurements and budget requests is not as
                                 complete as it might be.

                                 There is no question that better cost data would improve the manage-
                                 ment control, budgeting, and planning processes of the Air Force. Only
                                 in cases where funds are unlimited and efficiency can be ignored can
                                 costs be considered unimportant, Neither case is true today-if it ever
                                 was true.


Recommendations                  improve financial management and bring greater efficiency to Air Force
                                 operations, The recommendations focus on utilizing existing financial
                                 information and developing more accurate financial information (chap-
                                 ter 2), performing reconciliations and documenting adjustments (chapter
                                 3), accounting for costs of weapons systems (chapter 4), achieving
                                 financial management of inventories (chapter 6), and developing a new
                                 accounting system (chapter 6).


                                 DODconcurred or partially concurred with all of GAO'Srecommendations.
Agency Comments                  (See appendix IV.) In commenting on many of the recommendations, DOD
                                 cited initiatives, discussed in the July 1989 Defense Management Report
                                 sent to the President, as being responsive to GAO'Srecommendations.
                                 However, the Defense Management Report describes the efforts to
                                 achieve the initiatives’ objectives in broad, general terms. It does not
                                 contain detailed plans or milestones of the specific actions that would be
                                 required to successfully implement the initiatives. DODstated that it was



                                 Page 7                                 GAO/AFMLl-90-23   Air Force Financial   Audit
Executive   Summary




unable to provide a comprehensive response with milestones for correc-
tive actions in time for inclusion in GAO'Sreport, It said that a compre-
hensive response will be provided on the final report.

Overall, DODsaid that it has been providing accurate and reliable data to
the Congress on weapons systems, but it is aware that the Air Force
accounting systems, including financial controls over inventories and
government-furnished materials, need improvement. DODalso said that it
will endeavor to make accounting and reporting data more consistent in
future reports.




Page 8                                  GAO/AFMD-90-23   Air Force Financial   Audit
C&dents


Ex$cutive Summary

                               The Government’s Financial Information and Control
                                   Environment
                               Meaningful Financial Statements and Audits Can                              16
                                   Strengthen Federal Financial Management
                               Department of the Air Force                                                 18
                               Objectives, Scope, and Methodology                                          18

Chhpter 2                                                                                                  21
Fidancial Management Need   for Meaningful, Accurate Financial Statements
                      Unreliable Reporting to Treasury
                                                                                                           22
                                                                                                           26
Sy$tems Do Not        Financial Management Systems Are Not Used Effectively                                28
Prdvide Reliable          to Manage Resources
                                                                                                           33
Financial Information ~~~~~~~~~ations                                                                      34
                               Agency Comments and Our Evaluation                                          36

Chapter 3                                                                                                  36
Internal Control       Accounts Not Routinely Reconciled
                       Account Balances Contain Unsupported, Arbitrary
                                                                                                           36
                                                                                                           39
WtiaknessesPrevent         Adjustments
Accurate Financial     Other Internal Control Weaknesses                                                   41
                                                                                                           46
Reporting and Reduce ~~~~~~~~ations                                                                        46
Accountability Over    Agency Comments                                                                     47
Assets
                     1
Chapter 4                                                                                                   48
Actual Costs of        Actual Cost of Aircraft and Missiles in Production Is                                49
Aircraft and Missiles ValueUnknown
                             of Aircraft and Missiles Is Not Based on Cost                                  60
Are Not Known          Government-Furnished    Materials Not Included in                                    53
                                    Valuations
                               Aircraft and Missile Modifications Are Not Capitalized                       53
                               Operating Costs of Aircraft and Missiles Are Not Known                       54
                               Controls Over Contractor-Held Property Are Not in Place                      66
                               Improvements Needed in Weapons Systems Cost                                  66
                                    Management


                                Page 9                              GAO/AFMD-90-23   Air Force FinanciaJ Audit
                        Contents




                        Conclusions                                                                  59
                        Recommendations                                                              60
                        Agency Comments                                                              60

Ch’pter 5                                                                                            61
In entory Systems Do    Scope of Inventory Management Operations
                        Inaccurate Records of Inventory Quantities
                                                                                                     61
                                                                                                     63
No i provide Accurate   Unreliable Inventory Values                                                  66
Financial Data          Change in Cost Accounting System Is Needed                                   67
                        Other Inventory Weaknesses                                                   68
                        Conclusions                                                                  70
                        Recommendations                                                              71
                        Agency Comments and Our Evaluation                                           71

Chapter 6                                                                                            72
Air Force Financial     Systems Alternatives for Developing Meaningful
                            Financial Information
                                                                                                     73
Management System       Plans to Develop a New Base-Level Accounting System                          74
Improvement Efforts     BLARS Status and Objectives                                                  75
                        BLARS Requirements                                                           75
                        Other Comments on the BLARS Development Effort                               76
                        Conclusions                                                                  78
                        Recommendations                                                              78
                        Agency Comments                                                              79

Appendixes              Appendix I: Consolidated Financial Statements of the U.S.
                            Air Force for the Fiscal Year Ending September 30,
                            1988
                        Appendix II: Comparisons Between Air Force Financial                         97
                            Statements and Treasury Reports
                        Appendix III: Objectives, Scope, and Methodology                             99
                        Appendix IV: Comments From the Department of Defense                        101

Tables                  Table 2.1: Accounts Developed From Alternative Sources                       24
                        Table 2.2: Examples of AFSC Control Account Balances                         30
                            With Significant Changes
                        Table 2.3: Variances in Divisional Trial Balances From                       31
                            Period to Period
                        Table 2.4: Variances Among Divisional Trial Balances at                      31
                            September 30,1988



                        Page 10                               GAO/AFMD-90-23   Air Force Fhncial   Audit
Contents




Table 2.6: Air Bases With Credit Balances for Medical/                         32
    Dental Stock Fund Inventories
Table 2.6: Air Bases With Credit Balances in                                   33
    Construction-In-Process Accounts
Table 4.1: Procurement Expenditures on Selected Aircraft                       52
    Programs Calculated by AVISURS and GAO
Table 4.2: Expenditures on Selected Aircraft Programs                          52
    Reported in SARs and Calculated by GAO
Table 6.1: Inventory Distribution as of September 30,                          63
    1988
Table 6.2: Unserviceable Inventory Not Reported as Such                        65
    in Air Force Records




Page 1 I                              GAO/AFMD40-23   Air Force Financial   Audit
Abbreviations

AFAFC     Air Force Accounting and Finance Center
AFB       Air Force base
AFDW      Air Force District of Washington
AFLC      Air Force Logistics Command
AFSC      Air Force Systems Command
ALC       air logistics center
ANG       Air National Guard
ASD       Aeronautical Systems Division
AVISURS   Aerospace Vehicle and Equipment Inventory, Status, and
              Utilization Reporting System
BLARS     Base Level Accounting and Reporting System
CEMS      Comprehensive Engine Management System
CMD       Contract Management Division
DLIA      Defense Logistics Agency
DMS       Depot Maintenance Service
DOD       Department of Defense
ElSD      Electronics Systems Division
FMFIA     Federal Managers’ Financial Integrity Act of 1982
GAFS      General Accounting and Finance System
GAO       General Accounting Office
GFM       government-furnished materials
GSA       General Services Administration
HUD       Department of Housing and Urban Development
NSN       national stock number
O&M       Operation and Maintenance
OMB       Office of Management and Budget
RADC      Rome Air Development Center
RFP       request for proposal
SAR       Selected Acquisition Report
SSD       Space Systems Division


Page 12                              GAO/AFMD-90-23   Air Force Financial   Audit
Page 13   GAO/AFMD-90-23   Air Force Financial   Audit
\   Chadter 1

    Inkroduction


                            Throughout the 1980s concern has mounted over the federal govern-
                            ment’s declining fiscal condition and the ineffective ways in which it
                            manages and controls its financial operations. From the beginning of the
                            1980s to the present, the government has faced the problem of a federal
                            debt which has grown from about $900 billion to almost $3 trillion and
                            which has incurred related interest costs (now about $241 billion, or 27
                            percent of the general expenses of the government). In addition, the gov-
                            ernment has become saddled with hundreds of billions of dollars in
                            unanticipated liabilities which are not even included in the cash-basis
                            debt figures cited above, but for which the government must ultimately
                            bear the cost. On top of these liabilities are unmet national needs which
                            will also require funding in future years and further add to the deficit.

                            These conditions were not sudden; the events causing them occurred
                            over many years. Yet, the problems and their severity were not fully
                            recognized. In most cases, the government was not tracking the costs of
                            its obligations and needs as they were being incurred; in other cases,
                            information was available to indicate the need for timely action, but this
                            information was not taken into account in decisionmaking. It is time for
                            these problems to be identified and dealt with.


                            In today’s complex economic, political, and social environment, compet-
    The Government’s        ing demands to fund government programs and activities require accu-
    Financial Information   rate and timely financial information for making sound resource
    and Control             allocation decisions, The government also needs to have proper financial
                            control over its costs and assets to ensure that it is operating govern-
    Environment             ment programs in a cost-effective manner.

                            With distressing frequency, however, there are dramatic revelations in
                            the media and elsewhere of financial improprieties by government offi-
                            cials or extremely wasteful practices by federal agencies. The reason
                            these situations were allowed to occur-their root cause-is basically
                            the absence of good internal controls and accounting systems. However,
                            this fact is often overshadowed by the drama of the events themselves.
                            The recent scandal at the Department of Housing and Urban Develop-
                            ment (HUD) is a good example where the lack of good financial controls
                            has seriously impacted several of the nation’s housing programs and the
                            integrity of government. HUD, however, is not alone. The Director of the
                            Office of Management and Budget (OMB)recently testified before the
                            Senate Committee on Governmental Affairs that “The recently-exposed
                            HUD problems are not unique, not merely peculiar to a particular agency



                            Page 14                                GAO/AFMD-90-23   Air Force Financial   Audit
    Chapter 1
    Introduction




    under what some have described as absentee management....There are
    analogous problems in other agencies.”

    Those involved in such scandals are investigated and sometimes prose-
    cuted, but the poorly controlled, antiquated, and ineffective financial
    environments which permitted the events to occur in the first place too
    often remain the same. Moreover, such environments also contribute to
    waste and inefficient use of resources, uninformed decisionmaking, and
    diminished public confidence in the government. Ultimately, these fac-
    tors may be far more costly than the losses through fraudulent activities
    that surface from time to time.

    Our evaluation of federal financial practices clearly shows that the gov-
    ernment does not adequately control its resources; provide its managers,
    the Congress, or the public with a true accounting for the financial
    assets entrusted to it; or effectively use financial information to make
    decisions. In a 1986 special report, Managing the Cost of Government
    (GAO~AFMD-8536~),  we described six pervasive problems in the manner in
    which the federal government manages its financial resources and costs.
    These problems are

. poor quality of financial management information;
l poor linkages between the budgeting, budget execution, and accounting
  phases of the financial management process;
. inadequate attention paid to monitoring and comparing budgeted activ-
  ity with actual results;
l primary emphasis on fund control, leading to inadequate attention in
  other areas of federal financial management;
. inadequate disclosure of assets, costs, and liabilities; and
. antiquated and fragmented financial management systems.

    In a November 1989 report,’ we cited a number of problems which are
    illustrative of the situation governmentwide. For example, the federal
    government continues to rely on antiquated accounting systems that,
    despite improvement efforts over many years, have serious problems. In
    other cases, federal agencies are spending billions of dollars developing
    and acquiring automated systems but are experiencing massive
    problems in the process, This report also cited the increase of spare
    parts inventories at the Department of Defense (DOD) and concluded
    that, while much of this growth resulted from increased costs due to

    ‘Financial Integrity Act: Inadequate Controls Result in Ineffective Federal Programs and Billions in
                  _ -10, November Z&1989).
    Losses(GAO/AF'MD90


    Page I5                                                GAO/AFMD-90-23      Air Force Financial   Audit
                                Chapter 1
                                Introduction




                                inflation and support for weapons systems modernization, a sizable por-
                                tion represented unneeded inventories, The amount of unneeded secon-
                                dary items increased from approximately $10 billion in 1980 to about
                                $29 billion 1988.

    1

                      In response to mounting concerns of the public, the Congress, the media,
Meaningful Financial  and executive branch officials over the federal government’s fiscal con-
Statements and Audits d’  t’ a number of federal agencies have undertaken major initiatives
                        1 ion,
Can Strengthen        to improve and modernize their financial practices, systems, and con-
                      trols. This represents a mammoth and difficult task, given the years of
Federal Financial     neglect and low priority given to financial management, the size and
Mabagement            complexity of federal operations, and the magnitude of taxpayers’ dol-
                                lars involved. Yet, these are the very factors which make it so critical
                                that these operations be placed under sound financial control.

                                Decisionmakers who direct federal programs, like their counterparts in
                                private industry, need to know the cost of prior decisions in arriving at
                                the most economical solution to present problems. Air Force and DOD
                                management, the Department of the Treasury, the Office of Manage-
                                ment and Budget, and the Congress also need to regularly review the
                                results of operations and the financial position of the federal agencies
                                they oversee. The data for such accountability reporting should flow
                                from financial management systems that can accurately capture, pro-
                                cess, and report day-to-day transactions involving billions of dollars.
                                The integrity of these data, the systems that process them, and the
                                resultant internal and external reports can only be relied upon when
                                they are produced by the kind of disciplined process that results from
                                annual independent audits.

                                As part of the reform effort for better financial management, several
                                 federal agencies have attempted to develop meaningful financial state-
                                ments, along with underlying records and documentation adequate to
                                permit an independent auditor to express an opinion on the statements.
                                The process of generating and accumulating financial information neces-
                                sary to prepare accurate and meaningful statements instills discipline in
                                the system and strengthens accountability. This discipline is further
                                enhanced when the statements and the underlying information are sub-
                                jected to the rigors of an audit. Financial statement audits ensure that
                                 accounting transactions, accounting systems, financial statements, and
                                 financial reporting to the Congress, Treasury, the Office of Management
                                 and Budget, and the public are properly linked and consistent. Such
                                audits also provide the opportunity for an independent evaluation of the


                                Page 16                                 GAO/APMD-90-23   Air Force Financial   Audit
Chapter 1
Introduction




adequacy and effectiveness of the controls and safeguards for protect-
ing the resources entrusted to an agency and for ensuring that the
agency fully and fairly discloses its financial condition and operations.

The importance of financial statements and independent audits has long
been recognized by the private sector and, more recently, in the public
sector on the state and local levels. Audited annual financial statements
of federal entities, prepared according to generally accounting accepted
principles and standards,2 are urgently needed to provide useful, reliable
information to the Congress, federal managers, and the public in a
readily understood format.

Over the past several years, our financial audit work at both the civilian
and defense agencies shows similar patterns of shortcomings. Essen-
tially, these involve weaknesses in the basic controls over the accuracy
of financial data, and the fact that all financial information needed for
effective management, accountability, and oversight is not produced
and utilized. It is noteworthy that the majority of these entities have
received qualified or adverse opinions on their financial statements
because of financial weaknesses. We have noted that, typically,
improvements are made after initial audits, but many of these entities
must make substantial long-term improvements in correcting weak-
nesses in internal controls and need to develop sound, integrated
accounting systems capable of producing complete, accurate financial
information.

Having good financial information is particularly important in the
Department of Defense, which, in this era of budget constraints and
changing world conditions, will likely have to live with no-growth, or
even declining, budgets in the foreseeable future. DOD’S &year defense
plan contained programs which reportedly would cost about $150 billion
more than DOD can expect to receive during the period. This will force
difficult choices of which programs to terminate or curtail and how best
to finance those that are to be continued. DOD must not only adjust its
proposed programs and spending patterns to recognize current fiscal
realities, but it must also achieve greater efficiency and more effective
management of future appropriations and the resources it already has
on hand. To effectively do so, DODmust have complete and accurate data
on its costs and resources. These data can only be produced by a fully


“These arc contained in Title 2 (“Accounting Principles and Standards for Federal Agencies”) of
GAO’s Policy and Procedures Manual for Guidance of Federal Agencies.



Page 17                                               GAO/AFMD-90-23     Air Force Financial      Audit
                        Chapter 1
                        Introduction




                        functional and complete accounting system disciplined by independent
                        audits.

                        To begin to gain a perspective on the quality of the financial information
                        and systems available in DOD,we attempted to conduct a financial audit
                        of the Air Force. The Air Force is the only military service which has
                        attempted to prepare a set of financial statements in accordance with
                        generally accepted accounting principles for federal agencies. A copy of
                        the Air Force’s financial statements, upon which we did not express an
                        opinion, is contained in appendix I. We concluded that the Air Force
                        statements were unauditable.


                        The Department of the Air Force, created in 1947, is responsible for pre-
DGpartment of the Air   paring aerospace forces to perform offensive and defensive operations
Fo)-ce                  with the purpose of defending the United States, deterring aggression,
                        and being ready to conduct warfare in conjunction with the other armed
                        forces. To fulfill this mission, the Air Force has resources valued at
                        about $275 billion and receives almost $90 billion in annual appropria-
                        tions. The Air Force operates over 130 bases located throughout the
                        world, representing about 16 percent of the real property held by the
                        U.S. government. In addition to these facilities, the Air Force manages a
                        reported $99.1 billion of weapons systems (aircraft, missiles, and
                        engines) and a reported $63.8 billion of inventories of supplies and
                        spare parts, which amounts to about 20 percent of the equipment and
                        almost 30 percent of the inventories held by the U.S. government. The
                        Air Force employs about 900,000 civilian and military personnel.


                        Our review objectives were to (1) work with the Air Force to develop its
Objectives, Scope,and   first set of consolidated financial statements and establish a baseline for
Methodology             a full audit of the 1989 financial statements, (2) audit the account bal-
                        ances contained in the financial statements, (3) identify problems in the
                        Air Force’s financial management and accounting systems, and test the
                        effectiveness of significant internal control procedures, and (4) identify
                        opportunities for the Air Force to improve its financial management
                        operations. In pursuing these objectives, we reviewed the accounts com-
                        prising the Air Force’s 1988 financial statements and reviewed the Air
                        Force’s financial management operations, including key internal controls
                        which relate to recording, processing, summarizing, and reporting finan-
                        cial data. This report covers significant internal control, accounting, and
                        financial management issues as well as problems with respect to certain
                        individual accounts.


                        Page 18                                 GAO/AFMD-90-23   Air Force Finaucial   Audit
                       Chapter 1
                       Introduction




                       This review included coverage of the Air Force’s financial management
                       operations and accountability for the primary resources-personnel,
                       facilities, inventory, and equipment-it uses to accomplish its mission.
                       We reviewed the Air Force’s policies relating to its organization,
                       accountability procedures, and financial management. We also consid-
                       ered previous reports by GAO, Air Force Audit Agency, Defense Audit
                       Service, and Air Force pursuant to the Federal Managers’ Financial
                       Integrity Act of 1982. We discussed financial management operations
                       and accountability procedures, functions, and processes with managers
                       throughout the Air Force. We identified internal controls in the account-
                       ing systems and operations for the primary resources. Our audit tests
                       focused on the key internal controls specifically related to financial
                       management and accountability for resources,


Finahcial Management   The Air Force Accounting and Finance Center is the focal point for Air
                       Force financial operations for the worldwide network of over 120 Air
                       Force Accounting and Finance Offices and numerous disbursing agent
                       offices. The center is responsible for accounting for all money appropri-
                       ated to the Air Force and for reports to the Congress and financial man-
                       agers throughout the government on the use of these funds.

                       The Air Force’s financial operations are under the overall direction of
                       the Assistant Secretary for Financial Management who functions as the
                       Air Force’s chief financial officer. The Air Force’s financial management
                       structure is decentralized. The Air Force Comptroller is primarily
                       responsible for systems that account for, control, and report on appro-
                       priated funds and cash. Separate logistics and other systems support the
                       Comptroller’s general ledger accounting systems. We worked with the
                       Air Force to develop an inventory of its financial management systems.


WeaponsSystems         The Air Force Systems Command develops and purchases weapons sys-
                       tems (aircraft, missiles, and uninstalled engines). About $25 billion of
Management             the Air Force’s fiscal year 1988 budget was designated for weapons sys-
                       tems acquisition. The-Air Force had thousands of outstanding contracts
                       valued at over $250 billion as of September 30, 1988. Accountability for
                       these systems begins during production and extends through their use at
                       air bases.


Inventory Management   The Air Force manages inventories of over 1.6 million different spare
                       parts and supplies valued at over $60 billion. About $40 billion of the


                       Page 19                                GAO/AFMD-90-23   Air Force Financial   Audit
-7
     Chapter 1
     Introduction




     inventory is maintained at air logistics centers and about $20 billion at
     air bases, Managing the inventory includes not only maintaining physi-
     cal control and distribution, but also contracting to acquire the items
     and then using the inventory to maintain operations. Depot maintenance
     industrial fund activities are collocated with air logistics centers and use
     their inventories to maintain and repair weapons systems.

     We conducted our review between July 1987 and January 1990, using
     data related to fiscal year 1988. Our review was performed in accor-
     dance with generally accepted government auditing standards. Work
     was performed at Air Force headquarters in Washington, D.C., and loca-
     tions worldwide.

     Chapter 2 discusses financial management systems and procedures in
     the Air Force, while chapter 3 contains a discussion of weaknesses in
     basic internal controls which prevent accurate financial reporting and
     reduce accountability over assets. Chapter 4 identifies problems the Air
     Force faces in determining the actual costs of military hardware. Con-
     cerns about the quantities and valuation of Air Force inventories are
     contained in chapter 5. Chapter 6 discusses Air Force efforts to improve
     its financial management systems. The Air Force’s consolidated finan-
     cial statements are included as appendix I, a comparison of the consoli-
     dated financial statements with Treasury reports as appendix II, and
     our scope and methodology as appendix III. Comments from the Depart-
     ment of Defense are included as appendix IV.




     Page 20                                 GAO/APMD-99-23   Air Force Financial   Audit
Chanter 2

l?i$wial ManagementSystemsDo Not Provide
Reliable
   I    Financial Information

             The magnitude of assets and funds for which the Air Force is responsi-
             ble is matched by only a handful of other organizations worldwide. The
             Air Force is recognized as a world leader in developing and operating
             weapons systems on the cutting edge of technology to provide security
             for the United States and its allies. In contrast, the Air Force financial
             systems and practices for controlling and managing its immense array of
             assets and vitally important and complex operations are unquestionably
             obsolete and incapable of providing the kinds of reliable financial infor-
             mation every organization needs for effective and efficient management.
             The poor state of the Air Force’s financial management is clearly indi-
             cated by the fact that it was not able to produce a set of credible finan-
             cial statements, something most business entities and many state and
             local governments do routinely and regularly.

             The accounting and financial management systems generally do empha-
             size fund control requirements, that is, making sure spending limits are
             not exceeded. With some exceptions, we noted that fund control is ade-
             quate; expenditures did not exceed appropriations. However, the sys-
             tems do not effectively account for and control the actual costs incurred.

             The Air Force operates a total of 131 different accounting and financial
             management systems, many of which are not linked under an integrated
             general ledger. Moreover, some assets, including the Air Force’s major
             weapons systems-reportedly     valued at $99.1 billion-are not under
             the control of any accounting system. In short, the Air Force does not
             provide basic double-entry accounting control over significant portions
             of its financial operations.

             The existing financial systems do produce data which could be used to
             help plan for, manage, and control resources. All too often, however,
             such data are not considered in the normal course of operations nor used
             to perform analytical techniques which would disclose operating
             problems, Similarly, when the financial systems produce information
             which is obviously wrong or merits investigation, these problems are
             often ignored

             This results in unreliable financial reporting both internally and exter-
             nally. The processes which could not produce acceptable financial state-
             ments are the same processes providing information to Air Force
             management at all levels and to outside organizations such as Treasury
             and the Congress.




             Page 21                                GAO/AFMD-90-23   Air Force Financial   Audit
                            Chapter 2
                            Financial Management Syeteme Do Not
                            Provide Reliable Financial Information




-Need for Meaningful,
                            and operations of an entity that cannot be obtained elsewhere. Produc-
Akurate Financial           ing the financial statements requires a discipline throughout the organi-
Stptements                  zation to properly account for the resources entrusted to managers to
                            perform their mission. The financial information produced by this pro-
                            cess can be used by managers to assess the varying, complex operations
                            in an agency and to monitor the performance of subordinates against
                            expectations through the costs and budgeted funds.

                            The Air Force’s efforts to produce consolidated financial statements for
                            fiscal year 1988 represent a substantial commitment to improving its
                            overall financial management. However, these efforts were hindered by
                            the fact that much of the information needed to produce the statements
                            was not maintained on a systematic, consistent basis under basic double-
                            entry accounting control. The Air Force does not have an integrated gen-
                            eral ledger system from which statements can be produced. Also, the
                            information it does record is not as useful as it could be because the Air
                            Force does not follow generally accepted accounting principles in valu-
                            ing its equipment and it does not record depreciation for all of its depre-
                            ciable assets.


Air Force Lacks an          The Comptroller General’s accounting principles and standards (Title 2)
Integrated General Ledger   state that an agency’s accounting system must be an integral part of its
                            total financial management structure and must (1) provide sufficient
                            discipline and effective internal control over operations to protect
                            appropriated funds, cash, and other resources from fraud, waste, and
                            mismanagement, and (2) produce reliable and useful financial informa-
                            tion on the results of operations to support decisionmaking. Accord-
                            ingly, a general ledger serves as an integral part of an agency’s financial
                            management system and as an essential control mechanism by summa-
                            rizing all of an activity’s financial data for top management and
                            decisionmakers.

                            The Air Force, however, lacks a double-entry general ledger system to
                            provide a consolidated source of such financial information. To account
                            for its resources, the Air Force operates a large number of financial
                            management systems. Working with the Air Force, we identified 131
                            systems which it uses: 84 are classified as accounting systems and 47
                            are systems that feed data to these accounting systems. Taken together,
                            these systems are supposed to (1) account for, control, and report on the




                            Page 22                                  GAO/AFMD-90-23   Air Force Fhncial   Audit
                           Chapter 2
                           Finandal Management Systems Do Not
                           Provide Reliable Financial Information




                           status of the Air Force’s appropriated funds and cash, (2) maintain sup-
                           porting records and other resources, and (3) accumulate the cost of deci-
                           sions and actions in carrying out the Air Force’s mission and operations.

                           The Air Force’s 47 subsidiary systems were established primarily to
                           support the Air Force’s various program and administrative missions
                           and goals, such as major weapons systems, procurement, and inventory
                           management. These systems also serve as a starting point to authorize
                           and initially record detailed information on the financial effects of its
                           mission operations eventually recorded in the accounting systems.

