Financial Management: Improved Management Needed for DOD Disbursement Process Reforms

Published by the Government Accountability Office on 1997-03-31.

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

                 United States General Accounting Office

GAO              Report to Agency Officials

March 1997
                 Improved Management
                 Needed for DOD
                 Disbursement Process

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

                   Accounting and Information
                   Management Division


                   March 31, 1997

                   The Honorable John J. Hamre
                   Under Secretary of Defense (Comptroller)

                   Mr. Richard Keevey
                   Director, Defense Finance and Accounting Service

                   Department of Defense (DOD) problem disbursements have been the
                   source of much concern for many years. Problem disbursements are
                   specific disbursements that have not been matched with corresponding
                   obligations. Such disbursements can increase the risks of (1) fraudulent or
                   erroneous payments being made without detection and (2) cumulative
                   amounts of disbursements exceeding appropriated amounts and other
                   legal spending limits. If DOD is to adequately manage its fiscal operations
                   and produce auditable financial statements as required under the Chief
                   Financial Officers Act of 1990 and related acts, it must reduce its billions
                   of dollars of problem disbursements. In the 1996 annual report to the
                   President and the Congress, DOD noted that eliminating problem
                   disbursements was one of its key financial reform projects.

                   DOD  has indicated that transactions paid at one location, but accounted for
                   at another are the costliest, most time-consuming, complicated, and
                   error-prone segment of its accounting. These transactions are referred to
                   as transactions by others (TBOs). Cross disbursements are a special type of
                   TBO that requires additional processing because different military services
                   are involved. Defense Finance and Accounting Service (DFAS) officials
                   have stated that TBOs are major contributors to problem disbursements. To
                   address the deficiencies in the processes, in late 1995, DFAS established a
                   project to implement improvements to the current disbursement processes
                   and significantly reduce problem disbursements. In April 1996, DFAS issued
                   a report containing, among other things, 14 action items to improve TBO
                   disbursement operations in the short term.

                   We reviewed the implementation status of the 14 action items. This report
                   presents our assessment of DFAS’ development and implementation of this
                   project and includes recommendations to improve DFAS’ reform efforts.

                   DFAS recognized the need to reform its TBO and cross disbursing processes
Results in Brief   in the short term, and established aggressive milestones to complete the 14
                   action items, with most slated for completion in late 1995. However, their

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implementation has been significantly delayed. As of October 1996, 10 of
the 14 action items had either not been implemented or were only partially
completed. Of the four items implemented, our review of the two for
which some implementation information was available showed that DFAS
had not effectively met its objectives.

We identified three issues that limited DFAS’ ability to effectively and
promptly achieve its goal of improved TBO processing. First, DFAS did not
develop adequate information to effectively diagnose the causes of
problem disbursements, implement solutions, and evaluate progress. DFAS
managed its reform effort based on the experience of knowledgeable staff
without the benefit of enough supporting analysis of processes, causes,
and alternatives. For example, DFAS officials changed their policy
regarding disbursement processing time frames without a thorough
analysis to know if the new time frames were realistic or obtainable. DFAS
managers estimated that cross disbursements take 109 days to process.
One action item was a new policy that provided for up to 134 days to
process a cross disbursement—25 days longer than the process they
already considered too long. Without an analysis, DFAS does not know if its
stated time frames are reasonable or obtainable. Officials at two centers
questioned whether the time frames were reasonable and results at one
processing center validate that concern.

Second, DFAS did not provide strong, consistent management for the
project. For example, the official originally assigned to manage the project
in 1995 was reassigned and left the position before the action items were
implemented. At least three people headed the project during the first 6
months of 1996. Management turnover contributed to delays in issuing the
DFAS report and implementing some action items. Although a permanent
project officer was appointed in July 1996, a position description or formal
tasking as to the responsibilities and scope of the job had not been
prepared as of the completion of our work in December 1996.

