oversight

Financial Management: Improved Reporting Needed for DOD Problem Disbursements

Published by the Government Accountability Office on 1997-05-01.

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

                 United States General Accounting Office

GAO              Report to Congressional Requesters




May 1997
                 FINANCIAL
                 MANAGEMENT
                 Improved Reporting
                 Needed for DOD
                 Problem
                 Disbursements




GAO/AIMD-97-59
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Accounting and Information
                   Management Division

                   B-276402

                   May 1, 1997

                   The Honorable John Glenn
                   Ranking Minority Member
                   Committee on Governmental Affairs
                   United States Senate

                   The Honorable Stephen Horn
                   Chairman, Subcommittee on Government
                     Management, Information and Technology
                   Committee on Government Reform and Oversight
                   House of Representatives

                   The Honorable Charles Grassley
                   United States Senate

                   As you requested, we reviewed Department of Defense (DOD) reporting on
                   the amount of its problem disbursements—an area that has 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. As discussed in more detail in the “Background”
                   section of this report, problem disbursements consist of aged in-transits,
                   unmatched disbursements, and negative unliquidated obligations.

                   DOD has many initiatives under way to reduce problem disbursements and,
                   in March 1996, DOD stated in its annual report to the President and the
                   Congress that eliminating problem disbursements was one of its key
                   financial reform projects. DOD reported $18 billion in problem
                   disbursements as of May 31, 1996, a reduction of $33 billion from the
                   $51 billion balance used as a baseline as of June 1993. For this report, we
                   reviewed the accuracy of the problem disbursement report as of May 31,
                   1996, the most recent data available at the start of our review. The
                   objective of our review was to determine whether DOD’s reporting is
                   producing accurate and consistent data needed to effectively measure its
                   progress and manage the reduction of its problem disbursements.


                   To ensure that problem disbursement reports are an effective management
Results in Brief   tool, DOD’s reports, at a minimum, need to accurately identify the amount




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of problem disbursements. However, the reports by Defense Finance and
Accounting Service (DFAS), which is responsible for preparing DOD’s
reports on problem disbursements, do not provide this needed
information. Our testing of problem disbursement amounts reported by
DFAS as of May 31, 1996, shows that the $18 billion total reported by DOD
was understated by at least $25 billion. Accordingly, neither the Congress
nor DOD management can rely on DOD’s reported amount to determine the
extent of problem disbursements or to monitor progress made in resolving
them.

Furthermore, the underlying data for DFAS’ reports are not sufficient to
ensure consistent reporting and do not provide basic information about
the sources and causes of problem disbursements. Additional data are
essential if DOD is to prioritize and focus reengineering efforts and other
corrective actions on those organizations, activities, and actions that are
the more significant contributors to disbursement problems and to
measure its success in addressing specific problems. While summary data
would be acceptable for some analyses, the ability to identify sources and
causes of problem disbursements depends on the availability of detailed
data about transactions that result in problem disbursements.

While DOD and DFAS have committed significant resources to reducing
problem disbursements, they have not taken the steps needed to ensure
(1) accurate and consistent reporting and (2) the availability of underlying
data that are needed to quantitatively measure and manage reduction
efforts. Although DFAS prepared its first comprehensive reporting guidance
in May 1996, the understatement we identified resulted from the guidance
(1) not being followed because DFAS did not establish adequate oversight
and controls over the reporting process, (2) not offering detailed
instructions for offsetting transactions, and (3) not appropriately
identifying certain types of transactions as problems.

In written comments on a draft of this report, DOD disagreed with our
findings and stated that it no longer characterizes one type of transaction,
known as in-transits, as problem disbursements. We believe aged
in-transits, which represent disbursements that have not been matched
with related obligations within DOD’s normal processing time of 60 or 120
days, are problem disbursements, and, until recently, they have been
treated as such by DOD. DOD also stated that the Department officially
reports in-transit disbursements on a net basis—that is, by offsetting
collections, reimbursements, or adjustments against disbursement
balances. This statement is inconsistent with the written policies of DOD



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             and DFAS, which require absolute amounts, and with numerous discussions
             we had with DOD and DFAS officials throughout the course of our work. To
             report these balances on a net basis grossly understates and masks the
             magnitude and seriousness of DOD’s long-standing disbursing problems.
             For example, if DOD had an in-transit amount of $10 related to a collection,
             DOD may not know the correct appropriation to credit. In addition, it may
             have a dibursement for $8 for which the correct appropriation to charge is
             unknown. DOD has two problems totaling $18 which must be resolved. To
             offset these amounts would show a total problem of $2, severely
             understating the problem.


             Federal agencies, including DOD, are responsible for ensuring that
Background   appropriated funds are used only for the purposes, and within the amounts
             and time frames, authorized by the Congress. To comply with legal and
             regulatory requirements, DOD organizations’ accounting and fund control
             systems must be able to accurately record disbursements as expenditures
             of appropriations and as reductions of previously recorded obligations.
             Proper matching of disbursements with related obligations ensures that
             the agency has reliable information on the amount of funds available for
             obligation and expenditure. Because problem disbursements are not
             properly accounted for, DOD is unable to ensure that it has complied with
             the Anti-Deficiency Act, which requires that disbursements not exceed
             available funds.

             Problem disbursements not only affect reports prepared to monitor the
             obligation and expenditure of budgetary resources but also DOD’s financial
             position and results of operations. In enacting the Chief Financial Officers
             Act, as expanded by the Government Management Reform Act, the
             Congress called for annual audited financial statements that provide the
             needed information for both monitoring the effective allocation of
             budgetary resources as well as for assessing management performance
             and stewardship. The extent of problem disbursements currently results in
             inaccuracies in DOD’s financial statements and will also impact financial
             statements prepared pursuant to new reporting requirements that will be
             implemented in fiscal year 1998, including the program costs reported in
             the statement of net costs and the status of budgetary resources in the
             statement of budgetary resources.1



             1
              DOD is required to prepare audited financial statements for fiscal years 1996 and beyond in the format
             prescribed by the Office of Management and Budget. Beginning in fiscal year 1998, the information
             required will be much more extensive than now and will include the statements noted above.



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DFAS is responsible for reporting the status of problem disbursements each
month to the DOD Comptroller. These reports are used to determine the
amount of problem disbursements and, by comparison with prior months,
to determine the effectiveness of DOD reduction efforts. In addition, DOD
uses the reported amounts in its annual reports to the President and the
Congress to report on progress in financial management reform. The
reporting process begins when DFAS centers collect and compile problem
disbursement balances for the military services for which they are
responsible. Subsequently, these centers submit compiled problem
disbursement balances to DFAS headquarters for consolidation.

Both DOD and DFAS guidance provide the framework for reporting the
status of problem disbursements. The most comprehensive DOD guidance,
which was issued in June 1995, establishes policies and procedures for
researching and resolving problem disbursements. The most
comprehensive DFAS guidance, issued in May 1996, updated previously
issued guidance and provided instructions for reporting. Although not
involving major changes to previous guidance, the May 1996 guidance was
intended to improve the consistency of problem disbursement information
by formalizing the format for reporting problem disbursements. Under this
guidance, DFAS headquarters required its centers to report on the following
categories of problem disbursements.

