oversight

Financial Management: Army Records Contain Millions of Dollars in Negative Unliquidated Obligations

Published by the Government Accountability Office on 1990-05-02.

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

                 United   States   General   Accounting   Office
                 Report to the Chairman,
GAO              Subcommittee on Defense,
                 Committee on Appropriations,
                 House of Representatives

May 1990
                 FINANCIAL
                 MANAGEMENT
                 Army Records Contain
                 Millions of Dollars in
                 Negative Unliquidated
                 Obligations




GAO/AFMD-90-41
GAO
                   United States
                   General Accounting Office
                   Washington, D.C. 20548

                   Accounting and Financial
                   Management Division

                   B-235940

                   May 2,199O

                   The Honorable John P. Murtha
                   Chairman, Subcommittee on Defense
                   Committee on Appropriations
                   House of Representatives

                   Dear Mr. Chairman:

                   In response to your request of January 3, 1990, we are reporting to you
                   the results of our review of the Department of the Army Materiel Com-
                   mand’s control procedures over negative unliquidated obligations (11113)
                   related to the purchase of supplies and equipment inventories. Transac-
                   tions result in negative ums when the recorded expenditure exceeds the
                   amount obligated.

                   We undertook this work to follow up on our earlier review of negative
                   unliquidated obligations of the Air Force Logistics Command that identi-
                   fied over $24 million in overpayments to contractors and over $67 mil-
                   lion in processing errors.’ We reported the results of our Air Force work
                   to you in June 1989. As agreed with your office, this report focuses on
                   the number of negative UU& on the Army Materiel Command’s records
                   and the adequacy of controls to assure that they are corrected in a
                   timely manner.


                   At September 30, 1989, the records of the Army Materiel Command’s six
Results in Brief   major subordinate commands included about 4,500 negative C‘II) bal-
                   ances totaling about $328 million. Our review focused on two of the
                   subordinate commands, which had 1,483 negative I:U) account balances
                   totaling about $272 million. Although Army Regulation 37-l on Army
                   Accounting Guidance requires immediate corrective action on negative
                   ULL)S,these two commands were not always promptly resolving negative
                   balances. Our analysis of 84 of the negative 1~) balances totaling about
                   $49 million showed that 47 of the balances valued at over $23 million
                   were more than 6 months old. Coordination problems between the com-
                   mands and other Department of Defense (DOD) organizations caused
                   these delays in resolving the negative balances. Further. because Army
                   regulations do not require that negative I:UX be separately disclosed in



                   ‘Financial Management: Air Force Records Contain $512 Million in Negative I‘nliquldated Obhgations
                   (GAO:AFMD-89-78, June 30, 1989).



                   Page 1                                                   GAO/AFMD-90-41     Army Negative    ULOS
             B-235940




             reports to management officials, Army headquarters personnel did not
             know the magnitude of negative ums.

             Subordinate command officials advised us that most negative ULI)S
             occurred because (1) a contractor was paid too much or (2) information
             on an obligation, payment, or collection transaction was inaccurately or
             incompletely processed. Of the about $49 million in negative ~~13swe
             reviewed in detail, $7.6 million was caused by overpayments, $23.8 mil-
             lion was due to processing errors, and $2.7 million was related to other
             causes. In addition, the causes for $18.0 million could not be deter-
             mined.? h’egative I’EIS caused by overpayments tie up Army funds
             which could be used to meet other Army requirements. If not collected
             promptly, these overpayments can be considered interest-free loans to
             contractors and may be lost in the case of contractor bankruptcy. Also,
             the disbursing officers responsible for making overpayments to contrac-
             tors are personally liable for any overpayments that are not recovered
             unless the Comptroller General relieves them of that liability.

             We are making several recommendations which will strengthen manage-
             ment controls over negative ULI)Sto ensure they are promptly resolved.


             The Army has control procedures intended to ensure that it does not
Background   obligate or spend more money than the Congress has appropriated. In
             accordance with these procedures, (1) the Army incurs and records obli-
             gations when it enters into a contract, (2) these obligations are reduced
             or “liquidated” in the Army’s accounting records as payments are made,
             and (3) a um balance for the total contract indicates the amount remain-
             ing to be spent for that contract. Since the amount to be paid should
             always be equal to or less than the amount obligated, 1Jm balances
             should not be negative.

             The Army Materiel Command has six major subordinate commands
             located throughout the United States through which it purchases,
             stocks, and distributes billions of dollars worth of materiel. It carries out
             these tasks for Army units, other military services, and foreign
             governments.

             In most instances, the subordinate commands share purchasing respon-
             sibilities with the Defense Logistics Agency’s nine Defense Contract

             ‘Because certain negative GlDs have multiple causes. the total dollar value of the causes for negative
             LIDS is greater than the dollar totals for the 84 sampled balances.



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                         5235940




                         Administration Services Regions (JXXSR), which administer contracts for
                         the military services. In general, the former are responsible for award-
                         ing the contracts, while the latter are responsible for making the pay-
                         ments and recovering money from contractors in the event of an
                         overpayment. The DCASR provides the information on payment and col-
                         lection transactions to the subordinate command, which enters the data
                         into its contract accounting system. Both entities are responsible for
                         insuring that the (1) amounts paid to contractors do not exceed the
                         amounts obligated in the contracts and (2) payments are charged to the
                         correct appropriations. While both activities are responsible for insuring
                         that these payments are made and recorded correctly, the major
                         subordinate commands are ultimately accountable for correcting the
                         negative ums.


                         The objectives of our work were to review the Army’s outstanding nega-
Objectives, Scope, and   tive ums related to supply and equipment inventory purchases to deter-
Methodology              mine (1) the magnitude of negative LUX on the Army Materiel
                         Command’s records, (2) the procedures used to monitor and report them
                         to senior Army officials, and (3) their causes. To respond to the Subcom-
                         mittee’s January 1990 request, we relied on our follow-up work of the
                         Army Materiel Command’s negative unliquidated obligations. We con-
                         ducted our work at the headquarters of the Army Materiel Command
                         and the Defense Logistics Agency, both located in Alexandria, Virginia.
                         Appendix I contains more detailed information on our objectives, scope,
                         and methodology.

                         We performed our work in accordance with generally accepted govern-
                         ment auditing standards. The Department of Defense provided written
                         comments on a draft of this report. These comments are included in full
                         in appendix III.


                         The major subordinate commands are not promptly correcting negative
Negative UIDs Are        LXX+.At September 30, 1989, the six subordinate commands had about
Not Reported and         4,500 negative 11~)balances totaling about $328 million. They did not
Corrected                have reports that provided managers with information on the age of
                         negative IUE. However, our analysis of 84 negative balances at the two
                         subordinate commands we visited showed that 47 of the negative bal-
                         ances (56 percent) were over 6 months old. Action to correct negative
                         ru)s is slow because the major subordinate commands (1) have problems
                         in obtaining the information they need from the DCASRS to reconcile the
                         negative IUS and (2) do not always follow up on outstanding negative


                         Page 3                                     GAO/AFMD-90-41   Army Negative   UIh
                           5235940




                           uu3s in a timely manner. As a result, related overpayments to contrac-
                           tors and processing errors are not resolved in a timely manner.


