oversight

Financial Management: The Prompt Payment Act and DOD Problem Disbursements

Published by the Government Accountability Office on 1997-05-23.

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

                 United States General Accounting Office

GAO              Report to the Ranking Minority Member,
                 Committee on Governmental Affairs,
                 U.S. Senate


May 1997
                 FINANCIAL
                 MANAGEMENT
                 The Prompt Payment
                 Act and DOD Problem
                 Disbursements




GAO/AIMD-97-71
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Accounting and Information
                   Management Division

                   B-275091

                   May 23, 1997

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

                   Dear Senator Glenn:

                   This letter is in response to your request that we determine whether the
                   Prompt Payment Act of 1982 contributes significantly to Department of
                   Defense (DOD) problem disbursements. The Prompt Payment Act has been
                   described in DOD testimony as pressuring DOD personnel to pay invoices
                   within 30 days even though the payment may cause a problem
                   disbursement.

                   Problem disbursements are specific disbursements that have not been
                   properly matched with corresponding obligations. Matching
                   disbursements with obligations is an important control for ensuring that
                   funds are used in accordance with the purpose and other limitations
                   specified by the Congress. Without such matching, there is increased risk
                   that (1) fraudulent or erroneous payments may be made without being
                   detected and (2) cumulative amounts of disbursements may exceed
                   appropriated amounts and other legal limits.

                   Our work focused on the Defense Finance and Accounting Service (DFAS)
                   Columbus Contract Entitlement Directorate because it disburses more
                   funds than other DOD disbursing offices, handles the most complex
                   contracts, is identified with many of DOD’s disbursement problems, and
                   processed over 42 percent of DOD’s fiscal year 1996 interest penalty
                   payment dollars.

                   In addition, as subsequently agreed with your office, this report provides
                   information on two matters raised by DOD officials related to provisions of
                   the Prompt Payment Act that they believe result in higher than justified
                   administrative costs. We limited our work on these matters because they
                   were outside of the original scope of our review.


                   DOD did not provide, and we did not find, any empirical evidence to
Results in Brief   support assertions that the Prompt Payment Act contributes to problem
                   disbursements. Also, a 1995 Defense study, which identified several major




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contributing causes to DOD problem disbursements, did not cite either the
Prompt Payment Act or DOD policies on making timely payments as a
cause.

The Prompt Payment Act does not require federal agencies to pay an
invoice by the due date. Rather, it requires the government to pay interest
if an invoice is not paid on time. DFAS policy statements and daily operating
procedures emphasize timely payment to avoid interest penalties and DFAS
management has established a 30-day goal for paying most invoices. While
some DFAS personnel told us that these policies create “pressure” to make
timely payments, they stated that the policies do not result in payments
being made inappropriately. Information provided by the DFAS Columbus
Contract Entitlement Directorate shows that it is generally able to make
most payments in less than 30 days.

During the course of our review, DOD officials expressed concern regarding
provisions of the Prompt Payment Act that they believe result in higher
than justified administrative costs. One concern relates to the large
number of small interest payments. Under the act, contractors are entitled
to interest penalties of $1 or more. Almost 11,000, about one quarter, of all
payments of DFAS Columbus Contract Entitlement Directorate interest
penalty payments in fiscal year 1996 were for less than $5, but these
payments accounted for only $28,701, less than one quarter of 1 percent of
total interest paid.

Another concern relates to new DFAS procedures for allocating interest
payments to appropriation accounts. DFAS and service officials said that
these procedures increase the complexity and, accordingly, the cost of
making interest payments. Previously, DFAS Columbus charged all interest
costs to its own Defense Business Operations Fund (DBOF) account and
recovered the amounts through DFAS billing rates. This, in effect, meant
that all DFAS customers, and their respective appropriations, shared in the
interest penalty payments, regardless of which invoices were not paid on
time. The DOD Comptroller was advised that this DFAS practice did not
comply with the Prompt Payment Act requirement that agencies pay
interest from the appropriation that funds the program that incurred the
interest penalty. To address this compliance issue, DOD recently
established a number of separate accounts for the direct allocation of the
interest charges by DFAS to the services’ appropriations.




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             Problem disbursements are specific disbursements that have not been
Background   properly matched with corresponding obligations. Audit reports have
             served to highlight the scope and severity of DOD’s problems and have
             reported that billions of dollars in disbursements could not be promptly or
             accurately matched with related obligations. DOD has recognized this as a
             major area of concern and is working hard to reduce current problem
             disbursements. It has many short-term initiatives and long-term plans to
             reduce such disbursements.