In-transit—Refers to disbursements and collections that have been
reported to Treasury but have either not been received by the accounting
station or have been received but not processed or posted by the
accounting station.2 In-transit disbursements can be made by an
accounting station for its own transactions and for other accounting
stations that are responsible for recording these disbursements into their
accounting records. These disbursements can be for activities within the
same military service or for different military services. Accounting stations
that make disbursements for others are required to forward supporting
documentation to the appropriate station to be matched to corresponding
obligations. For the in-transit category, DFAS reports as problem
disbursements transactions it considers over-aged—specifically, those
(1) over 60 days old if the disbursing and accounting stations are assigned
to the same DFAS center or (2) over 120 days old if the disbursing station is
assigned to one DFAS center and the accounting station is assigned to
another DFAS center, DOD component, or federal agency.



2
 An activity responsible for maintaining accounting records of assigned fundholders, i.e., accounting
station.



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Unmatched Disbursements—Refers to disbursements and collections that
have been received by the accounting station, attempted to be matched to
an obligation in the accounting system, but were not matched because an
obligation was not identified in the accounting system. For example, if one
or more of the accounting line elements for each transaction, such as
appropriation, fiscal year, and program code, do not match the
information in the accounting records, then the transaction is considered
unmatched.

Negative Unliquidated Obligations (NULO)—Refers to disbursements that
have been received and posted to specific obligations by the accounting
station, but recorded disbursements exceed recorded obligations (i.e.,
more funds have been paid out than were obligated).

For illustrative purposes, one can draw analogies between these three
types of problem disbursements and three situations which could arise
with personal financial transactions. For example, in-transits can be
likened, in a general sense, to a situation in which a couple shares one
checkbook and one check register. If the wife has the checkbook and is
out of town on a business trip and the husband is at home with the check
register, the husband will not be able to record any checks in the register
until he receives documentation from his wife as to the amount and nature
of her expenditures. The time lag in recording the transactions could be
several days, depending on whether the wife phones, faxes, or mails the
needed information to her husband. Because the wife does not have the
check register and is unaware of transactions that have been created by
her husband, the couple may be faced with an overdrawn account when all
expenditures are known. This problem is compounded for DOD because it
allows a time lag (in-transit period), of up to 120 days as explained
previously.

Unmatched disbursements can be compared to a situation in which a
person receives the bank statement for a checking account, which lists all
the checks that have cleared that month, including the date of the check,
the amount, and the recipient. However, in attempting to reconcile the
bank statement with the check register, the person finds several
discrepancies. These discrepancies could be due to errors in entering
checks in the register, including failure to enter transactions at all, or bank
errors. The process of identifying and correcting errors becomes even
more complicated if we assume the person has two checking accounts and
sometimes records expenditures in the wrong check register. DOD’s




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              situation is far more complicated because about 80 stations3 post and
              match millions of disbursements with obligations.

              Finally, negative unliquidated obligations can be likened to an overdrawn
              checking account register. The causes can include problems in accurately
              recording checks and deposits in the correct account register. Similarly, at
              DOD, expenditures might exceed recorded obligated amounts, as explained
              above.

              In a December 6, 1996, memorandum, the DOD Comptroller directed DFAS
              to stop the reporting of in-transits with the unmatched disbursements and
              negative unliquidated obligations and to develop a new methodology for
              reporting in-transits. The Director, DFAS, implemented the Comptroller’s
              change and segregated in-transit problem disbursements beginning with
              the report for November 30, 1996 that was issued in January 1997.

              In a February 1997 letter,4 we expressed our concerns about excluding
              aged in-transits from problem disbursement reports, which serve as the
              basis for communicating progress in reducing problem disbursements to
              the President and the Congress. In response, DOD agreed to continue
              reporting in-transits with unmatched disbursements and negative
              unliquidated obligations in external communications but indicated that the
              three types of problems would not be aggregated into one problem
              disbursement report.


              To assess whether DFAS compiled and reported problem disbursement
Scope and     balances in accordance with established guidance, and whether quality
Methodology   controls for such reporting existed, we reviewed Comptroller and DFAS
              guidance for problem disbursement reporting dated June 30, 1995, and
              May 15, 1996, respectively. We also reviewed the quality controls in place
              to ensure accurate and consistent reporting and the problem disbursement
              data used for the compilation of the reports. We did not audit the validity
              of the underlying data. Instead, we reviewed the compilation of reported
              amounts at DFAS centers. The testing of detailed transactional
              disbursement data, which should be done as a part of the audit of DOD’s
              consolidated financial statements, could reveal further inaccuracies in
              reported problem disbursement balances.


              3
               DFAS is in the process of consolidating its accounting stations from over 300 stations to not more
              than 21 stations. As of March 1997, about 80 accounting stations were operational.
              4
               DOD Problem Disbursements (GAO/AIMD-97-36R, February 20, 1997).



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                        Specifically, we reviewed how DFAS summarized and reported DOD’s
                        problem disbursements as of May 31, 1996, and compared this reporting to
                        established guidance. DFAS’ May 15, 1996, guidance was in effect for about
                        2 months before the May 1996 problem disbursement report was issued in
                        July 1996. In addition, this guidance, which was to help consolidate and
                        clarify problem disbursement reporting requirements, was essentially an
                        update of guidance previously issued in September 1995 and earlier.

                        We performed our work at three DFAS centers—Cleveland, Denver, and
                        Indianapolis—that accounted for 95 percent of the reported problems; the
                        headquarters office in Washington, D.C., that consolidated the data and
                        finalized the monthly report; and selected accounting stations. We
                        obtained the databases used to quantify problem disbursement amounts
                        and compared the amounts in these databases to center reports and
                        consolidated totals. Where database totals did not agree with the reported
                        amounts, we discussed the nature and causes of differences with center
                        and headquarters officials. In addition, we assessed the controls in place at
                        these locations to ensure compliance with guidance and accurate
                        reporting. We also compared DOD’s May 31, 1996, report with prior and
                        subsequent months’ reports to determine if significant changes or
                        fluctuations had occurred.

                        We performed our work from May 1996 through December 1996 in
                        accordance with generally accepted government auditing standards. We
                        requested written comments on a draft of this report from the Secretary of
                        Defense or his designee. The Under Secretary of Defense (Comptroller)
                        provided written comments. These comments are discussed in the
                        “Agency Comments and Our Evaluation” section and throughout the
                        report where appropriate. DOD’s comments are reprinted in appendix II.


                        DOD’s problem disbursement reports did not show the full extent of
Accurate and            problem disbursements and, accordingly, did not provide a meaningful
Complete Problem        indicator for monitoring DOD’s reduction efforts. Our testing of the May 31,
Disbursement Data       1996, reported amounts showed that the balance was inaccurate and that
                        basic data needed to manage efforts to reduce problem disbursements
Not Ensured by          were not collected. In addition, DFAS did not establish adequate guidance
Guidance and            and effective controls to ensure accurate and consistent reporting of
                        needed data.
Oversight
Problem Disbursement    DFAS’May 31, 1996, report significantly understated DOD’s problem
Balance Is Inaccurate   disbursement balance. Our analysis of the reported amount showed that,



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                   in some instances, DFAS centers (1) excluded amounts from reported
                   balances, (2) misclassified amounts within reporting categories, and
                   (3) incorrectly aged transactions. We estimated that the DFAS reported total
                   of $18 billion was understated by at least $25 billion based on using
                   available data, existing guidance, and our adjustments for areas that the
                   guidance did not address but we felt were appropriate. Appendix I
                   summarizes these reporting problems, which are also discussed in more
                   detail in the following paragraphs.