Finally, DFAS may not be allocating sufficient resources to critical areas.
Because DFAS did not establish priorities based upon quantitative analysis,
DFAS has expended resources without ensuring that it is addressing the
more significant problems. For example, after 2 months of work on one
action item dealing with rerouting payments between two sections of one
DFAS center, DFAS canceled the action item because it was determined that
the completion would not have a significant impact. Conversely, DFAS
officials said that resource constraints had led to one center’s backlog of

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             unprocessed transactions continuing to exist a year after DFAS had planned
             to eliminate it.

             By better addressing these critical issues, DFAS will be in a stronger
             position to achieve meaningful and timely reforms in its TBO processing
             and ultimately reduce problem disbursements.

             DFAS, which provides accounting services for DOD, was established on
Background   January 15, 1991, to improve, standardize, and consolidate DOD’s finance
             and accounting policy, systems, and operations. DFAS is undergoing
             massive consolidation efforts to reduce its over 300 defense accounting
             offices into 5 existing large centers and not more than 21 new operating
             locations. DOD is also undertaking efforts to consolidate about 250
             financial and accounting systems in use today to standard integrated
             systems.1 However, it will be several years until DOD completes
             implementation of new and improved systems. Until this occurs, DOD will
             have to rely on its existing systems. Few of those systems electronically
             transfer data to each other and thus require manual intervention to record

             When a disbursing station disburses funds that are accounted for at
             another station, the accounting station calls this a TBO.2 Cross
             disbursements are a special type of TBO wherein the disbursing station is
             aligned with a different military service than the accounting station (e.g.,
             when an Army-aligned station makes disbursements that are accounted for
             by a Navy-aligned station). TBOs and cross disbursements can be the result
             of almost any disbursement activity, including payments on contracts
             (both for delivery of goods or services and progress payments), payroll, or
             travel. Although the processes vary widely among the services, figure 1
             depicts the general TBO and cross disbursement processes.

             However, as noted in our recent report Financial Management: DOD Inventory of Financial
             Management Systems is Incomplete (GAO/AIMD-97-29, January 1997) this number does not include
             many systems that DOD relies upon to produce financial management information and reports.
              From a disbursing station’s point of view, these transactions are called transactions for others (TFOs).

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Figure 1: DOD’s TBO and Cross Disbursing Processes

                    Disbursing                           Processing
                                                           Center                                  Accounting Station
                                                         (Service A)                                  (Service A)
                    (Service A)
                                      (7 days)
                                                            30 days

                                                                (7 days)

                                                       Processing Center                           Accounting Station
               TBO Process                                (Service B)                                 (Service B)
                                                                                 (5 days)

               Cross Disbursing Process                     30 days                                     30 days

                                            1. Cross disbursements take an estimated 109 days to process.
                                            2. TBO process varies by military service.

                                            Source: GAO analysis of DFAS documentation.

                                            To record a disbursement in the accounting records, disbursement data
                                            must be sent from the disbursing station to the accounting station. The
                                            transaction is routed through one or more processing centers that report
                                            the financial data to the Department of the Treasury and translate the
                                            accounting codes among the different computer systems. The accounting
                                            station records the transaction in the accounting records and matches the
                                            payment to its corresponding obligation. The proper matching of
                                            disbursements with recorded obligations is a vital control to ensure that
                                            funds are used in accordance with the purposes and limitations specified
                                            by the Congress through appropriations acts and the Antideficiency Act. In

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systems that do not electronically transfer data to each other, hard copy
documents are used to transmit the disbursement data. DFAS personnel
must then manually reenter the disbursement data into the accounting
systems. Frequently, the hard copy documents take months to reach the
cognizant accounting station. DFAS estimates the cycle time for processing
cross disbursements at 109 days.3 If documents are missing or illegible, the
process for that transaction stops until the appropriate station locates and
mails the required documents.

