DOD Problem Disbursements

Published by the Government Accountability Office on 1997-02-20.

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

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division


       February 20, 1997

      The.Honorable John J. Hamre
      The Under Secretary of Defense (Comptroller)
      Dear Dr. Hamre:
      We are completing our review of the accuracy and completenessof the
      Department of Defense’s (DOD) reporting on the amount of its problem
      disbursements. As you know, problem disbursementsare specific disbursements
      that have not been properly matched with corresponding obligations. Matching
      disbursements with obligations is an important control for ensuring that funds
      are used in accordance with the purposes and limitations spe&ied by the
      Congress. Without such matching, there is risk that (1) fraudulent or erroneous
      payments may be made without being detected and (2) cumulative amounts of
      disbursements may exceed appropriated amounts and other legal limits. DOD
      has numerous important initiatives under way to resolve its long-standing
      problems in this area, which we support.

      The Defense Finance and Accounting Service (DFAS) is responsible for
      producing a monthly report on the amount of problem disbursements. In turn,
      the data from these reports are presented to the President, Congress,DOD top
      managers, and others for use in monitoring DOD’s progress in eliminating these
      problems. We are issuing this interim report becausewe are concerned that your
      December 6, 1996,memorandum, which directed that certain problem
      disbursements be excluded from the monthly reporting, adversely affects the
      reports’ accuracy, completeness,and usefulnessas an oversight tool. The
      Director, DFAS, implemented the change and excluded certain transactions from
      the monthly report, beginning with the November 1996problem disbursement
      report. We are bringing our concerns to your attention at this time so that you
      may reconsider this change before DOD’s Annual Report to the President and the
      Congress,expected to be issued in February, is finalized.

                                     GAO/AIMD-97-36RDOD Problem Disbursements
                                                                                    -   ..

Prior to the November 1996report, three categoriesof problem disbursements
were included in the monthly reports: (1) unmatcheddisbursements,which are
transactions that were not matched to obligationsbecausethe obligations had
not been identified in the accountingrecords, (2) negativeunliquidated
obligations, which are disbursementsthat have been posted to specific
obligations by the accounting station, but exceededthe obligations,and
(3) in-transits, which are disbursementsand collections that have been reported
to Treasury, but have either not been receivedby the accountingstation or have
been received but not processedor posted by the accountingstation. For the
in-transit category, DFAS reports as problem disbursementsonly those (1) over
60 days old when the disbursing and accountingstations are assignedto the
same DFAS Center or (2) over 120days old made by a disbursing office assigned
to one DFAS Center and accountedfor by a station assignedto another DFAS
 Center, DOD component or Federal agency.
We fulIy agreewith the portions of your December6, 1996,memorandumthat
deal with the developmentof more detailedinformation to track m-transits, such
as by type of transaction and by origination. In earlier discussionswith your
staff and DFAS officials, we suggestedthat more basic information is needed
about the sources and causesof all problem disbursements. We are also in full
agreementwith your decision to identify a single DFAS coordinator for tig     the
in-transit disbursementproblem. We will continue to assessthe Department’s
efforts as it strives to resolve this long-standingand complex problem.
Your memorandumfurther directs that the current reporting process be stopped
and that a new methodologybe developedfor reporting in-transits. This is where
we have concern. DFAS officials have advisedus that it may be severalmonths
before a new methodologyis developedand, in the interim, in-transits have
already been dropped from the monthly reports, as stated above. The
memorandum states that “In-transits representa different kind of problem, and
one that has been masked by groupingthem in with NULOs [negative
unliquidated obligations] and UMDs [unmatcheddisbursements].”DOD included
in-transits in its problem disbursementreports in responseto our
recommendationin an October 1994report,l and we believethat the rationale for
doing so remains valid today, as discussedbelow.

Financial Management: Status of DefenseEfforts to Correct Disbursement
Problems (GAO/AIMD-957,October 5, 1994).
2                               GAO/AIMD-97-36RDOD Problem Disbursements
Prior to our 1994report, DOD did not include disbursementtransactions in its
reports if matching efforts had not yet been attempted, regardless of how old the
transactions were. At that time, DOD officials indicated that such transactions
were excluded becausedata were not readily available to show how long the
transactions had remained outstanding. However, in an April 21, 1994,
memorandum, the DFAS Deputy Director for General Accounting required the
DFAS Centers to maintain aging schedulesfor disbursementsand stated that it
should never take over 60 days for disbursementtransactions to be forwarded to
and received by an accounting station for matching. Following this guidance,the
DFAS Centers reported that as of April 30, 1994,their records included at least
$14.8billion of disbursementsthat were over 60 days old and had not yet been
received by an accounting station. DOD’s official response to our 1994report, a
letter dated April 17, 1995,from the Deputy Chief Financial Officer, clearly states:
The Department agreesthat m-transit transactions over 60 days old are
disbursing problems.”