Excluded Amounts   As we and the DOD Inspector General (IG) previously reported in 1994,5
                   activities can significantly understate problem disbursement balances
                   when problem disbursement amounts are excluded from reporting. We
                   found that DFAS continues to exclude large problem disbursement amounts
                   when it (1) offsets positive and negative amounts that result from
                   disbursements, collections, reimbursements, or adjustments or (2) omits
                   amounts from problem disbursement totals. In responding to our previous
                   report, DOD and DFAS agreed that problem transactions that involve
                   disbursements, collections, reimbursements, or adjustments should not be
                   offset. In written comments on a draft of this report, DOD stated that the
                   Department officially reports in-transit disbursements on a net basis—that
                   is, by offsetting collections, reimbursements, or adjustments against
                   disbursement balances. This statement is inconsistent with the written
                   policies of DOD and DFAS, which require absolute amounts, and with the
                   numerous discussions we had with DOD and DFAS officials throughout the
                   course of our work. Absolute or total reporting of problem disbursement
                   balances is necessary to present the full magnitude or impact of the
                   problems and ensure that all problem disbursements are reported.

                   In the May 31, 1996, balance, about $12.9 billion of the quantifiable
                   understatements represented instances where DFAS centers continued to
                   offset positive and negative amounts. Specifically, DFAS Cleveland offset
                   amounts for all in-transit categories while DFAS Indianapolis and Denver
                   offset amounts for certain in-transit categories. For example, DFAS
                   Cleveland reported a problem disbursement amount of $409 million for
                   transactions in a suspense account where the correct appropriation to be
                   charged or credited had not been identified. This balance represented
                   disbursements, generally positive amounts, of $1.04 billion and collection
                   and reimbursements, generally negative amounts, of $631 million. Because
                   the two amounts represent different types of transactions, they should not

                   5
                    Financial Management: Status of Defense Efforts to Correct Disbursement Problems
                   (GAO/AIMD-95-7, October 5, 1994) and Uncleared Transactions By and For Others (DOD OIG 94-048,
                   March 2, 1994).



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have been used to offset one another. If DFAS guidance had been properly
followed, a problem disbursement amount of $1.7 billion, an over threefold
increase, would have been reported. Thus, offsetting these two amounts
resulted in an understatement of $1.3 billion.

In another instance, two of the three centers we reviewed inappropriately
offset problem disbursement transactions with collections and
reimbursement transactions. At one center, transactions were offset if
they pertained to the same accounting station. At the other center,
transactions were offset if they related to the same fiscal station and
activity total. Therefore, the reported balance was not based on individual
transaction data. For example, DFAS Denver, for May 1996, offset
disbursements, collections, and reimbursements by accounting station and
then reported $1 billion as problem disbursements for one of its in-transit
categories. DFAS Denver would have reported $1.2 billion had it obtained a
total for each problem disbursement transaction, resulting in an
understatement of about $200 million.

As illustrated above, reporting problem disbursement amounts based on
detailed transaction data is generally preferable. However, reporting the
total of all transactions as problem disbursements is not appropriate in all
cases. For example, if a problem disbursement was initially recorded at
$100 and $55 had been entered as an adjusting amount, representing a
negative number, and both transactions remain in the data file, the total
problem disbursements based on transactional detail would be $155, not
the remaining problem disbursement balance of $45. We examined DFAS
Cleveland’s files to identify relationships such as voucher number,
accounting line, or reversal indicator to determine which transactions had
a logical relationship and should offset one another. Those problem
disbursements without these relationships should be reported in total in
accordance with DFAS guidance. By using this process, we determined that
a more accurate problem disbursement amount for one problem
disbursement data file would be $3.6 billion, about $2.6 billion more than
the $1 billion reported by DFAS Cleveland.

In addition to offsetting unrelated transactions, DFAS centers omitted about
$9.5 billion from their May 31, 1996, problem disbursement reports. The
identified understatement primarily resulted from DFAS Indianapolis
omitting problem disbursement amounts for accounts not considered its
responsibility and DFAS Cleveland omitting transactions that we believe
represent problem disbursements although they were not specifically
defined as problems by DFAS policy.



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We noted two instances where DFAS Indianapolis omitted problem
disbursement amounts. In the first instance, DFAS Indianapolis, although
responsible for reporting Army problem disbursements, omitted
$3.8 billion of such disbursements relating to charges made by other
military services against Army funds. Specifically, DFAS Indianapolis posted
these charges in a suspense account because supporting documentation,
which would have allowed it to recognize these charges as Army
expenditures, remained outstanding for over a year. However, DFAS
Indianapolis deleted the suspense amount from its problem disbursement
total.

In the second instance, DFAS Indianapolis did not ensure that all problem
disbursements relating to the Office of the Secretary of Defense (OSD)
were reported. We noted several instances where OSD funds were not
visible in any of DFAS’ problem disbursement reports. According to DFAS
Indianapolis officials, the Indianapolis center responsibilities for OSD funds
included reconciling related disbursements to Treasury balances,
reporting problem disbursements for Army-managed OSD funds, and
consolidating OSD problem disbursements reported by Defense agencies.
The completeness and accuracy of OSD problem disbursement reports
were the responsibility of submitting stations. However, we found
instances where problem disbursements were omitted from DFAS reports
for a number of OSD accounts, such as OSD’s budget clearing accounts.6
DFAS guidance identifies budget clearing accounts as a category of problem
disbursement. DFAS Indianapolis did not include these accounts because
each DFAS center was concerned with reporting only the portion of OSD
funds for which it was responsible, and DFAS Indianapolis did not have a
means to ensure that problem disbursements for all OSD funds were
identified. Although we did not quantify the amount of problem
disbursement understatements associated with OSD funds for the May 1996
report, DFAS Indianapolis identified about $400 million in December 1996
that it previously omitted in its problem disbursement reports.

In commenting on a draft of this report, DOD mistakenly combined
information from the two examples presented above. As stated above, the
first example related to $3.8 billion in an Army suspense account at DFAS
Indianapolis. In September 1996, after we pointed out this problem, DFAS
Indianapolis began to include the amounts in the Army suspense account
in its monthly problem disbursement report. However, DFAS Indianapolis
reported an adjusted net amount of about $214 million rather than the

6
 Budget clearing accounts are Treasury accounts in which transactions are to be temporarily recorded
until sufficient data are available to permit recording in the appropriate account.



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total (absolute) amount of $5 billion. Our second example related to OSD
funds for which we were not able to quantify the understatement. DOD’s
representation of the $3.8 billion of transactions in the Army suspense
account as managerial information related to OSD funds (Department code
97) is inconsistent with our analysis and DFAS Indianapolis’ subsequent
characterization of these transactions as problem disbursements.

DFAS Cleveland also omitted problem disbursement amounts because
certain transactions were considered recurring and routine, and reporting
guidance specifically required the omission of these transactions from
problem disbursement reports. Routine and recurring transactions, such
as payroll disbursements made through automated teller machines (ATMs),
are recorded in temporary holding suspense accounts by DFAS Cleveland
and facilitate payroll disbursements aboard Navy ships. We agree that
recurring and routine transactions held in suspense accounts should not
be reported as problem disbursements. However, when transactions held
in such accounts are neither routine nor temporary, the transactions
should be included as problem disbursements. For example, after
accounting for appropriate offsetting transactions, we noted that about
$4.5 billion of $17 billion in these accounts were related to closed or
invalid7 offices and decommissioned ships. In some cases, balances
remained outstanding for several years after offices were closed and ships
were decommissioned. Over 60 percent of the dollar amount and 65
percent of the number of transactions were at least 2 years old, with some
balances originating as far back as January 1988. According to DOD
disbursement regulations, such balances represent irregularities which
must be promptly investigated. While the $4.5 billion representing closed
or invalid offices and decommissioned ships appear to be problems, a
detailed analysis of transactions and supporting documentation would be
required to determine whether other transactions in these accounts are
problem disbursements.