Negative ULx)s Are Not     Although Army Regulation 37-l on Army Accounting Guidance requires
                           the major subordinate commands to age negative UIL%,we found that
Aged                       they do not produce reports that show the age of their negative UID bal-
                           ances. The use of such aging reports is one method of determining if neg-
                           ative uux are being promptly resolved. However, because the
                           subordinate commands were not producing aging reports, they did not
                           know how long the negative balances had been outstanding.

                           Information provided to us at the two subordinate commands we visited
                           showed they had 1,483 negative UID balances totaling about $272 mil-
                           lion. Our analysis showed that 47 of the 84 sampled balances were over
                           6 months old. These 47 balances represented $23 million (47 percent) of
                           the $49 million in negative UIDSwe reviewed. Of the 47 balances over 6
                           months old, 40 balances totaling $19.4 million were more than 1 year
                           old. The results of this aging analysis demonstrate the need to produce
                           aging reports as a means for closely monitoring negative UID balances.

                           Army officials acknowledged that negative UIDS were not being aged as
                           required by the Army regulation and that they did not know how long
                           the balances had been outstanding. According to the officials, their
                           accounting system currently does not have the capability to age nega-
                           tive balances. The officials told us, however, that they are in the process
                           of planning a change to their accounting system which will age negative
                           UILI balances. They could not tell us when the change would be
                           implemented.


Requests to Reconcile      Negative ULDSshould act as internal control flags to alert the major
                           subordinate commands of overpayments or errors. Corrective action on
Negative UIx)s Do Not      the negative uw balances requires cooperation and coordination with
Receive Prompt Responses   the DCMRS, who usually maintain the official contract files and are
                           responsible for paying the contractor for materials and supplies
                           provided.

                           For 43 of the 47 negative balances over 6 months old, we found that the
                           DcASRs had been asked to (1) provide the information needed to deter-
                           mine the cause of the negative I:W or (2) take corrective action once the
                           cause of the problem was identified. However, the DUSKS did not always
                           take timely action to resolve the negative IIIDS. For example, during the


                           Page 4                                      GAO/AFMLb9O-41   Army Negative   IJUk
5235940




period from July 1987 through July 1989, a subordinate command
asked a DC4SR four times to research and correct various negative uux
totaling over $800,000 on a contract. According to the subordinate com-
mand’s notification letters, the $800,000 represented overpayments
resulting from contract modifications which reduced the price of items
below the amounts already paid the contractor. However, as of October
1989-over 2 years after the first notification letter was sent-the
DCASR still had not responded.


We spoke about the $800,000 balance with a DCASR official who
acknowledged that no response had been sent and could not explain
why this had happened. The official agreed to resolve the balances after
we brought the matter to her attention in August 1989. Two months
later, however, an accounting official told us the contract was still being
reconciled. In this case, over 2 years had elapsed during which the con-
tractor may have been holding $800,000 of the government’s money
interest free.

For another contract! a subordinate command requested in July 1988
that a LMXSR resolve a $3.5 million negative UU) whose cause could not be
determined. As of August 1989, over 1 year later, there was still no
response to this request and the negative balance had increased to over
$12 million. A OCASR accounting official told us he was waiting for the
contract to be completed in early 1990 before starting the reconciliation.

The DCMRS’ slow responses to requests for reconciliation hinder the
subordinate commands’ ability to promptly resolve negative LJU)S.They
also significantly increase the amount of time it takes the DCASRS to iden-
tify and collect overpayments and resolve accounting errors.

Defense Logistics Agency accounting officials acknowledged that the
DCASRs share the responsibility  for ensuring that negative uu)s, as well
as other contract payment problems, are promptly resolved. To address
these problems the Defense Logistics Agency is redesigning the IXASRS’
automated services system to improve their overall contract payment
process. Defense Logistics Agency accounting officials stated that they
expect full implementation of the redesigned system to improve the
quality and accuracy of DCASR accounting data for contract payments.
Officials also told us that one goal of the redesign is to reduce the num-
ber of negative tito balances. Origim!ly, this redesign effort was to be
completed in 1982. However. scheduled implementation has slipped
about 8 years (to late 1990 ) for various reasons, including problems in
redesigning the system and higher priority projects within the Agency.


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Outstanding Negative       The subordinate commands do not have adequate follow-up procedures
                           to ensure that negative u1l0.sare resolved when the DCASR does not
UIDs Are Not Followed Up   respond to the subordinate commands’ notification letters in a timely
                           manner. Army Regulation 37-l on Army Accounting Guidance requires
                           that immediate corrective action be taken to resolve negative UID bal-
                           ances However, we found that in many cases the subordinate com-
                           mands do not initiate follow-up actions for a year or more to resolve
                           outstanding negative balances if the DCASRS do not respond to the notifi-
                           cation letters.

                           Our analysis showed that over 6 months to more than 2 years elapsed
                           before follow-up actions were taken for 43 of the 47 balances. The 43
                           balances represented about one-half of the $23 million of negative UIDS
                           over 6 months old. Neither we nor the subordinate command accounting
                           officials could determine why the DCASR had not been notified for the
                           other four balances, which were all over 1 year old.

                           Follow-up action is needed to ensure the timely collection of overpay-
                           ments or the correction of processing errors. For example, we found that
                           a $2.8 million overpayment had been outstanding for more than a year
                           as of October 1988. However, the subordinate command had not fol-
                           lowed up with the DCLSR since February 1988 to determine why the pay-
                           ment had not been collected. After we brought this to the attention of
                           DCASR officials, the $2.8 million overpayment was collected.


                           In addition, during our detailed review of the 84 sample balances, a
                           subordinate command accounting official advised us of two other con-
                           tracts that were not part of our sample which had 124 negative UID bal-
                           ances totaling about $9 million. According to the official, the 124
                           balances were overpayments caused by contract changes which reduced
                           the amount owed the contractors. The official told us that, because of
                           the complexity of the contracts, the subordinate command was waiting
                           until the contracts were completed before trying to recover the overpay-
                           ments. Such action does not conform to Army Regulation 37-l) which
                           requires immediate corrective action to resolve negative IUIS.

                           Timely follow-up on the negative [JIB caused by overpayments is essen-
                           tial to ensure the efficient use of government funds. Subordinate com-
                           mand accounting supervisors informed us that negative ITUX (1) tie up
                           Army funds that could be used to meet other Army requirements and
                           (2) indicate that millions of dollars in overpayments may have been




                           Page 6                                      GAO/AFMD-W-41   Army Negative   UWs
                         B-235940




                         made to contractors. However, subordinate command accounting offi-
                         cials acknowledged that they did not always send out follow-up letters
                         in a timely manner.

                         Negative ULDSare internal control “red flags” that should alert manag-
                         ers of problems. Because negative UIDS can indicate overpayments to
                         contractors or erroneously recorded transactions, we believe more
                         emphasis needs to be placed on following up on them.


                         Senior Army officials did not know about the magnitude of the negative
Negative UIQs Are        IUD problem because the Army does not require subordinate commands
Not Identified in        to report information on negative UIDSseparately. When the subordinate
Reports to Senior        commands prepare accounting reports, negative and positive ULDSare
                         combined to arrive at a net figure. For example, if the subordinate com-
Army Officials           mand had a $5 million negative um balance and a $15 million positive
                         IYD balance, it would net the two balances and report a $10 million posi-
                         tive LIID balance. As a result, the $5 million negative UU) would not be
                         disclosed in reports to senior Army officials.