From the time a disbursement is made until it is recorded in the
accounting records, the transaction is said to be “in-transit.” DOD officials
have stated they have reluctantly accepted as “normal” periods of 60 days
or less (120 days or less for cross disbursements), and therefore do not
report these in-transits as problem disbursements. After these time
periods, DFAS reports aged in-transit transactions as problem
disbursements that require the agency to take additional follow-up action.
In October 1996, DFAS reported that it had about $19 billion in problem
disbursements; $9 billion (about 45 percent) of that was made up of items
reported as being aged in-transit. The other $10 billion comprised
payments for which DFAS could locate no known obligation against which
to match the payment.4 In reviewing DFAS’ May 1996 problem disbursement
report we found that the amounts of problem disbursements are greater
than reported. Based on the results of our preliminary testing, in a
February 20, 1997, report, we noted that the May 1996 reported total
problem disbursements of about $18 billion were understated by at least
$25 billion, with most of the understatement related to aged in-transits.5

Partly due to the extended in-transit period, DFAS has been charged with
reengineering its disbursement processes. DFAS has undertaken many
projects to resolve problem disbursements and improve its disbursement
processes, including over 70 longer term, mostly systems related, projects
listed in the May 1996 DFAS business plan. DFAS’ future systems plans
include having electronic transfers of data that should eliminate DFAS’
dependency upon hard copy documents. However, until those new
systems are in place, DFAS is working to improve its current processes.

 DFAS uses a voucherless process to make several types of disbursements, including some travel
payments, contract payment notices, and civilian payroll payments. According to DFAS officials,
voucherless payments are processed faster because they are not dependent upon sending hard copy
 This included $7.7 billion of items that were not matched against any obligation (unmatched
disbursements), and $2.3 billion that matched against an obligation that was not large enough to cover
the payment (negative unliquidated obligations-NULOs).
 DOD Problem Disbursements (GAO/AIMD-97-36R, February 20, 1997).

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                    In April 1996, DFAS summarized its short-term actions to improve its
                    current processes in a report titled Summary Report: Standardization of
                    the DOD Expenditure/Collection Processes. The report discusses actions
                    that had been ongoing since late 1995 and provides a status of the
                    continuing action items. The report’s primary focus was on improving
                    current DFAS operations to reduce the number of problem disbursements.
                    Among other things, it presented 14 action items to “help stem the tide of
                    aged in-transit disbursements” and to specifically improve the TBO and
                    cross disbursement processes.

                    To identify DOD’s ongoing reform efforts, and to assess DFAS’ attempts to
Scope and           implement them, we obtained and evaluated DFAS’ report containing the 14
Methodology         action items. We obtained and reviewed minutes from the DFAS teams
                    working on the action items listed in the report and gathered available
                    data on the action items to assess the basis of the projects and the analysis
                    supporting their objectives. To evaluate the projects and their status, we
                    requested centers provide status updates for each of the action items and
                    any results or improvements resulting from their implementation as of the
                    end of October 1996. Additionally, we met with officials at DFAS
                    headquarters in Arlington, Virginia, and at each of the five DFAS centers in
                    Cleveland, Ohio; Columbus, Ohio; Denver, Colorado; Indianapolis, Indiana;
                    and Kansas City, Missouri.

                    To determine if DFAS was complying with its cross disbursements policy
                    regarding time frames, we analyzed electronic logs from one DFAS center to
                    determine the timeliness of processing and forwarding transactions. We
                    then compared these calculations to the timeframes provided for in DFAS’
                    policy to determine the percentage of transactions that complied with the
                    policy. We did not verify the data provided by DFAS.

                    We performed our work from June 1996 through December 1996 in
                    accordance with generally accepted government auditing standards. DOD
                    provided written comments on a draft of this report. These comments are
                    presented and evaluated in the “Agency Comments and Our Evaluation”
                    section and are reprinted in appendix I.

                    The 14 actions listed in the DFAS report to improve the disbursement
Implementation of   processes were significantly delayed in implementation. Table 1 lists the
Action Items Was    14 action items, DFAS’ planned completion dates, and our assessment of
Delayed             their status as of October 1996. The items relate to three types of activities:

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                                               (1) establishing and implementing policies, (2) gathering basic
                                               information, and (3) changing TBO and cross disbursement processes.