In commenting on a draft of this report, DOD stated that the net
outstanding balance for the ATM transactions in the suspense accounts is
about $10 million and only this amount would require corrective action.
We disagree. These accounts relate to hundreds of disbursing offices and
thousands of individual transactions. To simply offset all those ATM
accounts with positive outstanding balances against all those with
negative outstanding balances seriously understates the magnitude of this
problem and the amount of research needed to resolve these irregularities,
as required by DOD disbursement regulations.

7
 Offices that were not coded as being open or closed.



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Misclassification of       As discussed previously, problem disbursements were reported in three
Problem Disbursements in   categories—NULOs, unmatched disbursements, and in-transit
the In-transit Category    disbursements. NULOs and unmatched disbursements are considered
                           further along in the accounting cycle because an attempt has been made to
                           match disbursements to corresponding obligations. Although in-transit
                           disbursements have yet to be matched against corresponding obligations,
                           they are viewed as an issue when an attempt to match has not been made
                           for an extended time period. According to its May 1996 guidance, DFAS
                           headquarters, when compiling data from the centers for problem
                           disbursement reporting, excludes amounts for in-transit categories that
                           are not more than 60 or 120 days old depending on the type of
                           disbursement. As previously discussed, in-transit transactions are
                           transactions that have either not been received by the accounting station
                           or have been received but not processed or posted by the accounting
                           station. DOD has determined that transactions within this “normal”
                           in-transit time are not considered problem disbursements and therefore
                           excludes these amounts from the problem disbursement reports.8

                           Although it could be argued that 60 or 120 days may be too long for a
                           transaction to remain unrecorded in the accounting systems, we are not
                           taking exception to this processing time in this report. However, we
                           believe that certain transactions that are included in the in-transit category
                           are known problems and should not be granted this “normal” processing
                           time before being reported as problems. For example, DFAS Cleveland, in
                           following DFAS headquarters guidance, excluded from its report $2.2 billion
                           for transactions that failed edit checks but were less than 60 days old. Edit
                           checks are performed by DFAS centers prior to sending transactions to
                           accounting stations for posting to accounting records and include checks
                           to verify that cited appropriations are valid. Transactions that fail edit
                           checks because of invalid appropriations, program limits, or other vital
                           accounting data, are known problem disbursements. Like unmatched
                           problem disbursements, they should be reported as problems regardless of
                           age. While DFAS’ May 1996 guidance allows edit failures to be reported as
                           in-transits, such reporting does not appear to be in agreement with the DOD
                           Comptroller guidance. The DOD Comptroller guidance defines
                           disbursements in suspense accounts, which contain these edit failures,
                           separately from in-transit disbursements. Accordingly, the $2.2 billion for
                           suspense transactions less than 60 days old, including edit failures, should
                           have been reported as problem disbursements.


                           8
                            DOD officials stated that DOD has reluctantly accepted, for the present time, these time frames as the
                           “normal” processing times due to the limitations of existing systems. They add that DFAS has been
                           tasked to reengineer the disbursement and collection reporting processes.



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                  In commenting on a draft of this report, DOD stated the Department does
                  not intend to impose a special new requirement to identify and report all
                  transactions that failed edit checks. However, DOD already has readily
                  available information on these transactions. For example, DOD’s May 1996
                  report included a footnote that stated that $14 billion (which included the
                  $2.2 billion of edit failures) was not included in problem disbursement
                  totals because of the 60- or 120-day exclusion criteria. As stated above,
                  those transactions identified as edit failures should not be categorized as
                  in-transits and therefore should be reported immediately rather than
                  waiting until the 60- or 120-day “normal” processing period has elapsed.

                  Another instance of underreporting occurred because DFAS Indianapolis
                  reported unmatched disbursements as in-transits. Because DFAS
                  headquarters excludes certain in-transit balances less than 60 days old
                  from problem disbursement amounts, but reports all unmatched
                  transactions regardless of age, problem disbursements are understated
                  when unmatched balances are misreported as in-transits. DFAS Indianapolis
                  officials said that their accounting system did not distinguish between
                  unmatched and in-transit problem disbursements when the accounting
                  and disbursing stations are different. Accordingly, data were not readily
                  available to determine what portion of the $3.5 billion reported as
                  in-transit disbursements less than 60 days old should have been reported
                  as unmatched disbursements and as problem disbursements. Reporting of
                  problem disbursements by correct category is not only necessary for
                  compiling accurate problem disbursement reports but for also ensuring
                  that management actions needed to address the problems are
                  appropriately focused. Management actions to resolve these problems
                  would normally be different for unmatched disbursements and for
                  in-transit disbursements.


Incorrect Aging   As discussed earlier, the number of days that an in-transit transaction is in
                  process can determine whether it is considered “normal” or is counted as
                  a problem disbursement. For example, disbursements for which the
                  disbursing station and the accounting station are different but both
                  stations report to the same DFAS center are not considered problem
                  disbursements unless the processing time exceeds 60 days. DOD considers
                  up to 60 days as the normal time to process such transactions.
                  Accordingly, aging of transactions (number of days since transaction
                  originated) becomes critical in determining which in-transit items are
                  classified as problem disbursements. DFAS guidance on problem
                  disbursements does not clearly define what date should be used to age a



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disbursement. However, the Comptroller’s June 1995 guidance, with which
we agree, clearly defines the date the disbursement was paid as the
beginning date.

We found that certain DFAS centers inappropriately aged disbursements.
DFAS Cleveland, for the most part, used the date paid for aging
disbursements. However, Denver and Indianapolis used later
dates—generally the date the transaction was sent to the accounting
station or received by the DFAS center. As a result, when DFAS headquarters
exclude from reporting in-transit amounts less than 60 or 120 days that are
underaged by these centers, the problem disbursement balance is
understated. Because these centers often did not collect data necessary to
properly age disbursements, we were only able to determine and quantify
the resulting understatements of problem disbursement amounts where
data were available. As of May 31, 1996, we identified three instances of
understatements related to improper aging that we could quantify. These
three instances totaled about $662 million and are discussed below.

We identified one DFAS Indianapolis problem disbursement database that
required both disbursement and processed dates. However, about 14
percent of the 108,000 transactions in the database either did not contain
the date paid or contained obviously invalid data. For the transactions
where we could identify date paid in this file, problem disbursements were
understated by at least $258 million as of May 31, 1996, because
transactions were incorrectly considered less than 60 days old and not
reported as problem disbursements. In some cases, the transactions were
incorrectly aged by at least 90 days. We did not perform similar analyses
for DFAS Denver because problem disbursement data files did not include
date paid information.

In addition, DFAS Indianapolis added an extra 30 days beyond the 60 days
before certain in-transit transactions were reported as problems. DFAS
Indianapolis misreported these in-transit transactions by showing that they
were from 0 to 60 days old when they were actually up to 90 days old.
According to Indianapolis officials, they added in this extra time to
compensate for slow mail handling of voucher information. In this
instance, if DFAS Indianapolis had reported all in-transits older than 60
days, DOD’s May 31, 1996, balance would have been $250 million more.