                         Until we provided Army Materiel Command officials with the total num-
                         ber and dollar value of negative UIDSwe obtained from each of the six
                         subordinate commands, the officials did not know that their records
                         included about 4,500 negative um balances totaling about $328 million.
                         They believed negative UID balances were being promptly resolved dur-
                         ing the routine reviews the subordinate commands perform continu-
                         ously throughout the year. We believe the previously discussed lack of
                         emphasis given to correcting negative UIDSstems, in part, from Army
                         officials not being aware of the problem.

                         Army Materiel Command officials need information on negative ITIDSto
                         monitor the subordinate commands’ performance and take corrective
                         action when necessary. These problems may not be resolved if specific
                         information on the magnitude and causes of the negative I’UX is not
                         reported to the Army Materiel Command.


                         Since the subordinate commands did not maintain statistics on the
Causes of Negative       causes of their negative LUDS,we asked their accounting supervisors to
UID Balances             identify the primary causes. Most of their responses could be grouped
                         into two categories:

                     l   the contractor was paid too much or


                         Page 7                                     GAO/AFMD-90-41   Army Negative   CXDs
                                            Is235940




                                        l   the subordinate commands or DCASRS inaccurately or incompletely
                                            processed information (for example, charging the payment to the wrong
                                            item on the contract or not updating contract modifications).

                                            These observations, which were also confirmed by a top Defense Logis-
                                            tics Agency official, are consistent with the results of our analysis of the
                                            84 negative UIB balances in our sample. Our results are summarized in
                                            table 1.

Table 1: Causes of Sampled   Negative
ULOS                                        Dollars    in millions
                                            Cause                                                        Number of balances              Dollar value
                                            Contractor      was overpaid                                                   39                        $7.6
                                            Processina      error                                                          24                        23 8
                                            Unknown                                                                        24                         18.0
                                            Other causesa                                                                   4                       27
                                            Totalb                                                                             91                $52.1
                                            aNegatrve ULOs classrfred as other causes occurred because the contract (1) was affected by fluctua
                                            trons In the foreign currency rates, (2) had an accounting classifrcatron change, or (3) was affected by
                                            other sundry causes
                                            bThe totals for balances and dollar values In the table are greater than the totals for the 84 sampled
                                            balances because certarn negatrve ULOs have multrple causes


                                            The unknown category in table 1 refers to negative LJIDS for which
                                            neither we nor the subordinate commands could readily identify the
                                            cause due to the lack of adequate documentation needed to perform the
                                            reconciliation. Our detailed analysis showed that balances in the
                                            unknown category had been outstanding for periods ranging from
                                            3 months to over 1 year. Until the reason for the unknown negative bal-
                                            ances can be determined, corrective action cannot be taken. We did
                                            determine the causes for the remaining 67 negative IMIS. The two major
                                            causes are discussed below.


Negative UIDs Caused by                     When a DC4SR pays a contractor too much money, a negative IQI will
                                            occur if the amount disbursed is greater than the amount obligated. As
Overpayments                                shown in table 1, we found that overpayments to contractors valued at
                                            $7.6 million were the cause of 39 negative uu3s in our sample.

                                            Defense Logistics Agency and subordinate command accounting officials
                                            told us there are three major reasons why DCASRS overpay contractors.
                                            The following discussion illustrates each of these reasons with examples
                                            we found in our sample:



                                            Page 8                                                         GAO/AFMD90-41        Army Negative        UIDs
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                               B-235940




                           l   Contract modifications sometimes reduce the price of items below the
                               amount already paid the contractor under the original terms of the con-
                               tract. In these instances, the DCASR is responsible for collecting the over-
                               payment. In the case of one negative um, an April 1987 contract
                               modification reduced the price of an item from $122,800 to $118,598.
                               Because the contractor received payment for 59 of the items at the origi-
                               nal price, the contract change resulted in an overpayment of $247,918.
                           l   Duplicate payments are sometimes made for the same invoice. Our anal-
                               ysis of a contract for another negative uu3 showed that the DCXR mis-
                               takenly paid a contractor’s invoice twice in May 1988, causing an
                               overpayment of $307,326. However, the subordinate command did not
                               identify the duplicate payment until April 1989 during a negative uro
                               reconciliation.
                           l   DCASRS sometimes pay invoices without considering the amount of prog-
                               ress payments already made. Our analysis of a contract for another neg-
                               ative UILI showed that a DCASR overpaid a contractor $81,000 because
                               progress payments were not considered. In this instance, the amount
                               paid to the contractor should have been reduced by the amount of prog-
                               ress payments. Although the LXXSR was notified of the overpayment in
                               May 1985, it did not collect the overpayment. Because the contractor
                               filed for bankruptcy in July 1986, it is unclear how much of the $81,000
                               the government will collect.

                               Because overpayments tie up funds that could otherwise be used to
                               meet Army requirements, their prompt identification and collection is
                               important.” In addition, overpayments can be interest-free loans to con-
                               tractors when prompt collection is not made or may be lost if, as previ-
                               ously discussed, the contractor files for bankruptcy. The adverse effects
                               of overpayments, however, can be minimized if the overpayments are
                               identified and recouped promptly.


Negative UI.Os Caused by       Negative uux can also occur if obligation, payment, or collection data
                               are inaccurately or incompletely processed. These errors can range from
Processing Errors              erroneous charges to the wrong item in the contract to not recording
                               contract modifications. As table 1 illustrates, processing errors were the
                               cause for 24 negative UILE in our sample valued at $23.8 million. These
                               processing errors distort accounting reports that Army officials use to
                               make management decisions.

                               “As stated in our prior report cited in footnote 1, disbursing officers responsible for making overpay-
                               ments to contractors are personally liable for amounts not recovered unless the Comptroller General
                               relieves them of liability.



                               Page 9                                                       GAO/AFMD90-41       Army Negative    UIQs
       I             B-235940




                     For example, our review of a contract that contained five negative LNQ
                     balances totaling $2 million showed that the XASR had recorded pay-
                     ments against items that had previously been deleted from the contract.
                     According to the subordinate command accounting official, the lXX3R
                     may have erroneously recorded the contract change against another
                     item.

                     Subordinate command accounting officials stated that processing errors
                     can cause significant differences between the data in the DCASR and
                     subordinate command accounting records. They also noted that it is dif-
                     ficult and time-consuming to identify the causes of the differences and
                     to correct negative UID balances recorded in the subordinate command
                     records. Our detailed review of one contract supported this statement.
                     Although the contract had only a $145,000 negative LID balance, we
                     found a difference of about $12 million between the recorded obligated
                     balances on the subordinate command and LXXSR accounting records. See
                     appendix II for our detailed analysis.


The Army Has Not     in its Federal Managers’ Financial Integrity Act reports. On August 15,
Reported Negative    1988, the Office of Management and Budget provided guidance to agen-
UlDs as a Material   ties on determining whether material weaknesses and system noncon-
                     formances exist. If a material weakness or system nonconformance is
Internal Control     found, it should be reported in an agency’s Federal Managers’ Financial
Weakness             Integrity Act report, Specifically, a material weakness or nonconform-
                     ance exists when an actual loss or material misstatement of either
                     $10 million or 5 percent of a budget line item occurs. As of
                     September 30, 1989, the six subordinate commands’ accounting records
                     contained about $328 million of negative uro balances, indicating a
                     material internal control weakness.