Table 1: DFAS Action Items
                                                           Initial             Revised
                                                           estimated           estimated
            Action item                                    completiona         completiona         Status as of October 1996
Establish and implement policies
1           Establish standard time frames policy for      11/30/95            1/12/96             Implemented. Policy issued 2/96.
            processing cross disbursements.
2           Publish implementing guidance for cross        3/1/96              4/1/96              Implemented by centers separately,
            disbursements policy.                                                                  effective 4/1/96.
3           Publish implementing guidance for DOD          3/1/96              4/1/96              Implemented by centers separately,
            travel policy.                                                                         effective 10/1/96.
4           Develop a plan to use standard                 3/1/96              10/31/97            Not complete. Pending finalization of
            accounting classification codes.                                                       standard accounting codes.
Gather basic information on TBO processes and
develop corrections
5           Identify and eliminate unnecessary TBOs        11/27/95            4/15/96             Not complete. DFAS working to eliminate
            and cross disbursements.                                                               unnecessary TBOs.
6           Identify and develop corrections for           11/27/95            none                Not complete. Correction plans not
            accounting and disbursing stations’                                                    developed.
7           Clear backlogs of unprocessed                  11/27/95            1/31/96             Not complete. Backlogs at some centers
            transactions at DFAS centers.                                                          not cleared.
8           Identify specific problem areas and            11/27/95            8/31/96             Not complete. DFAS working to resolve
            develop solutions (19 were identified in                                               known problems.
            the report).
Change transaction routing or processes
9           Reroute travel documents to eliminate          12/22/95            3/1/96              Implemented. Effective 10/1/96.
            most from the cross disbursement
10          Change processing of adjustments for           11/15/95            6/1/96              Partially implemented. Change
            both open and canceled accounts from                                                   processing of adjustments for canceled
            cross disbursements to TBOs.                                                           accounts not developed.
11          Change cross disbursements from a              12/31/95            4/15/96             Not complete. To be implemented 1/1/97.
            major contract payment system to TBOs.
12          Develop full-scale use of a Treasury           8/1/96              10/7/96             Not complete. Being tested.
            electronic payment system.
13          Reroute disbursements for Washington           11/27/95            2/29/96             Canceled. Unneeded due to other
            Headquarters Service.                                                                  organizational changes.
14          Simplify routing of payments within            11/30/95            1/31/96             Canceled. Volume too low to justify
            sections of one DFAS center.                                                           change.
                                                The initial estimate was established in the January 1996 draft DFAS report. The revised estimate
                                               is generally based on the minutes of an April 1996 DFAS status meeting (the most recent minutes

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Delays in implementing the action items postponed much needed change
in DFAS’ disbursement processes. As shown in the table, the four items to
implement new policies were delayed, but less significantly than the other
types of actions. None of the four items directed at gathering additional
information about the TBO processes and taking corrective actions had
been completed. Finally, five of the six action items designed specifically
to change the transaction routing or processes originally were to be
completed by December 1995. However, as of October 1996, only one had
been implemented (item 9). One other item had been partially
implemented (10), one was pending future implementation (11), and a
third was being tested (12). The final two projects (13 and 14) were

For the four items implemented, data were available to assess the
implementation of portions of two action items (items 1 and 2—both
related to DFAS policy to establish time frames for cross disbursement
processing). We found that the required processing times were not being
achieved. Our analysis of DFAS’ logs from one processing center showed
that less than 10 percent of the vouchers were forwarded from the
disbursing station to the appropriate processing center within the policy’s
time frames. Less than 70 percent of the transactions were forwarded
between processing centers within the required time frames. The two
other implemented items (items 3 and 9—both related to DFAS rerouting of
travel payments) had not been implemented long enough to assess their
impact. The new travel policy did not go into effect until October 1996 and
at the time of our review, DFAS had not developed data to determine
compliance with the new policy or its effectiveness in decreasing problem

We support DFAS’ continuing efforts to reform its current process, and its
recognition that improvements are needed in the short term. In its report,
DFAS established aggressive milestones and goals for its reform efforts.
DFAS established a goal for the 14 action items of eliminating over
$300 million per month from the TBO processes and clearing over $1 billion
of items in suspense—most of which related to backlogs at DFAS
processing centers. However, DFAS did not establish a mechanism to
determine how well the action items, once implemented, were
accomplishing these goals. Because of the large number of ongoing DFAS
projects and changes, DFAS will not know if actions are having the desired
effects without measures that relate the actions to specific improvements.
As discussed in the following section, fact-based analysis is needed to
identify problems, develop effective solutions, and measure progress.