             The Prompt Payment Act of 1982, as amended, provides governmentwide
             guidelines for establishing due dates on commercial invoices and provides
             for interest payment on invoices paid late. Prior to passage of the act, we
             reported that the federal government did not have uniform criteria for
             establishing due dates for vendor invoices.1 Many invoices were paid too
             early or too late, sometimes without regard to contract terms, the effect on
             vendors’ cash flow, or the effect on government interest costs. In 1981, we
             estimated that contractors were losing at least $150 million annually
             because of late payments from the federal government. We also pointed
             out that the government could save at least $900 million annually if all
             early payments were instead paid when due.2 The Prompt Payment Act
             and implementing guidance and regulations issued by the Office of
             Management and Budget (OMB) and DOD are intended to address such
             issues.

             Except where otherwise specified within contracts, the act provides that
             agencies should pay within 30 days after the designated office receives the
             vendor invoice or the government accepts the items ordered as
             satisfactory, whichever is later. This 30-day payment time frame is
             consistent with the time frame originally included in the May 1978
             Department of the Treasury regulations. OMB Circular A-125, which
             prescribes implementing policy for the Prompt Payment Act of 1982, as
             amended, directs federal agencies to pay commercial obligations
             accurately and on time, and to use sound cash management practices.

             In fiscal year 1994, the federal government reported that about
             $23.4 million in interest was paid under the Prompt Payment Act. Of that
             amount, DOD paid about $13.8 million. In fiscal year 1995, reported federal
             interest payments increased to about $37 million, of which DOD paid

             1
              The Federal Government’s Bill Payment Performance Is Good But Should Be Better (FGMSD-78-16,
             Feb. 24, 1978).
             2
             Actions to Improve Timeliness of Bill Paying by the Federal Government Could Save Hundreds of
             Millions of Dollars (AFMD-82-1, Oct. 8, 1981).



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                  $25 million. DOD attributed the increase in interest payments, in part, to
                  additional processing time required by changes in its payments process,
                  such as the 1995 requirement for the prevalidation3 of invoices. In fiscal
                  year 1996, DOD paid $27.9 million in interest. Four DFAS centers processed
                  nearly all of DOD’s fiscal year 1996 interest payments.

              •   DFAS Columbus—$13.7 million,
              •   DFAS Cleveland—$6.7 million,
              •   DFAS Indianapolis—$3.7 million,
              •   DFAS Denver—$3.1 million, and
              •   All others—$.7 million.

                  DFAS  Columbus is divided into three directorates—Contract Entitlement,
                  Stock Fund, and Financial Services. The Contract Entitlement Directorate,
                  which administers large contracts, paid about 48,000 interest penalties
                  totalling over $11.9 million, which is 87 percent of the $13.7 million in
                  interest paid by DFAS Columbus in fiscal year 1996. The Stock Fund
                  Directorate paid over 56,000 interest penalties totaling over $1 million and
                  the Financial Services Directorate paid over 23,000 interest penalties
                  totalling about $800,000.


                  We reviewed the provisions of the Prompt Payment Act of 1982, as
Scope and         amended; OMB Circular A-125, which prescribes policy for executive
Methodology       departments and agencies in paying for goods and services; and DOD’s
                  regulations and procedures related to the act’s implementation. We
                  interviewed individuals at DFAS headquarters in Arlington, Virginia, and the
                  DFAS payment center in Columbus, Ohio, about the implementation of the
                  act and related guidance. Our interviews included voucher examiners,
                  supervisors, deputy directors and the Director, Contract Entitlement, DFAS
                  Columbus, as well as the Director and staff of the Contract Pay
                  Directorate at DFAS headquarters.

                  We obtained the DFAS Columbus Contract Entitlement voucher payment
                  procedures and reviewed them for procedures related to prompt payment.
                  We also discussed the DFAS Columbus Contract Entitlement procedures for
                  paying interest penalties with the DFAS Columbus Contract Entitlement
                  Prompt Pay Project Officer and obtained sample payment packages to use
                  as examples of DFAS Columbus practices.


                  3
                   Prevalidation is the process, required by Public Law 103-335, of matching disbursements to the
                  appropriate obligation in DOD’s official accounting records before the disbursement is made. The
                  objective of prevalidation is to prevent problem disbursements.