Likewise, in June 1, 1995, guidance to its fiscal stations, DFAS Indianapolis
stated that NULOs discovered on October 1, 1994, or after were to be
reported in the month after the month of discovery. Officials said that



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                           B-276402




                           fiscal stations were to use this period to resolve NULOs. Determining the
                           precise amount of understatement because of this misreporting would be
                           time-consuming because NULO balances existed at a multitude of fiscal
                           stations and May 1996 data were no longer available. However, we
                           reviewed DFAS Indianapolis’ subsequent month NULO report and determined
                           that, at a minimum, $154 million of NULOs were excluded by fiscal stations
                           following Indianapolis’ instructions.


Basic Data About Sources   In March 1996, DOD reported in its fiscal year 1996 report to the President
and Causes Not Collected   and the Congress that one of its financial reform projects was to eliminate
                           problem disbursements and that one critical component of its financial
                           management reform efforts was to reengineer its business processes. DOD
                           has numerous initiatives under way to make both short-term incremental
                           improvements as well as to develop long-term initiatives described by DOD
                           as reengineering entire processes. However, in reengineering business
                           processes to eliminate problem disbursements, DOD needs additional basic
                           data about the sources and causes of problem disbursements to determine
                           the most efficient corrective actions. In addition, baseline data on the
                           sources and causes of problem disbursements are necessary to establish
                           performance measures to determine whether the reengineered processes
                           are achieving desired results.

                           In assessing the business case for reengineering, performance
                           measurements and benchmarking are key to making this determination
                           because they help an agency understand the nature and size of the gap
                           between current and desired performance levels. In addition, performance
                           measures are to be used to (1) determine whether the new process is
                           achieving the desired results and (2) provide feedback on problem areas
                           that need further improvement. Performance measures can also be
                           valuable in determining the cost/benefit of incremental short-term
                           initiatives.

                           We noted during our review that DOD did not collect the basic data
                           necessary to develop and select improvement initiatives nor to measure
                           the success of its initiatives. For example, in its report, titled Eliminating
                           Unmatched Disbursements, A Combined Approach, dated June 1995, DOD
                           stated that the precise reasons causing contractor payments to become
                           unmatched were difficult to pinpoint because quantitative data were
                           unavailable. As a result, the determination of root causes was based on
                           observations and experience. Accordingly, the amount of problem
                           disbursements that related initiatives were to resolve was undeterminable.



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    In addition, although DOD is working toward matching every disbursement
    to an obligation prior to payment—referred to as prevalidation—as a key
    initiative to prevent future problem disbursements, it is unable to
    adequately measure whether the initiative is achieving desired results. For
    example, one of the indicators used to measure progress in reducing
    problem disbursements is the number of new problem disbursements.
    However, DFAS collects this performance measure inconsistently.
    Specifically,

•   DFAS Cleveland reports the actual number of problem disbursement
    transactions;
•   DFAS Denver estimates its volume of transactions based on the average
    number of transactions typically sent to accounting stations for a month;
    and
•   DFAS Indianapolis understates its volume of transactions by summarizing
    and reporting as one transaction multiple individual transactions with the
    same appropriation and accounting station.

    As a result of these inconsistent reporting methods, DOD cannot quantify
    new problem disbursements.

    Compiling basic information necessary to perform a comprehensive
    analysis on the causes of problem disbursements requires detailed
    transactional data that underlie summary reporting. The actual number of
    problem disbursements, the total dollar amounts, type of disbursements,
    date paid, funding stations, and disbursing offices are examples of such
    data. While some of these data are available at some locations, they are
    not consistently collected, compiled, and used in analyzing disbursement
    problems and determining progress resulting from management initiatives.
    For example, DFAS Indianapolis was not able to determine the full scope of
    problem disbursements because only summary data were available for
    reporting problem disbursements. DFAS Indianapolis did not have readily
    available detailed transactional data. Until detailed transactional
    information is collected, consolidated, and analyzed, DFAS Indianapolis will
    not be able to adequately identify the nature and scope of problem
    disbursements and develop adequate performance measures for related
    initiatives. Collecting consistent data that identify and quantify the nature
    of these problems would allow DOD to better support management
    initiatives to reduce such problems.




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                          In a December 6, 1996, memorandum, the DOD Comptroller requested that
                          a new methodology be developed for reporting on in-transit disbursements
                          and that they be tracked by type of transaction and by origination. As
                          discussed above, we agree that more detailed data are needed to
                          determine the scope and sources of the problems and whether initiatives
                          aimed at fixing the problems are effective.

Efforts Not Adequate to   DFAS’  efforts have not been adequate to ensure the accurate and consistent
Ensure Accurate and       reporting of problem disbursements. Specifically, although DFAS prepared
Consistent Reporting of   its first consolidated guidance in May 1996, our identified understatements
                          resulted from the guidance (1) not being followed, (2) not offering detailed
Needed Data               instructions for offsetting transactions, and (3) not appropriately
                          identifying some transactions as problems. In addition, DFAS did not
                          establish adequate oversight and controls over the reporting process.

                          As previously stated in this report, the DFAS centers we reviewed
                          significantly understated problem disbursement balances. Although
                          guidance was established by DFAS headquarters for reporting problem
                          disbursements, DFAS headquarters did not establish enforcement
                          mechanisms to ensure that its centers followed it. For example, the duties
                          of two staff at DFAS headquarters assigned to problem disbursements
                          primarily consisted of consolidating center balances into final reports.
                          They did not view their responsibilities as ensuring that data submitted by
                          center personnel were accurate or that DFAS and DOD guidance were
                          followed. Moreover, one of the two staff positions is rotated annually,
                          resulting in a loss of institutional knowledge and a “learning curve”
                          situation every time a new person is assigned.

                          We also found that the DFAS guidance was not consistent with the DOD
                          Comptroller guidance in reporting certain problem disbursements. DFAS
                          guidance treated edit failures the same as in-transits—they were not
                          reported as problems until the processing time exceeded 60 or 120 days.
                          The DOD Comptroller guidance recognized edit failures as problems from
                          the date they occurred. Further, we found instances where unrelated
                          transactions were offset against one another and where dates used to age
                          problem disbursements were later than the disbursement date. These
                          instances occurred because DFAS guidance did not expand on certain
                          requirements for reporting problem disbursements. For example, DFAS
                          guidance required problem disbursement reports to be presented in total,
                          without offsetting, by aging category but provided no other guidance.
                          When adjustments or other offsetting transactions are included in problem
                          disbursement data files, DFAS guidance did not specify how to treat them in



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                  B-276402




                  compiling problem disbursement reports. Likewise, DFAS guidance did not
                  specify how to age problem disbursements when processing does not
                  capture disbursement dates.

                  Lastly, we found that control procedures for ensuring accurate problem
                  disbursement reporting were often not documented at DFAS centers and at
                  headquarters. Although ad hoc procedures existed in some cases, the
                  errors we identified indicate that this approach was not effective in
                  ensuring that DOD’s problem disbursement reports were as accurate as
                  possible. For example, DFAS Cleveland maintained a checklist for ensuring
                  the completeness of problem disbursement data files. However, it relied
                  solely on the submitting accounting stations to provide reliable problem
                  disbursement data. Although we did not test the validity of data file
                  transactions, DFAS Cleveland noted two instances where data files did not
                  agree with hard copy totals, and it used the hard copy totals without
                  researching the reasons for the differences and reconciling the data.
                  Because of the general lack of controls over reporting, DFAS cannot ensure
                  the credibility of DOD’s problem disbursement reports.