                     The Federal Managers’ Financial Integrity Act of 1982 (31 U.S.C. 3512)
                     requires that each agency establish internal accounting and administra-
                     tive controls in accordance with standards prescribed by the Comptrol-
                     ler General. The act further requires a separate report on whether the
                     agency’s accounting system conforms to the accounting principles, stan-
                     dards, and related requirements established by the Comptroller General.

                     Although the Army has not reported negative IWS in its Federal Manag-
                     ers’ Financial Integrity Act reports, Army Materiel Command accounting
                     officials recognize DCASR payment problems! including those that result
                     in negative LXX. Officials believe these problems severely restrict the


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__~
              B-235940




              subordinate commands’ ability to maintain accurate accounting records.
              The Army Mat,eriel Command has recommended, in a July 1989 memo-
              randum to the Director, Army Accounting and Finance, that the Army
              report the DC~SR payment problems as a material weakness in its Federal
              Managers’ Financial Integrity Act report. According to Army Materiel
              Command officials, this suggestion is being reviewed by the Army’s
              Director of Accounting and Finance.

              Since 1985, the Defense Logistics Agency has reported material weak-
              nesses in the LKMRS disbursing of funds to contractors, including dupli-
              cate and erroneous payments, in its Federal Managers’ Financial
              Integrity Act reports. The Defense Logistics Agency is taking corrective
              action LOimprove the DCASRS’ processing of contractor payments by
              redesigning the entire contract payment and reporting process. As dis-
              cussed previously, this effort has experienced serious delays of about 8
              years.


              Negative I’WS are red flags that indicate a breakdown in internal con-
Conclusions   trols. Reconciling negative I’WS is important because they can be caused
              by overpayments to contractors and can result in inaccurate accounting
              reports on the budget execution for individual appropriations. Because
              overpayments tie up funds that could otherwise be used to meet Army
              requirements, their prompt identification and collection is important.
              Overpayments can be interest-free loans to contractors when prompt
              collection is not made or may be lost in the case of contractor
              bankruptcy.

              Since the subordinate commands and the DCASRS have a shared responsi-
              bility for accounting for purchases of supplies and equipment that have
              resulted in the negative I:WS. resolving the negative IJID problem will
              require a joint effort. Concentrating initial resolution efforts on over-
              payments to contractors would most immediately benefit the govern-
              ment because it would result in the recovery of government funds.

              The subordinate commands do not have summary information on nega-
              tive IUS. l’ntil Army officials receive this type of information, they will
              not have the management indicators needed to correct negative IUX.
              Also. the Arm\ has not placed sufficient management emphasis on the
              netld to follow existing regulations that require immediate corrective
              action on negative IX%.




              Pag? 11                                     GAO~AFMD-90-U   Army Negative   UUk
                      B-235940




                      We believe that the negative uu3 balances we have reported are a mate-
                      rial internal control weakness in the Army’s accounting system. How-
                      ever, the weakness has not been reported in the Army’s Federal
                      Managers’ Financial Integrity Act reports to the Secretary of Defense.


                      We recommend that the Secretary of Defense direct the Secretary of the
Recommendations       Army and the Defense Logistics Agency Director to establish policies
                      and procedures to ensure that adequate coordination and cooperation
                      exists between the subordinate commands and DCASRS to

                  l   resolve negative uu3s already recorded in the subordinate commands’
                      accounting records and collect any overpayments made to contractors
                      and
                  l   determine the control weaknesses that have caused negative ULOSand
                      institute controls to correct these problems with the intent of eliminat-
                      ing negative IrLL)s.

                      We also recommend that the Secretary of the Army

                  l   direct the subordinate commands to (1) comply with existing regulations
                      on aging negative balances and taking immediate action to correct nega-
                      tive UIOSand (2) report summary level data on the total amount and age
                      of negative ULI)Sto the Army Materiel Command on a quarterly basis
                      and
                  l   identify negative UPS as a material weakness in the Army’s annual Fed-
                      eral Managers’ Financial Integrity Act report to the Secretary of Defense
                      until this weakness is corrected.



Agency Comments       pal Deputy Comptroller agreed that the reported conditions reflect a
                      systemic DOD problem related to payments being made for all DOD compo-
                      nents. He stated that action will be taken as part of the DOD Corporate
                      Information Management effort to address this problem.




                      Page 12                                      GAO/AFMIMO41   Army Negative   uIl)s
__   -~~
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           We are sending copies of this report to the Secretaries of Defense and
           the Army, the Director of the Defense Logistics Agency, and other inter-
           ested parties. We will also make copies available to others upon request.

           Please contact me at (202) 275-9507 if you or your staff have any ques-
           tions concerning this report. Other major contributors to this report are
           listed in appendix IV.

           Sincerely yours,




           Jeffrey C. Steinhoff
           Director, Financial Management
             Systems and Audit Oversight




           Page 13                                    GAO/AFMD-90-41   Army Negative   UIDs
Contents


Letter
Appendix I                                                                                              16
Objectives, Scope, and
Methodology
Appendix II
Processing Errors
Cause Differences in
Agency Records
Appendix III
Comments From the
Department of
Defense
Appendix IV                                                                                             29
Major Contributors to
This Report
Tables                   Table 1: Causes of Sampled Negative Uu)s                                        8
                         Table II. 1: Differences Between Subordinate Command                           18
                             and DCASR Balances




                         Abbreviations

                         DCASR     Defense Contract Administration   Services Region
                         DOD       Department of Defense
                         IJAIl     unliquidated obligation


                         Page 14                                     GAO/AFMD-SO-41   Army Negative   UIQs
Page 15   GAO, AFMD-SO-41 Army Negative   1JlDs
ApI)cbndis I
--

Objectives, Scope,and Methodology


               As stated earlier in this report, the objectives of our work were to
               review the Army’s outstanding negative UIDS related to supply and
               equipment inventory purchases to determine (1) the magnitude of nega-
               tive LJIDSon the Army Materiel Command’s records, (2) the procedures
               used to monitor and report them to senior Army officials, and (3) their
               causes.

               We concentrated on the Army Material Command’s major subordinate
               commands because they have the primary responsibility for buying sup-
               plies and equipment for the Army. We analyzed negative CUB in detail
               at two of the six subordinate commands: the Communications and Elec-
               tronics Command, Fort Monmouth, New Jersey, and the Tank and Auto-
               motive Command, Warren, Michigan. Since the six subordinate
               commands operate similarly, we judgmentally selected these two for
               detailed review and believe their negative UU> problems are generally
               representative of the other four. We met with responsible officials at the
               two subordinate commands and reviewed pertinent accounting regula-
               tions, policies, accounting reports, and internal studies and evaluations.

               To determine the magnitude of the negative LIDS, we asked the six
               subordinate commands to provide us with the number and dollar value
               of negative ums recorded in their accounting records as of Septem-
               ber 30, 1989. In addition, at the two subordinate commands selected for
               detailed review, we asked officials to generate, from their automated
               systems, computer listings to determine the total number and dollar
               value of negative UIDScontained in their accounting records.