                           The Air Force’s 1988 annual report prepared pursuant to the Federal
                           Managers’ Financial Integrity Act of 1982 (FMFIA) contained the Air
                           Force’s annual assessment of its accounting systems’ compliance with
                           accounting principles, standards, and related requirements for federal
                           agencies. The Air Force reported that two of its primary accounting sys-
                           tems, the General Accounting and Finance System (GAFS) and the
                           Defense Integrated Financial System, did not substantially conform with
                           the required accounting principles and standards.

                           The Air Force attempts to use GAFS to fulfill the functions of a general
                           ledger system. It was designed to record, process, summarize, and report
                           the financial results for the various Air Force activities. However,
                           according to Air Force officials, GAFSwas not implemented in a manner
                           permitting it to satisfactorily perform these functions. As a result,
                           neither GAFSnor the underlying financial systems provide all the data on
                           accounts needed to prepare financial statements or other financial
                           reports.


Information Needed for     A general ledger system should serve as the basis for preparing financial
Financial Statements Not   statements and other financial reports. However, the Air Force’s finan-
                           cial statements did not flow from and are not supported by either a gen-
Produced From              eral ledger system or subsidiary accounting systems. The Air Force used
Accounting Systems         alternative sources to obtain the necessary data for its financial state-
                           ments In some instances, the data for the financial statements were
                           developed from budgetary subsystems within GAB. While the budgetary
                           subsystems operated within the financial management structure, the
                           accounting data were not routinely processed into the general ledger
                           accounts and had to be developed based on extract programs written
                           specifically to pull together financial data from budgetary reports for




                           Page 23                                  GAO/APMDBO-23   Air Force Financial   Audit
                                     Chapter 2
                                     Financial Management Systems Do Not
                                     Provide Reliable Finaucial Information




                                     the financial statements. In other instances, the data were developed
                                     from property systems that had no accounting function1

                                     The general ledger also should ensure that all transactions are accu-
                                     rately processed and recorded. Because the Air Force used a variety of
                                     unrelated sources for preparing financial statements, it has no assur-
                                     ance that material errors and omissions did not occur. Table 2.1 contains
                                     examples of accounts developed from alternative sources for the finan-
                                     cial statements. The fact that the Air Force had to derive account bal-
                                     ances from other sources is, in our opinion, a matter of concern because
                                     these accounts-such as aircraft, missiles, and engines-represent the
                                     major line items on Air Force’s financial statements.

Table 2.1: Accounts Developed From
Alteknative Sources                  Dollars in billions
                                     ---
                                                                                                                      System where data
                                     Account description                                          Amount              were obtained
                                     Aircraft                                                         $82             Property
                                     Missiles                                                          IO             Property
                                     Uninstalled engines                                   -            7             Property
                                                    --
                                     Aircraft under construction          -                            15             Budget
                                     Missiles under construction                                        3             Budget
                                     Depreciation expense and accumulated                                             Property
                                     -~-depreciation for buildings                   ..~                IO                           -___
                                     Accounts receivable                                                 2      -     Budget
                                     Accounts
                                     .~__I-     payable___~ .-                                          18            Budget
                                     Expenses                                                           70            Budget
                                     Revenue                                                            70            Budget


                                     Our audit showed that these various systems cannot be pulled together
                                     to produce reliable financial statements. Moreover, the absence of a
                                     fully integrated general ledger system to maintain the above accounts
                                     means that (1) financial management reports other than financial state-
                                     ments cannot be prepared with assurance of reliability and (2) monthly
                                     or other periodic financial management reports cannot be prepared on a
                                     timely basis.




                                     ‘For example, as discussed in chapter 4, the Air Force’s accountability (property) systems used for
                                     weapons systems tracks the location of military hardware, but the costs of acquiring the weapons
                                     systems are not fully accounted for.



                                     Page 24                                                   GAO/AFMD-90-23       Air Force Financial   Audit
                          Chapter 2
                          Financial Management Systems Do Not
                          Provlde Reliable Flnanclal Information




                          Title 2 requires equipment to be valued at historical cost, that is, the
                          actual costs expended to acquire the equipment and put it into opera-
                          tion The Air Force, however, values its equipment using a standard cost
                          which is intended to approximate the cost to replace the equipment.

                          The Air Force’s Consolidated Statement of Financial Condition for fiscal
                          year 1988 reported that it had equipment valued at $26.8 billion. This
                          consists of such things as vehicles, machinery, furniture, and computers
                          which it generally purchases from either the General Services Adminis-
                          tration (GSA) or the Defense Logistics Agency (DLA). When the Air Force
                          acquires a new piece of equipment, or DLA or GSAchanges its price for
                          the kinds of equipment items owned by the Air Force, the Air Force
                          revises the recorded values for all like items it holds. This can be
                          extremely misleading for longer-lived assets of these types, when cou-
                          pled with failure to record depreciation. Essentially, under this practice,
                          old pieces of equipment with limited remaining utility are valued as if
                          they were brand new items.


Depreciation Accounting   Title 2 requires federal agencies to record and report the depreciation
                          for capitalized assets in the financial statements of revolving fund activ-
Practices Could Improve   ities (such as the Air Force’s industrial funds). The principles further
Financial Reporting       encourage the reporting of depreciation by all federal functions and
                          activities such as general fund activities. Revolving funds function much
                          like commercial entities which provide goods and services to customers.
                          Accordingly, revolving funds need to recover costs associated with pro-
                          viding goods and services, General funds, on the other hand, are used to
                          fund the day-to-day operations of an entity. While general funds do not
                          operate on a cost-recovery basis, recording depreciation for general fund
                          assets help allocate the assets’cost over their useful life.

                          Our review found that the Air Force did compute, record, and report the
                          required depreciation amounts for its revolving funds and for general
                          fund assets of aircraft and buildings. However, it did not record d.epreci-
                          ation for other general fund assets of equipment which hdported
                          value of $26.8 billion. Further, consideration regarding the application
                          of depreciation concepts to missiles is needed to determine whether it is
                          appropriate to record depreciation on missiles. Although not currently
                          mandatory, we believe that reporting depreciation on all the Air Force’s
                          capital assets would improve its financial reporting.




                          Page 26                                  GAO/AFMD-90-23   Air Force Financial   Audit
                       Chapter 2
                       FInanclal Management Systems Do Not
                       Provide Reliable Financial Information




                       The Department of the Treasury requires federal agencies to prepare
Udreliable Reporting   and submit to Treasury annual financial statements as part of an effort
to /Treasury           to upgrade accounting and financial reporting within the federal govern-
                       ment. The reporting requirements also serve to establish a sound finan-
                       cial management foundation for improving the reliability of accounting
                       systems and, therefore, the financial reports they produce. Moreover,
                       Treasury uses the agency reports to prepare consolidated govern-
                       mentwide reports, which provide information to the Congress and the
                       public about overall government performance and stewardship.

                       Incorrect agency financial reports adversely affect Treasury’s and OMB'S
                       ability to evaluate agencies’financial performance because the analyti-
                       cal techniques Treasury is developing use the data in agency financial
                       reports. For example, analysis of turnover and use ratios covering
                       extended periods could help assess whether inventory is being used effi-
                       ciently and could identify emerging trends. However, analysis of such
                       information is only as good as the data being analyzed. If the data are
                       not accurate, the analytical results are at best questionable, if not incor-
                       rect and misleading.

                       The financial information produced by the Air Force and reported to the
                       Department of the Treasury is not reliable. The same accounting sys-
                       tems and practices which produce the financial statements are also used
                       for reporting to other government entities. Accordingly, these reports do
                       not contain accurate cost information for almost all of the Air Force’s
                       non-cash assets-such as inventory, equipment, aircraft, and missiles.
                       In addition, these reports have an additional shortcoming because they
                       are not carefully prepared.

                       In 1986, Treasury issued requirements for agencies to annually report
                       their financial position (SF 220). The SF 220 shows an entity’s assets,
                       liabilities, and equity similar to the consolidated statement of financial
                       position. In 1987, Treasury augmented its reporting requirement to
                       require all agencies to submit a report on their operations (SF 221). The
                       SF 221 shows the annual financial results of an entity’s activities,
                       including expenses, revenues, and other financing sources such as
                       appropriations; the SF 22 1 is similar to a consolidated statement of
                       operations. Each of these Treasury reports is on a fiscal year basis, and
                       Treasury requires them to be submitted by November 15 each year, 46
                       days after the close of the fiscal year.

                       Air Force officials stated that, prior to our audit, a number of Air Force
                       components failed to submit financial information to the finance center


                       Page 26                                  GAO/AFMD-90-23   Air Force Financial   Audit
                                                                                          P




    Chapter2
    Financial Mauagement Systems Do Not
    Provide Reliable Fhaucia.l Information




    in sufficient tim e for inclusion in the department’s year-end reports to
    Treasury. Therefore, finance center personnel routinely used March 31
    data for these components in preparing the year-end Treasury financial
    statements. For fiscal year 1988, all Air Force components submitted
    their financial data to the finance center in tim e for preparation of the
    Treasury reports except the Air National Guard (ANG). Finance center
    personnel used March 31, 1988, data for ANG in lieu of the m issing Sep-
    tember 30, 1988, data. The March 31 data understated ANG assets by
    about $634 m illion and liabilities by $29 m illion.

    Both Title 2 and the Treasury Financial Manual require similar financial
    statements to be prepared at each year-end. Both require the prepara-
    tion of financial statements by each major fund type and consolidated
    statements on the entity. Both require that all intra-agency transactions
    and balances be eliminated from the consolidated statements.

    The fiscal year 1988 consolidated financial statements which Air Force
    prepared contained additional accounts not reported in the Treasury
    reports. For example, the financial statements recorded depreciation on
    aircraft and buildings, losses due to aircraft crashes, and appropriations
    to be provided for accrued annual and m ilitary leave balances to be liq-
    uidated in future periods. These accounts should have been reflected in
    the Treasury reports.

    A detailed comparison of the Treasury reports with the consolidated
    financial statements is shown in appendix II. Our comparison of the
    accounts reported in the Treasury reports with the consolidated finan-
    cial statements shows the following:

l   The Air Force omitted asset accounts for aircraft and m issiles under
    construction ($18.2 billion) from the Treasury reports.
l   Intra-agency balances were not eliminated as required by Treasury reg-
    ulations, thus double-counting certain accounts. For example, reim-
    bursements from one Air Force appropriation to another were included
    as financing sources by both appropriations, thereby overstating total
    Air Force funding sources. Similarly, Air Force units remitted $3.4 bil-
    lion to the Depot Maintenance Service and $6.1 billion to the Air Force
    Stock Fund for maintenance services and supplies. These transactions
    were not eliminated and resulted in overstatements of revenues and
    expenses at the Air Force consolidated level, distorting the results of Air
    Force operations for the year.




    Page 27                                  GAO/AFMD-90-23   Air Force Financial Audit
                            chapter 2
                            Financial Management Systems Do Not
                            Provide Reliable Financial Information




                            To provide meaningful, comparable data, financial reports need to
                            record all the resources the agency is responsible for managing, plus the
                            adjustments necessary to eliminate intra-agency transactions, to more
                            accurately show the costs of operating the agency.


                            Despite their shortcomings, the existing financial systems do produce
Financial Management        some data which could be used to help plan for, manage, and control
S&terns Are Not Used        resources. All too often, however, such data are not considered in the
Effectively to Manage       normal course of operations nor used to perform analytical techniques
                            which would disclose operating problems. Similarly, when the financial
R&ources                    systems produce information which is obviously wrong or merits inves-
                            tigation, these problems are often ignored.

                            The Air Force’s financial management systems primarily operate as
                            fund control systems intended to ensure that budgetary resources are
                            available to meet obligations. However, even with this limitation, these
                            financial management systems can nonetheless provide much useful
                            information on the status of the Air Force’s resources. Air Force manag-
                            ers have not been routinely analyzing available data to identify
                            problems or potential problems within their operations.

                            Analysis of such financial data can point to potential problem areas and
                            equip managers with convincing support for changing the direction of
                            programs. Comparisons can be made of expected (or budgeted) perform-
                            ance with actual results, or performance from one period to another, or
                            performance between one operating unit and another. While minor dif-
                            ferences in performance are expected, significant deviations from man-
                            agement’s established expectations should be investigated. This will
                            result in the early detection of problems occurring in the operation of a
                            program or activity, or in the need to reexamine management’s
                            expectations.


Analysis of Financial       The Air Force’s financial management systems do produce some finan-
Accounts Not Used to        cial information which can be used to reveal potential financial manage-
                            ment problems, However, many routine financial reports, such as
Identify Potential Errors   monthly stock fund trial balances and semiannual general fund trial bal-
                            ances, are produced but apparently are not acted upon by managers. Air
                            Force regulations do not require any such analysis, nor are analytical
             u              reviews of financial data emphasized by Air Force top management.




                            Page 28                                  GAO/AFMD-90-23   Air Force Financial   Audit
    chapter 2
    Financial Management Systems Do Not
    Provide Reliable Financial Information




    Comparative reports of operations were generally prepared only for
    budgetary purposes and not for analysis of financial data from one
    period to the next, Only the Depot Maintenance Services (DMS), Air Force
    Industrial Fund, performed a comparative analysis of account balances.
    DMS managers were working to address some of the problems surfaced
    by the comparison.

    We compared account balances reported in fiscal year 1987 with fiscal
    year 1988 data and found several instances of significant fluctuations in
    records at all levels of the Air Force. The Air Force had not identified
    these fluctuations. We found instances at two air bases where Air Force
    managers could have avoided certain financial problems or, at a mini-
    mum, contained them more effectively through earlier detection had a
    comparative analysis been performed. We pointed out the following
    examples to the Air Force, which subsequently initiated investigations:

l   At Sembach Air Force Base, suspense accounts2 held significant
    uncleared balances, and trial balance accounts varied significantly from
    September 30, 1987, to September 30, 1988. A follow-up of these sus-
    pense account balances and variances by managers at the base would
    have identified that stock fund billings were not being made against
    operations and maintenance funds, and managers could have limited the
    losses incurred by the stock fund. The loss sustained by the stock fund
    was at least $82,000 and, as of September 30, 1988, Sembach’s suspense
    account still had a balance of over $525,000 in unprocessed and, in cer-
    tain instances, undocumented and unidentifiable transactions. For a sin-
    gle air base, these amounts represented major problems.
l   The Air Force District of Washington failed to receive $15.7 million in
    reimbursements from other appropriations because billings were not
    timely. By the time management realized a problem existed with billings
    for reimbursement, documentation to support the billings was no longer
    available. If managers at the base had reconciled sales to billings as
    recorded in the Standard Base Supply System, they could have detected
    a problem which had existed for over a year. As a result of the billing
    problems not being detected, records to research the billings and make
    corrections, which are retained for only 90 days, were no longer avail-
    able, and the stock fund could not be reimbursed.

    DMS managers, on the other hand, analyzed the financial data to track
    time lags in contractor reporting of material on hand and billings. At

    “Suspense accounts are generally used to hold miscellaneous unidentified transactions of an entity
    until they can be researched to decide the proper treatment and classification of the transactions.



    Page 29                                                GAO/AFMD90-23       Air Force Financial   Audit
                                      Chapter 2
                                      Financial Management Systems Do Not
                                      Provide Reliable Financial Information




                                      each of the three DMSactivities we visited, credit (negative) balances for
                                      government-furnished materials in-transit to contractors ranged from
                                      about $7 million to $12 million. At two DMSactivities, contractor-
                                      acquired property showed credit balances of about $3 million and $7
                                      million, respectively. However, management was aware that the credit
                                      balances in these asset accounts were improper and monitored the prob-
                                      lem until corrective actions could be made.

                                      We also found significant variances in Air Force Systems Command
                                      account balances from year to year. Although a significant variance
                                      may not be the result of an error, such variances should be investigated
                                      to verify the.appropriateness of account balances. As shown in table
                                      2.2, at the Air Force Systems Command (AFSC) headquarters, the consoli-
                                      dated general funds control accounts had substantial changes that were
                                      not questioned and, when we inquired, could not be explained by Air
                                      Force officials.

Table 2.2: Examples of AFSC Control
Acdount Balances With Significant     Dollars in billions
Changes                               Account                                     9/30/07        9/3o/sa          Change
                                      --1___
                                      Accounts Receivable-Reimbursable                 $3              $.8            t166%
                                      General Expenses                                21.6             6.1              -72%
                                      sales of Services                                1.3              .5             -62%
                                      Collections-Transfers Out                        1.6              .9              -44%
                                      Disbursements-Transfers Out                     24.4             a.9             -64%


                                      The significant increase in accounts receivable and the decrease in col-
                                      lections indicate potential problems developing in the collection of
                                      accounts. Also, the drop in general expenses, coupled with a decrease in
                                      disbursements, could indicate that information is not being reported to
                                      AFSCby the payment centers and/or the rate of progress payments is
                                      slowing. This might indicate to management that monitoring the prog-
                                      ress of contracts should be given closer attention. These examples illus-
                                      trate some of the ways that accounts can be analyzed to identify
                                      potential problems in Air Force operations.

                                      This type of analysis would also be useful at the level where the individ-
                                      ual trial balances are initially prepared. As shown in table 2.3, trial bal-
                                      ances prepared annually by the product divisions and other AFSC




                                      Page 30                                  GAO/AFMD-90-23   Air Force Financial   Audit
                                           Chapter 2
                                           FYnancial Management Syeteme Do Not
                                           Provide Reliable Financial Information




                                           activities” contained variances in account balances from year to year
                                           that could not be explained by managers.

Table 2.3: Variances in Divisional Trial
Balances From Period to Period             Dollars in millions
                                           Location
                                           ---                      - Account                          s/30/07         9/30/88      Change
                                           SSD                       Net Investment                      $2,084          $3,159          +52%
                                                       -
                                           ASD                       General Exoense                        456             237          -48%
                                           -
                                           ASD                       Disbursements                          504              13          -97%
                                           RADC                      Disbursements                          189             245          -F30%


                                           The significant decreases in the Aeronautical System Division’s
                                           expenses and disbursements should be investigated, particularly since
                                           these two accounts normally are closely related, but disbursements
                                           decreased substantially more than expenses.

                                           In addition to comparing information from period to period, useful anal-
                                           ysis can be performed between units with similar missions. We noted a
                                           number of differences among various product divisions’ trial balances as
                                           of September 30,1988, as shown below:
--
Table 2.4: Variances Among Divisional
Trial Balances at September 30,1988        Dollars in millions
                                           Account                                                     ASD             ESD               SSD
                                           General Expense                                             $237          $1,908                $0
                                           Disbursements                                                 13           5,489                 0
                                           Net investment                                             7,731               2             3,159


                                           Management should question why, in the case of ASD, expenses were
                                           much greater than disbursements, whereas at the Electronics Systems
                                           Division (ESD), disbursements exceeded expenses by almost three times.
                                           In any case, it is highly unlikely that an entity would have incurred no
                                           expenses nor have made any disbursements for the year, as in the case
                                           of the Space Systems Division.




                                           ‘3Thesedivisions include the Space Systems Division @SD), the Aeronautical Systems Division @SD),
                                           and the Rome Air Development Center (RADC).



                                           Page 31                                             GAO/AFMD-90-23     Air Force Financial   Audit
                                         Chapter 2
                                         Financial Management Systems Do Not
                                         Provide Reliable Financial Information




Abnormal Account                         In addition to analyzing data related to significant variances, analysis
Ba$ancesNot Followed UP                  also needs to be made of the reasonableness of stated account balances
                                         to ensure the quality of the data. Generally, account balances for spe-
                                         cific classes of accounts will carry a normal or predictable balance. For
                                         example, asset accounts will generally carry a positive, or debit, bal-
                                         ance. We found accounts reported from the base level to the command
                                         level and on to the Air Force Accounting and Finance Center (AFAFC)
                                         level with abnormal balances, such as negative, or credit, balances in
                                         asset accounts. Air Force officials could not explain why there were
                                         credit balances.

                                         As shown in table 2.5, at six air bases, credit balances were reported for
                                         asset accounts in the medical/dental stock fund trial balance as of Sep-
                                         tember 30, 1988,
Tab!le 2.5: Air Bases With Credit
Balences for Medical/Dental Stock Fund
lnvintorles                              .-Dollars in thousands
                                         Location                                                           Credit balance
                                         Air Force District of Washington                                                  $54
                                         Columbus AFB                                                               ..___ 263
                                         Lowry
                                            --~ AFB        -    __-.-_---    -_                                            112
                                         Reese AFB                                                                          63
                                         Williams AFB                                                                   ..__52
                                         Wurtsmith AFB--~~~‘-p~~                                                            54


                                         The purpose of preparing the trial balances is to provide information to
                                         be used to manage the operation of an entity. However, with significant
                                         errors found in the trial balances, the stock fund manager could neither
                                         use the trial balances to compare the relative performance of the stock
                                         fund’s activities at one Air Force activity with another, nor to maintain
                                         visibility over resources used in the stock fund’s operations.

                                         Table 2.6 shows bases where negative balances were also reported in the
                                         construction-in-process accounts. Three air bases under the Strategic Air
                                         Command reported negative construction-in-process balances to the
                                         command, which is clearly an error for an asset account. This informa-
                                         tion was then consolidated and reported to the finance center.




                                         Page 32                                  GAO/APMD-90-23   Air Force Financial   Audit
                                      Chapter 2
                                      Financial Management Systems Do Not
                                      Provide Reliable Financial Information




Table 1.6: Air Bases With Credit
Balanges in Construction-In-Process   Dollars in millions
Acco nts                              Location                                                           Credit balance
     “i
                                      Anderson AFB                                                          -         $5.8
                                      Beale AFB                                                                        8.4
                                      Minot AFB                                                                       22.7


                                      It is unlikely that the managers at either the base level or at the com-
                                      mand level could use the inaccurate information reported in these
                                      records to ascertain the status of construction at these bases. Manage-
                                      ment needs to determine the cause of these inaccurate balances and
                                      make necessary corrections to ensure the quality of the data to be used
                                      in decisionmaking at all organizational levels.


Management Control                    We recognize that, in addition to dollar-based reports, there are other
                                      important indicators of efficiency and other bases for planning and
Reports                               making strategic decisions. However, accurate dollar-based management
                                      reports which-disclose historical cost information are essential in every
                                      enterprise concerned with cost-effectiveness. Such reports should deal
                                      with such things as inventory and other asset management, base opera-
                                      tions, budgetary, and strategic planning alternatives. This chapter illus-
                                      trates that historical cost data are not generated in a manner designed to
                                      be reliable and timely and that little attention is paid to the data which
                                      are generated.


                                      Managing any private or public enterprise involves the control of
Conclusions                           resources to produce results. The manager’s job is to achieve goals at the
                                      least practicable cost, to make the best possible use of the resources
                                      entrusted to him or her, and to stay within spending and other limita-
                                      tions. Agency managers and the Congress need reliable, timely, consis-
                                      tent financial data as a basis for identifying problems, reaching
                                      decisions, and judging whether or not policy decisions have been prop-
                                      erly implemented. Now more than ever, agencies need accurate, reliable
                                      financial information to make more informed decisions and reap the
                                      benefits of financial analysis to identify potential problem areas and
                                      inefficient operations as well as to better utilize their scarce assets. Pre-
                                      paring annual financial statements provides a discipline to provide accu-
                                      rate, reliable financial data so managers can have information to
                                      supplement their current decisionmaking process, enabling better, more
                                      informed decisions.



                                      Page 33                                  GAO/APMD-W-23   Air Force Financial   Audit
\               .

                          Chapter 2
                          Financhl Management Syetema Do Not
                          Provide Reliable Financial Information




                          The Air Force has a long-range plan, as discussed in chapter 6, for a new
    Rehommendations       accounting system to deal, in part, with these problems and those dis-
                          cussed in chapters 3 through 6. However, until the new system is devel-
                          oped, the Air Force needs to use its present financial management
                          systems to its best advantage. The Air Force also needs to work toward
                          producing auditable financial statements in the near future. We plan to
                          continue working with the Air Force on its financial management opera-
                          tions and systems. Accordingly, based on matters discussed in this chap-
                          ter, we recommend that the Secretary of the Air Force

                          develop an overall plan specifying corrective actions and milestones for
                          the Air Force to produce consolidated financial statements in accor-
                          dance with Title 2 that will be submitted for independent audit,
                          give high priority to developing an integrated accounting system capable
                          of generating reliable financial management reports on a timely basis,
                          and
                      l   develop management reports designed to assist to achieve cost-
                          effectiveness and efficiency.

                          Until such time that these systems and reports can be developed, we
                          recommend that the Secretary direct his Chief Financial Officer to

                          correct deficiencies identified in existing systems to the fullest extent
                          possible;
                          investigate unusual and abnormal account balances;
                          perform a periodic comparative analysis of account balances from one
                          period to the next and follow up and explain significant variances;
                          perform, to the fullest extent possible in light of existing systems defi-
                          ciencies, comparative analyses of operating units across time periods
                          and of other cost centers to determine efficiency of operations;
                          accumulate and report actual costs of equipment in accordance with
                          Title 2; and
                          generate more reliable and complete financial information for reports to
                          the Department of the Treasury and for annual consolidated financial
                          statements.

                          Additional recommendations relating to the present financial manage-
                          ment systems appear in later chapters.




                          Page 34                                  GAO/AFMD-90-23   Air Force Financial   Audit
                     Chapter 2
                     Financial Management Systems Do Not
                     Provide Reliable Financial Information




                     DODstated in its response that the Air Force will, be required to develop
Ag&cy Comments and   a plan to adhere to executive branch financial statement requirements.
Our/Evaluation       We believe this is an important step. The most serious financial weak-
                     nesses discussed in this report, including the lack of a general ledger
                     system (chapter 2), material weaknesses in internal financial controls
                     (chapter 3), incomplete accounting for weapons systems costs (chapter
                     4), and unreliable records of inventory quantities (chapter 6) all directly
                     affect the financial statements required by the executive branch. How-
                     ever, the Air Force also needs to include in its plan several additional
                     steps, such as developing adequate descriptive footnotes to the state-
                     ments and ensuring adequate accrual for all income and expenses, in
                     order to make them meet Title 2 requirements. The Air Force has
                     already made significant progress in improving its financial manage-
                     ment by developing consolidated financial statements and furnishing
                     them to GAOfor audit. Such reporting and audits are necessary to ensure
                     that systems of internal control are adequate. Further, properly pre-
                     pared, audited financial statements enhance accountability and provide
                     greater discipline for management.

                     DODagreed that the Air Force needs an integrated accounting system,
                     but it did not agree that the Air Force’s financial reports were unreliable
                     and not timely. However, the executive branch financial reports cur-
                     rently produced require extensive manual efforts to prepare and
                     included material errors in fiscal year 1988. We believe that implement-
                     ing an integrated accounting system will enable the Air Force to more
                     quickly and accurately satisfy all of its financial reporting requirements.

                     We agree with DODthat it does produce some management reports that
                     address cost-effectiveness and efficiency. However, we identified oppor-
                     tunities for additional reports and analysis of financial data based on
                     accurate historical cost information that can enhance managers’ ability
                     to more effectively and efficiently monitor and use their limited
                     resources.