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                         DFAS’ management of these reform efforts did not ensure that the most
Project Management       effective action items were selected and, once selected, that the action
Could Be More            items were effectively and promptly implemented. Specifically, DFAS did
Effective                not (1) develop adequate basic information about the TBO processes and
                         proposed action items, (2) establish strong project management to oversee
                         and coordinate efforts, or (3) allocate its resources on the basis of
                         identified problems prioritized as to their severity. If DFAS better addresses
                         these issues it will be in a stronger position to achieve meaningful and
                         timely reforms in its TBO processing, which will ultimately lead to
                         reductions in problem disbursements.

More Thorough Analysis   DFAS did not develop adequate information about the TBO processes to
Essential                effectively analyze the causes of problems in the TBO processes and design
                         corrective action items. Consequently, DFAS’ efforts did not ensure that it
                         had chosen the most effective action items that would result in meaningful
                         and timely reforms. A fact-based analysis of performance problems helps
                         an organization prioritize candidates for improvement and makes a
                         compelling argument for investing time and resources in changing specific
                         aspects of business processes to achieve better results. Studies by the
                         National Academy of Public Administration (NAPA) show that
                         “organizations sometimes start reengineering without really knowing if
                         they are focusing on the most important issues.”6

                         DFAS’ efforts to improve its TBO processes are an example of this. For
                         instance, in a June 1995 report, DOD stated that quantitative data were
                         unavailable to determine the precise causes of problem disbursements.
                         According to DFAS officials, problem disbursement reform efforts are being
                         managed based on managers’ observations, experiences, and knowledge
                         of DFAS systems. While a limited number of prioritized corrective actions
                         could be started on such a basis, quantitative data are needed to validate
                         those actions and prioritize additional specific reforms.

                         DFAS  did not analyze the processes in enough detail to identify the costs
                         and causes of performance breakdowns. For example, the DFAS report
                         containing the action items states that not receiving disbursement data
                         promptly or not receiving them with sufficient support are causes of aged
                         in-transits. However, DFAS did not further analyze these causes to identify
                         why sites fail to provide prompt and accurate information. Without such
                         an analysis, DFAS does not have the information needed to establish

                          Caudle, Sharon, Ph.D, Reengineering for Results: Keys to Success From Government Experience,
                         (Center for Information Management-National Academy of Public Administration, August 1994),
                         page 61.

                         Page 9                                                GAO/AIMD-97-45 Problem Disbursements

priorities for reform efforts and direct resources to achieve meaningful
and timely reforms.

DFAS  officials diagrammed the existing cross disbursement payment
processes and concluded that cross disbursements took 109 days to
process. Although the officials acknowledged that the processes were too
long, they did not analyze the time frames to identify bottlenecks,
determine how many transactions fall outside the average, or establish
realistic improvement goals. Using available information, DFAS officials
subsequently developed and issued a policy (action items 1 and 2) to
regulate and reduce the time to process a transaction. The processing time
frames established in the policy provided for up to 134 days to process a
cross disbursement—25 days longer than the processes they already
considered to be too long. Without an analysis, DFAS does not know if its
stated time frames are reasonable or obtainable. Officials at two DFAS
processing centers said that even the new time frames were unrealistic.

Our review of the policy’s implementation at one site found that it
complied with the policy’s time frames for less than 10 percent of the
vouchers. While a standard policy may have been needed, policy directives
alone will not address the problems or achieve the desired results.
Addressing the problems will require both basic data against which to
track the implementation and mechanisms to ensure that the policy is

Because DFAS has not developed adequate basic information such as where
and why problems occur in the processes, we believe it has decreased the
likelihood for successfully reforming its disbursement processes or
decreasing the volume of problem disbursements in the short term. As
reported in our June 1996 study7 of the best practices of leading
organizations in the implementation of the Government Performance and
Results Act, three key steps of management reform are to (1) define
missions and desired outcomes or results, (2) measure performance to
gauge progress, and (3) use performance information as a basis for

DFAS managers stated that the 14 action items we reviewed were relatively
straightforward and may not have required extensive analysis. We
disagree. While actions are needed in reforming DFAS’ disbursement
processes, a thorough analysis of the processes would help ensure that

 Executive Guide: Effectively Implementing the Government Performance and Results Act
(GAO/GGD-96-118, June 1996).