               At the two subordinate commands, we judgmentally selected 84 negative
               UID balances for detailed review from 1,483 negative IJID balances that
               were recorded in reports between August 1988 and July 1989. We
               selected the 84 balances based on whether (1) the dollar value of an
               individual item in a contract was large or (2) the total contract UILI bal-
               ance was negative. The 84 negative LJIDbalances accounted for about
               $49 million (18 percent) of the two subordinate commands’ total nega-
               tive LID balances of about $272 million.

               To determine if negative UIDSwere promptly corrected at the two
               subordinate commands selected for detailed review, we compared the
               date of special computer listings of negative ITIDSto the last transaction
               date recorded in the accounting records or other contract data to deter-
               mine how long the negative balances had remained outstanding. Since
               the subordinate commands did not have reports showing the age of their



               Page 16                                     GAO,/AFMD90-41   Army Negative   UILk
Appendii   I
Objectives, Scope, and Methodology




negative ~UJ balances, it was not practical for us to review all 1,483 indi-
vidual account balances to determine their age. Therefore, we limited
our aging analysis to the 84 sampled balances.

We also discussed negative UKI reporting procedures with accounting
officials at the two subordinate commands and the Army Materiel Com-
mand to determine how information on negative ULI)Sis reported to
senior Army officials. In addition, we reviewed various reports which
contained obligation data the subordinate commands were required to
submit to the Army Materiel Command to ascertain if negative uu)s
were identified separately.

To determine why negative ULDbalances occurred, we interviewed
subordinate command and Defense Logistics Agency accounting supervi-
sors and reviewed pertinent contract files and other detailed transaction
records. We also analyzed in detail pertinent accounting transactions
and related source documents for one judgmentally selected contract to
test the accuracy of recorded balances.

We also reviewed the Army’s and Defense Logistics Agency’s Federal
Managers’ Financial Integrity Act’ reports for 1983 through 1988, which
contain information on internal control weaknesses and accounting sys-
tem deficiencies to determine if negative UIDS had been previously
reported.




’ Fcdcral agency accountmg systems must mclude internal controls that comply wth the Comptrollw
Gt~rwral‘s internal control standards and related requirements. such as the Treasury Financial ~lanual
and 0‘4IH circulars GAO’s Pohcg and Procedures Manual for Guidance of Federal Agencies contams
the prmcipks. standards. and related requirements to br observed by federal agencies



Page 17                                                     GAO/AFMD-SO-41      Army Negative   UIQs
ProcessingErrors CauseDifferences in
Agency Records

                                 To obtain a better understanding of the problems involved in correcting
                                 negative ULOScaused by processing errors, we judgmentally selected for
                                 detailed review a contract that had an overall negative UID balance of
                                 $145,000, the cause of which was unknown. Our detailed review of the
                                 contract confirmed what subordinate command officials told us about
                                 how the significant differences caused by processing errors make cor-
                                 recting negative UIDSa time-consuming effort. For example, although
                                 the contract had only a $145,000 negative urn balance, we found a dif-
                                 ference of about $12 million between the recorded obligated balances on
                                 the subordinate command and DC4SR accounting records. We also found
                                 that those records did not agree for 427 of the 449 obligation and pay-
                                 ment transactions reviewed. Because of missing records, incomplete
                                 data, and the number of errors, we could not completely reconcile the
                                 contract. Obtaining all the needed documentation to do so would have
                                 taken a significant amount of time. However, we did calculate the dollar
                                 value of the difference between the subordinate command and DCMR
                                 records for each of the 449 transactions we analyzed. Table II.1 shows
                                 the seven largest differences between those balances.

Table 11.1:Differences Between
Subordinate Command and DCASR    Subordinate   command                    DCASR                        Difference
Balances                         $6,842,268                            $X,708,926                      $1,133,342
                                 29,454                                 1,100,001                        1,070,547
                                 2.160,036                              1,642,568                           517,468
                                 27,620                                   345,694                           318.074
                                 121,320                                  418,680                           297,360
                                 292,806                                  585,672                           292,866
                                 227.192                                  489.230                           262.038


                                 A subordinate command accounting supervisor was not aware of the
                                 many errors in this contract and generally could not explain why they
                                 had occurred. The supervisor told us they had not reconciled the con-
                                 tract but agreed to do so after we informed them of the results of our
                                 analysis.




                                 Page 18                                     GAO/AFMD-90-41   Am~y Negative   UIDs
Comments From the Department of Defense


Note GA3 comments
supplementing those In the
report text appear at the
end of this appendix                          COMPTROLLER       OF THE    DEPARTMENT      OF DEFENSE

                                                            WASHINGTON,     DC 20301-l   100




                                                                                                    APR lo 1990

                             Mr.   Donald H. Chapin
                             Assistant    Comptroller    General
                             Accounting    and Financial
                                 Management Division
                             Washington,    D.C. 20548
                             Dear Mr. Chapin:
                                   This is the Department of Defense (DOD) response to the
                             General Accounting      Office (GAO) Draft Report,   "Financial
                             Management:    Army Records Contain Millions      of Dollars    in Negative
                             Unliquidated   Obligations,"    dated March 2, 1990 (GAO Code 903100)
                             OSD Case 8258.
                                   The DOD concurs with the findings      and recommendations     in the
                             report.    The Department agrees that the reported        conditions
                             reflect   a systemic    DOD problem related   to payments being made for
                             all DOD Components.       Action will  be taken as a part of the
                             Corporate   Information    Management effort    to cure this systemic
                             problem.
                                   The detailed       DOD comments on the report       findings    and
                             recommendations        are provided     in the enclosure.       The Department
                             appreciates     the opportunity       to comment on the draft       report  and
                             the GAO efforts        in helping   to identify    the problem of negative
                             unliquidated      obligations.
                                                                           Cordially,



                                                                     Donald B. Shycoff
                                                             Principal    Deputy Comptroller
                             Enclosure




                                  Page 19                                                      GAO;AFMD-SO-41   Army Negative   UKh
         Appendix III
         Comments    From the Department      of Defense




                      GAO DRAFT REPORT - DATED MARCH 2, 1990
                         GAO CODE 903100 - OSD CASE 8258
    "FINANCIAL      MANAGEMENT: ARMY RECORDSCONTAIN MILLIONS OF DOLLARS
                      IN NEGATIVE LJNLIQUIDATED OBLIGATIONS"
                                      *****