                     In discussing its comments, DODasserted that the actual costs of equip-
                     ment could be developed from existing systems. However, in working
                     with Air Force officials during the course of the audit, neither we nor
                     the Air Force identified a system or procedure that would provide the
                     actual costs of equipment.




                     Page 35                                  GAO/AFMD-99-23   Air Force Financial   Audit
Internal Control WeaknessesPrevent Accurate
lhwial Reporting and ReduceAccountability
Over Assets
                       Weaknesses in basic internal controls together with unreliable financial
                       management systems and the resulting billions of dollars of errors in
                       account balances adversely affect the reliability and accuracy of finan-
                       cial statements and other financial management information used by the
                       Air Force. Effective financial management requires strong systems of
                       internal control to help ensure the integrity and reliability of financial
                       information, to safeguard assets, and to promote conformity with
                       proper operating procedures.

                       Air Force management is responsible for establishing and maintaining a
                       system of internal controls, including accounting controls, in accordance
                       with the Accounting and Auditing Act of 1950 and the Federal Manag-
                       ers’ Financial Integrity Act of 1982 (FMFIA). The objectives of a system
                       of internal controls are to help provide management with reasonable,
                       but not absolute, assurance that (1) obligations and costs are in compli-
                       ance with applicable laws, (2) funds, property, and other assets are
                       safeguarded against waste, loss, and unauthorized use or misappropria-
                       tion, and (3) assets, liabilities, revenues, and expenditures applicable to
                       agency operations are properly recorded and accounted for to permit
                       the preparation of accounts and reliable financial and statistical reports
                       and to maintain accountability over agency assets. These objectives are
                       not being met by the Air Force.

                       During our review, we found areas of internal control weaknesses that
                       need to be addressed by the Air Force. Specifically, the Air Force needs
                       to focus on internal control procedures over the preparation of adjust-
                       ments to financial records, the reconciliation of accounts between sub-
                       sidiary/supporting and general ledger records, and other internal
                       control problems which were significant to a particular organizational
                       level within the Air Force but not pervasive to the Air Force as a whole.
                       These matters are covered in this chapter. Other control weaknesses
                       specifically related to inventories and weapons systems are discussed in
                       the following chapters.


                       Title 2 requires that reconciliations between summary and detailed
Accounts Not           records be periodically performed and documented and that adjust-
Routinely Reconciled   ments, if necessary, be made promptly to properly bring these records
                       into agreement. If two sets of independently derived records do not
                       agree, management is alerted to a potential problem and can follow up
          u            quickly to determine the reasons for lost assets or failed procedures and
                       correct the errors or system weaknesses. Reconciliation procedures
                       require identifying, investigating, and resolving all discrepancies


                       Page 36                                 GAO/AFMD90-23   Air Force Fiiancial   Audit
                         Chapter 3
                         Internal Control Weaknesses Prevent
                         Accurate F’inanclal Reporting and Reduce
                         Accountablllty  Over Assets




                         between general ledger type control accounts and subsidiary records
                         and, where warranted, making the appropriate adjustments to either the
                         subsidiary records or to the general ledger or control accounts.

                         We found that reconciliations between subsidiary records and the con-
                         trol accounts are not always performed to ensure the accuracy and pro-
                         priety of recorded account balances. In addition, we found instances
                         where the accounting records showed that disbursements had been
                         made that exceeded the corresponding obligation amounts, and the Air
                         Force had not investigated why this occurred. Such occurrences could
                         indicate that disbursement information is being incorrectly recorded,
                         contractors are being overpaid, or the Anti-Deficiency Act is being
                         violated.


Con$ml Accounts Not     Our audit tests revealed that the control accounts were not regularly
Reconciled With         reconciled with subsidiary records which provide the detailed support
                        for the summary-level data recorded in the general ledger accounts. This
Subsidiary Records      occurred at three Air Logistics Centers (ALCS), which maintain the Air
                        Force’s inventories of spare parts and supplies, and at three Depot Main-
                        tenance Service (DMS) activities, which repair and maintain Air Force
                        equipment and weapons systems. We identified and presented the fol-
                        lowing discrepancies to local officials for investigation.

                        At Warner Robins ALC, one account had a negative balance of $2.1 bil-
                        lion, although the account balance should normally be positive or zero.
                        The general ledger accountant said that he had no documentation to
                        support the account balance and that the account had been in error
                        since 1983.
                        At the San Antonio ALC, subsidiary data in the Contractor Repair Inven-
                        tory System, which is used to control parts provided to various contrac-
                        tors for repair, did not agree with control account balances for materials
                        with contractors. During our audit, we found that the general ledger
                        account for materials provided to contractors was overstated by $697
                        million, while the account for the repair parts was overstated by $169
                        million. This discrepancy indicates poor control over government-owned
                        materials and equipment with contractors.
                      . The Ogden AX general ledger included $379 million in equipment, an
                        amount which was also included in the DMSgeneral ledger. The Air Force
                        requires reconciliations between these two systems in order to detect
                        duplications and errors, but we found that the prescribed procedures
                        were not followed. For example, some of the data necessary to properly
                        perform the reconciliations were either never considered or were


                        Page 37                                     GAO/AFMD-90-23   Air Force Financial   Audit
                   .
--
                              Chapter 3
                              Internal Control Weaknesses Prevent
                              Accurate Nnancial Reporting and Reduce
                              Accountability  Over Assets




                              recorded twice-once at the Ogden DMS and once at the San Antonio DMS.
                              Since the reconciliations were not properly done, incorrect adjustments
                              to the accounts were made, simply compounding the problem.

                              Similar problems have been recognized in our prior reports on DOD agen-
                              cies. For example, we reported “arbitrary and erroneous reconcilia-
                              tions,“’ and we reported that internal controls over in-transit material at
                              one of the ALCs were inadequate because the Air Force did not reconcile
                              individual payments and receipts.2

                              Further, at two bases we visited, year-end stock fund account balances
                              for recording sales of inventory items to base units could not be recon-
                              ciled to subsidiary records generated by the supply management system.
                              The base units reimburse the stock fund with Operation and Mainte-
                              nance (O&M) funds, Neither we nor base officials could fully resolve
                              these discrepancies because necessary documentation of transactions
                              between the stock fund and base units had not been retained. Since the
                              stock funds are revolving funds and are reimbursed for sales by custom-
                              ers’ appropriated funds, the failure to be reimbursed in effect supple-
                              ments the customers’ appropriated funds improperly. Congressional
                              intent on use of appropriated funds is circumvented when customers
                              receive items from the stock funds without paying for them.


Disbursements Not             The Air Force Systems Command did not properly reconcile its disburse-
Reconciled W ith Obligation   ment transactions with supporting records of obligations as required by
                              Air Force regulations. Systems Command records disclosed that, as of
Balances                      September 30, 1988, almost $7 billion in disbursements was not recon-
                              ciled with obligation records, Reconciliations of disbursement transac-
                              tions to supporting records of obligations are essential to monitoring and
                              controlling contractor payments and ensuring compliance with the Anti-
                              Deficiency Act. The act provides that no officer or employee-of the
                              United States shall make or authorize an expenditure from or create or
                              authorize an obligation under any appropriation or fund in excess of the
                              amount available therein (31 USC. 1341). The act also provides that no
                              officer or employee of the United States shall authorize or create any
                              obligation or make any expenditure in excess of an apportionment or in
                              excess of the amount permitted by regulation (31 USC. 1517).

                              ‘Navy’s Progress in Improving Physical Inventory Controls and the Magnitude, Causes, and Impact of
                              Inventory Record Inaccuracies in the Army, Air Force, and Defense Logistics Agency (GAO/
                                     _ _ , November 4,1983).
                              NSIAD849
                              “Inventory Management: Receipt Confirmation Problems (GAO/NSIAD-88-79, July 14, 1988).



                              Page 38                                             GAO/AFMDSO-23      Air Force Financial   Audit
                       Chapter 3
                       Internal Control Weaknesses Prevent
                       Accurate Fln~clal   Reporting and Reduce
                       Accountability  Over Assets




                       The Systems Command awards contracts while other organizations (for
                       example, the Army, Navy, and Defense Contract Administration Ser-
                       vices) are responsible for making the actual payments to contractors.
                       The organization making the actual payments then provides payment
                       information to the Air Force Accounting and Finance Center, which ver-
                       ifies the information and forwards it to Systems Command. Both the
                       payment office and Systems Command are responsible for ensuring that
                       the payments do not exceed the obligations and that correct appropria-
                       tions are charged. The Systems Command either accepts the transac-
                       tions if they are found to be for proper disbursements or it rejects and
                       returns them to the Finance Center if they are deemed improper.
                       Acceptance requires the Systems Command to match the disbursements
                       with the related obligations and to notify the Finance Center that the
                       transactions are accurate and proper.

                       Reconciliations are a key control in ensuring that payments do not
                       exceed obligations on contracts and that funds are properly spent. When
                       payments exceed obligations (also referred to as negative unliquidated
                       obligations), management needs to initiate immediate corrective action.
                       These issues are discussed in our recent report,3 which recommended
                       that negative unliquidated obligations already recorded be resolved and
                       that quarterly reports on the amount and age of the negative unliqui-
                       dated obligations be submitted to management.


                       Title 2 requires that documentation of transactions and other significant
Account Balances       events, including adjustments to accounting records, be complete and
Cohtain Unsupported,   accurate so that transactions and related information can be traced from
Arbitrary              their initiation, through their processing, to their completion. Compli-
                       ance with this standard requires that documentation be purposeful and
Adjustments            useful to managers and auditors involved in analyzing operations. Air
                       Force regulations also require that adjustments be adequately
                       documented.

                       We found that adjustments totaling billions of dollars were made to
                       account balances and records throughout fiscal year 1988. We did not
                       find records to adequately document the purpose of many of these
                       adjustments, and Air Force officials could not provide a reasonable
                       explanation for them.


                       3Financial Management: Air Force Records Contain $612 Million in Negative Unliquidated Obligations
                       (GAO/AFMD    _89 - 78 , June 30,198Q).




                       Page 39                                             GAO/AFMD-90-23     Alr Force Financial   Audit
    Chapter 3
    Int.emal Control Weaknesses Prevent
    Accurate Financial Reporting and Reduce
    Accountability  Over Assets




    There are legitimate and necessary reasons for making adjustments to
    accounting records, such as correcting errors, posting accruals to recog-
    nize expenses and related liabilities, or writing off assets which are no
    longer of value. However, without adequate safeguards, adjustments to
    accounting records could also be used for any number of illegitimate or
    improper purposes, such as covering up defalcations, hiding losses of
    assets, or masking errors. Accordingly, from an internal control stand-
    point, it is essential to establish internal controls which ensure that only
    legitimate, authorized adjustments are made and that clear documenta-
    tion is maintained to explain their basis and purpose. Such documenta-
    tion allows for detection and systematic correction of errors and
    establishes that adjustments were made for a valid purpose and were
    authorized and executed by personnel acting within the scope of their
    authority.

    Our audit work revealed that many significant adjustments to account-
    ing records appeared incorrect, were of questionable purpose, and were
    not documented. Because of the lack of documentation, we could not
    determine whether these adjustments were appropriate or whether the
    affected account balances were accurately stated. Air Force officials
    could not explain these adjustments.

    Our audit tests of adjustments revealed that certain undocumented
    adjustments were made to force control accounts and subsidiary records
    to agree, as shown in the following examples:

.   The control accounts in the Space Systems Division’s trial balance for
    March 31, 1988, differed from its subsidiary records by $2.4 billion. To
    get the two systems to agree, an adjustment was made which charged
    the difference to the subsidiary system. The effect of this adjustment
    was to reduce assets and decrease the Other Operating Gains and Losses
    account. However, Space Systems Division officials could not provide
    documentation to support the adjustment, nor could they explain how
    the difference between the trial balance and subsidiary records arose.
    Simply masking discrepancies is not a proper use of adjustments.
l   At Sembach Air Force Base, we found over $214,000 in undocumented
    adjustments that were apparently made to force the control accounts to
    agree with subsidiary records. These adjustments were charged to a sus-
    pense account designed to identify transactions which need to be
    reviewed. When management uses suspense accounts (accounts with
    transactions that have not yet been classified for posting to their proper
    accounts), it should also institute controls over the transactions entered
    into these accounts to ensure that they are promptly classified and


    Page 40                                   GAO/AFMLI-90-23   @ Force Financial   Audit
                             Chapter 3
                             Int4wnal Control Weaknesses Prevent
                             Accurate Fbmncial Reporting and Reduce
                             Accountability  Over Assets




                           removed from the suspense accounts on a timely basis. However, we
                           noted several examples where suspense accounts were not being prop-
                           erly used at Sembach. For example, an unsupported adjustment of
                           $82,000 was made during fiscal year 1988 to force the fuels inventory
                           control account to agree with subsidiary records. Some of the unsup-
                           ported adjustments were attributed to the actions of a disgruntled
                           employee in the finance office who failed to properly process transac-
                           tions, entered erroneous data into the materiel accounting system, and
                           destroyed source documents. An investigation is under way to determine
                           if any fraud occurred.
                         . At the Systems Command, our audit tests disclosed unsupported adjust-
                           ments of $600,000 that were made to obligation and expenditure
                           accounts for Operations and Maintenance appropriations in September
                            1988. Officials could not explain the adjustments, nor could they find
                           any documentation to show why they were made.
                         l At the three Au3 we reviewed, the interfaces between the perpetual
                           inventory tracking systems and inventory accounting system did not
                           function properly. As a result, the two systems reported different
                           amounts on hand for the same items. To compensate, either each month
                           or each quarter, the accounting and finance office adjusted the accounts
                           in the inventory accounting system to force them to agree with the per-
                           petual inventory tracking system’s balances. However, the discrepancies
                           between the systems were not researched to determine their causes. The
                           net effect of such adjustments for fiscal year 1988 decreased the inven-
                           tory accounts by about $361 million. At our request, Ogden ALC officials
                           researched $241 million of its September 30, 1988, adjustment and
                           found that $114 million was the result of inventory system errors, while
                           $127 million resulted from coding and timing errors. These errors had
                           been masked by the improper adjustments and would not likely have
                           been detected had we not asked base officials to investigate.

                             Air Force regulations require that supervisors and managers review and
                             approve all adjustments. However, many of the adjustments discussed
                             above were not provided to higher levels of management for their
                             review and approval. Not submitting adjustments for review and
                             approval circumvents essential internal controls and could allow adjust-
                             ments to be used to hide errors, fraud, or misuse of assets.


                             Our review disclosed several other internal control weaknesses that
Other InterQal Control       were significant to particular organizational levels within the Air
Weaknesses                   Force’s management structure but not pervasive to the Air Force. We



                             Page 41                                  GAO/AFMD-90-23   Air Force Financial   Audit
                           Chapter 3
                           Inted    Control Weaknesses Prevent
                           Accurate Financial Reporting and Reduce
                           Accountability  Over Assets




                           discuss these problems in more detail and make recommendations to cor-
                           rect the problems in separate reports evaluating the internal controls at
                           (1) base-level operations, (2) Systems Command operations, (3) Air
                           Logistics Centers, and (4) Depot Maintenance Services, Air Force Indus-
                           trial Fund.

-’

WeabnessesFound in         Internal control weaknesses contributed to the inaccuracy of financial
BashLevel Operations       reporting by the base-level general accounting and finance system. We
                           found the following conditions during our review of base-level
                           operations.

                       . Reconciliation of civilian payroll and personnel master records is not
                         performed. At the Air Force District of Washington, the payroll office
                         had not reconciled its records to personnel records since May 1986. This
                         reconciliation is the primary control to ensure that civilian employees
                         are paid as authorized by the base personnel office, This comparison
                         serves to identify any errors or irregularities such as improper pay rates
                         or fictitious employees.
                       . Discrepancies in shipments of materials are not always researched.
                         Internal controls to ensure proper recording of goods shipped to bases
                         are not always performed. Follow-up listings which are used to prompt
                         follow-up for missing or damaged goods are not always prepared. Addi-
                         tionally, when the follow-up listings are prepared, required reports
                         which document resolution of the discrepancy are not always produced.
                         Weak controls over shipments could result in the Air Force’s paying for
                         defective items or goods it does not receive.

                           We determined that the Air Force bases do not consistently report con-
                           struction-in-process. During construction of, or improvement to, base
                           facilities, the bases should periodically recognize as assets the construc-
                           tion performed or improvements made. This is accomplished by record-
                           ing the appropriate amounts as “construction-in-process.” At three of
                           nine bases tested, construction-in-process was not properly recorded.

                           At one base, the construction of a new aircraft hangar was not recorded
                           in the base property records. According to the real property officer, the
                           base does not routinely account for costs associated with construction-
                           in-process unless the Air Force acts as the construction agent. According
                           to a contracting officer, failure to record construction-in-process in the
                           accounts caused an understatement of assets of at least $39 million.




                           Page 42                                   GAO/AFMD-90-23   Air Force Financial   Audit
                         Chapter 3
                         Intemal Control Weaknesses Prevent
                         Accurate! Flnanclal Reporting and Reduce
                         Accountability  Over Assets




                         Conversely, recording unfinished construction, or improvements, in the
                         completed building account overstates building cost and depreciation
                         before the useful life of the building commences. One of the bases tested
                         had seven facilities under construction as of September 30, 1988, with a
                         cost at that time of $8.6 million. The base prematurely recorded these
                         facilities in the completed buildings account at an estimated completion
                         cost of $16.4 million, thus overstating assets by about $7.9 million.

                         Once construction has been completed, the associated costs should be
                         moved from the construction-in-process account to the completed facili-
                         ties account. At one base, we found that a completed project for $79,960
                         had been recorded in the completed building account. However, the cost
                         of the project had not been removed from the construction-in-process
                         account, thus causing an overstatement of that amount.


WeaknessesFound at       Our tests of the authorization, approval, and financial reporting for con-
Systems Command          tracts to acquire major weapons systems showed that budget authority
                         and obligation and expenditure transactions were not recorded
                         promptly. When these transactions are not recorded in a timely manner,
                         managers receive incomplete financial information. This same informa-
                         tion is then used to determine if funds are available for other procure-
                         ment actions, The result is that managers are then more likely to
                         commit, obligate, and expend more funds than were authorized for a
                         program or contract.

                     . Budget authority: The Electronic Systems Division (ESD) requires budget
                       authority to be recorded in GAFSwithin 3 days of receipt of the source
                       documents. We found that 362 of the 657 budget authority entries were
                       not recorded within 3 days, and 262 of the transactions were not
                       recorded within 7 days.
                     . Obligations: ESDrequires obligations to be recorded within 5 calendar
                       days of receipt. We found 100 of 165 obligations we tested were not
                       recorded within 5 days. Further, 30 of the obligations were posted
                       between 11 and 20 days after receipt, and 24 were recorded over 21
                       days after receipt. Similarly, the Space Systems Division requires obliga-
                       tions to be recorded within 7 days, and we found that 71 of the 202
                       obligations we tested were not recorded within the 7 days.
                     . Expenditures: Neither the Air Force Systems Command nor the Air
                       Force had criteria for the number of days it should take for expendi-
                       tures to be recorded. We reviewed a total of 278 expenditures at three
                       product divisions and the Rome Air Development Center and found that
                       214 were not posted within 10 days.


                         Page 43                                    GAO/AFMD-90-23   Air Force Financial   Audit
                             Chapter 3
                             Intemal Control Weaknesses Prevent
                             Accurate F’luauclal Reportlug and Reduce
                             Accountability  Over Assets




                             The late posting of commitments and obligations affects the accuracy of
                             Air Force Systems Command’s financial reports-available       funding
                             could be overstated. To the extent that program managers rely on these
                             financial reports to commit and obligate funds for procurements, the
                             inaccurate reports would cause them to misinterpret the amount of
                             funds available and exceed a contract’s obligational authority.


WedknessesFound at Air       Based on audit work performed, we found the following weaknesses at
Logistics Centers            the ALCS:
                         .  Inventory adjustments are not timely. The Air Force Logistics Command
                           regulations require that any adjustment or correction to inventory
                           records be made within 21 days. However, we noted at the Ogden ALC
                           that over 10 percent of the adjustments we reviewed exceeded the crite-
                           ria, with processing times ranging from 23 to 113 days. Accurate
                           records of inventory quantities on hand are critical for maintaining
                           readiness. Good internal control would alert management to any adjust-
                           ments which were not promptly made.
                         . Disbursements are not recorded on a timely basis by ALCS.Financial
                           reports issued and used by the ALCSmisstated the status of central pro-
                           curement funds by hundreds of millions of dollars. We found time lags
                           of up to 492 days from the date that contract administrators paid a con-
                           tractor until the ALCS,which are responsible for contract funding,
                           learned of the disbursement. The significant overstatement of unliqui-
                           dated obligations in these reports is potentially misleading for those Air
                           Force managers who use the data in making decisions on resource allo-
                           cation. At the San Antonio ALC, we studied 75 disbursements reported
                           from the Army, Navy, or another Air Force base. We found that it took
                           from 96 to 230 days for San Antonio to receive data on 63 of the trans-
                           actions. It took from 303 to 492 days before San Antonio was notified of
                           the other 12. There were similar occurrences at the Ogden ALC, with time
                           lags ranging from 118 to 385 days.


WeaknessesFound at           Managers must strengthen controls relating to the issuing and account-
Depot Maintenance            ing for materials and for the accountability, depreciation, and disposal
                             of equipment used in the repair of items at depots. Current controls do
Services                     not ensure proper safeguarding of these materials and equipment or the
                             proper reporting of the results of the Depot Maintenance Services’
                             operations.
             J




                             Page 44                                    GAO/AFMD-90-23   Air Force Financial   Audit
    Chapter 3
    Internal Control Weaknesses Prevent
    Accurate Financial Reporting and Reduce
    Accountablllty  Over Assets




l Controls over material costs. Controls over the $613 million of material
  costs incurred by DMSduring fiscal year 1988 did not (1) ensure that
  material was charged to the correct job or (2) limit material quantity
  issues to actual job requirements. As a result, the DMScould be issuing
  materials in excess of those needed for its repair functions, and material
  costs for specific jobs may not be correctly reported. For good internal
  control, the DMSshould know how much material each type of job
  requires. The Air Force reported the failure to limit material quantities
  to actual job requirements as a control weakness in its FMFLAreport for
  fiscal year 1988.
. Controls over equipment. Our testing over the acquisition, transfer,
  depreciation, and disposal of industrial equipment disclosed (1) errone-
  ous posting to equipment accounts, (2) incorrect adjusting entries, (3)
  unrecorded equipment, and (4) facility costs misclassified as equipment
  costs. As a result, the financial data and reports are not accurate or reli-
  able, and accountability for equipment is not effectively maintained.

    In addition, as of February 20, 1990, we were still awaiting the Air
    Force’s response to our December 21, 1989, inquiry concerning several
    issues identified during our audit. Specifically, we have asked the Air
    Force to explain its authority to transfer $76.5 million of fiscal year
    1988 Operations and Maintenance appropriated funds to DMSand to
    fund certain military construction work with DMSfunds.

    On November 12, 1984, a building at the Oklahoma City AX was exten-
    sively damaged by fire. On August 27, 1985, about $76.5 million of fiscal
    year 1985 O&M funds were “passed through” to DMSfor fire costs. The
    transfer converted $76.5 million of O&M funds available for fiscal year
    1985 to DMSfunds with no fiscal year constraints. The Air Force may
    transfer funds between O&M and DMSunder statutory authority included
    in each Defense Appropriations Act if certain prescribed procedures are
    followed. Since we are not aware that the Air Force followed the proce-
    dures for transfer when the $76.5 million was transferred to DMS,the
    transfer may have been improper.

    Our audit also identified about $24.5 million of DMSfunds which were
    used to finance six line-items in a contract to restore the DMSfacilities
    damaged by the fire. These items ranged in estimated prices from
    $400,000 to $10.6 million. The work represented by these items may
    have been a military construction project which had to be financed from
    military construction appropriations rather than from DMS.A military
    construction project consists of all military construction work necessary
    to produce a complete and usable facility or an improvement to an


    Page 46                                   GAO/AFMD-90-23   Air Force Financial   Audit
                      Chapter 3
                      Internal Control Weaknesses Prevent
                      Accurate Fiuancial Reporting and Reduce
                      Accountability  Over Assets




                      existing facility (10 USC. 2801). A military construction project which
                      costs more than $1 million generally must be specifically authorized by
                      law (10 USC. 2802). Such projects may also be carried out by the Air
                      Force under statutory authorities to conduct emergency construction
                      (10 USC. 2803) or to restore facilities which are lost or damaged (10
                      U.S.C. 2854). However, emergency and restoration projects under these
                      authorities which cost more than $1 million must be financed out of the
                      military construction appropriation. Our review of the work financed by
                      the $24.5 million in DMS funds indicates that restoration may have been
                      a military construction project costing more than $1 million. If so, the
                      Air Force may have carried out an unauthorized military construction
                      project and may have improperly funded the project with DMS funds.

   I
   I
                      Effective financial management requires strong systems of internal con-
Cocclusions           trols to help ensure the integrity and reliability of financial information,
                      to safeguard assets, and to promote conformity with proper operating
                      procedures. Although Air Force management is responsible for main-
                      taining a system of internal controls, including accounting controls, our
                      review identified pervasive control weaknesses, such as not routinely
                      reconciling account balances and adjusting account balances without
                      adequate support or documentation. We also identified a number of con-
                      trol weaknesses that were significant to specific organizational levels
                      within the Air Force. In many cases, these weaknesses resulted from
                      noncompliance with Air Force regulations.

                      The Air Force is not alone, however, in its failure to attain a sound inter-
                      nal control environment. Our recent report illustrates the seriousness of
                      the internal control and accounting system problems encountered in the
                      federal government in recent years and the need for a vigorous program
                      to correct these problems.4


                      We recommend that the Secretary of the Air Force direct the Chief
Recommendations       Financial Officer to

                  l   report the internal control problems with reconciliations and documen-
                      tation for adjustments in FMFIA reports to the Secretary of Defense;
                  l   reconcile subsidiary records periodically to the control accounts and cor-
                      rect errors and weaknesses;




                      Page 46                                   GAO/AFMD-90-23   Air Force Financial   Audit
                      Chapter 2
                      Wmnal Control Weaknesses Prevent
                      Accurate Financial Reporting and Reduce
                      Accountability Over Assets




                  . reconcile disbursements with obligations and promptly correct errors;
                  . document all adjustments to subsidiary records and control accounts;
                  l enforce Air Force’s requirement that supervisors and managers review
                    and approve all significant adjustments; and
                  . report unsupported adjustments and reconciliation internal control
                    problems, if applicable, in future FMFIA reports.