                  The reporting issues we identified raise doubt about whether DOD has the
Conclusions       appropriate tools necessary to design and evaluate efforts to reduce
                  problem disbursements. Because DOD has not successfully identified the
                  scope of its problem disbursements, related reports do not provide a basis
                  to measure reduction efforts. In addition, because the basic data
                  underlying DOD’s reports are often not sufficient to identify specific causes
                  of problems, DOD does not have management information necessary to
                  effectively manage the reduction of these problems. In order to effectively
                  manage the reduction of its problem disbursements, DOD needs to be able
                  to identify the root causes of its problems, prioritize them, perform
                  corrective actions, and measure its success in resolving problem
                  disbursements. Furthermore, until DOD reduces its problem disbursements
                  to acceptable levels, DOD will not be able to accurately report on its
                  operating costs and budget execution in required financial statements.


                  We recommend that the Secretary of Defense ensure that the Under
Recommendations   Secretary of Defense (Comptroller) take the following steps to provide for
                  accurate and consistent reporting of DOD’s problem disbursements.

                  (1) Revise DFAS reporting guidance to include:




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                         B-276402




                     •   reporting problem disbursements from detailed transactional data at the
                         DFAS center level, which would allow DOD to maintain a source of
                         management data necessary to identify, quantify, and resolve its problems
                         and would provide for more meaningful calculations of amounts;
                     •   detailed instructions addressing the offsetting of positive and negative
                         transactions and the logical relationships, such as voucher number,
                         accounting line, or reversal indicator, of these transactions;
                     •   reporting all transactions that are rejected by edit routines as problems
                         regardless of age, consistent with current DOD Comptroller guidance; and
                     •   reporting additional problems such as recurring and routine suspense
                         transactions citing closed or invalid disbursing offices and
                         decommissioned ships.

                         (2) Establish adequate quality controls over the collection, compilation,
                         and reporting of problem disbursements at DFAS to enhance the credibility
                         of problem disbursement reports. Such measures, if properly developed
                         and executed, should not be costly to implement and would establish
                         reporting credibility. At a minimum, these controls should:

                     •   include documentation of the process, procedures, and sources of data
                         used for preparing problem disbursement reports at all reporting centers
                         and headquarters; and
                     •   establish an accountability process to include reviewing and approving the
                         compilation of the reported amounts at all reporting levels, enforcing
                         existing guidance for classifying and aging transactions, and reporting
                         total problem disbursement amounts.


                         In written comments on a draft of this report, DOD did not concur with our
Agency Comments          findings, conclusions, and recommendations and stated that the report
and Our Evaluation       was totally misleading and, in part, incorrect. DOD based its position on
                         two major assertions: (1) DOD no longer considers in-transits to be problem
                         disbursements and the understatements we identified almost exclusively
                         relate to in-transit transactions and (2) the underreporting we identified is
                         really a definitional issue related to the use of absolute or net numbers for
                         reporting purposes.

                         We disagree with DOD’s position. First, DOD’s comments ignore the fact that
                         as of May 1996 (the date of the DOD problem disbursement report that we
                         reviewed), DOD’s policies and procedures clearly defined aged in-transits
                         as problem disbursements, and they were included in DOD’s problem
                         disbursement reports. Our report defines the three types of problem



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B-276402




disbursements that were included in DOD’s May 1996 comprehensive
reporting guidance: in-transits, unmatched disbursements, and negative
unliquidated obligations. DOD began including in-transits in its problem
disbursement reports in response to our recommendation in an October
1994 report.9 DOD’s official response to that report, a letter dated April 17,
1995, from the Deputy Chief Financial Officer, clearly states: “The
Department agrees that in-transit transactions over 60 days old are
disbursing problems.”

As stated in the “Background” section of our report, it was not until
December 1996, after we had completed our field work and briefed DOD
officials on our findings, that the Under Secretary of Defense directed that
in-transits be excluded from DOD’s monthly reporting. We issued an interim
report in February 199710 to discuss our position that eliminating these
transactions from the reports would adversely affect the reports’ accuracy,
completeness, and usefulness as an oversight tool. In that report, we
stated that any transaction that has not been matched with an obligation
within DOD’s “normal” processing time of 60 or 120 days is clearly a
problem disbursement that should be reported, researched, and resolved.
Moreover, DOD’s aging information on the $7.7 billion of aged in-transits
included in its problem disbursement total as of May 31, 1996, showed that
over $1.4 billion had been in the “in-transit” category for over 2 years.
Clearly, such aged in-transits are problem transactions that should be
identified and monitored just as unmatched disbursements and NULOs are.
In his February 1997 comments on our interim report, the Under Secretary
of Defense (Comptroller) stated that DOD would continue to report
in-transits along with problem disbursements in external communications.

In our evaluation of DOD’s comments on our interim report, we agreed that
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 responsive to our recommendation that in-transits
continue to be reported. At that time, we believed that DOD’s intent was to
report in-transits separately from unmatched disbursements and NULOs,
but that they would, nonetheless, be reported and tracked. However, we
are concerned about DOD’s assertion in its comments that the Department
no longer views in-transits as problem disbursements. We continue to
believe that any discussion of problem disbursements is incomplete


9
 Financial Management: Status of Defense Efforts to Correct Disbursement Problems
(GAO/AIMD-95-7, October 5, 1994).
10
    DOD Problem Disbursements (GAO/AIMD-97-36R).



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B-276402




without a discussion of in-transits and that they should continue to be
reported externally.

Regarding the second major issue—offsetting reimbursements,
collections, or adjustments against disbursements (referred to as net)
versus total (or absolute) reporting—DOD’s statement that it officially
reports in-transits on a net basis is not consistent with the written policies
of DOD and DFAS and with the numerous interviews and discussions we had
with DOD and DFAS officials throughout the course of our work. As stated in
the report, in response to DOD IG and GAO reports issued in 1994, DOD
agreed that problem disbursement transactions should not be offset. Since
that time, the Department’s official policy for reporting problem
disbursements has been on a total or absolute basis, as stated in DFAS’
May 1996 guidance.

Reporting the total or absolute amount of problem disbursements helps
ensure that accurate baseline data are available to focus attention on the
resolution of problem disbursements and measure progress towards that
goal. To illustrate, if DOD has an in-transit amount of $10 related to a
collection or reimbursement, DOD may not know the correct appropriation
to which it should be credited nor whether it has the authority to spend it.
Meanwhile, it may also have an in-transit disbursement amount of $8 for
which the correct appropriation to charge is not known. Thus, DOD has two
problems that must be resolved—one for $10 and one for $8—for a total of
$18. To offset these amounts and indicate a total problem amount of $2, as
DOD advocates, would be inaccurate and misleading.


Our report explains that offsetting unrelated transactions is generally not
appropriate. However, in cases where a proper relationship can be
demonstrated, it may be appropriate. In arriving at the estimated
$25 billion understatement of problem disbursements, we offset
transactions when we could identify a relationship between transactions.
DOD’s apparent confusion over its own reporting policy is further support
for our recommendation that its reporting guidance be revised to include
detailed instructions addressing the offsetting of positive and negative
transactions.