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                      We obtained data from the DFAS Columbus database containing interest
                      payments made in fiscal year 1996 for the Contract Entitlement
                      Directorate, which administers major DOD contracts and paid $11.9 million
                      of the $27.9 million in interest penalties paid by DOD in fiscal year 1996. We
                      stratified the interest payments by dollar amount to determine the
                      significance of small interest payments. We relied upon available records
                      and did not independently verify or audit DOD’s reported data. Regarding
                      the issue involving allocating interest payments, we interviewed officials in
                      the Army, Navy, Air Force, Marine Corps, and DFAS.

                      We performed our work from June 1996 to March 1997 in accordance with
                      generally accepted government auditing standards. DOD provided written
                      comments on a draft of this report. These comments are presented in
                      appendix II.


                      DOD officials did not provide, and we did not find, any empirical
No Empirical          information to support the assertion that the Prompt Payment Act
Evidence to Support   contributes to problem disbursements. The act does not mandate that an
Assertion That the    invoice be paid within a specified time frame. Rather, it establishes
                      guidelines for determining payment due dates, and requires that if
Prompt Payment Act    payment is not made in a timely manner, the government will pay interest
Contributes to        to the contractor.
Problem               The act states, in part, that “the head of an agency acquiring property or
Disbursements         service..., who does not pay...by the required payment date, shall pay an
                      interest penalty....” Further, the act states that “the required payment date
                      is (A) the date payment is due under the contract ... or (B) 30 days after a
                      proper invoice for the amount due is received if a specific payment date is
                      not established by contract.”

                      In a June 1995 report, DOD identified a number of causes of problem
                      disbursements, but these did not include the Prompt Payment Act. DOD’s
                      Acquisition and Financial Management Working Group stated that while
                      quantitative data were unavailable, observations and experience suggested
                      that the root causes of problem disbursements were inaccurate or
                      incomplete data within different information systems, resulting in
                      payments being charged to the wrong lines of accounting.4 The group also
                      reported that data entry errors and the lack of timely distribution of
                      contract documents among program managers, contracting and contract

                      4
                       Our report, Financial Management: Improved Management Needed for DOD Disbursement Process
                      Reforms (GAO/AIMD-97-45, Mar. 31, 1997) noted that DOD needs more complete analysis to identify
                      the underlying causes of problem disbursements.



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                          administration offices, contractors, disbursing offices, and accounting
                          offices were major contributors to problem disbursements. Other
                          contributing factors reported were a high percentage of manually
                          processed payments, non-uniform contract structure and format, multiple
                          funding sources for a single contract line item, complex progress payment
                          procedures, and the lack of standard automated systems. In our April 1997
                          report on DOD contract payment practices, we discussed similar issues and
                          recommended that DOD thoroughly evaluate opportunities to reduce the
                          amount of detail accounting at DFAS Columbus and to streamline payment
                          techniques.5


                          On February 22, 1996, the DFAS Director notified DFAS personnel that
DFAS Management           paying all vendor invoices within 30 days was a key project for 1996. DFAS
Focuses on Specific       management had established, as a matter of policy, a goal of paying
Payment Time Frames       invoices within 30 days. This goal is also specified in DFAS management
                          statements and the DFAS Columbus daily operating procedures.

                          DFAS Columbus Contract Entitlement personnel we interviewed were very
                          aware of the Director’s emphasis on timely payment, and the voucher
                          examiners and supervisors we spoke with said they felt “pressure” from
                          management to pay invoices within 30 days. However, neither the voucher
                          examiners nor the supervisors believed that this pressure would cause
                          payments to be made in a manner that contributed to problem
                          disbursements.

                          The DFAS Columbus daily operating procedures also stress timely
                          processing and payment of vouchers. DFAS generates a number of daily
                          reports to monitor the timeliness of invoice payments, including the
                          following:

                      •   The “Overage/Projected Overage Invoices On-Hand” report lists all
                          invoices that are past the due date, or very close to the due date, by
                          number of days.
                      •   The “Potential Interest Payment-Alert” lists all unpaid invoices that are
                          past the established due date.
                      •   The “Interest Due Report” lists unpaid invoices which are 16 or more days
                          past the established due date.
                      •   The “Daily Status of Discount Invoices” lists discounts still available.



                          5
                           Contract Management: Fixing DOD’s Payment Problems Is Imperative (GAO/NSIAD-97-37, Apr. 10,
                          1997).