                      DOD   concurred with the recommendations presented above.
Agdncy Comments




                      Page 47                                   GAO/AJ?MD-90-22   Air Force Financial   Audit
Chapter 4

Actual Costsof Aircraft and MissilesAre
Not Known

               Federal financial management systems should provide for both fund
               control to monitor spending authority within appropriation limits and
               the accumulation of actual cost data to account for and manage avail-
               able resources. Information provided by a financial management system
               should complement other program information and enable deci-
               sionmakers to more effectively fulfill an agency’s mission. The Air Force
               accounting systems, however, do not provide reliable information on Air
               Force weapons systems-which include aircraft, missiles, engines, satel-
               lites, and other major components. This information is needed for over-
               sight and funding decisions, such as evaluating alternative weapons
               systems or modifications to existing weapons systems, for the Air
               Force’s multibillion dollar programs.

               Air Force accounting systems do not record the billions of dollars
               invested in aircraft, missiles, and engines. During production of weapons
               systems, program managers know whether appropriations are available
               to purchase these systems but do not have timely and accurate informa-
               tion on their cost. Furthermore, Air Force financial systems do not rou-
               tinely provide managers with accurate, reliable information on the
               operating costs of these weapons once they have been purchased. More
               specifically, the reported cost of aircraft and missiles is not based on the
               actual cost of production and usually does not include the costs of gov-
               ernment-furnished materials (GFM). Furthermore, the subsequent costs
               associated with aircraft and missile modifications are not capitalized.
               Instead, military hardware is valued using an estimated unit cost that is
               determined at the time of initial delivery. That cost is not subsequently
               adjusted for actual cost information. Accordingly, the reported costs of
               all military hardware are grossly understated and the actual costs could
               not be determined at September 30, 1988. This was one of the factors
               preventing us from expressing an opinion on the Air Force’s fiscal year
               1988 consolidated financial statements.

               The decisions to purchase weapons systems are based on many factors,
               such as the ability to respond to military threats. However, it is impor-
               tant that managers consider the actual operating and capital costs of
               existing weapons systems before deciding to request appropriations to
               upgrade or replace these systems. Such information is also relevant to
               other decisions and to cost-effectiveness. Moreover, actual cost informa-
               tion is needed for meaningful reporting to the Congress and the public,
               and it instills the discipline needed to control resources and to maintain
               accountability.




               Page 49                                 GAO/AFMD-90-23   Air Force Financial   Audit
                           Chapter 4
                           Actual Costa   of Aircraft   and Missiles Are
                           Not Known




                           Air Force financial management systems focus on maintaining fund con-
Actual Cost of             trol to ensure that current expenditures do not exceed available appro-
Aircfaft and Missiles      priations, but not on accounting for resources used and costs incurred.
in Prjoduction Is          As a result, program managers do not get timely and accurate informa-
                           tion on the cost of military hardware in production. This diminishes the
Unknown                    Air Force managers’ ability to manage procurement effectively and ulti-
                           mately to accurately assess the value of completed military hardware.

                           In fiscal year 1988, approximately $25 billion was appropriated to the
                           Air Force to procure military hardware. At October 1988, the Air Force
                           had contracts valued at $256 billion to procure aircraft, missiles,
                           engines, and other military hardware. Air Force military hardware pro-
                           curement, which is managed by the Air Force Systems Command,
                           includes highly technical, state-of-the-art weapons systems. A single
                           piece of military hardware, such as a B-1B bomber or an MX missile, can
                           cost several hundred million dollars.

                           Financial controls are established at the point of purchase or when
                           orders are placed to ensure that funds will be available to procure items.
                           Program managers monitor military hardware in production by tracking
                           the number of items produced under the contract to ensure that funds
                           are available to continue production. However, useful cost information
                           on individual weapons is not maintained under systematic accounting
                           control, and all costs associated with the production of a weapons sys-
                           tem are not accumulated. It is virtually impossible to monitor the cost of
                           a specific system in development as compared with the estimated cost to
                           produce it. In addition, this leads to inaccurate reporting of costs to the
                           Congress in Selected Acquisition Reports (SAR). (Inaccurate reporting to
                           the Congress is discussed in greater detail later in this chapter.)


Delays in Reporting        Our audit disclosed that the Air Force’s standard General Accounting
                           and Finance System (GAFS)does not provide timely financial data to pro-
Expenditures for Weapons   gram managers responsible for acquiring military hardware. The organi-
                           zational structure for procuring military hardware in the Air Force is
                           complex and decentralized, involving several organizations within and
                           outside the Air Force which fulfill such functions as administering con-
                           tracts, approving payments, making disbursements, and recording and
                           reporting disbursements. To effectively manage programs, timely and
                           accurate financial information must be communicated among these orga-
                           nizations and be made available to program managers.




                           Page 49                                         GAO/AFMD-90-23   Air Force Financial   Audit
                        Chapter 4
                        Actual Costs of Aircraft   and Missiles Are
                        Not Known




                        For example, contract disbursements made by the Contract Management
                        Division (CMD) are recorded in the Acquisition Management Information
                        System. However, this system does not interface with GAS. Instead, dis-
                        bursement data are routed from CMDthrough the Air Force Accounting
                        and Finance Center to the accountable stations,’ thereby creating sub-
                        stantial delays in recording that information. In addition, we found that
                        the accountable stations did not record the disbursements in a timely
                        manner once they had received them. While the Air Force had no crite-
                        ria for the number of calendar days it should take to record the dis-
                        bursements, we felt 10 days was a reasonable criterion. We tested 278
                        transactions and found that 214 took over 10 days.

                        In addition to delays in recording disbursement data from payment sta-
                        tion to accountable station, we found a lack of reconciliation between
                        the two. Due to the lack of reconciliations, Air Force managers cannot be
                        assured that financial transactions are recorded correctly for aircraft
                        and missiles in production. Reconciliations need to be performed regu-
                        larly to detect and correct errors within Air Force Systems Command
                        records. (See chapter 3 for a discussion on reconciliations of disburse-
                        ments with obligation balances.)


                        The Air Force systems do not accumulate, account for, and report the
Value of Aircraft and   actual costs of aircraft and missiles, nor is the value of completed mili-
Missiles Is Not Based   tary hardware based on the actual procurement cost. Title 2 requires
on Cost                 that all property and equipment with an initial acquisition cost of
                        $5,000 or more and an estimated service life of at least 2 years be
                        accounted for at cost. After the Air Force procures a weapons system,
                        the Air Force’s accountability system is updated to show the location of
                        the military hardware but not its full acquisition cost.

                        The Air Force Logistics Command (AFLC) is responsible for valuing mili-
                        tary hardware and tracking its location, readiness, and status. AFLC uses
                        an automated accountability system, the Aerospace Vehicle and Equip-
                        ment Inventory, Status, and Utilization Reporting System (AVISURS), to
                        track the location of Air Force weapons systems. This system was
                        neither designed nor intended to serve as an accounting system. Never-
                        theless, the Air Force used AVISURSas the source for the weapons sys-
                        tems account balances included in the financial statements even though
                        more accurate information on the costs was available in annual Selected

                        ‘An accountablestation is the accountingand financeoffice relatedto the programoffice responsible
                        for the weaponsystemfor which the paymentoffice madethe disbursement.



                        Page 60                                            GAO/AFMD-90-23     Air Force Financial   Audit
Chapter 4
Actual Costa of Aircraft   and Missiles Are
Not Known




Acquisition Reports sent to the Congress for recent weapons systems
programs.

AVISURSgenerates asset valuations for Air Force aircraft and missiles
based on the unit cost and the number of aircraft and missiles for each
of the 263 specific classes/types of aerospace vehicles, such as the B-1B
bomber or the B-52 bomber. Until May 1983, the unit costs which were
input to AVEURS were provided by a manual containing information on
the Air Force’s various types of aerospace vehicles. The Air Force
reportedly calculated these costs by dividing the total procurement costs
by the total units acquired for each type of aircraft, an approach we
believe to be valid conceptually. However, the Air Force stopped updat-
ing this manual in May 1983. Consequently, only 147 of its current fleet
of 253 specific classes of aircraft and missiles have unit costs computed
in this manner. For the 147, we compared the costs in the AVISURSsystem
with those in the manual and found the two did not agree in 86 cases.
Air Force officials could not explain the differences or show us how the
costs had been developed for the 86 types of aerospace weapons.

The manual has not been kept up to date since May 1983. The unit costs
for the remaining 106 of the 253 types of aircraft and missiles procured
since 1983 were recorded in AVISURSbased on telephone conversations
with representatives of the Systems Program Office responsible for pro-
curing the aircraft and missiles. Air Force officials stated that these unit
costs were “initial fly-away costs”-the estimated average costs at the
time the first aircraft or missile is delivered by the contractor.

This approach is not an adequate substitute for actual costs. Aircraft
and missiles generally are delivered under many separate contracts at
varying costs over several years and frequently include different elec-
tronics or payload capabilities which would affect the costs. However,
once a unit cost is entered in AVISURS,it is not updated or revised regard-
less of actual costs. For example, we computed $219 million as an aver-
age cost for the B-1B bombers, based on the total procurement
expenditures, while AVISUHSreported a unit cost of approximately $150
million.

To determine whether the reported valuations for aircraft and missiles
approximated the actual procurement expenditures or costs incurred,
we analyzed the total procurement expenditures for several aircraft
from 1973 through 1988 and found, as shown in table 4.1, that the
AVISURScosts reported to the Finance Center were significantly under-
stated. We consider our estimates to be conservative because we did not


Page 61                                       GAO/AFMDSO-23   Air Force Financial   Audit
                                          Chapter 4
                                          Actual Coats of Aircraft       and Mtesiles Are
                                          Not Known




                                         include research, development, test, and evaluation costs associated
                                         with each type of aircraft, and the estimates are incomplete because
                                         they do not include the cost of government-furnished materials.

TabI/ 4.1: Procurement Expenditures on
Selekted Aircraft Programs Calculated    Dollars in billions
by A~ISURS and GAO                                                                        Costs reported by
                                         Type/class of aircraft                      AVISURS                         GAO               Difference
                                         B-1B                                               $14.8                    $21.9                    $7.1
                                         B-52                                                 2.8                      4.0                     1.2
                                         F-15                                                11.1                     17.9                     6.8
                                         F-16                                                12.0                     18.3                     6.3


                                         These few examples show that the total understatement of aircraft pro-
                                         curement costs may be on the order of tens of billions of dollars. We
                                         have not attempted to determine research, development, test, and evalu-
                                         ation costs.

                                         Additionally, we compared our estimated costs for the B-lB, F-16, and
                                         F-15 with procurement expenditures reported in the respective SARS
                                         dated December 31,1988. As shown below, the SARS'expenditures more
                                         closely approximated the costs we estimated.

Table 4.2: Expenditures on Selected
Aircraft Programs Reported in SARs and   Dollars in billions--.-     -
Calculated by GAO                                                                   Costs/expenditures      reported by
                                         Type/class of aircraft                       SAR                          GAO                Difference
                                         B-16                                         $21.5                          $21.9        ----..     ~$( .4)
                                         F-15                                          18.5                           17.8                       .7
                                         F-16                                          19.7                           18.3                      1.4


                                         Due to the lack of detailed information, we were unable to reconcile the
                                         difference between our estimates and the expenditures reported in the
                                         SARS.While the SARS'amounts were more accurate than the costs
                                         reported in AVISURS,as discussed later in this report, the SARS'costs were
                                         also not complete. Cost systems that can track the accumulation of costs
                                         applicable to a project’s development are crucial to effectively manage
                                         and control the cost of a project.


                    Y




                                         Page 62                                                    GAO/AFMD-90-23    Air Force Financial   Audit
                        Chapter 4
                        Actual Costs of Aircraft   and Missiles Are
                        Not Known




    I
                        The costs of weapons systems are also understated because the Air
Gov$mment-              Force does not incorporate in them the value of government-furnished
Fur ished Materials     materials. GFMincludes parts, components, assemblies, and raw and
Not 1 ncluded in        processed materials. During the procurement of certain military hard-
                        ware, the Air Force furnishes contractors these materials, which either
Valqations              become part of the end item or are consumed in the production of the
                        end item. With few exceptions, GFMis provided without cost to contrac-
    I                   tors and thus is not included in the contract prices.

                        The Air Force values aircraft at initial fly-away cost and missiles and
                        engines at average acquisition cost. Since government-furnished materi-
                        als are not usually included, this substantially understates the cost of
                        these assets. We were unable to ascertain the amount of understatement
                        because data and records made available to us were incomplete. As a
                        result, the real cost of producing an aircraft or missile is not known and,
                        accordingly, cannot be reported to the Congress or other
                        decisionmakers.


                        The Air Force’s valuation of military hardware does not include appro-
Aircraft and Missile    priate portions of about $25 billion incurred since 1973 for modifica-
Modifications Are Not   tions made after acquisition. The Air Force often modifies existing
Capitalized             military hardware to improve or enhance its capability and extend its
                        serviceable life. Engineering and modification costs incurred after
                        approval of the basic procurement contracts are only added to hardware
                        costs when such changes result in a new category of weapons system.
                        This practice significantly understates the investment in weapons
                        systems.

                        Based on our review of the historical data contained in appropriation
                        expenditure reports, we estimated that the Air Force incurred modifica-
                        tion costs of $25.2 billion ($24 billion for aircraft and $1.2 billion for
                        missiles) from fiscal years 1973 through 1988. These costs were not
                        reflected in the asset valuations as of September 30, 1988, because the
                        expenditures were processed through fund control systems and not cap-
                        tured in the property accounting records.

                        The Air Force needs to include the modification costs when it evaluates
                        the total cost of maintaining and operating weapons systems. We were
                        unable to determine how much of the $25.2 billion should have been
                        capitalized or, in fact, was capitalized because relevant historical data
                        were unavailable.



                        Page 53                                       GAO/APMD-90-23   Air Force Financial   Audit
                             Chapter 4
                             Actual Costa of Aircraft   and Missiles Are
                             Not Known




  i
                            As with acquisition costs, the costs of operating and supporting weap-
Oljerating Costs of         ons systems are not accounted for or included in the budget in a way
Aikcraft and Missiles       that would allow the costs to be identified with a specific type of weap-
Ape Not Known               ons system. In its 1987 report on the Department of Defense’s appropri-
                            ations bill for fiscal year 1988, the Senate Committee on Appropriations
                            expressed its concern over the long-term implications of procuring
                            weapons systems which have increasingly expensive operating and sup-
                            port costs. We initiated a separate review of the costs but had to termi-
                            nate it in February 1987 because operating and support cost data were
                            unavailable.

                            DODhas initiated several initiatives designed to improve the quality of
                            information on operating and support costs. In an internal document,
                            however, the Air Force has identified several concerns about reporting
                            operating and support costs for its major weapons systems to the Con-
                            gress. These concerns are stated as follows:

                        . “While every attempt was made to make the data reflect budget fund-
                          ing, not every cost element could be tracked directly to the budget. Some
                          cost elements had to be modeled, i.e., estimated.”
                        . “Fixed overhead items, such as system management and engineering,
                          were allocated and were not variable with respect to a specific weapon
                          system’s activity or the number on hand.”
                        . “The preparation of the data for the reports is very labor intensive. To
                          make the data more precise and to accommodate accumulation of the
                          data on a routine basis for annual budgets would require major changes
                          to the DODbudget process.”

                            The Air Force document also stated that because of the limitations in its
                            ability to track costs for specific weapons programs, the operating and
                            support cost data reported in the budget were not consistent with simi-
                            lar data reported by program offices for Selected Acquisition Reports.
                            The Congress cannot provide oversight of the total costs associated with
                            major weapons systems, planned or on hand, without accurate, complete
                            operating and support costs for the weapons systems. An adequate cost
                            accounting system would provide reliable data on each and every
                            weapon in the Air Force’s inventory and such information should be
                            routinely available to the Congress. Also, from the Air Force manage-
                            ment’s perspective, it would appear extremely difficult to take meaning-
                            ful actions to control costs if precise records of actual costs remain
                            unavailable.




                            Page 54                                        GAO/AFMD-99-23   Air Force Financial   Audit
                             Chapter 4
                             Actual Costs of Aim&   and Missiles Are
                             Not Known




     I
                             The Air Force does not have a system or procedure to track and monitor
Controls Over                property owned by the Air Force but held by contractors. We found that
Contractor-Held              (1) some satellites and engines paid for and accepted by the Air Force
Propierty Are Not in         and held by contractors and (2) government-furnished materials which
                             have been issued to contractors were not recorded in any Air Force
Plach                        property or accounting system.

                             When functions or controls are delegated to third parties, such as con-
                             tractors, the government has a greater exposure to fraud, waste, and
                             abuse. Even when a federal agency determines that delegating control of
                             assets like GFMis the best course of action, that agency has a fiduciary
                             responsibility to establish accountability and to exercise appropriate
                             oversight and control.


Satel4itesand Engines Held   We found that almost $630 million worth of satellites and about $5.7
                             million worth of engines for C-20A cargo planes that were paid for and
by Contractors Are Not       owned by the Air Force and held by contractors were not recorded in
Accounted for or Tracked     any Air Force property or accounting system. The Air Force has prop-
                             erty systems that effectively track the location of most of its equipment
                             from the time it is received. Aircraft and missiles are tracked by AVISURS
                             and engines by the Comprehensive Engine Management System (CEMS).
                             The C-20A engines should have been recorded in CEMSbut were not. The
                             Air Force, however, has no system to track and account for satellites.
                             While local managers had documents identifying the satellites and
                             engines held by the contractors, higher-level managers had no access to
                             these documents and were not informed of the costs associated with
                             maintaining the assets at the contractors’ facilities. More specifically, we
                             found the following:

                         l   Seven communications satellites costing over $630 million were stored
                             for the Air Force at the production contractor’s facilities. The seven
                             satellites plus four more in production were scheduled for launch
                             through 1992. In addition to the acquisition costs, the Air Force had
                             incurred costs totaling $18 million for the contractor to store the satel-
                             lites. Had the costs associated with storing these satellites been recorded
                             and reported, Air Force managers would have been better able to evalu-
                             ate whether the production should continue or be slowed to reduce the
                             storage costs.
                         l   At one air base, about $5.7 million in C-20A cargo aircraft engines were
                             at the contractor for maintenance but were not recorded in the account-
                             ing system as being owned by the Air Force.



                             Page 65                                   GAO/AFMD-90-23   Air Force Financial   Audit
                           Chapter 4
                           Actual Costs of Ahcraft   and Missilea Are
                           Not Kuown




Government-Furnished       Since 1967, we and DOD internal audit organizations have issued numer-
Materials Are Not          ous reports on the management, use, and accountability of GFM. How-
                           ever, the Air Force has not developed a system or procedures to track or
AcTounted for or Tracked   monitor GFM once it has been issued to contractors. Once issued, GFM is
                           dropped from the Air Force’s inventory records, leaving the contractor
                           to account for the material in its possession. As a result, the Air Force
                           does not usually include the cost of furnished items in the unit cost of
                           military hardware.

                           We previously reported2 that the Air Force procedures and practices for
                           reviewing, validating, and approving GFM requisitions did not ensure
                           that contractors would requisition and receive only needed items and
                           quantities of GFM. Furthermore, weaknesses in both the contractor con-
                           trols and government oversight over GFM provided to contractors have
                           contributed to the accumulation of excess material. Since 1967, both we
                           and congressional committees have criticized DOD and the Air Force for
                           not establishing property accountability and financial accounting con-
                           trols over GFM. We recommended in two reports3 that accounting systems
                           be established to adequately account for (1) the quantity and value of
                           GFM authorized and provided to contractors and (2) the contractors’
                           receipt and use of this material.

                           The long-standing problems with the management, control, and account-
                           ability for GFM continue. As a result, there is no assurance that (1) the
                           government’s sizeable investment in such property has been adequately
                           protected and (2) the potential for waste, fraud, and abuse has been
                           minimized.


                           The Air Force’s current financial reporting practices do not disclose the
Improvements Needed        costs of investment decisions for weapons systems. Neither DOD and the
in Weapons Systems         Air Force nor the Congress and other decisionmakers have complete and
Cost Management            reliable historical data on the costs of existing weapons. Moreover, deci-
                           sionmakers do not have good historical cost information, some of which
                           may be useful in evaluating the costs of proposed new weapons systems,
                           although usefulness may vary depending on the degree of technological


                           ‘Government Property: DOD’s Management of the Property It Furnishes to Contractors (GAO/
                                  - 8 _161, May 26,198S).

                           “Internal Controls: Air Force Can Improve Controls Over Contractor Access to DOD Supply System
                           c-D            -88_QQ, March l&1988) and Government Property: DOD’s Management of the Prop
                           erty It Furnishes to Contractors (GAO/NSIAD-88-151, May 26,1988).



                           Page 66                                             GAO/AFMD-90-23    Air Force Financial   Audit
                          Chapter 4
                          Actual C!~sta of Aircraft   and Miseilee Are
                          Not Known




    i

                          change being made. As a result, decisions are made based on incomplete
                          and inaccurate data.

                          As it becomes necessary to look for ways to contain and even reduce the
                          cost of defense, it is evident that the budget cannot finance all the weap-
                          ons systems now being planned and developed. Even assuming that the
                          defense budget were to grow 2 percent faster than inflation, the pro-
                          grams included in DOD'Smost recent 5-year plan will reportedly cost at
                          least $150 billion more than the amount which will probably be avail-
                          able. While cost will not be the only factor in the difficult decisions on
                          cuts and reductions, complete and reliable cost data will be needed to
                          make informed decisions.


Inaccurate Reporting of   Since 1969, Selected Acquisition Reports have been the primary means
Costs to the Congress     by which DODinforms the Congress of the status of major weapons sys-
                          tem acquisitions. SARS summarize estimates of technical, schedule, quan-
                          tity, and cost information. However, they do not include actual
                          contractor costs incurred to date or compare funded quantities to
                          planned and actual contractor deliveries.

                          The Congress has repeatedly expressed dissatisfaction with the lack of
                          timely and complete data in SIRS. In 1982, the House Committee on
                          Armed Services Special Panel report on Defense Procurement Proce-
                          dures noted that “the SAR is inadequate in its reporting on major weapon
                          systems to the Congress, thus inhibiting proper oversight.”

                          In previous reports, we have suggested changes to improve SARS. Our
                          February 1985 report4 discussed a revised SAR format that would com-
                          pare planned costs with actual costs and include estimates of the time
                          needed to complete a project. The actual cost data should come directly
                          from the Air Force accounting system. However, as previously dis-
                          cussed, the Air Force accounting system does not generate the actual
                          cost of the weapons systems. Instead, the Air Force must resort to using
                          the costs obtained from the various contractors’ accounting systems.
                          Accountability demands that Air Force management have its own cost
                          information for control purposes. Dependence on contractors is a glaring
                          symptom of the poor condition of the Air Force’s financial management
                          systems.


                                     the Cost of Government: Building an Effective Financial Management Structure (GAO/
                                     35 and 85-35A, February 1985).



                          Page 6’7                                            GAO/AFMD-90-23     Air Force Financial   Audit
                        Chapter 4
                        Actual Costa of Aircraft   and Missiles Are
                        Not Known




-/   +
                        We also reported6 that the presentation of SARreports has not been mod-
                        ernized to take advantage of computer technology that would improve
                        timing and provide helpful graphics and data analysis. More recently,
     ~                  we reported” on how DOD could substantially improve the quality, timeli-
     I                  ness, and presentation of data it provides to the Congress.


Co& Management of       Both historical and future costs should be considered in decisions
WciaponsSystems         related to funding and selections of alternatives among weapons sys-
                        tems. However, as discussed in this report, the Air Force does not have
                        reliable, complete information on costs, and important decisions are
                        based on incomplete and inaccurate data. The following are examples of
                        cost considerations:

                    l   Comparison of costs among alternative weapons systems. The Air Force
                        proposed that its close ground support aircraft (the A-7) be upgraded to
                        help meet the air support needs of ground forces in the 1990s and
                        beyond. The Congress was concerned about the aircraft’s cost-
                        effectiveness in meeting this needq7

                        The total cost of the proposed A-7 PLUS was not known because (1) the
                        Air Force had not decided on avionics and engine options, (2) studies on
                        radar improvements, aircraft rewiring, and aircraft vulnerability could
                        lead to additional aircraft modifications, and (3) the production sched-
                        ule was uncertain.

                      However, once these costs have been determined, the Air Force still
                      would not have the total cost of the A-7 PLUS because the actual costs
                      of the weapons systems, the GFM, and subsequent modifications are not
                      properly captured in the accounting system. Moreover, because of the
                      previously discussed weaknesses in how the Air Force assigns costs to
                      its aircraft, it would not be in a position to compare the cost-
                      effectiveness of the existing A-7 with that of the proposed A-7 PLUS.
                    . Weapons systems cost growth. In 1983, the Air Force analyzed alterna-
                      tives for solving its long-term airlift capability shortfall. The alterna-
                      tives were to buy additional C-5 aircraft or develop the C-17 aircraft.

                        %elected Acquisition Report: SuggestedApproaches for Improvement (GAO/NSIAD-86-118, July 17,
                        1%36).
                        “Weapon Acquisition: Improving DOD’s Weapon Systems Acquisition Reporting (GAO/NSIADQOQO,
                        November 14,1989).

                        ‘Close Air Support: Upgraded A-7 Aircraft’s Mission Effectiveness and Total Cost Unknown (GAO/
                        NSIAD-88-210, September 2, 1988).



                        Page 68                                            GAO/AFMD-90-23     Air Force Financial       Audit


                                                                                                                    .
                          Chapter 4
                          Actual Costs of Aircraft   and Missfles Are
                          Not Known




                          Even though Air Force systems did not have complete, accurate costs
                          for existing aircraft, which would have been helpful in estimating costs
                          for additional C-5 aircraft, they concluded that the C-17 was the cost-
                          effective alternative.

                          While complete, reliable financial data may not have affected the ulti-
                          mate decisions made in these situations, the decisions were made with-
                          out such data.


Com$ehensive Cost         While costs are considered to a limited extent by managers and deci-
Infor$ation Would         sionmakers, there are opportunities to better or more efficiently and
                          effectively use costs in managing weapons systems. During the planning
Improve the Air Force’s   and budget development stages for weapons systems, actual costs of
Ability to Manage         existing systems can be used to provide a baseline for many components
Weapons                   of similar or upgraded weapons systems. During the procurement period
                          and throughout the life of a weapons system, managers at all levels need
                          to more closely monitor planned costs and actual costs. Such costs need
                          to be carefully considered when decisions are made with respect to new
                          acquisitions, modifications or upgrades, maintenance programs, and
                          even operations, Knowledge of weapons systems costs, combined with
                          good operating and other cost information, will provide a basis for
                          ensuring cost-effectiveness in the Air Force.