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                    DFAS focuses its resources on the most significant problems. As DFAS
                    moves into more complex areas of reform, an analysis of the processes
                    and problems will be even more critical.

Stronger Project    Although strong management is critical to successful reform efforts, DFAS
Management Needed   provided short-term, temporary project management, which contributed to
                    delays in issuing the report and implementing the projects. In 1995, DFAS
                    formally designated a project officer to, among other things, improve the
                    current cross disbursement and TBO processes as well as reduce problem
                    disbursements. However, after about 5 months, the project officer rotated
                    out of the position before the actions were complete. For the first 6
                    months of 1996, at least three other people were in charge of implementing
                    these action items. The final report containing the action items was
                    delayed for 3 months because of the rotation of the project officer. In
                    July 1996, DFAS headquarters assigned a permanent project officer;
                    however, the person assigned had received no formal tasking or position
                    description at the completion of our work.

                    Due to a lack of consistent management with clearly defined duties and
                    authorities, the various DFAS centers have attempted to work out solutions
                    to disbursement problems individually. This was not always done
                    seamlessly. One reengineering expert has stated that without strong
                    aggressive, committed, and knowledgeable leadership, there will be no
                    one to persuade the elements within the organization to subordinate the
                    interests of their functional areas to those of the organization as a whole.8
                    We found this to be true at DFAS. For example, one action item we
                    reviewed (item 11) was to eliminate all of one DFAS center’s cross
                    disbursements and convert them to a TBO-type transaction, which would
                    take a shorter period to record. DFAS estimated this should eliminate about
                    $115 million in cross disbursements each month. However,
                    implementation was delayed because another center was proposing a
                    conflicting project. Management officials did not intervene to direct a
                    resolution of the problem. After 6 months, the other center withdrew the
                    conflicting project, allowing the action item to proceed. However, much of
                    the initial work had to be redone, and, in the interim, DFAS disbursed over
                    $1 billion through the cumbersome cross disbursement processes. At the
                    time of our review, the action item was pending implementation in
                    January 1997. DFAS headquarters officials agreed that this action item

                    Hammer & Champy, Reengineering the Corporation: A Manifesto for Business Revolution (New York:
                    Harper Collins Publishers, 1993), page 107.

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                          should not have been delayed, and stated that poor communication among
                          the centers contributed to the delay.

Allocation of Resources   Because DFAS has many projects to reform its processes and a limited
Could Be Improved         number of resources, the allocation of resources based on the priority of
                          projects assumes a greater importance. With regard to problem
                          disbursements, DFAS officials stated that reform projects have to compete
                          for resources along with every other need. Without establishing priorities
                          for multiple competing projects, sufficient resources may not be provided
                          to fully implement and complete the more critical reforms.

                          Because a thorough analysis of the TBO processes was not conducted, DFAS
                          may not be concentrating its resources to resolve the largest sources of
                          problems. As a result, some of DFAS’ efforts may have been directed at
                          projects that, even if completed, would have had only a minimal impact on
                          the disbursement process. For example, one action item was to improve
                          the disbursement processes by rerouting payments made between two
                          sections of a center (item 14). However, after 2 months of work, officials
                          decided that too few transactions would be affected to warrant the needed
                          systems changes and therefore canceled the action item.

                          Where DFAS has identified what it believes to be causes of problem
                          disbursements, it has not dedicated sufficient resources to resolve the
                          problems. For example, one action item (item 7) was for DFAS centers to
                          resolve their backlogs of unprocessed cross disbursement transactions by
                          November 1995. DFAS officials stated that these backlogs, for the most part,
                          were the result of a onetime rerouting of cross disbursement transactions.
                          Until processed and sent to the accounting stations these transactions
                          remain as problem disbursements; i.e., aged in-transits. However, almost a
                          year after the backlogs were to be resolved, one center still had a large
                          backlog of about 110,000 vouchers. We estimate the center would need
                          about 6 months to clear this backlog of unprocessed vouchers, even
                          without considering the normal in-flow of new transactions. Officials at
                          the center said that without additional staffing the backlog may never be
                          eliminated. DFAS headquarters officials stated that their resources were
                          concentrated on reducing the number of new cross disbursements rather
                          than clearing the backlogs of unprocessed transactions. However, in
                          January 1997, DFAS assigned a team to review the backlog and determine
                          what actions were needed to eliminate it.