In addition to its two major points, DOD took issue with our report on a
number of other factual and conceptual areas. We address these points in
our detailed comments in appendix II. We continue to believe that DOD is
significantly understating the magnitude of its disbursement problems.
Without basic underlying problem disbursement data that are collected



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consistently by a credible process, the Department cannot accurately
measure the extent of its disbursement problems, much less progress
made in reducing such balances. The $25 billion understatement we were
able to quantify demonstrates our point that DOD’s reporting process over
all its disbursing problems needs to be improved.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we will not distribute it until 30 days from the date of
this letter. At that time, we will send copies to the Chairman of the Senate
Committee on Governmental Affairs; the Chairmen and Ranking Minority
Members of the Senate Committee on Armed Services, the House
Committee on National Security, and the House Committee on
Government Reform and Oversight; the Ranking Minority Member of the
Subcommittee on Government Management, Information and Technology,
House Committee on Government Reform and Oversight; and the Director
of the Office of Management and Budget. We will also send copies to the
Secretary of Defense, the Under Secretary of Defense (Comptroller), and
the Director of the Defense Finance and Accounting Service. Copies will
be made available to others upon request.

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




Lisa G. Jacobson
Director, Defense Audits




Page 22                                GAO/AIMD-97-59 DOD Problem Disbursements
Page 23   GAO/AIMD-97-59 DOD Problem Disbursements
Contents



Letter                                                                                         1


Appendix I                                                                                    26

Total Quantifiable
Understatements as of
May 31, 1996
Appendix II                                                                                   29

Comments From the
Department of
Defense
Appendix III                                                                                  36

Major Contributors to
This Report




                        Abbreviations

                        ATM       automated teller machine
                        CERPS     Centralized Expenditure and Reimbursement Processing
                                       System
                        CFO       Chief Financial Officer
                        DFAS      Defense Finance and Accounting Service
                        DOD       Department of Defense
                        FRS       Financial Reporting System
                        IG        inspector general
                        NULO      negative unliquidated obligations
                        OMB       Office of Management and Budget
                        OSD       Office of the Secretary of Defense
                        SAMS      Suspense Aging Monitoring System
                        TBO       Transactions by Others


                        Page 24                          GAO/AIMD-97-59 DOD Problem Disbursements
Page 25   GAO/AIMD-97-59 DOD Problem Disbursements
Appendix I

Total Quantifiable Understatements as of
May 31, 1996


Dollars in millions
                                                                                                         GAO
                                                                                           DFAS      minimum
                                                                                         amount     reportable
DFAS location           Category/ Sub-category            Reporting issue               reported       amount    Understatement

Excluded amounts by offsetting of transactions
Cleveland               In-transit/Interfunda             Offsetting positive and         $1,846       $4,315            $2,469
                                                          negative balances
Cleveland               In-transit/Cross disbursingb      Offsetting positive and            632        5,007             4,375
                                                          negative balances
Cleveland               In-transit/CERPSd                 Offsetting positive and            409        1,672             1,263
                                                          negative balances
Cleveland               In-transit/SAMSd                  Offsetting positive and            968        3,572             2,604
                                                          negative balances without
                                                          establishing relationships
Cleveland               In-transit/FRSd                   Offsetting positive and            373        1,496             1,123
                                                          negative balances
Denver                  In-transit/Intra servicec/Cross Offsetting positive and            1,024        1,225               201
                        disbursingb                     negative balances
Denver                  In-transit/Suspense               Offsetting positive and            464        1,115               651
                                                          negative balances
Indianapolis            In-transit/Unprocessed TBOs Derived from summary data                N/A     Unknown           Unknown
                                                    which “offsets” disbursement
                                                    detail with collection detail
                                                    when total amounts required
                                                          Offsetting positive and            273          539               266
                                                          negative balances
  Subtotal                                                                                $5,989      $18,941           $12,952

Excluded amounts by omission
Indianapolis            In-transit/Unsupported cross Deletions relating to Army               $0       $3,833            $3,833
                        disbursingb                  suspense accounts not
                                                     reported
Indianapolis            In-transit/Unsupported cross OSD appropriations not fully              0            0          Unknown
                        disbursingb                  visible in problem
                                                     disbursement reports
Cleveland               In-transit/SAMS holdd             Transactions held in                 0        4,525             4,525
                                                          suspense not reported as
                                                          problems. Some
                                                          transactions are old, cite
                                                          closed and invalid offices
Denver                  In-transit/Intra servicec/Cross Normal processing time not             0        1,155             1,155
                        disbursingb                     applicable
  Subtotal                                                                                    $0       $9,513            $9,513
                                                                                                                     (continued)




                                                Page 26                                GAO/AIMD-97-59 DOD Problem Disbursements
                                                 Appendix I
                                                 Total Quantifiable Understatements as of
                                                 May 31, 1996




Dollars in millions
                                                                                                               GAO
                                                                                                 DFAS      minimum
                                                                                               amount     reportable
DFAS location              Category/ Sub-category           Reporting issue                   reported       amount    Understatement

Misclassification of disbursements
Cleveland                  In-transit/CERPSd                First 60 days not reported for          $0         $264                $264
                                                            transactions rejected by edit
                                                            routines
Cleveland                  In-transit/SAMSd                 First 60 days not reported for           0          179                 179
                                                            transactions rejected by edit
                                                            routines
Cleveland                  In-transit/FRSd                  First 60 days not reported for           0        1,746               1,746
                                                            transactions rejected by edit
                                                            routines
  Cleveland subtotal                                                                                                             $2,189
  for misclassifications
Denver                     In-transit/Suspense              First 60 days not reported by           $0         $103                $103
                                                            DFAS headquarters for
                                                            transactions rejected by edit
                                                            routines
                                                            Out of balance conditions                      Unknown     A portion of $1.3
                                                            and disbursements not yet                                   billion would be
                                                            validated                                                          reportable
Indianapolis               In-transit/Unprocessed TBOs Unmatched transactions                      N/A     Unknown     A portion of $3.5
                                                       included in this category                                        billion would be
                                                       when required to be                                                     reportable
                                                       reported separately by
                                                       category
  Subtotal                                                                                          $0       $2,292              $2,292

Incorrect aging
Indianapolis               In-transit/Unprocessed TBOs Transaction aged based on                    $0         $258                $258
                                                       date received rather than
                                                       date paid
                                                            30 days not reported                     0          250                 250
Indianapolis               NULO                             First 30 days not counted                0          154                 154
                                                            when all NULOs should be
                                                            reported
                                                                                                                            (continued)




                                                 Page 27                                     GAO/AIMD-97-59 DOD Problem Disbursements
                                      Appendix I
                                      Total Quantifiable Understatements as of
                                      May 31, 1996




Dollars in millions
                                                                                                               GAO
                                                                                              DFAS         minimum
                                                                                            amount        reportable
DFAS location         Category/ Sub-category      Reporting issue                          reported          amount      Understatement
Denver                All                         Transactions aged based on              Unknown           Unknown                Unknown
                                                  date received by Denver                                                         however a
                                                  rather than date paid as                                                  portion of $5.3
                                                  required by DOD guidance                                                 billion would be
                                                  for obligating problem                                                          reportable
                                                  disbursement amounts
  Subtotal                                                                                        $0             $662                  $662
Total (Minimum                                                                               $5,989          $31,408                $25,419
Understatement)

                                      a
                                       Interfund transactions are paid through a billing process used by DOD to purchase materials
                                      from within the Department or other government entities; generally reimbursement transactions.
                                      b
                                       Cross disbursing transactions are those transactions where the disbursement is being made on
                                      the behalf of one service for another service or the State Department.
                                      c
                                       Intra service transactions are where the disbursing station and the accounting station differ but
                                      both are operating on the behalf of the same service.
                                      d
                                       The CERPS, SAMS, and FRS suspense files includes data from specific systems used to process
                                      disbursements. CERPS-Central Expenditure and Reimbursement Processing System, SAMS -
                                      Suspense Aged Monitoring System, and FRS-Financial Reporting System. SAMS transactions are
                                      classified as being either in a “process” (in-transit) or “hold” status.