Conclusions               control to monitor spending authority within appropriation limits and
                          the accumulation of actual cost data to account for and manage avail-
                          able resources. Information provided by a financial management system
                          should complement other program information and enable deci-
                          sionmakers to be more effective in fulfilling an agency’s mission. Actual
                          cost information can help provide (1) a basis for accountability for man-
                          agers, (2) a fundamental basis to serve as a measure against budgeted
                          costs and forecasts, and (3) historical data to assist in estimating budget
                          requirements and evaluating alternatives.

                          However, the Air Force has no systems to accurately account for billions
                          of dollars invested in aircraft, missiles, and engines. Furthermore, Air
                          Force accounting systems cannot produce the operating and support
                          costs for weapons systems. While the decisions related to weapons sys-
                          tems acquisition are based on other factors in addition to cost, such as
                          the ability to respond to military threats, managers at every level must
                          consider accurate data on the costs of alternatives when making funding


                          Page 69                                       GAO/AFMD-90-23   Air Force Financial   Audit
                      Chapter 4
                      Actual Costs of Aircraft   and Missiles Are
                      Not Known




                      decisions. Moreover, actual cost information is not available for report-
                      ing to the Congress and the public. This kind of information is clearly
                      needed for effective congressional oversight.


                      We recommend that the Secretary of the Air Force direct the Chief
R&commendations       Financial Officer to

                  .   accumulate and report actual costs of weapons systems, which include
                      acquisition costs, GFM,operating and maintenance costs, and
                      modifications;
 I                .   report actual and planned cost data to the Congress so better decisions
                      can be made on program funding;
                  .   account and report on satellites through either revisions to existing sys-
                      tems or a new system to provide oversight of these assets; and
                  .   establish and implement procedures to identify and record in the
                      accounting records equipment paid for and accepted by the Air Force
                      but held by contractors.


                      DODconcurred with all the recommendations presented above.
Agency Comments




                      Page 60                                       GAO/AFMD-90-23   Air Force Financial   Audit
Inventory SystemsDo Not Provide Accurate
Firbncial Data

                         The systems that are supposed to provide accountability and financial
                         control over the $63.8 billion invested in inventories of spare parts and
                         supplies do not provide accurate, reliable data supporting either the
                         quantities or the value of these inventories. Using inaccurate informa-
                         tion for purchase decisions can result in unnecessary procurement and
                         excess inventories in some instances and shortages in others. Building
                         inventories in excess of requirements wastes tax revenues that are
                         sorely needed elsewhere. Conversely, inadequate inventories inhibit the
                         Air Force’s ability to fulfill its mission.

                         Air Force managers cannot be sure they have accurate information to
                         use in determining when to procure items unless a physical count of sup-
                         plies and spare parts is made. Serious inaccuracies in the pricing data
                         for inventories compound the problem. Even if reliable data can be
                         obtained, their usefulness is limited if the systems are not constructed to
                         generate good cost accumulations. Accumulation of cost information in
                         the accounting records can also provide information on cost trends use-
                         ful for budgeting as well as information to help control operations.
                         Accordingly, an inventory system which will satisfy such needs should
                         be capable of

                     l assigning a cost to each stock item in the inventory;
                     . tracking the movement of inventory;
                     e maintaining records of input, usage, and quantities on hand;
                     l being reconcilable with physical counts;
                     . assigning a value to usage (such as average cost) identified by program
                       or other classifications; and
                     . making comparisons with requirements.

                         The Air Force systems do not provide this information; therefore, it is
                         not available for purchasing new inventory items in the most cost-
                         effective manner, analyzing cost trends, or controlling material usage
                         and repair costs.


Scope of Inventory       plies and spare parts, eight times the inventories reported by General
Management               Motors, one of the largest corporations in the United States. These
Operations               inventories are maintained at over 130 bases located throughout the
                         world. Air Force inventory management is an extremely complex task
            *
                         due to the size of its operations, frequent technological obsolescence of




                         Page 61                                 GAO/AFMD-90-23   Air Force Financial   Audit
Chapter 5
Inventory System     Do Not Provide Accurate
FimnciEll Data




inventory items, and the need to decentralize storage for national secur-
ity reasons. To maintain and support its operations and weapons sys-
tems, the Air Force manages about 1.6 million different types of spare
parts and supply items. The Air Force Logistics Command (AFLC) and
five Air Logistics Centers (ALCS) use a number of highly complex finan-
cial and logistics systems and subsystems to compute requirements, fill
orders, track inventory quantities, and value inventory.

ALCS  procure items on the basis of requirements computations, which in
turn are determined by a variety of factors, including quantities of
inventory items on hand, in transit, and in the repair process; projected
usage rates; and procurement lead times. In recent years, we have issued
several reports’ relating to problems found in the requirements determi-
nation process. Among the problem areas reported are inaccurate sys-
tems and procedures for determining inventory requirements and
identification of inventory inaccuracies and their causes.

The items purchased as a result of the requirements determination pro-
cess are received at warehouses, stored, and issued to customers world-
wide. During this process, perpetual inventory systems monitor the
quantities of each item to provide accountability over the items (that is,
where the items are and how many are at each location throughout the
Air Force). Perpetual inventory systems are designed to track invento-
ries on an item-by-item basis, increasing recorded quantities for each
unit received and reducing them for each unit issued. This type of sys-
tem can provide managers with up-to-date, detailed information on
which to base decisions. However, periodic physical inventory counts
are also needed to substantiate the information maintained in the per-
petual system to ensure that all transactions were recorded properly
and to account for any theft or spoilage.

Each inventory item maintained by Air Force has a unique national
stock number (NSN) by which it is classified and recorded in the perpet-
ual inventory system. For each NSN,hundreds or even thousands of indi-
vidual units may be in stock at (1) one or more of the ALCs, where
central inventories are maintained, (2) Base Supply units, where Air
Force operating units have ready access to them, or (3) the Depot Main-
tenance Service, Air Force Industrial Fund operations (depots), where

‘Air Force Budget: Potential for Reducing Requirements and Funding for Aircraft Spares (GAO/
         - - 90BR, February 18,1988), DOD Inventory Management: Revised Policies Needed (GAO/
NSIAD-88-76, January 14, 1988), Military Logistics: Buying Spares Too Early Increases Air Force
Costs and Budget Outlays (GAO/mD-86-149,         August 1, 1986), and Procurement: Spare Parts Ini-
tiatives Air Force Implementation (GAO/NSIAD-87-28, February 13,1987).



Page 62                                              GAO/AFMD-90-23      Air Force Financial   Audit
                                            Chapter 5
                                            Inventory Systems Do Not Provide Accurate
                                            Fiuancial Data




---
                                            they are used to repair and maintain aircraft, engines, missiles, and
                                            related components.

                                            While ALCSare responsible for maintaining the bulk of the inventory, the
                                            air bases and the depots also maintain inventories to fulfill their respec-
                                            tive missions. Table 5.1 shows the inventories at these activities.

Table 5 1: Inventory Distribution as of
Septe ber 30,1986                           Dollars in billions
                                            Activity/location
                                                           -~                                                                   Value
      1                                     ALCs                                                                                $40.4
                                            ~-                                                                                 ___-
                                            Depots                                                                                1.1
                                            _.-- bases
                                            Air          -___--                                                                 22.3
                                            Total                                                                              $63.6



                                            Maintaining accurate records over inventories has been a long-standing
Inaccurate Records of                       problem for the Air Force. The inventory accountability systems which
Inventory Quantities                        the ALCSuse to track the location and quantities of inventory items do
                                            not provide reliable, accurate inventory data to managers. Inaccurate
                                            inventory records can cause critical supply shortages, prolonged delays
                                            in filling requisitions, or unnecessary procurements resulting in excess
                                            inventory. Although the Air Force has recently improved the accuracy
                                            of its data in automated perpetual inventory systems and generally
                                            takes accurate physical inventory counts, we believe the perpetual
                                            records are still too unreliable to be used in making effective and effi-
                                            cient decisions. A perpetual inventory system should be capable of pro-
                                            viding data to answer the following questions:

                                          . What inventory items were acquired and how much did they cost?
                                          . Where did the inventory items go? (Data should be available both in
                                            terms of quantities and values.)
                                          . How much inventory has been used?
                                          . How much inventory is on hand? (Data should provide quantity, value,
                                            and location of inventory items.)
                                          . How much inventory is needed or not needed? (Data should provide
                                            both quantities and locations.)

                                            Problems with inventory accuracy have been the subject of congres-
                                            sional hearings and GAOand Air Force Audit Agency reports for many
                                            years, Some improvements have been made as a result of a number of
                                            programs the Air Force initiated to improve inventory accuracy. Since



                                            Page 63                                     GAO/AFMD-90-23   Air Force Fiuaucial   Audit
                              Chapter 6
                              Inventory System   Do Not Provide Accurate
                              Financial Data




                              1983, the AFLC has required random sampling of physical inventories at
                              ALCS to obtain an objective measure of inventory accuracy. Data from
                              these inventory observations showed that inventory accuracy in fiscal
                              years 1987 and 1988 had improved over previous years. However, the
                              data also showed that the perpetual inventory systems have not yet
                              achieved a high degree of reliability.      u


Inventory Accuracy Is Still   To assess the accuracy of inventory records, we selected random sam-
a Ihoblem at ALCs             ples of inventory items at two ALCS, Ogden and Warner Robins. Further,
                              to assess inventory procedures and controls, we observed and tested
                              physical inventories performed by Air Force personnel. We made test
                              counts during these inventories and compared the results with Air Force
                              counts.

                              On the basis of our samples at the two ALCS, we estimate that (1) the
                              counts for about 100,000 NSNS, with a value of about $5.7 billion,
                              exceeded those in the perpetual inventory records, (2) the counts for
                              about 82,000 NSNS, with a value of about $1.1 billion, were less than
                              those in the perpetual inventory records, and (3) about 786,000 NSNS
                              were correct. While many of the differences were not material, about
                              112,586 NSNS differed by 10 percent or more between the counts and the
                              perpetual inventory records.

                              The volume of errors Air Force inventory teams detected also shows
                              that records still need to improve with regard to quantity accuracy; the
                              inventory management systems at ALCS still have not achieved reliabil-
                              ity. During fiscal year 1989, some of the quarterly counts of 500 items
                              have shown the perpetual records to differ by less than 10 percent,
                              other counts have shown significant differences. For example, the San
                              Antonio ALC’S second-quarter inventory had initial unit accuracy of only
                              49 percent, and the Warner Robins ALC’S third-quarter counts showed
                              only 58 percent accuracy.

                              These significant differences show the ALCS’ inventory records to be
                              unreliable, Inaccurate inventory balances recorded in these perpetual
                              inventory systems can lead to improper requirements determinations
                              and, subsequently, to inappropriate procurement decisions.




                              Page 64                                      GAO/AFMD90-23   Air Force Financial   Audit
                                         Chapter 6
                                         Inventory System8 Do Not Provide Accurate
                                         Ftnancial Data




Rec@rdsof Inventory                      We also tested the reliability of inventory records at 10 air bases. Using
                                         NSNS,we selected a sample of 2,341 supply items which comprised a
Quahtities at Bases Appear               quantity of 369,076 units valued at $24.8 million from a universe of $1.1
ReaSonable                               billion. Based on this sample, we found total overages of 239 units, or
     I                                   $175,445 (1 percent), and total shortages of 4,810 units, or $451,508 (2
                                         percent). These differences, while of concern, show that air base inven-
                                         tory records are much more accurate than ALC records,


                                         The Air Force does not accurately record and report the value of its
Unleliable Inventory                     inventories. Yet, such information is important to assess the cost of pro-
Va]lues                                  viding a service or doing a job (such as constructing a system or simply
                                         providing maintenance) and to maintain cost control as well as physical
                                         control. Air Force policy requires only that its inventories be valued at a
                                         price based on an item’s most recent acquisition cost. However, the Air
                                         Force does not consider the condition or “serviceability” of inventory
                                         items when valuing them.


Underviceable Inventory                  Inventory values are not adjusted for the condition of the items in the
                                         inventory. Although about $7 billion (over 50 percent) of the
Reported at Full Value                   investment-item inventory at three ALcs-Ogden, San Antonio, and
                                         Warner Robins-was unserviceable, it was valued the same as new
                                         inventory items. This practice significantly overstates inventory values
                                         and is misleading because the true inventory value is less than the
                                         amount shown and because there is a substantial additional cost to bring
                                         unserviceable items to a usable condition. Table 5.2 shows the values of
                                         unserviceable inventory, according to Air Force records.

Table 5.2: Unserviceable Inventory Not
Reported aa Such in Air Force Records    Dollars in billions
                                                                       Total investment-          Unserviceable                Percent
                                         ALC                              item inventory              inventory          unserviceable
                                         Ogden                                        $3.4                    $2.1                    61.8
                                                  -___
                                         San Antonio                                   3.0                     2.0                    52.6
                                         Warner Robins                                 5.0                     2.9         -_____     58.0
                                         Total                                       $12.2                    $7.0                    57.4


                                         The military services maintain a large number of unserviceable items in
                                         their inventories for a variety of reasons. For example, a good argument
                                         can be made that it is more efficient to maintain components that are
                                         very expensive to repair and not in high demand under normal inven-
                                         tory control and repair them only when needed. Although this approach


                                         Page 65                                             GAO/AFMD-90-23    Air Force Financial   Audit
                       Chapter 6
                       Inventory Syetems Do Not Provide Accurate
                       Financial Data




                       may provide effective inventory management, failure to consider and
                       report the cost of repair is not acceptable for financial management. To
                       show these items at the same value as fully serviceable items, when
                       many require the investment of significant dollars before they can be
                       used, significantly distorts the total value of the inventory and the
                       financial statements.

                       Because of indications that over 50 percent of the $12.2 billion
                       investment-item inventory at the three ALCSwas unserviceable, we
                       believe that it is important to know the repair costs and use that infor-
                       mation in conjunction with new purchasing in order to properly decide
                       whether or not it is cheaper to buy a new item or to repair an unservice-
                       able one. Unless the records reflect estimates of repair costs, it is likely
                       that the potentially lower cost of repairing such items versus the cost of
                       purchasing new items will not be carefully considered. This can lead to
                       decisions to purchase rather than repair, which could result in substan-
                       tial overinvestment in inventories. The Air Force needs to develop a
                       methodology which regularly adjusts the unserviceable portion of its
                       inventory to reflect the costs associated with repairing these items.


Valuation Policy Is    Title 2 requires inventories to be valued at the lower of cost or market.
Acceptable but Not     Since cost information is not readily available, we believe market valua-
                       tion is an acceptable alternative. Market valuation involves application
Consistently Applied   of either (1) current replacement cost (by purchase or reproduction) or
                       (2) net realizable value (by sale or contemplation of sale), where comple-
                       tion and disposal costs and normal profit margin are considered. How-
                       ever, since the Air Force cannot readily sell its inventories because no
                       market exists, current replacement cost by purchase or reproduction is a
                       viable alternative. In applying this alternative, the Air Force inventory
                       valuation policy generally considers the last acquisition cost plus a
                       surcharge for government-furnished materials and transportation to be
                       the value assigned to inventory on an item-by-item basis.

                       We found, however, that the Air Force did not consistently apply its
                       inventory pricing policies, which results in erroneous and misleading
                       inventory valuations. Under the Air Force policy, after the Air Force
                       assigns values to inventories of spare parts and supplies based on the
                       item’s latest acquisition cost, it then multiplies this cost by the number
                       of units in stock to arrive at the total inventory value. Therefore, all
                       items of a particular stock number are valued at the same price, and the
                       resulting value of the inventory is essentially the cost to replace the



                       Page 66                                     GAO/AFMD-90-23   Air Force Financial   Audit
                           Chapter 5
                           Inventory Syetems Do Not Provlde Accurate
                           Fiuancial Data




                           items. The Air Force believes that such a standard pricing policy pro-
                           vides the most useful information to Air Force managers because cur-
                           rent costs are more pertinent for decisionmaking than historical costs.

                           To evaluate the implementation of this policy, we randomly selected a
                           sample of 113 items from stock numbers at the three ALCS we visited. We
                           found that Air Force inventory values often did not represent replace-
                           ment costs as outlined in Air Force policy. Only 47 of the 113 items were
                           priced in accordance with the policy. Of the 66 remaining items, the Air
                           Force priced 22 too high and 44 too low. These variations were caused
                           by numerous factors, including the frequency of recent procurement
                           activity, the extent of price inflation for the items, the age and quantity
                           of inventory on hand, and how well the inventory pricing history system
                           was maintained. Two examples highlight the magnitude of errors possi-
                           ble under the present system:

                       l   A capacitor for aerospace and ground equipment was valued at $10,446.
                           The most recenq acquisition costs for this item were $953 and $1,492.
                           Air Force officials were unable to explain this discrepancy.
                       l   A control panel for an F-15 aircraft was valued at $298,075, but the
                           latest acquisition price was $210,342. The item manager said that the
                           system had not been updated to reflect the new price and promised to
                           correct the oversight.

                           Air Force officials told us that inventory pricing was not a high priority
                           and that our tests confirmed that the Air Force has not effectively
                           implemented its inventory valuation methodology.


                           While the Air Force’s use of replacement cost valuation in its cost
Change in Cost             accounting system has some advantages, the present system does not
Accounting System Is       consider historical costs. As a result, the misleading effects of replace-
Needed                     ment cost valuations are not considered and the full advantages of a
                           cost system based on replacement costs are not being obtained.

                           At present, changes in replacement costs distort inventory trend infor-
                           mation Real inventory growth can occur a~ a result of the increase in
                           the quantities of units of a particular NSNor the procurement of spares
                           for a new weapons system. If replacement costs are used, however,
                           much of the growth in the value of the inventory is due to inflation in
                           the replacement cost of inventories held in stock; this distorts the real
                           picture of inventory growth. It is impossible for users of inventory
                           information to ascertain real growth versus inflation adjustments in the


                           Page 67                                     GAO/AFMD-90-23   Air Force Financial   Audit
                      Chapter 5
                      Inventory Systems Do Not Provide Accurate
                      Financial Data




-i
                      value of existing stock. We believe all gains or losses in inventory values
                      caused by fluctuations in the valuation process should be reflected sepa-
                      rately in the statement of operations and in inventory management
                      reports to isolate this element of inventory change.

                      To more effectively manage inventory, the Air Force systems need to
                      include the cost of the inventory as well as the cost to replace inventory.
                      Top management needs to have a system which produces information
                      useful in communicating to managers the expectations against which
                      they will be evaluated and held accountable. Such a system should
                      include the following:

                  .   establishing cost centers, such as air wings or air bases, which corre-
                      spond to activities for which individual managers have responsibility;
                  .   setting of standards against which performance is to be measured, such
                      as budgets, forecasts, cost per unit of measure (aircraft, person, base,
                      etc.);
                  .   accumulating costs at the cost center level;
                  .   reporting systematically the performance against the established stan-
                      dards; and
                  .   consolidating and providing these performance reports to each suc-
                      ceeding level of management.

                      The effective operation of such a system should provide the capability
                      to manage more effectively by identifying expectations and persons
                      responsible for meeting them. This should result in the ability to con-
                      trast performance of managers, more effective budgeting, and more effi-
                      cient expenditure of the tax dollar.


Other Inventory       weaknesses. In addition to problems with the accuracy of inventory
Weaknesses            records and the valuation of the inventories noted above, the Air Force
                      has problems with (1) the effectiveness of research to identify the
                      causes of inventory discrepancies, (2) the physical protection of inven-
                      tories, and (3) the determination of inventory requirements. While the
                      Air Force has taken steps to improve its inventory control, further
                      improvements are needed, especially in view of the continued inventory
                      growth which is exacerbating the problems in managing inventory.
                      Some of the long-standing problems that we have reported on in recent
                      years are discussed below.




                      Page 68                                     GAO/AFMD-90-23   Air Force Financial   Audit
       Chapter 5
       Inventory Systems Do Not Provide Accurate
       Financial Data




    . Inappropriate reversals of high-dollar transactions were made to inven-
       tory records in order to avoid management’s attention. We found two
       cases where physical inventories showed differences of $3.8 million and
       $797,000, respectively, between the perpetual records and the quanti-
       ties on hand. Subsequent research showed that issue documents caused
       quantities to be reduced in the records, but the items involved were
       never shipped. Rather than processing inventory adjustments with
       appropriate explanations, the issue transactions were removed from the
       system. While this corrected the quantities in the records, it violated Air
       Force policy, which states that reversals will not be processed to
       increase or decrease asset balances in order to correct inventory inaccu-
       racy. More importantly, management was not notified of the corrections
       and was not aware of this type of problem. We have reported that inap-
      propriate reversals are a long-standing problem at ALCS.~
    . In cooperation with the Air Force, the Federal Bureau of Investigation
      has completed an investigation which resulted in indictments against
      military and civilian personnel for stealing military goods. Stolen equip-
      ment, including F-16 engines, sleeping bags, munitions, and firearms,
      were purchased by FBI agents in a “sting operation” near military bases
      in the western and southwestern United States.
l     The Air Force’s statistical sampling and evaluation methodology over-
      stated inventory accuracy because items with zero balances and items
      with no-location designation were included as correct. We recommended
      that the Secretary of Defense, in requiring annual statistical samples as
      the basis for measuring and reporting inventory accuracy, provide that
      these samples exclude zero-balance items where there is no record of a
      storage location.:3 However, we observed that the Air Force is continuing
      this practice.
l     Another report4 disclosed that the Air Force did not adequately consider
      the cost-effectiveness of terminating contracts for excess on-order mate-
      rial. We found that terminations should be increased, thereby reducing
      the government’s procurement and inventory holding costs and provid-
      ing a basis for reduced Air Force spare part funding. Recommendations
      were made to require an emphasis on an effective program, including
      appropriate management guidance and oversight, for terminating
      procurements of excess on-order spares when termination is in the best
      interest of the government.

      zInventory Management: Air Force Inventory Accuracy Problems (GAO/NSLAD-88-133, May 12,
      1988).

      “See footnote 2 above.
      4Military Procurement: Air Force Should Terminate More Contracts for On-Order Excess Spare Parts
      (GAOINSIAD _87 _141 , August 12,1987).



      Page 69                                             GAO/AFMD-90-23     Air Force Financial   Audit
-___   .~-.
                  chapt4x5
                  Inventory   Systm~   Do Not Provide Accurate
                  Financial   Data




              l We reviewed the Air Force’s practices for purchasing recoverable spare
                parts (spare parts that can be repaired after becoming unserviceable) to
                determine whether it was buying them at the appropriate time. We
                reported” that, at two of the Air Force’s five air logistics centers, recov-
                erable spare parts were regularly bought up to 14 months earlier than
                necessary. Recommendations were made to the Air Force to require
                compliance with existing regulations precluding early procurement and
                to review in-process recoverable spares purchases for opportunities to
                cancel or delay the purchase.
              . We reported” the Air Force’s price growth and the inadequacy of price
                analysis in relation to purchases of spare parts. After receiving a draft
                of the report, Air Force officials issued a letter outlining price analyses
                pitfalls and citing examples of inadequate price analyses. The letter
                requested appropriate officials to remind buyers of these pitfalls and to
                ask buyers to examine their use of price analyses.
              . We also have ongoing work addressing the problems causing growth in
                unrequired inventory not related to increased military capability. The
                most common causes for this growth are overestimated use rates and
                modifications of aircraft and equipment. Other causes included faster
                than expected phase-outs of older aircraft, fluctuating war reserve and
                safety level requirements, improved item reliability, and items being
                reclassified as repairable. Also, orders for items in excess of require-
                ments were not terminated and procurement lead times were overesti-
                mated. As a result, materials were received sooner than required. Of the
                total $29 billion of DOD unrequired inventory, the Air Force part was
                estimated at $10 billion. This audit confirms that inaccurate records
                contribute to this condition.

                  We currently have ongoing work which will address matters related to
                  inventory on a DOD-wide basis.


                  While the problems in effectively managing the Air Force’s huge inven-
Conclusions       tories seem overwhelming, the Air Force has made headway in dealing
                  with some of these long-standing problems. Continued progress is even
                  more critical at present as complex issues arise from budget reductions,
                  the probable reduction of forces overseas, and the related redeployment
                  of large quantities of inventory.

                  fiMilitary Logistics: Buying Spares Too Early Increases Air Force Costs and Budget Outlays (GAO/
                  I%IAD _86 - 149, August 1, 19SS).
                  “Procurement: Spare Parts Initiatives Air ForceImplementation(GAO/NSIAD-87-28,February 13,
                  1987).



                  Page 70                                              GAO/AFMD-90.23     Air Force Financial   Audit
                          chapter 6
                          Inventory Systems Do Not Provide Accurate
                          Financial Data




                          The Air Force can more effectively manage inventories by improving
                          the reliability of data used to make managerial decisions. Inaccurate
                          inventory balances can lead to the waste of limited resources. This
                          unnecessary investment in inventories leads to very substantial costs
                          related to stock maintenance, deterioration, and obsolescence. The man-
                          agement benefits from maintaining accurate inventory balances include
                          the abilities to (1) forecast requirements, (2) manage inventories
                          between locations, (3) locate items when needed, (4) identify excess
                          stocks, (5) establish accountability for custody and efficient use of
                          items, and (6) produce reliable inventory valuations for financial
                          reporting.

                          The sheer magnitude of the inventory not only makes it a challenge to
                          manage but also requires that good inventory management be achieved
                          to promote efficient and effective operations and support the mission of
                          the Air Force.


                          We recommend that the Secretary of the Air Force emphasize the need
Recommendations           to improve the accuracy of perpetual inventory records. In this regard,
                          we are recommending that the Secretary require the Chief Financial
                          Officer to

                  . establish a policy to value unserviceable items to reflect the estimated
                    costs of repair;
                     adopt an improved standard cost accounting system integrated with the
                      l


                    general ledger which provides for accurate determination of standard
                    costs based on replacement costs, identification of inflation growth, and
                    variance analysis with respect to purchase prices, material usage, and
                    repair costs; and
                  . initiate a special effort to reduce the $10 billion of unrequired inventory
                    and deal with the root causes of this problem.



Agency Comments and
Our Evaluation
                          DOD concurred with the recommendations presented above except it is
                          still considering how to value unserviceable items, and it plans to
                          develop a cost accounting system based on its specific needs. This sys-
          Y               tern may be a job order cost system rather than a standard cost system.




                          Page 71                                     GAO/AFMD-90-23   Air Force Finaucial   Audit
Chapter 6

Air Force Financid ManagementSystem
Improvement Efforts

              The previous chapters have discussed financial and accounting deficien-
              cies occurring throughout most aspects of the Air Force’s operations.
              The existing accounting practices and systems do not provide the kinds
              of financial information needed to manage in a cost-effective manner.