                                             FINDINGS
0      FINDING A: Backqround:                  Armv Procedures.              The GAO explained
that the Army has control                 procedures         to ensure that it does not
obligate     or spend more money than the Congress has appropriated.
According      to the GAO, the key features                      of these procedures             are
that (1) the Army incurs and records obligations                                for     one or more
appropriation         accounts when it enters                  into a contract,            (2) these
obligations        are reduced or "liquidated"                     in the Army accounting
records as payments are made, and (3) an unliquidated                                    balance for
a total     contract       price     indicates      the amount remaining                 to be spent
for that contract.               The GAO noted that since the amount paid
should always be equal to or less than the amount obligated,
unliquidated         obligation        balances     should not be negative.                    The GAO
observed that the Army Materiel                    Command has six major subordinate
commands, located             throughout       the United States,             through which it
purchases,       stocks,        and distributes         billions        of dollars         worth of
materiel.        The GAO further            noted that these Commands carry out
these tasks        for Army units,           other Military           Services,         and foreign
governments.          The GAO noted that the subordinate                        commands share
purchasing       responsibilities            with the Defense Logistics                    Agency's
nine Defense Contract              Administration            Services      Regions,        which
administer       contracts        for the Military             Services.        The GAO observed
that,    generally,         the Army commands are responsible                       for awarding
the contracts,          while the Defense Contract                   Administration           Services
Regions are responsible                for making the actual               payments and
recovering      money from contractors                in the event of overpayments.
The GAO further           described       the contract           administrator’s           role as
providing      the information            on payment and collection                   transactions
to the subordinate              command level,       which enters the data into its
contract     accounting          system.       The GAO emphasized that both entities
are responsible           for insuring         that the (1) amounts paid to
contractors        do not exceed the amounts obligated                        in the contracts
and (2) payments are charged to the correct                            appropriations.               The
GAO pointed        out that while both activities                     are responsible            for
insuring     that these payments are made and recorded correctly,                                     the
major subordinate             commands are ultimately                accountable         for
correcting       the negative          unliquidated         obligations.

DOD POSITION:           Concur.
0     FINDING B: Negative          Unliquidated   Obliqations     Are Not Aaed.
The GAO observed that Army Regulation             37-1, Army Accounting
Guidance,      requires     the major subordinate     commands to age negative
unliquidated       obligations.      The GAO found, however, that the major
subordinate       commands do not produce reports          that show the age of
their    negative     unliquidated     obligation  balances.      The GAO
explained      that the use of such aging reports            is one method of




          Page20                                                        GAO/AFMD-90-41ArmyNegativeLJIl)s
        Appendix III
        Comments From the Department        of Defense




determining        if negative        unliquidated         obligations        are   being
promptly     resolved.          The GAO indicated            that,    since the subordinate
commands were not producing                  aging reports,         they did not know how
long the negative            balances had been outstanding.                     The GAO
evaluated      the negative          unliquidated        obligations        at two subordinate
commands and found 1,483 negative                     unliquidated         obligation        balances
totaling     about $272 million.                The GAO analysis           showed that 47 of
the 84 sampled balances were over 6 months old.                               The GAO further
found that these 47 balances                  represented         $23 million        (47 percent)
of the $49 million            in negative        unliquidated         obligations         reviewed.
The GAO calculated            that 40 balances           totaling       $19.4 million         of the
47 balances were over one year old.                        The GAO concluded            that the
analysis     demonstrates          the need to produce aging reports                      as a means
for closely        monitoring        negative     unliquidated         obligations.
According     to the GAO, Army officials                   acknowledged         that negative
unliquidated         obligations        were not being aged, as required                     by the
Army regulation,           and that they did know how long the balances                           had
been outstanding.             The GAO explained            that Army officials             stated
that their      accounting        system currently            does not have the
capability       to age negative           balances.         The GAO further          explained
these same officials             stated that they are in the process of
planning     a change to the accounting                  system, which will            age
negative     unliquidated         obligation        balances.        According        to the GAO,
however, these officials                could not estimate           when the change would
be implemented.
DOD POSITION:      Concur.    The Department               agrees     that failure  to
age negative    balances   limits  the ability                of    management to take
corrective   actions.
0      FINDING C: Requests to Reconcile                    Neuative      Unliauidated
Obliqations       Do Not Receive Prompt Responses.                     The GAO reported
that negative       unliquidated          obligations        should act as internal
control     flags to alert          the major subordinate             commands of
overpayments       or errors.          The GAO pointed          out that corrective
action    on the negative           unliquidated        obligation      balances      requires
cooperation       and coordination           with the Defense Contract
Administration         Service Regions --(1)            where the official          contract
files    are usually       maintained        and (2) which are responsible                 for
paying the contractor             for materials         and supplies       provided.         The
GAO found that,         for 43 of the 47 negative                 balances over 6 months
old, the Defense Contract                Administration         Services     Regions had been
asked to (1) provide            the infbrmation          needed to determine           the cause
of the negative         unliquidated         obligation       or (2) take corrective
action    once the cause of the problem was identified.                            The GAO
learned that the contract                administrators         did not always take
timely    action     to resolve        the negative        unliquidated       obligations.
The GAO cited an example where a subordinate                          command asked a
contract      administrator         four times during a 2-year period                  to
research and correct            various      negative      unliquidated       obligations
totaling      over $800,000 on a contract.                   According     to the GAO, the
Army records indicated              that the $800,000 represented                overpayments
resulting      from contract          modifications,         which reduced the price of
the items below the amounts already                     paid to the contractor.                The




         Page 21                                                    GAO;AFMD-90-41      Army Negative   ULb
                        Appendix III
                        Comments From the Department         of Defense




                GAO noted that two years later                    the Defense Contract             Services
                Administration           Region still       had not responded.                The GAO indicated
                that the Defense Contract                 Service Administration               Region officials
                could not explain            why the response had not been prepared and sent.
                The GAO concluded            the slow responses to request for reconciliation
                by the Defense Contract               Administration            Service Regions hinder            the
                subordinate       commands' ability             to resolve         negative     unliquidated
                obligations       promptly.         The GAO also noted that this also
                significantly          increases      the amount of time it takes the contract
                administrators           to identify       and collect         overpayments        and resolve
                accounting       errors.        According       to the GAO, Defense Logistics                   Agency
                accounting       officials        acknowledged         that the Defense Contract
                Administration           Service Regions share the responsibility                        for
                ensuring      that the negative            unliquidated          obligations,        as well as
                other contract           payment problems,            are promptly        resolved.        The
                Defense Logistics            Agency accounting            officials       advised the GAO that
                the Defense Contract              Administration          Service automated services
                systems is being redesigned                 to address these problems and to
                improve the regions'              overall     contract        payment process.           The GAO
                stated that full            implementation          is expected to improve the quality
                and accuracy of the system of accounting                           data for contract
                payments.        The GAO observed,            however, that this redesign                  effort
                was to be completed             in 1982, but scheduled                implementation         has
                slipped      about 8 years because of problems in redesigning                              the
                system --to late 1990.
                DOD POSITION:         Concur.     The Department agrees that the Defense
                Logistics    Agency needs to respond promptly                 to requests       from the
                Military    Services      to reconcile      negative     unliquidated        obligations.
                However, the statement          that the redesign         effort     has slipped
See comment 1   about 8 years because of problems in redesigning                      the system is
                not completely        accurate.      A slippage      occurred     in various       areas
                subsequent     to redesign.        The Functional        Description       for redesign
                was completed in 1985.            The slippage       in programming the
                redesigned     system occurred         because of (1) higher priority
                projects    within     the agency (such as, establishment                of the
                Defense Logistics         Agency Finance Center,          the establishment           of
                the Defense Contract          Management Command), (2) modeling                 studies
                to ascertain       the best technology        approach (main frame,
                distributed      processing,      etc.)    and (3) mandated changes (such as
                Prompt Payment Act and cash management).
                0      FINDING D: Outstandinq            Neqative     Unliquidated       Oblisations        Are
                Not Followed Up On. The GAO found that the subordinated                             commands
                do not have adequate followup                procedures     to ensure that negative
                unliquidated      obligations       are resolved        when the Defense Contract
                Administration        Service Region does not respond to the subordinate
                command notification          letters      in a timely manner.           The GAO observed
                that Army Regulation          37-1, Army Accounting             Guidance,     requires      that
                immediate corrective          action     be taken to resolve          negative
                unliquidated      obligation       balances.       The GAO found, however, that in
                many cases the subordinate             commands do not initiate             followup
                action      for a year or more to resolve             outstanding      negative      balances
                -- if the contract          administrators        do not respond to the
                notification      letters.        The GAO calculated          that over 6 months to