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              Finally, DOD has not implemented a standard line of accounting—a
              problem it has acknowledged since the 1960s. The lack of standard
              accounting classification codes necessitates that DOD rely, to a large
              extent, on hard copy vouchers and manual intervention for its TBO and
              cross disbursement processes. Since each military service uses a different
              set of accounting codes to designate how disbursements should be
              recorded, cross disbursements must be translated among the different
              service’s accounting codes. One action item to develop a plan to use
              standardized accounting codes (item 4) is on hold pending completion of
              the DOD standard codes, now scheduled for the beginning of fiscal year
              1998. We reported in 1980,9 1986,10 and 199011 that DOD needed to allocate
              resources to develop standardized accounting classification codes and
              implement them throughout its finance and accounting systems.

              In responses to our prior reports, DOD agreed that not having standard
              accounting information was a source of problem disbursements. DOD has
              not fully implemented the standard codes, citing technical complexity and
              costly system modifications. Implementing a standard line of accounting
              may be costly in the short term and could involve complex system
              integration issues. However, if DFAS does not address such root causes of
              its disbursement problems, those causes will continue to drain resources
              and prevent the effective reform of slow, cumbersome, and error-prone
              processes. Accordingly, we reiterate our previous recommendation that
              the DOD Comptroller finalize and implement a standard accounting
              classification code for all DOD accounting and finance systems.

              Because basic data are lacking, neither we nor DFAS can assess whether
Conclusions   tangible progress is being made toward resolving TBO disbursement
              problems. In order to resolve entrenched problems such as DOD’s problem
              disbursements, a thorough analysis of the processes and problems is
              required. DFAS has not performed the analysis needed to identify the most
              severe sources of problems. Without such an analysis, DFAS could continue
              to undertake numerous projects to address what could be significant
              problems without the data to identify underlying causes and provide a
              basis for measuring progress.

              Defense’s Accounting for Its Contracts Has Too Many Errors—Standardized Accounting Procedures
              Are Needed (FGMSD-80-10, January 9, 1980).
               Management Review: Progress and Challenges at the Defense Logistics Agency (GAO/NSIAD-86-64,
              April 7, 1986).
               Financial Management: Problems in Accounting for DOD Disbursements (GAO/AFMD-91-9,
              November 9, 1990).

              Page 13                                             GAO/AIMD-97-45 Problem Disbursements

                         While generally such an analysis should be performed before proceeding
                         with reform efforts, we do not advocate that DFAS discontinue all of its
                         ongoing reform efforts in favor of additional analysis. However, we believe
                         that work can continue on a select number of significant actions in
                         conjunction with developing better quantitative analysis of problem areas.
                         An analysis would help to validate that those actions would result in
                         significant improvements and help prioritize additional actions. A
                         concurrent process would help ensure that DFAS’ most significant problems
                         are being addressed and that resources are focused on those reform
                         efforts identified as high priority.

                         In addition, strong, consistent management with clearly defined
                         responsibilities and authorities would help coordinate the centers’ work,
                         and the effective and prompt implementation of needed reforms. Finally,
                         an investment of adequate resources to make the reforms identified and
                         prioritized by an analysis would help ensure that these problems will not
                         continue to drain future resources.

                         To ensure the effective management of ongoing and future disbursement
Recommendations          reform efforts, we recommend that the Director, Defense Finance and
                         Accounting Service

                     •   develop more complete analysis to identify underlying causes, define
                         solutions, and measure progress;
                     •   provide for consistent project management with clearly defined
                         responsibilities and authority; and
                     •   prioritize reform efforts to ensure that sufficient resources are allocated to
                         the most severe sources of problems.