              Generally, federal agencies and private sector firms have demonstrated
              the ability to develop, manage, and operate complex technology success-
              fully, when top management clearly articulates its priorities and com-
              mits the resources needed to successfully fulfill the priority. The Air
              Force has committed resources in developing sophisticated, complex
              weapons systems, yet its financial management operations are clearly
              antiquated and even lack one of the most fundamental controls-a gen-
              eral ledger accounting system. Since the Air Force’s financial manage-
              ment practices and systems have been deficient over many years, it
              appears that this area has not been a high priority for either DODor Air
              Force leadership. The effort and resources required to deal with these
              issues in a first-class manner, though formidable, are small when com-
              pared to those devoted to achieving the organization’s other
              accomplishments.

              More importantly, the potential efficiencies to be gained through effec-
              tive financial management would allow the Air Force to better accom-
              plish its primary mission. To illustrate, if one were to consider other
              uses that could have been made of the $10 billion invested in unrequired
              inventories in terms of additional flying time for aircraft, the lost benefits
              resulting from waste and inefficiency become readily apparent. From
              another perspective, even as expensive as moderen military hardware is,
              $10 billion translates into many fighters, bombers, or missiles. Clearly,
              neither DODnor the public can any longer afford the luxury of ignoring
              the consequences of weak financial management of defense operations.

              If cost-effectiveness and efficiency become a priority of Air Force finan-
              cial management, and thus an important part of the organization’s cul-
              ture, improvements in operations and program management can and
              will be accomplished. Good financial management and accounting sys-
              tems provide the foundation for cost-effectiveness and efficiency.

              The need for improvement in this area has been demonstrated in many
              GAOreports, including this one, and is manifested by the poor state of
              accounting practices and systems in the Air Force. Tens of billions of
              dollars of costs are not entered into the accounting system and brought
              under accounting control. The existing financial management systems



              Page 72                                   GAO/AFMD-90-23   Air Force Financial   Audit
                           Chapter 0
                           Air Force Financial Management   SyHem
                           Improvement Efforts




                           are not designed to provide the accountability needed. Chapter 2 points
                           out that the accounting systems do not capture costs aa they are
                           incurred. Chapter 3 indicates that controls over costs are weak. Chap-
                           ters 4 and 6 illustrate major dollar impacts of these conditions on weap-
                           ons systems and inventories.

                           When accountability and accurate cost information are not obtained, the
                           following conditions result:

                       l Financial information needed for management and analysis of Air Force
                         trends is unreliable.
                       l Operating costs of air wings, bases, depots, and commands cannot be
                         compared and evaluated.
                       . Losses can occur from fraud, waste, abuse, and mismanagement, yet not
                         be identified and their causes dealt with.
                       . Inventories cannot be effectively managed to avoid shortages and exces-
                         sive stocks.
                       l Cost factors cannot be properly considered when deciding to replace or
                         upgrade existing weapons systems.
                       . The basis for evaluating procurements and budget requests is not as
                         complete as it might be.


                           The scope of our audit did not include a detailed technical analysis of
Systems Alternatives       the Air Force’s numerous financial management systems and it is
for Developing             unclear to us whether it would be better to try to upgrade existing sys-
Meaningful Financial       terns and develop them as originally intended to achieve an integrated
                           general ledger system or whether it would be better to develop an
Information                entirely new system, The poor quality of the present data being gener-
                           ated by or drawn from the existing systems and potentially serious sys-
                           tems interface problems-the exchange of data among related
                           systems-suggest that an entirely new system might be a better alterna-
                           tive. However, developing an entirely new system might take longer to
                           achieve even a reasonable level of improvement than would correcting
                           the present systems. The probable multibillion dollar costs and losses
                           that result from the current lack of accountability and accurate cost
                           information suggest that the decisionmakers should consider, among
                           other factors, the time required to upgrade versus the time required to
                           replace present systems with entirely new ones. It is well beyond the
                           scope of a financial audit to answer this question.




                           Page 73                                  GAO/AFMD-90-23   Air Force Financial   Audit
                         Chapter 6
                         Air Force Fhnclal   Management   System
                         Improvement Efforts




                         Nonetheless, it is a decision that should be made as quickly as possible
                         by the Secretaries of Defense and the Air Force with the advice of sys-
                         tem experts and with a knowledge of Air Force capabilities to execute
                         the decision. This decision should be made in the context of a plan to
                         develop and maintain an integrated Air Force accounting and financial
                         management system, including financial reporting and internal controls,
                         which

                     l comply with the accounting and financial reporting principles, stan-
                       dards, and requirements, and the internal control standards established
                       by the Comptroller General and with policies and requirements pre-
                       scribed by the Office of Management and Budget and the Department of
                       the Treasury;
                     l include complete, reliable, consistent, and timely information which is
                       prepared on a uniform basis and which is responsive to the financial
                       information needs of DODand Air Force management, including the
                       development and reporting of cost information;
                     l integrate accounting and budgeting information; and
                     . provide for the systematic measurement of performance.


                         The Air Force has a project underway to develop a completely new gen-
Plans to Develop a       era1 ledger accounting system for use at its 120 bases. This new system
New Base-Level           will produce 120 base-level general ledger trial balances, which must
Accounting System        then be manually consolidated to obtain an Air Force-wide trial balance.
                         The Air Force expects this system, known as the Base Level Accounting
                         and Reporting System (BLARS),will be operational by 1994.

                         The Air Force’s consultant for this project has advised us that because
                         the General Accounting and Finance System (GAFS) has not been imple-
                         mented to function effectively as a general ledger accounting system
                         and has interface problems with supporting systems, a completely new
                         general ledger accounting system is preferable to attempting to upgrade
                         GAFS.However, BLARSis dependent on other systems at the bases, such
                         as the supply transactions processed through the Standard Base Supply
                         System, for information on many of the resources. Efforts to improve
                         the other Air Force systems that need to interface with BLAHSwill be
                         affected by the decisions on BLARS'development. The BLARSproject is not
                         being approached in the context of an overall Air Force plan, nor does it
                         consider overall DODneeds. Action to change the culture and make cost-
                         effectiveness the priority of those who will implement and use the BLARS
                         system has not yet occurred. The BLARSrequirement and other aspects
                         of the BLARSdevelopment may need further review.


                         Page 74                                   GAO/AFMD-90-23   Air Force Financial   Audit
                     Chapter 6
                     Air Force Financial Management   System
                     Improvement Efforts




                     As concerned as we are with the need for a quick response to improve
                     the Air Force’s financial management system, we believe that these con-
                     cerns need to be addressed in order for any systems changes to produce
                     meaningful, long-term benefits. Accounting and financial management
                     systems development and major modification efforts require substantial
                     commitments of human and financial resources. The decisions made
                     when these efforts are being planned and carried out will significantly
                     affect the system’s future efficiency, its effectiveness in providing the
                     information needed to manage the agency’s operations, and its useful
                     life. Historically throughout the federal government, system develop-
                     ment efforts have been flawed, suffering from significant cost increases,
                     schedule slippages, performance shortfalls, redirected development and
                     acquisition strategies, and, all too frequently, have failed completely.

                     Thus, careful, effective planning throughout the entire development
                     process is extremely important. Accordingly, a structured approach to
                     developing new or to modifying existing systems can be viewed as con-
                     sisting of five major stages: (1) initiation, (2) definition, (3) design, (4)
                     development and testing, and (5) installation.


                     The Air Force has just completed the system’s requirement definition
BLARS Status and     phase of the BLARSproject. The ultimate success of the project will
Objectives           depend upon the adequacy of the defined requirements and the success-
                     ful completion of the other stages of the systems development effort. At
                     present, the system requirements have been identified and a draft
                     request for proposal has been distributed to various Air Force officials
                     for comment. In March 1990, the Air Force plans to request proposals to
                     design, develop, and implernent BLARS.Defining the system requirements
                     is only the second step in a long process. Equally difficult and critical
                     stages are yet to come. In short, much remains to be done before the
                     present systems can be replaced or improved. Full implementation by
                     1994 will be difficult and only possible sooner if it becomes a very high
                     priority for the Air Force.


                     We have not made a thorough systems analysis, nor have we reviewed
BLARS Requirements   the system requirements in detail. Therefore, we express no opinion on
                     the adequacy of the systems requirements. However, some new features
                     included in the BLARSrequirements appear to represent significant
          Y
                     improvements over the Air Force’s present accounting operations.
                     Examples of some of the new features follow:



                     Page 76                                   GAO/AFMD-90-23   Air Force Financial   Audit
                         Chapter 6
                         Air Force Nnanclal Management   System
                         Improvement Efforts




                     . A general ledger function at the base level that maintains a chart of
                       accounts, performs automated general ledger posting, and provides sum-
                       mary data for reporting. (See chapter 2.)
                       A series of reports comparing actual expenditures to those planned. (See
                       chapter 2 .)
                       A property accounting subsystem to maintain and update property
                       accounts, including aircraft and missiles, which reflects actual costs.
                       (See chapter 4.)
                     . The capability to provide payment data directly to the accounting sta-
                       tion, bypassing the finance center. At the accounting station, BLARSwill
                       verify whether payments have been made correctly. (See chapters 3 and
                       4.)

                         The system requirements do not specifically call for a cost accounting
                         system that meets the objectives discussed in chapter 5, a very impor-
                         tant requirement in our opinion, nor do they cover program financial
                         systems that carry out unique program and operating functions as well
                         as financial management. Except for a cost accounting system, the sys-
                         tems requirements appear to incorporate existing governmental require-
                         ments included in the (1) U.S. Government Standard General Ledger. (2)
                         Core Financial System’Requirements and (3) Title 2 of GAO'SPolici and’
                         Procedures Manual for Guidance of Federal Agencies.

                         BLARSis intended to be a base level financial accounting and information
                         system. With proper interfaces, it could provide information needed by
                         successively higher levels of command and exchange information with
                         related systems, such as those operated by the Logistics Command.
                         However, the present scope of its requirements only identifies the sys-
                         tems with which such interfaces would be needed, but developing those
                         interfaces and making the changes to the related systems would be
                         required to ensure that internal controls are effectively strengthened
                         and financial management improved. Accordingly, BLARSshould not be
                         viewed as fully responsive to the Air Force’s need for an integrated, ser-
                         vicewide general ledger system.


                         The Air Force has prepared a draft of the request for proposal (RFP),
Other Comments on        which will be used to solicit bids for the design and implementation of
the BLARS                BLARS.The draft identifies some elements that may help avoid design
Developmeqt Effort       and development delays during the implementation of BLARS,including
                         incorporating existing off-the-shelf systems or software and adopting an
                         incremental approach to implementation. Incorporating existing systems
                         or software could reduce design and development costs, and more


                         Page 76                                  GAO/AFMD-90-23   Air Force Financial   Audit
    Chapter 6
    Air Force Financial Management     System
    Improvement Efforts




    importantly, the Air Force could get processes already proven to work.
    An incremental approach can minimize the risks inherent in implement-
    ing all modules of the new system at the same time. Moreover, under
    this approach, users will be able to benefit from individual modules as
    they become operational. This approach may permit the Air Force to
    obtain some improvements from BLARS in certain systems before 1994.

    In recent years, we have reviewed a number of major federal systems
    development efforts, including several undertaken by DOD organiza-
    tions.’ This work has revealed a disturbing pattern of cost growth,
    delays, performance shortfalls, and outright failures. These reviews
    identified similar development efforts that fell short of their objectives.
    In order to avoid such problems, we believe the planning for BLARS needs
    to address several additional concerns not specifically addressed in the
    requirements definition, including

. Direction of the development effort: The Air Force’s chief financial
  officer should be directly responsible for the project. In addition to
  outside consultants, the chief financial officer should consult with a
  panel of recognized experts drawn from both the private and public sec-
  tor, some of whom should have major systems development expertise
  and others with experience in operating the kinds of systems which
  might be borrowed by the Air Force.
  Data integrity: As discussed in previous chapters, much of the data cur-
  rently used by the Air Force are inaccurate and unreliable. Before BLARS
  is implemented, the historical data will need to be corrected for entry
  into the system.
  Interface problems: BLARS is designed to rely heavily on many other
  existing Air Force systems (such as supply, contracting, personnel, and
  inventory) and on systems external to the Air Force (such as those oper-
  ated by the Defense Logistics Agency) as a source of data. The Air Force
  must ensure that the data exchanged between and among these systems
  are compatible and accurate and enhance financial management.
. Systems changes: A common tendency during the design and develop-
  ment of new systems is to add additional capabilities to the system sim-
  ply to accommodate user requests to gain their acceptance of the
  system. The Air Force needs to be certain that requirements are com-
  plete and reasonably satisfy the users so that the requirements can be


    ‘See our reports entitled, ADP Acquisition: Air Force Logistics System Modernization Projects (GAO/
    IMTEC-89-42, April 21, 1989) and Automated Information Systems: Schedule Delays and Cost Over-
    runs Plague DOD Systems (GAO/ImC-89-36,          May 10, 1989).



    Page 77                                              GAO/AFMD-90-23      Air Force Financial   Audit
                        Chapter 0
                        Atr Force Financial Management   System
                        Improvement Efforts




                        finalized and serious delays which result from systems changes can be
                        avoided.
                      . Adequacy of personnel and funds: The common problem of underesti-
                        mating the total cost of development must be avoided. Realistic esti-
                        mates should be communicated to DOD and, through the budget process,
                        to the Office of Management and Budget and to the Congress.

                        Since we did not make a systems needs study nor review the require-
                        ments and RFP documents in detail, these comments are not all-inclusive.


                        Throughout the report, we have made recommendations that will help
Coficlusions            improve financial management and control over the Air Force’s opera-
                        tions. While these measures should improve management control over
                        the next few years, without an effective integrated accounting and
                        financial management system, the Air Force will continue to have
                        incomplete financial data and will not be able to effectively perform
                        financial management. Although BLARS does not represent an effective
                        overall solution to the Air Force’s financial systems needs, we believe
                        that the BLARS initiative represents a significant first step for establish-
                        ing a foundation for ultimately developing a sound financial manage-
                        ment system to correct the Air Force’s lack of accurate and reliable
                        financial data.


                        We recommend that the Secretary of the Air Force
Recommendations
                  l make improving accounting practices and financial management sys-
                    tems an Air Force-wide priority effort, supported by adequate
                    resources;
                  l direct the chief financial officer to develop a comprehensive plan for
                    improving and integrating the Air Force’s financial management and
                    accounting systems;
                  l review the systems requirements of BLARS and all related systems to
                    ensure that they are complete and that they address all the Air Force’s
                    concerns about its operations and the problems addressed in this report;
                    and
                  . ensure that a project management structure and plan are in place to
                    avoid the potential pitfalls that have caused problems in past systems
                    development efforts. This structure must include adequate representa-
                    tion and participation by top management and functional users in all
                    phases of the development effort.



                        Page 78                                   GAO/AFMD-90-23   Air Force Financial   Audit
                  Chapter 6
                  Air Force Financial Management   System
                  Improvement Efforts




                  DOD   concurred with all the recommendations presented above.
Agqncy Comments




         Y




                  Page 79                                   GAO/AFMINW23   Air Force Financial   Audit
CdnsolidatedFinancial Statementsof the U.S.
Aik Force for the Fiscal Year Ending
September30,1988
                  We attempted to audit the accompanying consolidated statement of
                  financial position of the Department of the Air Force, an agency of the
                  Department of Defense, as of September 30, 1988, and the related con-
                  solidated statement of operations for the fiscal year then ended. These
                  financial statements are the responsibility of Air Force management.

                  GAOis not expressing an opinion on the Air Force’s financial statements
                  because of the conditions discussed in this report.

              . The Air Force accounting systems do not support a consolidated general
                ledger. A significant amount of transactions included in the financial
                statements are not under basic double entry accounting control
                (chapter 2).
                Material weaknesses in internal controls over the accumulation of finan-
                cial data ultimately reported in the financial statements prevent reliance
                on the amounts reported therein (chapter 3).
                The actual cost of military hardware could not be determined. The Air
                Force reported $117 billion for these assets based on a standard cost
                rather than a historical cost basis and did not capitalize any modifica-
                tion costs (chapter 4).
              . The extent of the overstatement of the $63.8 billion inventories could
                not be determined. The inventories were valued at standard cost rather
                than at the lower of cost or market. Also, nearly one third of the inven-
                tory was unserviceable but was valued the same as new items
                (chapter 5).




                  Page 80                                  GAO/AFMD-90.23   Air Force J?inmciai Audit
                                             Appendix I
                                             cOmolidatedFinancial     Statement8oftheU.S.
                                             Air Force for the Fiscal Year Ending
                                             September 30,1988




Consolidated Statement of Financial Position
I
                                                     AS OF SEPTEMBER 30,           1988
                                                           (in millions1
                                                                                                (Unaudited)
                       Assets:
                       Funds with U.S. Treasury          (note 1-C)                             $ 79,674
                       Appropriations       to be provided     (note 1-B)                          2,143
                       Accounts receivable,         net (note 31
                          Governmental                                                                   967
                          Public                                                                         65i
                       Inventories      (note 1-D)                                                  63,762
                       Property     and equipment (notes l-E, 4):
                          Equipment                                                                 26,770
                          Buildings                                                                  19,666
                          Aircraft                                                                   82,344
                          Less accumulated       depreciation
                          Land
                          Other real property                                                         8,832
                          Missiles                                                                    9,921
                          Construction      in progress                                               1,685
                          Aircraft     under construction                                            14,925
                          Missiles    under construction                                            3,276
                          Uninstalled      propulsion    units                                      6,853
                          Other assets                                                                 143
                       Total Assets                                                             $274.774

                       Liabilities:
                       Accounts payable
                          Governmental                                                          8        892
                          Public                                                                     17,518
                       Personnel accruals         (note    1-F)
                          Annual leave                                                                   673
                          Military    leave                                                           1,554
                          Separation     allowance                                                       200
                       Deposit and trust        fund                                                     106
                       other                                                                          2,299
                       Total Liabilities                                                            TF75i-J

                       Equity (note 1-I):
                       Invested capital                                                             182,975
                       Cumulative     results    of operations                                        4,772
                       Unexpended appropriations
                          Unobligated     balances                                                   15,791
                          Undelivered     orders                                                     49,137
                          Unfilled    orders                                                         (1,145)
                       Total Equity
                       Total Liabilities       and Equity
                       The accompanying notes are an integral     part of these financial
                       statements.    The supplemental  schedules in note 10 provide
                       additional  details  by fund type for the consolidated   financial
                       statements.




                                               Page 81                                      GAO/AFMD-90-23     Air Force Financial   Audit
                                            Appendix I
                                            Conwltdated   FinancSal Statements of the U.S.
                                            Air Force for the Fiscal Year Ending
                                            September 30,1988




Con/solidated Statement of Operations

                                                        FOR THE YEAR ENDING
                                                         SEPTEMBER 30, 1988
                                                            (in millions)

r                                                                                               (Unaudited)
                       Operating      Revenues and
                           Financing     Sources (note 1-B):
                       Appropriations         realized                                             $64,001
                       Appropriation        reimbursements                                           2,128
                       Airlift     services                                                             993
                       Depot maintenance                                                                 97
                       Real property        maintenance
                          and other revenue                                                               254
                       Stock fund sales                                                                2,366
                       Total Operating         Revenues
                          and Financing        Sources                                             $69,839
                       Operating     Expenses:
                       Military    personnel                                                       $19,990
                       Civilian     and foreign     national    personnel                            9,108
                       Travel and transportation                                                     1,626
                       Utilities,      rents,    and communications                                  1,769
                       Equipment maintenance                                                         1,104
                       Purchased services                                                            8,598
                       Supplies     and fuels                                                           717
                       Research and development           (note 1-H)                                13,675
                       Depreciation        (note 1-E)                                                3,593
                       Aircraft     crashes (note 8)                                                    152
                       Other                                                                         1,054
                       Stock fund cost of sales and expenses                                          8; 693
                       Total Operating         Expenses                                            $70,079

                       Excess of Operating  Expenses Over
                         Revenues and Financing   Sources                                          $    (240)

                       The accompanying    notes are an integral   part of these financial
                       statements.    The supplemental   schedules  in note 10 provide
                       additional  details   by fund type for the consolidated    financial
                       statements.




                   *

    -



                                            Page 82                                          GAO/AFMD-90-23     Air Force Financial   Audit
                                               Appendix I
                                               Consolidated Financial Statements of the U.S.
                                               Air Force for the Fiscal Year Endlng
                                               September 30,1999




Notes td Financial Statements

                                                    NOTES TO FINANCIAL STATEMENTS
                       Note 1:       Summary of      Significant      Accounting   Policies
                       A.   Entity      and Basis     of Consolidation
                            The United States Air Force was created on September 18, 1947
                            by  the National  Security Act of 1947.   The National     Security
                            Act Amendments of 1949 established    the Department of Defense
                            (DOD) and made the Air Force a department    within   DOD. The
                            overall  mission of the Air Force is to organize,     train,    and
                            equip aerospace forces to deter aggression    and, if necessary,
                            defeat aggressors   of the United States and its allies,
                            Fiscal     year 1988 represents         the first      year that the Air Force
                            has prepared consolidated            financial      statements     as required       by
                            Title     2 of GAO’s Policy and Procedures Manual for Guidance of
                            Federal Agencies Ihereinafter              referred     to as Title     2).    Title
                            2 requires      executive     agencies to annually           issue four
                            consolidated       financial    statements:         (1) statement of financial
                            position,      (21 statement     of operations,          (31 statement      of changes
                            in financial       position,    and (4) statement          of reconciliation         to
                            budget.      As a result      of first-year       efforts      to comply with Title
                            2 reporting       requirements,      the Air Force prepared the
                            consolidated       statements    of financial        position     and operations
                            for the year ended September 30, 1988.
                            The accompanying consolidated          financial      statements     account for
                            all funds for which the Air Force is responsible                  except that
                            information   relative     to classified      assets,     programs, and
                            operations   has been excluded from the statements               or otherwise
                            aggregated and reported        in such a manner that it is no longer
                            classified.    The consolidated        financial      statements     are
                            presented   on the accrual       basis of accounting         as required    by
                            Title    2. A discussion     of these funds is included            in note 9.
                            The supplemental      schedules in note 10 present financial               data
                            by fund type.
                            All significant      intra-agency       transactions       and balances have
                            been eliminated      in consolidation.           As shown in the following
                            table,   significant      portions    of revenue and expenses, which
                            resulted    from intra-agency        activities      within   the Air Force,
                            have been eliminated,         including      $1,482 million      of eliminations
                            within   the general funds not shown in the supplemental
                            schedules     (note 10).
                                                                                               (in     millions1
                                 Appropriation       reimbursements                                  $ 1,789
                                 Airlift    services                                                      691
                                 Depot maintenance                                                     3,448
                                 Stock funds activities                                                6,129
                                 Total eliminations                                                  $12.05;




                                              Page 83                                           GAO/APMD-90-23     Air Force Financial   Audit
                      Appendix I
                      Consolidated Financial Statements of the U.S.
                      Air Focw for the Fbcal Year Ending
                      September SO, 1988




B.   Recognition     of Revenue and Financing           Sources

     Financing     sources for general funds are provided             through
     congressional      appropriations       which are received      on both annual
     and multi-year       bases.     Currently,    the congressional       budgetary
     process under which the Air Force operates                does not
     distinguish      between capital      and operating     expenditures.       For
     budgetary     purposes,     both are recognized       as a use of resources
     (outlays).       For financial      reporting    purposes under accrual
     accounting,      operating     expenses for general       fund activities       are
     recognized     in the period incurred.           Expenditures    for capital
     and other long-term         assets are not recognized         as expenses until
     consumed in the Air Force's operations.                Unexpended
     appropriations      are recorded as equity of the U.S. government.
     Certain     expenses, such as annual and military      leave earned but
     not taken, are not funded when accrued.         Such expenses are
     financed     in the period in which payment is required,
     Therefore,      for Air Force general funds, an amount due from
     future    financing     sources (appropriations to be provided)    is
     recognized      as an asset in the consolidated    statement  of
     financial      position   which is comprised of the accrued amount of
     such expenses at year-end.
     The Air Force operates two types of revolving              funds,
     industrial    and stock, for the purpose of distributing             services
     and inventories      to Air Force and DOD activities.           Revenue for
     industrial    fund activities      is recognized     at the point the
     rendered service       is completed and on a percentage         of physical
     completion    basis.     Revenue for stock fund activities         is
     recognized    at the point the inventory         items are sold.
     The Air Force performs certain       services     for other governmental
     and public   entities.     These services     are initially    financed
     through general funds and subsequently           reimbursed   by the
     recipients.      Reimbursements are recognized        as revenue at the
     time   the services    are rendered.
C.   Funds with    U.S. Treasury
     Air Force fund resources are maintained      in Treasury accounts.
     Its cash receipts   and disbursements   are processed by the
     Treasury,  and the balance with the Treasury      represents     the
     aggregate  of all  unexpended balances.    As of September 30,
     1988, the Air Force had $49,137 million      in funds with the
     Treasury  which were available    to pay outstanding    obligations.
D.   Inventories
     Inventories,  including operating   supplies and non-consumable
     items, are valued at standard prices established     by the Air
     Force or the Defense Logistics    Agency as required  by DOD




                     Page 84                                          GAO/AFMD-90-23Air    ForceFinancialAudit
                                 Appendix I
                                 Consolidated Financial Statements of the U.S.
                                 Air Force for the Fiscal Year Endlng
                                 September 30,1938




-     ,
      /        accounting     directives.        Generally,     these prices are based on
               prices paid for recently           acquired    items plus appropriate
               surcharges.       Gains and losses that result             from standard price
               changes for stock fund items are recognized                   and reported    in
               the statement      of operations      as miscellaneous         revenues or
               expenses.      In 1988, the stock funds recorded a net loss of
               $59.7 million,       while the industrial         funds recorded a loss of
               $2.4 million      due to changes in standard prices.                No gains or
               losses are recognized         in the consolidated          statement   of
               operations     as a result      of changes in standard prices            for
               general fund inventories.            Such changes are reflected            in the
               asset valuations        and related     invested     capital    as reported     in
               the statement      of financial      position.
          E.   Property,     Plant,   and Equipment
               Valuations  for equipment,     aircraft,  missiles,    and engines are
               not based on historical     procurement    costs.    These assets are
               valued and reported     at standard or average procurement       costs
               in conformance with DOD accounting       directives.
               Equipment     is valued at standard costs which the Air Force
               establishes       using federal   stock categories.       While no gains             or
               losses are      recognized   in the statement     of operations    for
               changes in      standard costs of equipment,        such changes are
               reflected     in asset valuations      and related    invested  capital.
               Aerospace vehicles       (aircraft    and missiles)    are valued at
               average procurement       costs.     Engineering    and modification    costs
               incurred    subsequent to approval        of the basic procurement
               contracts    are not capitalized       unless such modifications       and
               engineering     changes result     in a new category of weapon system
               commonly referred      to as "mission,      design,   series,"    or MDS.
               Land and facilities       are valued at cost.      Buildings   are
               capitalized     when constructed    or at the date of acquisition        and
               are assigned useful lives        of 40 years.     Building   improvements
               costing     more than $5,000 are capitalized       and depreciated    over
               the remaining      useful life   of the building.
               Routine maintenance and repair          costs are expensed when
               incurred.     Depreciation      of property    and equipment is
               calculated    on a straight-line       basis.     Industrial     funds record
               depreciation    on buildings       and equipment as required         by Title 2
               for revolving     fund activities.       While Title       2 does not
               specifically    require depreciation         on general fund assets,
               depreciation    is recorded on Air Force's aircraft             and
               buildings.     No depreciation       has been recorded for other
               general fund equipment and missiles            (see note 4).