                                      Page 28                                            GAO/AIMD-97-59 DOD Problem Disbursements
Appendix II

Comments From the Department of Defense


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2.


See comment 3.




See comment 4.


See comment 5.




                             Page 29   GAO/AIMD-97-59 DOD Problem Disbursements
                  Appendix II
                  Comments From the Department of Defense




See comment 6.

See comment 7.




See comment 8.




See comment 9.




See comment 10.



See comment 11.




See comment 12.




See comment 9.




                  Page 30                                   GAO/AIMD-97-59 DOD Problem Disbursements
                  Appendix II
                  Comments From the Department of Defense




See comment 13.




See comment 14.



See p. 11.




See p. 10.




                  Page 31                                   GAO/AIMD-97-59 DOD Problem Disbursements
                  Appendix II
                  Comments From the Department of Defense




See comment 15.



See p. 13.




See comment 16.




                  Page 32                                   GAO/AIMD-97-59 DOD Problem Disbursements
               Appendix II
               Comments From the Department of Defense




               The following are GAO’s comments on the Department of Defense’s letter
               dated April 9, 1997.


               1. We address DOD’s characterization of our report in the “Agency
GAO Comments   Comments and Our Evaluation” section.

               2. Our report clearly distinguishes between the categories of unmatched
               disbursements, negative unliquidated obligations, and in-transit
               disbursements. The “Background” section defines each and includes
               analogies that relate these types of problems to personal financial
               situations.

               3. As discussed in the “Agency Comments and Our Evaluation” section, we
               disagree with DOD’s decision to no longer characterize in-transits as
               problem disbursements. This matter is discussed in detail in our interim
               report, DOD Problem Disbursements (GAO/AIMD-97-36R, February 20, 1997).

               4. Our report does not ignore the reduced amount of problem
               disbursements reported by DOD. Page 1 states that DOD reported a
               $33 billion reduction in problem disbursements. However, the concerns
               discussed in this report about the basis for those amounts preclude us
               from relying on gross dollar changes in DOD’s reported problem
               disbursements as a true indicator of progress in resolving disbursement
               issues.

               5. Our report demonstrates that DFAS’ efforts have not been sufficient to
               quantify and correct the causes of in-transit disbursements. Furthermore,
               in a December 6, 1996, memorandum to the DFAS Director, the DOD
               Comptroller stated that DOD had “failed to come to grips with the
               underlying causes and potential solutions to the in-transit problem.”

               6. In addition to the $25 billion of understatements we identified that relate
               primarily to in-transits, we reported other issues that resulted in
               unquantifiable amounts of understatements pertaining to unmatched
               disbursements and NULOs. Moreover, the control weaknesses we identified
               relate to the compilation and reporting of all problem disbursement data.

               7. We have modified the report to include DOD’s comment that its official
               policy is to report problem disbursement data on a net basis. This matter is
               discussed in detail in the “Agency Comments and Our Evaluation” section.




               Page 33                                   GAO/AIMD-97-59 DOD Problem Disbursements
Appendix II
Comments From the Department of Defense




8. Our report fully discusses the reporting of net (offset) amounts versus
absolute (full or total) amounts and presents our position that when offset
amounts are reported, problem disbursement totals, and hence the
significance of the issues, are minimized. The report also recognizes the
need for DOD to establish logical transactional relationships before
absolute amounts are calculated.

9. DOD’s example of using net amounts for revenue and payments is not
analogous to offsetting in-transits that involve collections or
reimbursements and disbursements because these transactions are not
necessarily related. See the “Agency Comments and Our Evaluation”
section for our overall discussion on the net versus absolute issue and an
example that illustrates our position that the use of absolute amounts is
generally the accurate and appropriate method for reporting problem
disbursement data.

10. DOD’s characterization of financial statement presentation is
misleading. DOD’s scenario would be analogous to a Statement of
Operations presenting one bottom-line number for net income or net loss.
In fact, financial statements show the details, such as specific kinds of
revenues and expenses, that allow users to see how the bottom-line
number was determined. These critical details allow users to assess the
condition of an entity and determine whether any changes are needed to
improve performance in specific areas.

11. Financial statements prepared pursuant to the CFO Act and submitted
to the Office of Management and Budget are to be prepared in accordance
with standard accounting and reporting conventions, such as
accumulating and reporting the total of like transactions. DOD’s netting of
potentially unrelated transactions, such as collections and various types of
disbursements, could result in information that is misleading or of
marginal utility in managing operations.

12. We agree that in-transits, unmatched disbursements, and negative
unliquidated obligations are different types of problems and that different
management actions are needed to address each type of problem. Our
point is that only by identifying, reporting, and tracking all disbursing
problems can management determine appropriate corrective actions and
ultimately resolve these problems.

13. Our report recognizes the complexity of determining an accurate
measure of problem disbursements. Although absolute amounts will



Page 34                                   GAO/AIMD-97-59 DOD Problem Disbursements
Appendix II
Comments From the Department of Defense




generally provide the most accurate calculation, as explained in the
“Agency Comments and Our Evaluation” section, we used net amounts
where we could establish transactional relationships. Any difficulty we
encountered in determining the full extent of DOD’s problem disbursements
was the result of the lack of clear and consistent DOD reporting guidance
that was adhered to by all locations.

14. The second paragraph of page 2 of DOD’s comments states that the
Department does report in-transit transactions on both a net and an
absolute basis, when appropriate, on internal monthly reports. This
supports our position that in-transits reported in absolute terms on a
month-to-month basis would result in a consistent and meaningful
measure of these transactions.

15. After DFAS Denver provided us with additional information in
April 1997, we determined that the $1.4 billion included (1) edit failures
which could be quantified and (2) out-of-balance conditions and
disbursements awaiting supporting documentation/verification, both still
problems that could not be readily separated and quantified. In addition,
because disbursements awaiting documentation were redated and
reclassified as another in-transit category, the 60- or 120-day processing
time for these type of transactions does not apply. According to a DFAS
Denver official, these disbursements could be posted to accounting
records and matched to an obligation in no more than 30 days.
Accordingly, we modified the report to recognize these changes in
category, but they do not affect the $25 billion in quantifiable
understatements we reported.

16. Our audits, and those of the 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 (the DFAS-reported amount and our
quantified understatements) 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. Operation Mongoose,
referred to in DOD’s response, was initiated as a post-payment audit
process to counter the effects of the lack of internal controls. Also, it is
focused on certain vendor and payroll payments and does not address
contractor payments, which are generally the subject of this report.



Page 35                                   GAO/AIMD-97-59 DOD Problem Disbursements
Appendix III

Major Contributors to This Report


                        David Childress, Assistant Director
Accounting and          Miguel Castillo, Project Manager
Information             Francine DelVecchio, Communications Analyst
Management Division,    James Loschiavo, Social Science Analyst
                        James Ungvarsky, Computer Specialist
Washington, D.C.
                        Cecelia Ball, Senior Evaluator
Kansas City Field       Edwin Boothe, Senior Evaluator
Office                  Shirley Klaudt, Staff Evaluator
                        Marshall Picow, Senior Evaluator


                        Pat Sevon, Computer Specialist
Atlanta Field Office
                        Thomas Armstrong, Assistant General Counsel
Office of the General   Amy Shimamura, Senior Attorney
Counsel




(919050)                Page 36                            GAO/AIMD-97-59 DOD Problem Disbursements
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