                         In written comments on a draft of this report (see appendix I), DOD
Agency Comments          generally agreed with our findings and concurred with all of our
and Our Evaluation       recommendations. DOD stated that the effective management of ongoing
                         and future disbursement reform efforts depends on the three factors we
                         cited. DOD also noted specific actions taken or planned in response to the

                         DOD disagreed with our statement that a preliminary analysis of DOD’s
                         problem disbursements shows that they are underreported by up to
                         $25 billion. We have previously provided DOD officials with detailed data
                         showing the basis for our position that reported problem disbursement

                         Page 14                                    GAO/AIMD-97-45 Problem Disbursements

amounts are understated and DOD officials have not provided data that
refutes the amount of underreporting. This issue is the subject of an
ongoing review that will address our finding that DOD’s problem
disbursement reporting is not producing accurate and consistent data
needed to effectively measure its progress and manage the reduction of its
problem disbursements.

DOD also commented that the report, by being limited to one of the
Department’s major initiatives, does not capture the results of the many
other major initiatives that are underway—many of which are expected to
help reduce in-transit disbursements. We agree that DOD has been working
in many areas to resolve problem disbursements, and our report notes that
DOD lists over 70 ongoing projects in a May 1996 business plan. However,
this report focuses on the 14 action items specifically related to TBOs and
cross disbursements. We also are evaluating other initiatives that are in
varying stages of completion. The large number of initiatives supports our
conclusion that the reform projects must be (1) prioritized on the basis of
strong analysis to determine which ones will produce the greatest results
and (2) managed by an experienced project manager with clear
responsibility and authority.

In addition, DOD stated that it has internal controls in place to reduce the
risks associated with fraudulent payments. We strongly disagree. Our
audits, and those of the DOD Inspector General and audit services, have
identified material internal control weaknesses in areas such as general
electronic data processing, basic reconciliations, and supervisory reviews.
DOD’s inability to match over $40 billion of disbursements with recorded
obligations, including disbursements that cite closed bases and
decommissioned ships, is also indicative of major control weaknesses. All
of these weaknesses would contribute to making DOD’s payment processes
vulnerable to fraudulent payments and diminish the Department’s ability
to detect fraudulent and other improper payments that occur.

DOD also noted that the military departments and Defense agencies are
committed to reducing problem disbursements as quickly as feasible and
that, by most reasonable standards, the Department has been successful in
that regard. As stated above, our preliminary work on DOD’s reporting of
problem disbursement data indicates that reported amounts are
substantially understated and raises concerns over whether DOD has
sufficient, reliable information to determine the extent to which
disbursement problems have been reduced.

Page 15                                   GAO/AIMD-97-45 Problem Disbursements

This report contains recommendations to the Director, DFAS. Within 60
days of the date of the report, we would appreciate receiving a written
statement on actions taken to address these recommendations.

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Armed Services, the House
Committee on National Security, the Senate Committee on Governmental
Affairs, and the House Committee on Government Reform and Oversight;
and the Director of the Office of Management and Budget. We are also
sending a copy to the Secretary of Defense. Copies will also be made
available to others upon request.

Please contact me at (202) 512-9095 if you have any questions on this
report. Major contributors to this report are listed in appendix II.

Lisa G. Jacobson
Director, Defense Financial Audits

Page 16                                  GAO/AIMD-97-45 Problem Disbursements
Page 17   GAO/AIMD-97-45 Problem Disbursements
Appendix I

Comments From the Department of Defense

             Page 18        GAO/AIMD-97-45 Problem Disbursements
Appendix I
Comments From the Department of Defense

Page 19                                   GAO/AIMD-97-45 Problem Disbursements
Appendix I
Comments From the Department of Defense

Page 20                                   GAO/AIMD-97-45 Problem Disbursements
Appendix II

Major Contributors to This Report

                       David Childress
Accounting and
Management Division,
Washington, D.C.
                       William Cordrey
Atlanta Regional       Bob Crowl
Office                 Marshall Hamlett
                       Sue Piyapongroj

(918863)               Page 21            GAO/AIMD-97-45 Problem Disbursements
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