                                                                                                                                 J


                         Page 22                                                     GAO/AFMD-90-41      Army Negative   ull)s
       Appendix III
       Comments From the Department       of Defense




                                                                                                          1


more than 2 years elapsed before followup                       action     were taken for 43
of the 47 balances over 6 months old.                       The GAO estimated        that
these 43 negative           balances      represented       about one half of the $23
million     of negative        unliquidated        obligations       over 6 months old.
The GAO emphasized that followup                   action     is needed to ensure timely
collection     of overpayments            or the correction          of processing      errors.
The GAO cited an example where, as of October 1988, a S2.8 million
overpayment     had been outstanding               for more than a year and the
subordinate     command had not followed                 up with the contract
administrator       for 8 months as to why the overpayment                      had not been
collected.      The GAO concluded              that negative       unliquidated
obligations     are internal           control     "red flags"       that should alert
managers of problems.               The GAO asserted         that because negative
unliquidated      obligations          indicate      overpayments       to contractors      or
erroneously     recorded transactions,                more emphasis needs to be
placed on following            up on them.

DOD POSITION:    Concur.           The Department agrees that negative
unliquidated  obligations           indicate  problems with the
transactions.
0      FINDING E: Neqative             Unlisuidated       Obligations       Are Not
Identified       In Reports To Senior Army Officials.                      The GAO deduced
that senior Armv officials                did not know about the magnitude of the
negative     unliquidated         obligation       problems because the Army does
not require        subordinate       commands to report          information       on negative
unliquidated         obligations       separately.        The GAO explained          that,  when
the subordinate           commands prepare accounting              reports,     negative    and
positive     unliquidated         obligations       are combined to arrive             at a net
figure.      The GAO pointed           out that the Army Materiel              Command
officials     were not aware of the total                 number and dollar         value of
negative     unliquidated         obligations       at each of its six subordinate
commands until          the GAO provided         information       that their      records
included     about      4,500    negative     unliquidated       obligation      balances
totaling     about $328 million.              The GAO concluded          that Army Materiel
Command officials            need information         on negative      unliquidated
obligations        in order to monitor           subordinate       commands' performance
and to take corrective             action     when necessary.          The GAO further
concluded      that these problems may not be resolved                      if specific
information       on the magnitude and causes of the negative
unliquidated         obligations       are not reported        to the Army Materiel
Command.
DOD POSITION:      Concur.        The Department agrees that information
on negative   unliquidated         obligations  needs to be reported   to
senior Army officials.
0     FINDING F: Neqative            Unliquidated       Obliqations      Caused by
Overpayments.         The GAO learned that,            when a Defense Contract
Administration        Services     Region pays a contractor            too much money, a
negative     unliquidated       obligation      will    occur if the amount
disbursed      is greater     than the amount obligated.               The GAO found
that overpayments         to contractors        valued at $7.6 million         were the
cause of 39 negative          unliquidated        obligations       in the sample.




        Page 23                                                 GAO/AFMD-SO-41     Army Negative   UIDs
        Appendix III
        Comments    From the Department    of Defense




According      to the GAO, there are three major reasons                     why Contract
Administration       Services Regions overpay contractors,                    as follows:
            - contract       modifications decrease the contract  price                    and
related     obligation      below the amount already  paid to the
contractor;
           -    duplicate      payments     are made for       the same invoice:          and
         - progress     payments made to contractors                     before work is
actually  completed are not considered    when the                    final    payment is
made to the contractor.
            The GAO concluded    that,   because overpayments      tie up funds
that could otherwise       be used to meet Army requirements,           their
prompt identification       and collection     is important.      In addition,
the GAO concluded      that the overpayments      can serve as interest-free
loans to contractors.         The GAO further    concluded    that the adverse
effect     of overpayments    can be minimized,     if the overpayments        are
identified     and recouped promptly       -- however, under current
procedures,     years can pass before overpayments         are identified       and
collected.
DOD POSITION:     Concur.    The Department agrees that overpayments
to contractors    are one of the causes of negative    unliquidated
obligations    and that aggressive   action  needs to be taken to
recover contractor     overpayments  when identified.
0     FINDING G: Neaative           Unliouidated         Oblisations       Caused By
Processina        Errors.    The GAO observed that negative                  unliquidated
obligations         can also occur if obligation,              payment, or collection
data is inaccurately          or incompletely          transmitted       to the Army
subordinate         command accounting      offices.         The GAO explained             that
these errors         can range from erroneous            charges to the wrong item in
the contract         to not recording      contract       modifications.           The GAO
found that processing          errors     caused 24 negative            unliquidated
obligations        valued at $23.8 million           in the sample.           The GAO
pointed     out that these processing            errors      distort     accounting
reports     that Army officials         use to make management decisions.
According       to the GAO, subordinated          command accounting              officials
stated that processing           errors    can cause significant              differences
between the data in the Defense Contract                     Administration           Services
Region and subordinate           command accounting            records.       The GAO
reported      these officials       also noted that it is difficult                     and time-
consuming to identify          the causes of the differences                  and to correct
negative      unliquidated     obligation      balances        recorded in the
subordinate        command records.        The GAO cited a review of one
contract,      which had a $145,000 negative               unliquidated        obligation
balance -- but the GAO found a difference                     of about $12 million
between the recorded obligation               balances on the subordinate
command and the Defense Contract               Administration           Services       Region
accounting        records.




        Page 24                                                   GAO/AF’MD-W-41Army Negative UIQs
        Appendix III
        Comments From the Department             of Defense