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                          These reports are distributed to the voucher examiners who are required,
                          each day, to note actions taken to resolve each overaged invoice.



                          If DFAS Columbus has the information necessary to make a payment—such
DFAS Is Generally         as a complete contractor invoice showing quantity and price information
Able to Make              that matches the information specified in the contract—payments can
Payments in Less          easily be made in less than 30 days. Of the 883,318 invoices subject to the
                          Prompt Payment Act that were paid by the DFAS Columbus Contract
Than 30 Days              Entitlement Directorate in fiscal year 1996, DFAS data show that 94 percent
                          were paid on time.

                          Over half of those invoices paid by the Directorate are routinely matched
                          to the DFAS contract database that contains contract information for
                          determining whether sufficient funds exist to pay the invoice. When
                          matched electronically with the database, the invoices go into an
                          “automated pay” status. Such invoices could be paid in only a few days;
                          however, invoices subject to the Prompt Payment Act are normally
                          released for payment no sooner than the 23rd day after receipt of the
                          invoice. This is to ensure that, consistent with regulations regarding good
                          cash management, such as OMB Circular A-125, the government is not
                          paying invoices any earlier than necessary.


                          During the course of our review, DOD officials raised two concerns related
Other Prompt              to the provisions of the Prompt Payment Act that they believe result in
Payment Act Issues        higher than justified administrative costs. As agreed with your staff, we are
                          including a description of these matters in this report.


Small Interest Payments   The act states that a business concern shall be entitled to any interest
                          penalty of $1 or more from the government (interest penalties of less than
                          $1 are not required to be paid). We found that small interest payments
                          made by the DFAS Columbus Contract Entitlement Directorate comprised a
                          large portion of the number of payments made, but accounted for a very
                          small portion of the total interest dollars paid. For example, as shown in
                          appendix I, of the 47,773 contract entitlement interest payments in fiscal
                          year 1996, 10,789, about one quarter of all interest payments, were for $5
                          or less, and totaled $28,701—less than one quarter of 1 percent of total
                          interest payment dollars. Interest payments up to $25 comprised over




                          Page 7                                          GAO/AIMD-97-71 Prompt Payment
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                         50 percent of all interest payments, but less than 2 percent of total interest
                         dollars paid.

                         In the two other DFAS Columbus directorates, the proportion of small
                         interest payments was even higher. In the Financial Services Directorate,
                         over 47 percent of the 23,275 interest penalties paid in fiscal year 1996
                         were between $1 and $5, and accounted for about 3.5 percent of the total
                         interest dollars paid. In the Stock Fund Directorate, over 91 percent of the
                         56,281 interest penalties paid in fiscal year 1996 were between $1 and $25,
                         the smallest category on which data were available, and accounted for
                         about 46 percent of total interest dollars paid.

                         DOD officials said that the current minimum payment of $1, which was
                         established almost 15 years ago, may need to be increased because the
                         benefits from such small interest payments may not justify the costs of
                         making such small payments. However, to some extent the number of late
                         payments and the resulting interest and administrative costs related to
                         them are the result of DFAS payment processes and practices and how
                         efficiently they are carried out. For example, for each interest penalty
                         payment, current DFAS policies require that the reason for the interest be
                         identified and documented. In one case, a $1.05 interest payment was
                         supported by nine pages of documentation.


Allocation of Interest   The second concern raised by DOD officials pertains to the allocation of
Payments                 interest payments to appropriation accounts. The Prompt Payment Act
                         specifies that interest penalties are to be paid from the appropriation
                         which administers the program. Until recently, DFAS Columbus paid the
                         interest payments and charged the payments to the DFAS Columbus DBOF
                         account. DFAS Columbus then recovered the amounts of these interest
                         payments, like all other costs, from the military services through DFAS
                         billing rates. Under this process, all DFAS customers shared the interest
                         expense on payments, regardless of which contracts and appropriations
                         the interest related to.