           *

--_




                                Page 86                                          GAO/AFMD-90-23      Air Force Financial   Audit
                              Appendix I
                              Consolidated Financial Statements of the U.S.
                              Air Force for the Fiscal Year Ending
                              &ptember 30,1988




-/

     F.   Accrued     Leave

          Civilian   annual leave and military     leave are accrued as earned
          and the accrued amounts     are reduced as leave is taken.    The
          balances for annual and military      leave at the end of the
          fiscal   year reflect  current  pay rates for the leave that is
          earned but not taken.      Sick and other types of leave are
          expensed as taken.
     G.   Foreign     Currency     Transactions
          The Air Force conducts a significant               portion     of its operations
          overseas.       Gains and losses from foreign            currency transactions
          for four general fund appropriations                (Air Force operation        and
          maintenance,       Air Force construction,         family housing operation
          and maintenance,         and family     housing construction)        are
          recognized      and reported      in the statement       of operations.       The
          gains or losses are computed as the variance                   between the
          current     exchange rate at the date of payment and a standard
          exchange rate established            at the beginning      of the fiscal      year.
          In fiscal      year 1988, the Air Force recognized              a net loss of
          $477 million       due to foreign       currency   transactions      for the four
          appropriations.          Similar    gains and losses for other
          appropriations        are not recognized        in the statement of
          operations.        They are absorbed by budgetary            transactions     in
          which obligations          are increased     or decreased to reflect        foreign
          currency     fluctuations.
     H.   Research,     Development,       Testing,     and Evaluation        Costs
          The Air Force conducts and contracts       for research,
          development,    testing,   and evaluation  (RDThE) of advanced
          aerospace systems.       RDT&E costs are expensed as incurred.                    In
          fiscal  year 1988, the Air Force incurred       RDT&E costs of
          $13,675 million    , of which $962 million    was for reimbursable
          work performed for other entities.
          RDT&E programs support modernization           of weapon systems through
          military    research,    exploratory    development,    and the
          development     and testing     of prototypes   and full-scale
          preproduction     of hardware.       The Air Force contracts      for and
          procures    its weapons systems considering          the technological
          advances achieved through RDThE programs.
     I.   Equity
          Equity consists     of invested    capital , cumulative        results     of
          operations,     and unexpended appropriations.           Invested      capital,
          as presented     in the consolidated      statement    of financial
          position,    represents   the value of the Air Force's capital
          assets as reported      at standard prices/costs,          except for land
          and buildings.      The portion    of invested     capital     attributable
          to land and buildings       represents    their  undepreciated         cost.




                              Page 86                                           GAO/AFMD-W-23    Air Force Financial   Audit
                            Appendix I
                            Consolidated Financial Statements of the U.S.
                            Air Force for the Mscal Year Ending
                            September 30,19fM




         Increases   to invested      capital     are recorded when capital       assets
         are acquired    or constructed        or when asset valuations       increase
         as a result   of increases       in standard prices/costs.         Decreases
         occur as capital       assets are depreciated         or consumed in
         operations,   or when standard prices/costs             are decreased.
         Donated capital     and trust      fund balances,      while immaterial    to
         the Air Force’s overall        financial     position,     have been included
         in invested   capital.
         Cumulative    results  of operations for working capital    funds
         represents    the excess of revenues over expenses since fund
         inception,    less refunds to customers and returns    to the U.S.
         Treasury.
         Unexpended appropriations   represent   amounts of authority               which
         are unobligated   and have not been rescinded    or withdrawn,              and
         amounts obligated   but for which neither   legal liabilities               for
         payments have been incurred   nor actual payments made.
Note 2.        Accounting     for     Intragovernmental     Activities
The Department of the Air Force, as an agency of the Department of
Defense and the federal    government,      interacts      with and is
dependent upon the financial     activities       of the federal      government
as a whole.   Therefore,   these financial        statements      do not reflect
the results  of all financial    decisions       applicable     to the Air Force
as though the agency were a stand-alone           entity.
A.   The Air Force’s proportionate       share of public    debt and related
     expenses of the federal     government are not included.          Debt
     issued by the federal    government and the related        interest    costs
     are not apportioned    to federal    agencies.     The Air Force’s
     financial  statements,   therefore,     do not report any portion       of
     the public  debt or interest     thereon,   nor do the statements
     report the source of public      financing    whether from issuance of
     debt or tax revenues.
B.   Financing     for the construction     of Air Force facilities      was
     obtained    through budget appropriations.          To the extent this
     financing     may have been ultimately     obtained through the
     issuance of public debt, no interest           costs,  thereon,   have been
     capitalized       since the Treasury does not allocate       such
     borrowings      to the benefitting   agencies.
C.   The Air Force’s civilian       employees participate      in the Civil
     Service Retirement      System (CSRS) and Federal Employees
     Retirement    System (FERS) while military       personnel     are covered
     by the Military     Retirement    System (MRS).    Additionally,
     employees and personnel       covered by FERS and MRS are also
     covered by Social Security.         The Air Force funds a portion         of
     pension benefits     under these retirement      systems but does not
     disclose   the assets or actuarial      data on the accumulated        plan
     benefits   or unfunded pension liabilities        of its employees.

     Y




                            Page 87                                         GAO/AFMD-90-23   Air Force Financial   Audit
-
                           Appendix I
                           Cbneolldated Financial Statements of the    U.S.
                           Air Force for the Fiscal Year Ending
                           September 30,1988




         Reporting   such amounts is the responsibility   of the Office of
         Personnel   Management for CSRS and FERS and the Department of
         Defense for MRS. In fiscal     year 1988, the Air Force
         contributed   the following amounts to the retirement   plans and
         Social Security.
                                                   (in   miili;;;)
                            CSRS
                            FERS                                 158
                            MRS                               5,287
                            Social   Security                 1,085
                                                             mE
         The Air    Force also contributed        $30 million          to the FERS Thrift
         Savings    Plan on behalf of its        participating           employees.
    D.   Certain    legal actions to which the Air Force may be a named
         party are administered          and, in some instances            litigated,     by
         other federal     agencies.        Legal actions       to which the Air Force
         is a litigant     are covered by the Federal Tort Claims Act and
         Chapter 163 (military         claims)     of Title     10, United States Code.
         Air Force contingent        liabilities         under the Tort Claims Act and
         Chapter 163, 10 U.S.C, are $2,500 and $100,000, respectively,
         per occurrence.       Settlements       in excess of these amounts are
         paid from the Treasury's           Claims , Judgments and Relief Acts
         Fund.    Thus, moat contingent          liabilities      arising        from legal
         actions    against the Air Force will              not materially         affect its
         operations     or financial      condition.         (See note 7.)
    E.   In fiscal     year 1988, the Air Force sold assets to foreign
         governments      under the provisions      of the Arms Export Control
         Act of 1976. Under the provisions             of the act, DOD has
         authority     to sell defense articles        and services    to foreign
         countries,      generally    at no profit    or loss to the U.S.
         government.       Customers    are required     to make payments in
         advance to a trust        fund maintained     by the Department of the
         Treasury from which the military           services    are reimbursed for
         the cost of administering         and executing     the sales.     In fiscal
         year 1988, the Air Force received            reimbursements     of $565
         million    for assets and services        sold under the Foreign
         Military     Sales program.
    F.   Certain     Air Force contracts         are administered      by other DOD
         entities.        Generally,    the Air Force administers          its high-
         dollar-value       prime contracts       for acquisitions      of weapon
         systems.       Other contracts       are administered      by the Defense
         Contract     Administration       Services     (DCAS), Army, or Navy.       Under
         the provisions        of inter-service       agreements,    these entities    make
         disbursements       of Air Force funds to contractors            in accordance
         with contract       terms   and provide      financial    data to the Air
         Force.      Additionally,      the State Department disbursed          over
         $1,024 million        of Air Force funds in fiscal           year 1988,
         primarily      to reimburse foreign         governments for the cost of




                           Page 88                                            GAO/AFMD-90-23    Air Force Financial   Audit



                                                                                                            ‘,
                            Appendix I
                            Consolidated Flnanclal Statements of the U.S.
                            Air Force for the Fiscal Year Ending
                            September 30,1988




       fuels provided   for Air Force aircraft.   The following  amounts
       of disbursements    of Air Force funds were made by these entities
       in fiscal   year 1988.
                                                           (in   millions)
                              DCAS                               $13,569
                              Army                                11,686
                              Navy                                 1,559
                               State                               1,024
                                                                 Sm<
Note      3.     Accounts    Receivable
As presented in the consolidated          statement     of financial     position,
accounts      receivable    include accounts,   claims,    and refunds
receivable      and advance payments to other entities.             Allowances     for
uncollectible        accounts are based upon analysis        of collection
experience      by fund type.

                                                                                       Total
                                                  Amount      Allowance                 net
                                                           (in millions)                -
       Accounts   receivable
         Government                           $     824            $2              $     822
          Pub1 ic                                   144                 8                136
       Refunds                                      258                 0                258
       Claims                                        33                 0                 33
       Advance payments                            369                                   369
       Total                                  Sl.azs                               $1,-618
During         fiscal   year 1988,     the Air Force       wrote    off      approximately     $24
million          in uncollectible      receivables.
Note 4.          Property    and Equipment
Depreciation       is recorded for industrial           fund equipment and
buildings    whereas depreciation           is recorded only for aircraft       and
buildings     within     the general funds.         Buildings   are assigned useful
lives    of 40 years, and depreciation            is calculated    by the straight-
line method.         Aircraft    are assigned useful lives of 20 years and
also depreciated         on a straight-line       basis exclusive    of 5 percent
residual    values.        Depreciation     of aircraft     is based on the
vehicles'     recorded values using average procurement costs (see note
1-E).




                            Page 99                                               GAO/AFMD-90-23     Air Force Financial   Audit
                                 Appendix I
                                 ComwMated     Financial Statements of the U.S.
                                 Air Force for the Fiscal Yeax Ending
                                 September 30,1888




    Book values      for    the Air          Force’s   depreciated         assets    are shown
    below.
                                                Recorded             Accumulated             Book
                                                 value               depreciation            value
                                                                     7in millions)           -
    Equipment,      industrial
       funds                                    $  1,834               $     721            $ 1,113
    Buildings                                     19,666                10,295                9,371
    Aircraft                                      82,344                36,074
                                                $103                   $sr;sim              St&g
    Under provisions       of the Intermediate-Range    Nuclear Forces Treaty
    (INF Treaty)     signed by the United States and the Union of Soviet
    Socialist     Republics   in December 1987, the Air Force’s       inventory of
    ground launched cruise missiles         is to be destroyed     by May 31,
    1991.     Total value of these missiles       is $658 million.
    Note 5.      Treaties        for    Use of Foreign       Bases
    The Air Force has the use of land, buildings,                        and other facilities
    which are located overseas and have been obtained through various
    international          treaties      and agreements negotiated           by the Department
    of State.        Generally,        treaty     terms     allow the Air Force continued
    use of these properties               until     the treaties     expire.     Capital
    investments         in buildings        and other facilities         (for example,
    runways) located            on the overseas bases are capitalized               as
    stipulated        in note 1-E.          The fiscal       year 1988 consolidated
    statement       of financial         position      includes   $3,701 million      of
    buildings       and facilities          located in foreign        countries.      These fixed
    assets     are subject         to loss in the event treaties             are not renewed or
    other agreements            are not reached which allow for the continued                 use
    by the Air Force.              Therefore,       in the event treaties        or other
    agreements are terminated                 whereby use of foreign         bases is no longer
    allowed,      losses will         be recorded        for the value of any non-
    retrievable         capital      assets.
    As of September 30, 1988, two overseas bases, Torrejon,                          Spain, and
    Hellinikon,      Greece, are planned to be closed within                     3 years.
    Negotiations      are anticipated          within the year with the cognizant
    governments      regarding      possible      closure     of the bases.        Funding for
    closing     and relocation       costs will be provided through future                 Air
    Force appropriations          and North Atlantic            Treaty Organization       (NATO)
    funding.      As of September 30, 1988, the Air Force had not
    finalized     cost estimates        regarding       closing     these bases and
    relocating     their   activities        to other bases.           Operating    expenses
    for overseas bases are included                 in the consolidated         statement    of
    operations.
    Note 6.      Leases
    As of September 30, 1988, the Air Force was committed to numerous
    operating  leases and rental agreements. Generally,  these leases

*




                                 Page   80                                              GAO/AFMD-90-23   Air Force Financial   Audit
                           Appendix I
                           ConsoUdated Financial Statements of the U.S.
                           Air Force for the Fiscal Year Ending
                           September 30,1888




and agreements        were for       rental   of equipment,     space,     and operating
facilities.
The Air Force owns substantially       all of the facilities   and real
property   used in its domestic operations,       and capital assets
overseas are capitalized     similar   to domestic assets.    Since most
of the leases entered into by the Air Force are operating          in
nature,  rather than capital,      no capital leases are recognized     in
the consolidated   statement of financial     position.
Note   7.    Obligations        and Contingencies
The Air Force is obligated    for goods and services     which have been
ordered but not yet received     (undelivered  orders)   as of September
30, 1988.   Aggregate undelivered     orders amounted to $49,137
million  at September 30, 1988.      Of this amount, $28,184 million
relates  to contracts  for the construction    and delivery   of
aerospace vehicles.
The Air Force is a party to various              legal and administrative
actions    and claims brought against          it.    These relate    primarily     to
tort claims     resulting     from aircraft      and vehicle   accidents,      medical
malpractice,      property    and environmental       damages resulting      from Air
Force activities,         and contract   disputes.
Legal claims against the Air Force are adjudicated                      under two
federal    statutes,       the Federal Tort Claims Act and 10 U.S.C.,
Chapter 163 (for military              claims).      As discussed     under note 2-D,
the Air Force's         liability      for claims made under the Federal Tort
Claims Act is limited             to $2,500.       Settlements     and awards in excess
of $2,500 are paid from the Claims, Judgments and Relief                         Acts    fund
maintained      by the Department of Treasury.                 Under 10 U.S.C., Chapter
163, the Air Force is liable               for payment of awards and settlements
up to $100,000 resulting             from damages to real and personal property
and personal       injury      or death caused by Air Force activities                within
the United States and its territories.                    The Air Force is liable           for
similar    awards and settlements             in certain     foreign   countries
resulting     from DOD activities.              Awards and settlements        in excess of
$100,000, foreign          and domestic,        are paid from the Claims, Judgments
and Relief      Acts fund.
Air Force payments during fiscal                year 1988 for awards,
compromises,        and settlements       resulting     from such legal actions
amounted to $14 million.            General Counsel estimates              that payments
arising      from legal and administrative            claims outstanding         at
September 30, 1988, will          approximate        $22 million       in fiscal     year
1989.      In the opinion of Air Force management and legal counsel,
the ultimate        resolution   of legal actions          still    pending will      not
materially       affect    the agency's operations            or financial     position.
Therefore,       no contingent    liabilities        have been recognized          in the
consolidated        statement   of financial        position.




                           Page 81                                          GAO/AFMD-BO-23AirForceFinancialAudit
                          Appendix I
                          Consolidated Financial Statements of the U.S.
                          Air Force for the Nscal Year Ending
                          September 30,1988




As of January 1989, the Air Force was a party to 558 contract
appeals before the Armed Services      Board of Contract Appeals.
Total value   of these appeals was $469 million.         According to
management,   approximately  80 percent of appeals are successfully
defended by the Air Force.     In fiscal    year 1988, contractors
recovered about $38 million    from resolved     claims.    Such claims                are
funded primarily    from Air Force appropriations.
Additionally,    the Air Force is a defendant     in a patent
infringement  lawsuit    filed   by an aircraft manufacturer.    The Air
Force’s general counsel       expects that the suit will be decided in
favor of the manufacturer       and that the Air Force will   eventually
pay for damages.     Funding for these damages is expected to be
derived through future appropriations.
Note 8.     Aircraft       Crashes
An operating    loss of $152 million     has been recognized     in fiscal
year 1988 for aircraft      which were either    destroyed   or damaged
beyond repair due to aviation       mishaps.   The loss represents        the
book value at unit costs (see note 1-E) of those aircraft              either
destroyed    or damaged. No loss has been separately         recognized       for
aircraft   which were damaged by accidents       but were reparable.
Costs associated     with repair  of such aircraft     are recorded as
operating    expenses and generally     funded from operation      and
maintenance appropriations.
Note   9.   Major      Activities/Funds
The Air Force’s major activities           consist      of general,    working
capital    (stock and industrial),       trust,      special,    and deposit
funds.     General funds are used to record financial               transactions
arising    under congressional      appropriations.           Air Force manages
15 general fund accounts:          7 are funded by current          year
appropriations      and 8 by multi-year         appropriations.       These
15 funds received      budget authority         of $95,137 million       in fiscal
year 1988, of which the current          year appropriations          received
$64,876    million.
The Air Force’s working capital            funds finance industrial       and
commercial type transactions.             The stock fund is composed of six
divisions:     fuels,     commissary,     general    support,  systems support,
medical/dental    , and the Academy store.            The stock fund provides
supplies   and inventories        to Air Force organizations        on a
commercial basis.         Receipts derived       from stock   fund operations
are normally     available     in their    entirety    for use without    further
congressional     action.      In fiscal    year 1988, the stock fund
recorded an operating        deficit     of $207 million.




                         Page 92                                          GAO/AFMD-90-23     Air Force Financial   Audit
                        Appendix I
                        Consolidated Financial Statementa of the U.S.
                        Air Force for the Fiscal Year Ending
                        September 80,leSS




               Stock      fund sales,   costs of sales and expenses,
                        and net operating    results  by divlsron
                                                      Cost of sales             Net operating
    Division                        Sales                                          results
                                    -                 ?m)
Fuels                              $2,894                   $2,937                     $(43)
Commissary                          2,460                    2,457                         3
General support                     2,091                    2,069
Systems support                        714                      909                    (1%
Medical/dental                         329                      324
Academy store                                                                                :
Total                              sd                       $8.70:                    (SZ)
Amounts shown are before intra-agency                       eliminations       (see
supplemental schedules in note 10).
The industrial        fund is composed of four divisions:                   airlift
services,     depot maintenance,        laundry/dry       cleaning,        and real
property.      These divisions      provide      services     to other Air Force
entities    through buyer-seller          relationships.          Airlift       and depot
maintenance      comprise the most significant              portion       of industrial
fund activity        accounting  for 95 percent of total                industrial      fund
revenues in fiscal         year 1988.      The industrial         fund recorded an
operating     deficit     of $93 million      in fiscal      year 1988.
           Industrial       fund   revenues, expenses,               and net operating
                                   results  by divlslon
                                                                                Net operating
Division                                     Revenues          $x;f;;;~~~,         results
Real property       maintenance,
   laundry/dry      cleaning                  $      254             $   243            $11
Airlift    services                               1,684               1,773              (89)
Depot maintenance                                 3,553               3,568              (15)
Total                                         $5.492                 $5,584#           (SE)

Amounts shown are before intra-agency                       eliminations       (see
supplemental schedules  in note 10).
Special    funds account for receipts      of the government that are
earmarked for a specific       purpose.    The Air Force manages two
special    funds, the Wildlife     Conservation   Fund and the Military
Assistance     Program.
Deposit fund accounts are generally      used to (1) hold assets for
which the Air Force is acting   as agent or custodian     or whose
distribution  awaits legal determination     or (2) account for
unidentified  remittances.   The Air Force maintains     31 deposit
funds.




                        Page 98                                                GAO/AFMDBO-28     Air Force Financial   Audit
                   Appendix I
                   Consolidated Financial Statemente of the U.S.
                   Air Force for the Fiscal Year Ending
                   September 80,19?38




Air Force trust        funds account  for gifts    and bequests     limited  to
specific     purposes by the donor and/or assets held for particular
purposes.       The Air Force Revolving     Trust Fund, Commissary Stores
Surcharge Collections,        is the most significant       of these and was
established       to reimburse appropriations      for payments made on
behalf of commissary stores for operating             equipment and supplies,
utilities,      laundry services,    and inventory     losses.    Surcharges
provide     revenue which is used to construct         commissaries.
Note 10.    Supplemental     Schedules
The supplemental     schedules present the financial    position  and
results   of operations    by funds.  Descriptions   of these funds are
presented    in note 9.




                  Page 94                                          GAO/AFMD-90-28   Air Force Financial   Audit
                                                                  Appendix I
                                                                  Consolidated Financial Statements of the U.S.
                                                                  Air Force for the Nscal Year Ending
                                                                  September 39,198S




                                                                                                                                                                                                                                               -1


                                                                                    Schduls     of Assets.                 Llabl I Itles,  ad Eqult~             by Fund Two
                                                                                                                      Cd      1~s In ml I I Ions)


                                                                 General           Stock       Industrlsl                   Trust          speclsl           oqlxlt            I ntrsqplcy            Consol ldoted
                                                                                   fVldS          funds                     fmds            turds              turds           01 Imln~lmr             alI       funds



                                                                                                   s       33,               s 4;
                                                                                                                                                I'8               s'?                   s         8
   hzmwts             racdvable,             nut
        oovamumtal                                                    692            7%                    458                        3                  0                0                  (932)                       967
        Plbl Ic                                                       482             54                   106                        9                  0                0                     0                     651
    lnventcrIss                                                   54,41 I      10,279                  1,072                          0                  0                0                       0               63.762
   Fvoperty           and aquipmnt
        W        pnent                                            24,801                   0           1,834                      135                    0                0                       0               26,770
        &I      Idlrgs                                            19,249                   0               417                        0                  0                0                       0               19,645
        Ofhw real             prop-ty                              8,820                   0                 I2                       0                  0                0                       0                8,832
        AIKl-aft                                                  m,w                      0                  0                       0                  0                0                       0               82.w
        Mlssl      lea                                             9.921                   0                    0                     0                  0                0                       0                9.921
        LESS sccunulated                   Qpraclatlrn           M6.139~                   0               (%I 1                      0                  0                0                       0              (47,090)
        Lad                                                           292                  0                    0                     0                  0                0                       0                      252
        cmstrlctlm                 In prcg-es?i                     1,423                  0                 13                   249                    0                0                       0                1,685
        Alraatt            under      amsll-uttlm                 14,925                   0                  0                       0                  0                0                       0               14,925
        Mlssl      lea undw           cmstructlm                   3,276                   0                    0                     0                  0                0                       0                3,276
        Unlnstal          led propulslm              units         6,853                   0                    0                     0                  0                0                       0                6,853
        Other       f&$&s                                                  2         141                        0                 0                  9                0                      - 0                 145


        Total       Assets                                   $266              'Q&                 '3&                        '4A               $16               SlOe                  S(QZ)                s2m


Llabllltles
   kmults             pay&le
        GoveXflMltSl                                         I      1,477      s     I83           s       160               s         1        $3                s       0             S(932)               I       892
        Pital Ic                                                  16,729             713                    69                         2                 5                0                  0                    17,518
   Fwslxlnel              .x0-UOIS
        Annual        Iewe                                            1588                 0                85                        0                  0                0                       0                  673
        Mllltsy            lee+2                                    1,554                  0                    0                     0                  0                0                       0                1,554
        Sepaatlm              al loranca                              I89                  0                 II                       0                  0                0                       0                      200
   L?qmslt          and trust             fund                             0               0                    0                     0                  0            ICB                         0                      Ice
   other                                                              637            22                !,rjso                         0                  0            0                      - 0                 2.299


        Total       Ll~llltles                               S 21,174          s     978           Sl,sof,                    s        3         $8               IloB                  S(932)               S 23,244


Equity
   Invested           caplta1                                $177,248          54,xa               $1,361                     s (2)             SO                s       0             s         0          $182.975
   C~lutl~e                results         of opwatlms                     0       4,318                     28                   426                    0                0                       0                4.772
   Unapsnded               qyx-oprlatlms
        Lk4llgsted               balmms                           15,716                   0                      0                   14                 I                0                       0               15,791
        undal Ivered             crde-s                           49,lJo                   0                    0                      0                 7                0                       0                49,137
        Unfilled           cam-s                                 (1.145)                   0           0                          0                  0                0                       4                  (1.145)

        Total       Equity                                   s241.a)9          sm                  11.589                     s4w
                                                                                                                               -                 S/L              $0                    $2.                  sa

Total        Ll~llltlss              ad     Equity           $262,183          SQ&                 $32                        1444               $12              SlOe                  S(QA,                $274,774




                                                                  Page 95                                                                                                     GAO/AFMD-90-28                     Air Force Financial   Audit
                                                               Appendix I
                                                               Consolidated Financial Statements of the U.S.
                                                               Air Force for the Fiscal Year Ending
                                                               September 30,1999




                                                                         Qrsd                9tak        lndbhlal            Trust        gdal         cqdt            lnhaagency         orvplict3kd
                                                                           flnta
                                                                          ---                fulds         fwds              flr&
                                                                                                                             -----         furds        fud5           el Imlmtlms         all fln&


cpsetlq              rmmlll5       m-d flnacll-g      -
    t(lprqlaflcw                naIlid                                   ss,m            I           0       s           8    I1              $16              so         I         0           %4,0x
    ~latlal                    relllb~s                                    2,271                     0                   0      164             0               0                037)            2,123
    AIrlIft          srvlms                                                          0           0               1.684                0            0            0                WI)                    9x5
    thmt       ml-                                                                   0               0           3,545                0            0               0           0.440)                    ¶
    hBlEFcFstylmlntsran,mdonprrerexa                                                 0               0              254               0            0               0                 0                  2%
    9kxk       fti       salee                                                       Oe.4sj                   -          0        0            9               0              (4129,             2&i

btsl       @ntlrg              FWmta       sd Flnmclrq        Sames      St%,241         $a,43               5,491            II65            $16              so         WO,5is)               rQm


Q=eJ       ecpl*res
 Mllltrypsnnel                                                           $19,993         s       0           s       0        I       0       SO               so         I         0           119,933
  Clvl Ilm rd “relp                       natimoI    prnmsl                6.53                  0               u97                  0         0               0                 (52)            9,103
    Tryel ad trmqx~+atlm                                                      2,as                   0               64               0            0               0             (691)             1,626
    WI I ItIes, mk,   conmnlcatlms                                          1,645                0                  1%                0            0            0                  112)            1,m
    EqJlpltmt ndliwwa                                                       se-                  0               1.050                0            0            0              (3,555)             1,100
    Rrctrrrrd sn4o?s                                                       em                    0                   0                0            0               0                 0             8.m
    LFpl IQ sld fudr                                                       5,024                 0               1948                 0            0               0           (5,713)               n7
    RmarrhWddWlapnnt                                                      13,5?4                 0                   0                0            0            0                (149)           13,675
    Dg9latlm                                                               3,483                 0                  113               0            0            0                    0             3.593
    AIrwatt  a-ashes                                                          152                0                    0               0            0            0                    0               152
    oltw                                                                      1,109              0                  a0            lcs          16                  0             wm                1.a
    stok       flndmstOf             salasudqelres                                   Os,7m                    -      0            0            0               0                  (9)            8.69J

Tim        optrating           EqTumes                                   566%            $00                 19.584           ng              $2               ro_        St=                   c!m?.

fitnss        (mflclt)         of cpratlq           %#sws
    sdFlnarlngSamasO.wEq~~~                                              s2              SE)                 $2’              $2                                                                $2)
                                                                                                                                              $2               3          $2




w




                                                               Page 96                                                                                    GAO/AFMD-90-23                      Air Force Financial   Audit
Appendix II

C@mparisons BetweenAir Force Financial
St$ttementsand Treasury Reports

 -------

                                  U.S. AIR FORCE COMPARISONBETWEEN
                             CONSOLIDATEDSTATEMENTOF FINANCIAL POSITION
                              AND TREASURY REPORT ON FINANCIAL POSITION
                                       AS OF SEPTEMBER30, 1988
                                                         Consolidated            Treasury
                                                           statement
                                                              (Dollars
              Assets:
              Funds With u. S. Treasury                       $ 79.7
              Appropriations      to be provided                 2.1
              Accounts receivable,        neta
                 Governmental                                       1.0               2.2
                 Public                                               .7                .8
              Inventories                                          63.8              74.2
              Property     and Equipment:
                 Equipment                                         26.8              25.5
                 Buildings                                         19.7              27.3
                 Aircraft    and Missiles                          92.2              97.1
                 Less accumulated depreciation                    (47.1)
                 Land                                                   .3               .2
                 Other real property
                 Construction      in progress                      !*I:               1.6
                 Aircraft     under construction                   14:9
                 Missiles     under construction                    3.3
                 Uninstalled     propulsion    units                6.9
                 Other assets
              Total Assets                                                           $308
              Liabilities:
              Accounts payable
                 Governmental                                $        .9             $ 13.9
                 Public                                            17.5                  5.0
              Personnel     accruals
                 Annual leave                                          .7                     .6
                 Military    leave                                   1.6
                 Accrued payroll                                         0                    .9
                 Separation      allowance                             .2
              Deposit and trust        fund                             .l                    .l
              Other
              Total Liabilities                                   -43                 7k-k
              Equity:
              Invested     capital                                183.0               221.1
              Cumulative      results    of operations               4.8                 4.3
              Unexpended appropriations                             63.8               61.6
              Total Equity                                        251.6               287.0
              TOTAL Liabilities        and Equity                $274.9              $308.5

              aThese amounts      include advances and prepayments           which    are shown as
               separate line      items in the Treasury Report.