DOD POSITION:         Concur.    Processing    errors     are a systemic  problem
related     to the current      payment process for all DOD Components,
including      the Army.      The DOD Corporate      Information    Management
effort    will    address the systemic      problems related       to DOD
centralized       payments.
 0      FINDING PI: The Army Has Not ReDorted Neoative                                    Unliauidated
 Obliqations        As A Material             Internal        Control      Weakness.           The GAO
 explained       that,      since negative            unliquidated           obligations          generally
 should not occur,              the magnitude and age of the Army negative
 unliquidated         obligations           it found indicates               that the Army Materiel
 Command subordinate               commands have a material                     internal       control
 weakness-- which was not disclosed                         in the Army Federal Managers'
 Financial       Integrity         Act   Report to the Secretary                     of Defense.            The
 GAO pointed        our that the Office                 of Management and Budget provided
 guidance to agencies on determining                            whether weaknesses and system
 nonconformances           should be reported                 in an agency's            Federal
 Financial      Managers' Financial                 Integrity         Act report,           which defined
 a material       weakness as a misstatement                       or loss of either              $10
million      or 5 percent            of a budget line item.                    The GAO described                the
Federal Managers' Financial                      Integrity         Act of 1982 (31 U.S.C. 3512)
 requirement        that each agency establish                      internal         accounting         and
administrative           controls        in accordance             with standards            prescribed           by
the Comptroller            General.           The GAO indicated              that the Act further
 requires     a separate           report on whether the agency's                         accounting
system conforms to the accounting                          principles,            standards,       and
 related     requirements           established          by the Comptroller                General.          The
GAO observed          that,      although        the Army has not reported                     negative
unliquidated         obligations           in its Federal Managers'                     Financial
Integrity      Act reports,            Army Materiel             Command accounting               officials
recognize       the Defense Contract                  Administration             Services        Region
payment problems,              including         those that result               in negative
unliquidated         obligations.              According         to the GAO, it is the view of
these officials            that these problems severely                        restrict        the
subordinate         commands' ability               to maintain          accurate        accounting
records.       The GAO pointed               out that the Army Materiel                      Command has
recommended, in a July 1989 memorandum to the Director,                                           Army
Accounting        and Finance,          that the Army report                   the Defense Contract
Administration           Services       region payment problems as a material
internal      control        weakness in its Federal Managers'                           Financial
Integrity      Act report.             The GAO indicated               that this suggestion                  is
currently      being reviewed by the Army's Director                                 of Accounting           and
Finance.       The GAO noted that,                  since 1985, the Defense Logistics
Agency has reported               material        weaknesses in Defense Contract
Administration           Services       Regions'         disbursing         funds to contractors,
including      duplicate          and erroneous            payments.          The GAO added that
the Defense Logistics                 Agency is taking              corrective          action     to
improve the Defense Contract                      Administration            Services         Regions'
processing        of contractor           payments by redesigning                     the entire
contract      payment and reporting                   process.         The GAO pointed             out,
however, that this effort                    has experienced             serious        delays of about
8 years.




        Page 25                                                             GAO/AFMD-90-41         Army Negative       C’Uk
          Appendix III
          Comments From the Department   of Defense




    DOD POSITION:   Concur.     This is a systemic  problem related                        to
    the current  payment process for all DOD Components including                               the
    Army.   The DOD Corporate     Information Management effort   will
    address the systemic    problems related   to DOD centralized
    payments.

                                    RECOMMENDATIONS
    0     RECOMMENDATION1: The GAO recommended the Secretary                of
    Defense direct      the Secretary   of the Army and the Director,          Defense
    Logistics    Agency to establish     policies    and procedures      to ensure
    that adequate coordination        and cooperation    exists   between the
    subordinate    commands and the Defense Contract         Administration
    Services    Regions:
0        to resolve    negative  unliquidated    obligations               already      recorded
         in subordinate     commands' accounting      records             and
a        to collect     any overpayments      made to contractors.

DOD POSITION:           Concur.   Before July 1990 the DOD will                   direct        all
DOD Components          to implement the recommendation.
0     RECOMMENDATION2: The GAO recommended that the Secretary                         of
Defense direct        the Secretary       of the Army and the Defense Logistics
Agency Director         to ensure that adequate coordination               and
cooperation      exists      between the subordinate        commands and Defense
Contract      Administration       Services    Regions (1) to determine           the
control      weaknesses that have caused negative              unliquidated
obligations      and (2) to institute          controls   to correct       these
problems with the intent            of eliminating      negative     unliquidated
obligations.
DOD POSITION:   Concur.   Before July 1990, the DOD will instruct
the Defense Logistics   Agency, the Army, and other DOD Components
to:
l       determine    the control     weaknesses       that     have caused        negative
        unliquidated    obligations:
l       institute    controls    to correct     these        problems with        the intent
        of eliminating      negative   unliquidated           obligations:        and
a        report     back to the DOD on the corrective                 actions    taken.
The DOD Corporate  Information     Management                effort       will   also
address these systemic   problems.




          Page 26                                                 GAO/AFMD-9041 Army Negative uIl)s
           Appendix III
           Comments From the Department           of Defense




    0     RECOMMENDATION3: The GAO recommended the Secretary         of the
    Army direct     the subordinate   commands (1) to comply with existing
    regulations    on aging negative      balances and (2) to take immediate
    action    to correct  negative   unliquidated   obligations.

    DOD POSITION:   Concur.  The Deputy Assistant                          Secretary        of the
    Army for Finance and Accounting   will:
    l     direct  Army commands to comply with existing                          guidance      to age
          and correct  negative unliquidated  obligations                         and
    a     require     installations     to report              negative    unliquidated
          obligations        above a predetermined               dollar    threshold    to the
          command not less than quarterly.
    To ensure continued           monitoring,         the Army will     include      the
    requirements        to age, correct,            and report   negative     unliquidated
    obligations       in their      internal        control  checklists      and make this a
    quality      assurance    review      item.       These requirements        will    go into
    effect     in June 1990.
    0    RECOMMENDATION4: The GAO recommended the Secretary             of the
    Army direct  the subordinate  commands to report        summary level data
    on the total   amount and age of negative    unliquidated     obligations
    to the Army Materiel   Command on a quarterly      basis.

    DOD POSITION:         Concur.      The Secretary       of the Army will    direct
    the Army Materiel         Command to order subordinate          commands to
    report     summary level       data on the total        amount and age of
    negative     unliquidated       obligations     on a quarterly    basis starting
    June 1990.        In addition,       the Army has requested      a milestone      plan
    and monthly progress           reports     from the Army Materiel      Command for
    correcting      negative    unliquidated       obligations    and collecting
    overpayments       made to contractors.
    0     RECOMMENDATION5:             The GAO recommended the Secretary         of the
    Army identify    negative          unliquidated   obligations   as a material
    weakness in the Army's             annual Federal Managers'     Financial
    Integrity    Act report   to        the Secretary    of Defense until     the
    weakness is corrected.

    DOD POSITION:        Concur.      The Army will       include     negative
    unliquidated      obligations       as a material       weakness in the Army's
    annual Federal Managers'            Financial    Integrity      Act report       for
    fiscal    year 1990.       The Army requested         the Army Materiel          Command
    to include    negative      unliquidated      obligations       as a material
    weakness in its annual Federal Manager's                   Financial     Integrity   Act
    report    submitted     to the Secretary       of the Army.




!
            Page 27                                                       GAO,‘AFMD-90-41     Army Negative   Ul&k
              Appendix III
              Comments From the Department   of Defense




              The following is GAO’S comment on the Department of Defense’s letter
              dated April 10, 1990.


              1. We agree that there were factors other than redesign problems that
GAO Comment   contributed to the implementation slippage of the DCXSRS’ system, and
              the report has been modified accordingly.




              Page 28                                     GAO/AFMD-90-41   Army Negative   LJWs
 Appendix I\’

 Major Contributors to This Report


                          Joseph Potter, Assistant Director
Accounting and            Larry Logsdon, Project Manager
Financial Management      Lisa Lim, Evaluator
Division, Washington,
D.C.




                          Blaine Ohl, Deputy Project Manager
Philadelphia    Re@ona1   William Petri& Evaluator
Office                    Martin Ward, Ekaluator




(903100)                  Page 29                              GAO/AFMD-90-41   Army Negative   LXOs
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