                         In December 1995, the DOD Comptroller revised the interest payment
                         policy after being advised by the DOD Office of General Counsel that to be
                         consistent with OMB Circular A-125 and the Federal Acquisition
                         Regulations, the policy should be revised so that DFAS will directly charge
                         the DOD component’s appropriated funds available to pay for contract
                         administration of the underlying program. The revised DOD policy requires
                         that, “interest penalties incurred under the Prompt Payment Act shall be



                         Page 8                                           GAO/AIMD-97-71 Prompt Payment
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                  charged directly to the account that funds the administration of the
                  program for which the penalty was incurred.” In early fiscal year 1997,
                  each of the military services implemented approaches to comply with the
                  DOD Comptroller’s direction. While their approaches vary in some ways,
                  each involves the establishment of a number of accounts to which DFAS
                  Columbus is to charge the interest penalties. For example, the Navy has
                  established over 50 individual accounts that are to be used as a means for
                  charging interest penalty payments to the correct appropriations. The
                  processes used by DFAS to allocate the interest payments to the accounts
                  are largely manual—DFAS personnel review payment data and manually
                  enter the account and interest amount into the payment system.

                  The revised processes are also more complex. Rather than processing a
                  single transaction for the entire amount of interest on a single payment,
                  DFAS now determines the interest amounts for each account that funded
                  the goods or services purchased. In one case, an interest payment of $1.85
                  was divided among 56 separate accounting lines. DFAS Contract
                  Entitlement Directorate officials estimate that this new process has
                  increased its average 45-minute interest payment processing time by about
                  10 percent. Officials did not know how much additional processing time
                  was being incurred at accounting stations.

                  The services are concerned that the new procedures may not be in the
                  interest of efficient government operations. The Army intends to establish
                  a working group to review the prompt payment procedures and to
                  formulate a policy for the Army and DFAS to use in the next fiscal year.


                  In written comments on a draft of this report, DOD agreed with the overall
Agency Comments   conclusion that the Prompt Payment Act does not contribute to problem
                  disbursements. These comments are reprinted in appendix II.


                  We are sending copies of this report to the Secretary of Defense, the DOD
                  Comptroller, the Director of Defense Finance and Accounting Services,
                  and interested congressional committees. Copies of this report will also be
                  made available to others upon request.




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Please contact me at (202) 512-9490 if you or your staff have any questions
concerning this letter. The major contributors to this letter were David
Childress, John L. Carter, Rose M. Dorlac, and Julie A. Cahalan.

Sincerely yours,




George H. Stalcup
Associate Director, Defense Financial Audits




Page 10                                        GAO/AIMD-97-71 Prompt Payment
Page 11   GAO/AIMD-97-71 Prompt Payment
Appendix I

FY 1996 DFAS Columbus Contract
Entitlement Interest Payments


                      Number of payments               Percent of total                                       Percent of total
Interest amount              with interest                  payments                    Interest paid           interest paid
$1.00-$5.00                          10,789                          22.6                       $28,701                   0.2
$5.01-$10.00                           6,227                         13.0                        45,074                   0.4
$10.01-$25.00                          8,661                         18.1                       141,932                   1.2
$25.01-$50.00                          6,087                         12.7                       218,672                   1.8
$50.01-$100.00                         5,170                         10.8                       366,959                   3.1
$100.01-$500.00                        7,614                         15.9                  1,711,826                     14.4
$500.01-$1,000.00                      1,527                          3.2                  1,066,997                      9.0
$1,000.01-$5,000.00                    1,390                          2.9                  2,935,843                     24.6
Over $5,000.00                           308                          0.6                  5,405,628                     45.3
                                                                          a
Total                                47,773                        100.0                 $11,921,632                    100.0
                             Note: We did not independently verify or audit this information.
                             a
                             Does not add to 100.0 due to rounding.

                             Source: DFAS Columbus Contract Entitlement Directorate.




                             Page 12                                                            GAO/AIMD-97-71 Prompt Payment
Appendix II

Comments From the Department of Defense


Note: GAO’s comment
supplementing those in
the report text appears at
the end of this appendix.




See comment 1.




                             Page 13   GAO/AIMD-97-71 Prompt Payment
              Appendix II
              Comments From the Department of Defense




              The following is GAO’s comment on the Department of Defense’s letter
              dated April 25, 1997.


              1. The Prompt Payment Act of 1982 as amended, which includes the $1
GAO Comment   threshold for interest penalties, was intended to foster equitable payment
              policies and to encourage federal agencies to improve their payment
              processes. Any change in the interest penalty threshold could effect all
              federal agencies as well as the vendor community, and accordingly is a
              matter for congressional determination. We believe that any initiative to
              change the minimum interest payment level should consider the efficiency
              of agency payment processes, the effect of such a change on vendors, and
              other relevant factors.




(918870)      Page 14                                        GAO/AIMD-97-71 Prompt Payment
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