More current data indicate that this category remains a serious problem. As of
May 31, 1996,DOD’s reported problem disbursement balance of $18 billion
included $7.7 billion of m-transits. According to DOD’s aging information on
these transactions, $3.8 billion, or about 50 percent, were over 180 days old.
Even more significantly, $1.4 billion were originally processed before April 1,
1994,yet still remained in the nin-transit~category over 2 years later. Clearly,
these are problem transactions that should be monitored, and maintaining their
visibility by including them in monthly reports that are received by top DOD
managersand eventually reported to the President and Congressis an important
means of ensuring that they are resolved.
Thus, we are concerned that your December 6 memorandum characterizesas a
3nistaketfthe decision made 2 years ago to report in-transits along with
unmatched disbursementsand negative unliquidated obligations. We do not take
exception to allowing a nnormalnprocessing time before considering an in-transit
transaction a problem disbursement. DOD officials told us that DOD reluctantly
accepts the current 60- and 120day processing times due to limitations of
existing systems,but that this will be addressedas part of DFAS’s efforts to
reengineer the disbursement and collection reporting process. However, a
transaction that an accounting station has not even attempted to match with an
obligation within DOD’s 2- or 4month “grace period” is clearly a problem
disbursementthat should be reported, researched, and resolved.

In addition, the reasons stated in your December 6 memorandum for previously
including m-transits in problem disbursementreports remain valid today: ‘... to
make sure that the Services (and DFAS, for that matter) did& report artificial

3                                GAO/AlMD-97-36RDOD Problem Disbursements
progress in resolving NULOs and UMDs’by putting them back into the processing
cycle where they would show up as in-transit disbursements. I felt by reporting
all three together I would keep the pressure on everyoneto get at the underlying
problems.” The possibility of “recycling transactions to the in-transit category is
again a concern now that in-transits have been dropped from DFAS’smonthly
reports as directed by your memorandum.
Moreover, eliminating the in-transit category from the problem disbursement
report removes from scrutiny not only those in-transits that DOD had been
reporting on, but also the additional transactions that we found as part of our
ongoing work. As early as September 1996,we had briefed DOD officials on our
preliminary results of testing the May 31, 1996,reported problem disbursement
balance. These results showed that the $18 billion total was understated by at
least $25 billion, most of which related to in-transits.
An important step towards effective resolution of DOD’sproblem disbursements
is accurate and complete information on the scope and magnitude of the
problem. An accurate benchmark of the amount of problem disbursementsis
necessaryto ensure that visibility over this issue is maintained and that DOD
managers as well as the President and the Congresshave the complete and
consistent information necessaryto monitor the Department’sprogress in
resolving its problems over tie.

We recommend that you (1) direct the Director, DefenseF’inanceand Accounting
Service, to report in-transit transactions, in accordancewith the Department’s
60- and 120day criteria, along with unmatched disbursementsand negative
unliquidated obligations in the monthly problem disbursementreports and
(2) ensure that in-transits are included as problem disbursementsin all external
report;ing,including DOD’s annual report to the President and the Congress.

In written comments on a draft of this letter (see enclosure),the Department of
Defensepartially concurred with our recommendations. DOD agreedto continue
reporting in-transits with unmatched disbursementsand negative unliquidated
obligations in external communications. DOD did not agreeto reestablish the
reporting of in-transits along with unmatched disbursementsand negative
uuhquidated obligations in its monthIy problem disbursementreports. DOD

4                                GAOKIMD-97-36R DOD Problem Disbursements
contended that the visibility of in-transit problem disbursementswould not be
lost becauseDFAS continues to prepare separatemonthly reports on in-transit
disbursementsfor internal managementreview and analysis.

 We reaffirm our position that DOD needs to consistently and completely report
 the Department’s problem disbursementsregardless of the type. Becausethe
 monthly internal reports serve as the basis for external reporting on problem
 disbursement issues, the intent of our recommendation was to ensure that the
 monthly reports are as complete and a&rate as possible. Our primary concern
 is that the President, the Congress,and other interested decisionmakers continue
‘to have a complete picture of the Department’sproblem disbursements,including
 over-agedin-transits, to ensure that focus is maintained on resolving these
 problems. As long as DOD’s monthly reporting mechanism provides accurate ’
 and consistent information on all types of problem disbursements,we would
 consider DOD’s actions responsiveto .our recommendation.

This report contains recommendationsto you. Within 60 days of the date of this .
letter, we would appreciate receiving your written statement on actions taken to
address these recommendations.
We are sending copies of this letter to the Chairmen and Ranking Minority
Members of the SenateCommittee on Armed Services,the House Committee on
National Security, the SenateCommittee on GovernmentalA&&s, the House
Committee on Government Reform and Oversight, and the Director of the Office
of Managementof Budget. We are also sending a copy to the Secretary of
Defense. Copies will also be made availableto others upon request.

Please contact me at (202) 512-9095if you or your staff have any questions.
David Childress, Miguel Castillo, and CeceliaBall were major contributors to this

sincerely yours,

Director, Defense Financial Audits

5                               GAOkIMD-9736R DOD Problem Disbursements
ENCLOSURE                                                                                      EWCLOSURE

               CoMnawr!3        FROM THE DEPARTMENT                     OF DEFENSE

                                    UNDER    SECRETARY      OF DEFENSE
                                           1100 DEFENSE PENTAGON
                                         WASHINGTON.   DC 20301-l 100

                 Mr. GeneL. Dodam
                 AssistantCompdler General
                 U. S. GeneralAccountingOffice
                 washington.DC 20548
                        This is theDepanment
                                          of Defense (DoD)response
                                                                 to theGeneralAccountingOffice (GAO)
                 draft mpxt.TINANCIAL MANAGEMENT:DODProblemDisbmsement           Reportin&”dated
                 January24.1997(GAO Code 9188611OSD    Case1285).

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                                               GAOhUMD-97-36R             DOD Problem Disbursements
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