                                Page97                                        GAO/~-90-23AirForceFinancialAudit
                              Appendix II
                              comparisons Between Air Force Financial
                              Statementi and Treasury Reports




-,



                                        U.S. AIR FORCE
                              CONSOLIDATED STATEMENT OF OPERATIONS
                               AND TREASURY REPORT ON OPERATIONS
                                      FOR THE YEAR ENDING
                                      SEPTEMBER 30, 1988
                                                              Consolidated           Treasury
                                                               statement
                                                                 (Dollars  in billions 9
         Operating      Revenues and
             Financing     Sources:
         Appropriations        realized                           $ 64.0              $ 94.4
         Appropriation        reimbursements                             2.1
         Airlift     services                                            1.0
         Depot maintenance                                               0.1               5.5a
         Real property        maintenance
            and other revenue                                            0.2               0.2
         Stock fund sales                                                2.4               9.0
         Total Operating         Revenues
            and Financing        Sources                                69.8          $109.1
         Operating    Expenses:                                                          80.2
         Military    personnel                                    $ 20.0
         Civilian    and foreign     national    personnel              9.1
         Travel and transportation                                      1.6
         Utilities,     rents,   and communications                     1.8
         Equipment maintenance                                          1.1
         Purchased services                                         8.6                    5.6
         Supplies    and fuels                                      0.7
         Research and development                                  13.7
         Depreciation                                               3.6
         Aircraft    crashes                                            0.1
         Other
         Stock fund cost of sales and expenses                      z
         Total Operating       Expenses                           $70.0               S&s
         Net Operating      Results                               STbTz)              $(14.6)
         Less: Capital      Expenditure                             0.0                  18.6
         Excess of Operating        Expenses Over
            Revenues and Financing         sources                $(0.2)              $_ ( 4.4)


         aThis amount represents  total          industrial    funds (i.e.,    airlift
          services, depot maintenance,           real property     maintenance     and other).




     Y




                              Page 98                                          GAO/AFMDSO-23      Air Force Financial Audit
Appcrdix III

Objectives,Scope,and Methodology


               During fiscal year 1988, the Air Force developed its first set of consoli-
               dated financial statements for external use. We coordinated with the Air
               Force throughout this effort by providing technical assistance in devel-
               oping the statements and footnote disclosures. We also reviewed the
               accounts that comprise the financial statements and reviewed the Air
               Force’s financial management operations. As a result of our review, we
               identified issues that need to be resolved not only to enable the Air
               Force to prepare accurate financial statements but also to improve its
               accountability and financial management. This was the first comprehen-
               sive assessment of the Air Force’s financial management operations and,
               without a doubt, the largest, and arguably, the most complex audit ever
               undertaken.

               Our specific objectives for this review were to:

               develop an understanding of the Air Force’s internal control
               environment;
               identify and document the internal controls, both manual and auto-
               mated, that relate to recording, processing, summarizing, and reporting
               financial data;
               identify and document the information streams of financial transactions
               from inception of a transaction to the reporting of the information to the
               Finance Center;
               evaluate the adequacy and effectiveness of significant internal account-
               ing controls; and
               test events, transactions, or account balances to substantiate their accu-
               racy, completeness, and propriety.

               This review included coverage of the Air Force’s financial management
               operations and accountability for the primary resources-personnel,
               facilities, inventory, and equipment-it uses to accomplish its mission.
               We reviewed the Air Force’s policies relating to its organization,
               accountability procedures, and financial management. We also consid-
               ered previous reports by GAO,Air Force Audit Agency, Department of
               Defense Office of the Inspector General, and Air Force pursuant to the
               Federal Managers’ Financial Integrity Act. We discussed financial man-
               agement operations and accountability procedures, functions, and
               processes with managers throughout the Air Force. We identified inter-
               nal controls in the accounting systems and operations for the primary
               resources. Our audit tests focused on the key internal controls specifi-
               cally related to financial management and accountability for resources.

               Field work was performed at the following locations:


               Page 99                                 GAO/AFMD-SO-23   Air Force Financial   Audit
    Appendix III
    Objectives, Scope, and Methodology




. Air Force headquarters, Washington, D.C.;
l Air Force Accounting and Finance Center, Lowry Air Force Base, Den-
  ver, Colorado;
l Air Force Systems Command Headquarters, Andrews Air Force Base,
  Maryland;
9 Aeronautical Systems Division, Wright-Patterson Air Force Base, Ohio;
. Space Systems Division, Los Angeles Air Force Station, California;
l Electronic Systems Division, Hanscom Air Force Base, Massachusetts;
9 Contract Management Division, Kirtland Air Force Base, New Mexico;
. Air Force Wright Research and Development Center, Wright-Patterson
  Air Force Base, Ohio;
l Rome Air Development Center, Griffiss Air Force Base, New York;
. 4960th Test Wing, Wright-Patterson Air Force Base, Ohio;
l Air Force Office of Scientific Research, Bolling Air Force Base, Washing-
  ton, D.C.;
. Air Force Logistics Command Headquarters, Wright-Patterson Air Force
  Base, Ohio;
9 Ogden Air Logistics Center, Hill Air Force Base, Utah;
. San Antonio Air Logistics Center, Kelly Air Force Base, Texas;
l Warner Robins Air Logistics Center, Robins Air Force Base, Georgia;
. Oklahoma City Air Logistics Center, Oklahoma;
. Randolph Air Force Base, Texas;
l Wurtsmith Air Force Base, Michigan;
. Nellis Air Force Base, Nevada;
l MacDill Air Force Base, Florida;
l Langley Air Force Base, Virginia;
l Griffiss Air Force Base, New York;
. Sembach Air Base, West Germany;
l Royal Air Force Lakenheath, England;
. Hickam Air Force Base, Hawaii;
. Kadena Air Base, Japan;
l Andrews Air Force Base, Maryland;
. Air Force District of Washington, Bolling Air Force Base, Washington,
  D.C.;
l Tactical Air Command Headquarters, Langley Air Force Base, Virginia;
. Strategic Air Command Headquarters, Offutt Air Force Base, Nebraska;
9 Air Training Command Headquarters, Randolph Air Force Base, Texas;
l United States Air Forces in Europe, Ramstein Air Base, West Germany;
l Pacific Air Forces, Hickam Air Force Base, Hawaii;
l Military Airlift Command Headquarters, Scott Air Force Base, Illinois;
l Dover Air Force Base, Delaware;
l Travis Air Force Base, California; and
. Rhein-Main Air Base, West Germany.


    Page 100                             GAO/AFMD-90-23   Air Force Fiuancial   Audit
‘Appendix IV

Qmments From the Departmentof Defense


Note: GAO comments
supplepenting those in the
report text appear at the
end of this appendix.                         COMPTROLLER     OF THE DEPARTMENT OF DEFENSE
                                                         WASHINGTON.   DC   20301-1100




                             Mr. Donald H. Chapin
                             Assistant   Comptroller    General
                             Accounting   and Financial    Management Division
                             U.S. General Accounting      Office
                             Washington,   DC 29548-0001
                             Dear Mr. Chapin:
See ccimment 1,                    This is the Department of Defense (DOD) response to the GAO
                             draft  report “FINANCIAL MANAGEMENT: Billion-dollar    Decisions
                             Made Using Inaccurate   and Unreliable Air Force Data,” dated
                             February 1, 1990 (GAO Code 917118/OSD Case 8193-A).
                                    The Department is concerned that the report may mislead
                             some readers into thinking         that the Air Force has misstated           the
                             cost of its aircraft        or other programs to the Congress.
                             Accurate costs are reported          to the Congress for weapon systems
                             through the Selected Acquisition           Report data, as well as
See comment 2                annually    in the Procurement,       Research and Development,       and
                             Construction    appendices     to the President’s     Budget.    The DOD is
                             aware that the Air Force accounting           system, including     financial
                             controls    over inventories      and Government furnished      property
                             provided    to contractors,      needs improvement.
                                      The Defense Management Report embodies several major
                             initiatives       that specifically       address the problems      identified    in
                             the report.        These initiatives        include major effort8      to improve
See comment 3                accounting      and material      management systems and operations.           In
                             addition,      the Department has recently           made several major policy
                             changes to improve the management of inventories                  and equipment.
                             Several of these initiatives            are    incorporated   in the FY 1991
                             budget request recently           submitted      to the Congress.
                             Implementation        of these policy       changes and initiatives       will
                             resolve     the problems cited in the report.
                                    The Department emphasizes that the Air Force has
                             demonstrated     its interest   in enhancing ixs accounting         efforts    by
                             its willingness      to prepare the prototype     reports  solicited        by
                             the GAO. Notwithstanding        the draft   report contents,      the Air
                             Force continues      to seek appropriate    improvements,    where
                             warranted.      The DOD will   endeavor to make accounting        and
                             reporting    data more consistent     in future   reports.


                     Y




                                Page 101                                           GAO/AFMD-90-23   Air Force Financial   Audit
      comment*   From the Department   of Defense




                                                                                      2


       The DOD responses to the recommendations are enclosed.
Unfortunately,     due to the short time available           for providing
comments, the Department was unable to provide its Usual
comprehensive    response,     including    the milestone/completion       dates
for the corrective     actions.       A comprehensive    response will     be
provided on the final       report.      The DOD appreciates     the
opportunity    to comment on this draft        report.
                                               Cordially,




Enclosure




     Page 102                                           GAO/AFMD-90-23   Air Force Financial   Audit
                       Appendix IV
                       Commenta From the Department       of Defense




                                 GAO   DRAFT REPORT - DATED FEBRUARY 1, 1990
                                       (GAO CODE 917118) OSD CASE 8193-A
                     "FINANCIAL MANAGEMENT: BILLION-DOLLAR DECISIONS MADE USING
                               INACCURATE AND UNRELIABLE AIR FORCE DATA"
                                        DEPARTMENTOF DEFENSE COMMENTS


                                                RX.OMMNDATIONS
                                                      *    l   *   *   *


                 0 Recommendation No. 1: The GAO recommended that the Secretary
                   of the Air Force develop an overall     plan specifying  corrective
                   actions    and milestones for the Air Force to produce
                   consolidated    financial statements  in accordance with Title      2
See comment 4      that will    be submitted to us for audit.

                    DoD Response:      Partially  Concur. The Air Force will    be
                    required   to develop a plan for taking appropriate     corrective
                    actions   needed to adhere to required   Executive  Branch
                    financial    statement requirements.
                 0 Recommendation No. 2: The GAO recommended that the Secretary
                   of the Air Force give high priority   to developing an
                   integrated  accounting system capable of generating  reliable
See comment 4.     financial  management reports on a timely  basis.

                   DoD Response:      Partially     Concur.    A Defense Management Report
                   initiative  provides       for the development of DOD-wide financial
                   management functional         requirements.    This initiative enjoys a
                   high DOD priority.
                 0 Recommendation No. 3: The GAO recommended that the Secretary
                   of the Air Force develop management reports   designed to assist
See comment 4.     to achieve cost-effectiveness and efficiency.

                   DoD ResDonse:    Partially     Concur.    A Defense Management Report
                   initiative provides      for the development of DOD-wide financial
                   management functional       requirements.
                 o Recommendation No. 4:        The GAO recommended that the Secretary
                   of the Air Force direct       his Chief Financial  Officer  to correct
                   deficiencies   identified     in existing  systems to the fullest
                   extent possible.




                      Page 103                                             GAO/AFMD-90-23   Air Force Financial   Audit
                                                                                                                                               I




                                Appendix W
                                C o m m e n t s F r o m the Department of Defense




                             Q o D R e m o n s ~ r Concur. Requirements currently              exist              in the
                             Air F o r c e requiring correction              of these deficiencies.                 T h e Air
                             F o r c e will    r e e m p h a s i z e these requirements.
                          0 R e c o m a k e n d a t i o n No. 5       T h e G A O r e c o m m e n d e d that the Secretary
                            of the Air F o r c e dir&t                 his Chief Financial O fficer              to
                            investigate            u n u s u a l a n d a b n o r m a l account balances.

                             D o 0 R e a w n s e a Concur.    Requirements currently          exist in the
                             Air Force for the investigation          of u n u s u a l a n d a b n o r m a l
                             account balances.         T h e Air Force will r e e m p h a s i z e these
                             requirements.
                         0 R e c o m m e n d a t i o n No. 4: T h e G A O r e c o m m e n d e d that the Secretary
                           of the Air Force direct his Chief Financial O fficer                          to perform
                           a periodic comparative analysis of account balances from o n e
                           p e r i o d to the next a n d follow u p a n d explain significant
                           variances.
                             D o D Reswnse:     Concur.  Requirements currently           exist in the
                             Air Force requiring periodic comparative analysis of account
                             balances.    T h e Air Force will r e e m p h a s i z e these requirements.
                         o R e c o m m e n d a t i o n No. 7: T h e G A O r e c o m m e n d e d that the Secretary
                           of the Air F o r c e direct his Chief Financial O fficer                      to
                           perform, to the fullest              extent possible in light of existing
                           systems deficiencies,              comparative analyses of operating units
                           across tim e periods a n d of other cost centers to determine
                           efficiency         of operations.
                            D o 0 Response: Concur.     Requirements currently    exist in the
                            Air Force requiring comparative analyses to determine
                            efficiency   of operations.    T h e Air Force will r e e m p h a s i z e
                            these requirements.
                         o R e c o m m e n d a t i o n No. 8. T h e G A O r e c o m m e n d e d that the Secretary
                           of the Air Force direct his Chief Financial O fficer                          to
                           accumulate a n d report actual costs of e q u i p m e n t in a c c o r d a n c e
                           with Title          2.

S e e c o m m e n t 4.      D o D R e s D o n s e r Partially    Concur.      A Defense M a n a g e m e n t Report
                            initiative          provides for the d e v e l o p m e n t of D O D - w i d e financial
                            m a n a g e m e n t functional    requirements.
                         0 R e c o m m e n d a t i o n No. 9. T h e G A O r e c o m m e n d e d that the Secretary
                           of the Air Force dir&t               his Chief Financial O fficer               to
                           g e n e r a t e m o r e reliable   a n d complete financial              information for
                           reports to the Department of the Treasury a n d for a n n u a l
                           consolidated             financial statements.

                            D o 0 Reswnset   Concur.   Appropriate action will                          b e initiated
                            consistent   with Executive B r a n c h requirements.




                              Page 104                                                G A O /A F M D - S O - 2 3 A i r Force Financial Audit
.

           Appendix IV
           Comments From the Department   of Defense




    o Recommendation No. 10: The GAO recommended that the Secretary
      of the Air Force direct      the Chief Financial    Officer  to report
      the internal    control  problems with reconciliations      and
      documentation    for adjustments   in Federal Managers’ Financial
      Integrity    Act reports  to the Secretary   of Defense.

       y    Resoonse:     Concyr.  Appropriate         material  weaknesses in
        nternal  controls    will be identified         in future Air Force
       Federal Managers’ Financial      Integrity        Act reports.
    0 Recommendation No. 11: The GAO recommended that the Secretary
      of the Air Force direct     the Chief Financial   Officer  to
      reconcile  subsidiary   records periodically    to the control
      accounts and correct   errors and weaknesses.

       DoD Response:      Concur.      Current DOD accounting    policies
       require periodic      reconciliations.     Incidents   cited by the GAO
       represent   instances     of noncompliance    with these policies.
       Appropriate    corrective     action will be directed.
    o m:                              The GAO recommended that the Secretary
      of the Air Force direct         the Chief Financial    dfficer   to
      reconcile  disbursements        with obligations    and promptly    correct
       errors.
       DOD Response:   Concur. The most significant       problems exist
       when payments are made for the Air Force by others.         Solutions
       to these problems are being aggressively      pursued as a result
       of the Defense Management Report initiatives.
    o Recommendation No. 13:          The GAO recommended that the Secretary
      of the Air Force direct         the Chief Financial   Officer to
      document all adjustments          to subsidiary records and control
      accounts.
      DoD Response.         Concur.  Air Force directives    currently   require
      documentation       for adjustments    to subsidiary  records and
      control     accounts.    These requirements    are not being followed     in
      all cases.       This results   in a compliance problem requiring
      increased management attention.           The Defense Management Report
      initiatives      are also expected to help resolve such problems.
    o Recommendation No. 14: The GAO recommended that the Secretary
      of the Air Force direct     the Chief Financial    Officer  to enforce
      Air Force’s requirement     that supervisors    and managers review
      and approve all significant      adjustments.

      DoD Response:  Concur.   The need for adjustments   to be
      reviewed and approved will  receive greater  emphasis.




           Page 106                                      GAO/AFMD-90-23   Air Force Financial   Audit
     AppendixIV
     Comments From the Department    of Defense




o Pecoumendation No. 15r            The   GAO recommended that the       Secretary
  of the Air Force direct           the   Chief Financial  Officer     to report
  unsupported adjustments           and   reconciliation  internal     control
  problems,  if applicable,          in   future Federal Managers’       Financial
  Integrity  Act reports.
   Do0 Reswnsea      Concur.  Appropriate         material   weaknesses in
   internal controls    will be identified         in future Air Force
   Federal Managers’ Financial     Integrity         Act reports.
0 Recommendation No. 16: The GAO recommended that the Secretary
  of the Air Force direct    the Chief Financial  Officer    to
  accumulate and report actual costs of weapons systems, which
  include acquisition   costs, Government furnished     material,
  operating  and maintenance costs, and modifications.

   DoD Reawnse:       Concur.     Appropriate  action will be initiated
   consistent    with Executive     Branch requirements.     It should be
   noted, however, that the cost data required           to meet
   congressional     requirements    for Air Force weapons systems is
   currently   being obtained from sources other than the asset
   accounts in the Air Force accounting         system.
0 Recommendation No. 17: The GAO recommended that the Secretary
  of the Air Force direct  the Chief Financial Officer  to report
  actual and planned cost data to the Congress so better
  decisions  can be made on program funding.

  DOD Response:     Concur . All data required      by the Congress will
  be provided.     As noted in response to Recommendation 16,
  however, applicable     data from sources other than the Air Force
  asset accounts are being used to provide        the Congress with
  required
     .       data.
o Recommendation No. 18: The GAO recommended that the Secretary
  of the Air Force direct     the Chief Financial     Officer   to account
  and report on satellites     through either   revisions     to existing
  systems or a new system to provide oversight         of these assets.

  DOD Reswnsex    Concur.   The Department is taking steps, as
  part of the Defense Management Report initiatives,  to develop
  a DOD-wide standard accounting  module to record the cost of
  Government property.
o Recommendation No. 19: The GAO recommended that the Secretary
  of the Air Force direct  the Chief Financial     Officer   to
  establish  and implement procedures  to identify      and record in
  the accounting  records equipment paid for and accepted by the
  Air Force but held by contractors.
  Do0 Resuonse : Concur.  The Department            is taking       steps, as
  part of the Defense Management Report,            to correct       this Air




    Page106                                        GAO/AFMD-90-23    Air Force Fiiancial   Audit
.

                       Appendix IV
                       CommentsF’rom the Department of Defense




                    Force deficiency.       One of the Department’s    initiatives
                    involves     developing  a DOD-wide standard accounting        module to
                    record the cost of Government property        in the hands of DOD
                    contractors.
                 0 Recommendation No. 20: The GAO recommended that the Secretary
                   of the Air Force require    the Chief Financial     Officer to
                   establish  a policy to value unserviceable      items to reflect the
                   estimated  costs of repair.
See comment 5.      DoD Resoonse:  Partially     Concur.    As a part of the Defense
                    Management Report initiatives,       a revised policy will be
                    considered.
                 0 Recommendation NO. 21: GAO recommended that the Secretary                 of
                   the Air Force require     the Chief Financial      Officer     to adopt an
                   improved standard cost accounting       system integrated         with the
                   general ledger which provides      for accurate determination          of
                   standard costs based on replacement        costs,   identification      of
                   inflation  growth, and variance     analysis    with respect to
                   purchase prices,   material   usage, and repair       costs.
See comment 5.

                    DoD Response:    Partially Concur.   A Defense Management Report
                    initiative   to develop a standard financial  management
                    requirements   is expected to meet the Department’s  needs in
                    this area.
                 o Recommendation No. 22: The GAO recommended that the Secretary
                   of the Air Force direct        the Chief Financial    Officer  to
                   initiate   a special  effort      to deal with the root causes and
                   reduce the $18 billion       of inventory    in excess of strategic
                   requirements.

See comment 6      DOD Remonee x Partially           Concur.     The Department does not
                   agree that the $18 billion          referred     to by the GAO is excess to
                   strategic    requirements.        The Department has recognized        that
                   the large value of inventories            requires   appropriate   action.
                   The DOD acquisition       officials     have initiated     actions  to
                   improve inventory     management through the Defense Management
                   Report initiatives.
                 o Recommendation No. 23: The GAO recommended that the Secretary
                   of the Air Force make improving     accounting  practices and
                   systems an Air Force-wide  priority     effort, supported by
                   adequate resources.
                   LIoD Reswnse:      Concur.  The Defense Management Report
                   initiatives    have been established    to develop standard DOD-wide
                   functional    requirements  for accounting   practices  and systems.
                   This effort    enjoys a high DOD priority.
                 o Recommendation No. 24:        The GAO recommended that the Secretary
                   of the Air Force direct       the Chief Financial Officer to develop




                       Page 107                                     GAO/AFMD90-23 Air Force Financial Audit
        Appendix    Iv
        CkmunentsFrom the Department of Defense




    a comprehensive      plan for improving  and integrating     the Air
    Force'8  financial      management and accounting   systems.

    Do0 ReSTWiser Concur.         A Defense Management Report initiative
    is expected to provide       for such improvement and integration.
0 Recommendation No. 25: The GAO recommended that the Secretary
  of the Air Force review the systems requirements    of Base Level
  Accounting   and Report System and all related systems to ensure
  that they are complete and that they address all the Air
  Force’s   concerns about its operations and the problems
  addressed in this report.
    DoD Reswnse:      Concur.    A Defense Management Report initiative
    provides   for DOD-wide accounting     functional      requirements   and
    systems.    This initiative,     which would alleviate        the need for
    the Air Force to pursue development of the Base Level
    Accounting    and Reporting   System, can be expected to address
    the conditions    identified   in this draft      report.
0   Recommendation No. 26: The GAO recommended that the Secretary
    of the Air Force ensure that a project   management structure
    and plan are in place to avoid the potential    pitfalls   that
    have caused problems in past systems development efforts.
    This structure  must include adequate representation     and
    participation  by top management and functional    users in all
    phases of the development effort.

    DoD Resvoneer     Concur.   A Defense Management Report
    initiative,   to develop standard DOD-wide requirements          and
    systems is being established.       This effort,   which is fully
    supported by the Secretary     of Defense, will    have both “top
    management” and “functional     user” involvement,     including
    adequate structure,    plan, and personnel     and financial
    resources.




       Page   108                                  GAO/AFMD-99-23   Air Force Financial   Audit
           Appendix   IV
           CommentaF’rom the Department of Defense




           The following are GAO’S comments on the Department of Defense’s letter
           dated February 21,199O.


           Force Does Not Effectively Account for Billions of Dollars of Resources.

           2. We have modified the report to specifically discuss the Selected
           Acquisition Reports sent to the Congress and recognize that the costs
           they report are more accurate than the costs provided by the Air Force’s
           financial management systems.

           3. The Defense Management Report is addressed under Agency Com-
           ments at the end of the executive summary.

           4. The DOD response is discussed under Agency Comments and Our Eval-
           uation at the end of chapter 2.

           5. The DOD response is discussed under Agency Comments and Our Eval-
           uation at the end of chapter 5.

           6. We corrected the report to show $10 billion as unrequired inventory.




(917119)   Page 109                                  GAO/AFMD-90-23   Air Force Nnancial   Audit
-..