Foreign Military Sales: Recovery of Nonrecurring Research, Development, and Production Costs

Published by the Government Accountability Office on 1999-05-19.

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

      United States

GAO   General Accounting Office
      Washington, D.C. 20648

      Accounting and Information
      Management Division


      May 19,1999

      The Honorable William J. Lynn
      Under Secretary of Defense (Comptroller)

      Subject: Foreign Militarv Sales: Recovers of Nonrecurring Research,
               Develonment, and Production Costs

      Dear Mr. Lynn:

      Last October, we reported to Senator Charles E. Grassley on the results of our review
      of the Department of Defense’s accounting and reporting on the costs of the foreign
      military sales (FMS) program.’ In that report we noted that the Air Force and Navy
      were not promptly collecting nonrecurring research, development, and production
      costs from the EMS trust fund as major defense equipment items were delivered to
      FMS customers. Specifically, we identified over $183 million of nonrecurring costs
      related to items that were delivered to EMS customers-some as long ago as 1989-
      that had not been charged to the foreign customers’ trust fund accounts.

      To address these issues, we recommended that the Air Force and Navy (1) recover
      the amount identified in our report that had not yet been charged to FMS customers’
      trust fund accounts and (2) review all other open EMS cases that require foreign
      customers to pay a proportionate amount of nonrecurring research, development, and
      production costs for major defense equipment and recoup nonrecurring costs that
      have not yet been recovered for items that have already been delivered to FMS
      customers. The Air Force and Navy have now collected the over $183 million
      identified in our report.

      While the collection of this amount is a positive first step, our recent visit to the Air
      Force Materiel Command’s headquarters, as part of another audit, disclosed that the
      Air Force has not collected nonrecurring costs owed for items related to other open
      FMS cases. Specifically, we found that $152,101,014 of nonrecurring research,
      development, and production costs had not been collected from Saudi Arabia’s trust

      “Foreign Militarv Sales: Millions of Dollars of Nonrecurring Researchand DeveloDmentCosts
      Have Not Been Recovered (GAO/AIMD-99-11, October 20,1998).

                                                 GAO/AI&ID-99-148R EMS Nonrecurring Costs

fund account for 26 F-15 aircraft that were delivered to the country between
December 1997 and March 1999.

Volume 15 of DOD’s Financial Management Regulation 7000.14-R,entitled Security
Assistance Policv and Procedures, states that “Charges for nonrecurring costs are
earned as items are physically delivered to the FMS customer.” As we noted in our
October 1998 report, not recovering nonrecurring costs promptly from an FMS
customer’s trust fund after items are delivered represents poor financial management
practices. It also raises the risk that amounts will never be recouped and that these
funds, deposited in advance into the FMS trust fund for this purpose, will be
erroneously returned to FMS customers.

We recommend that you take the actions necessary to ensure that the Air Force
promptly bills and collects the over $152 million of outstanding nonrecurring costs
owed by Saudi Arabia for the 26 F-15 aircraft. We also recommend that you
reemphasize to the military services the need to expeditiously complete the review of
other FMS cases involving nonrecurring costs to ensure that all amounts owed have
been collected.

In written comments on a draft of this letter, the Defense Deputy Chief Financial
Officer stated that the Air Force had deferred the collection of nonrecurring costs
based on directions from the Defense Security Cooperation Agency (DSCA). He
further stated that the Under Secretary of Defense (Comptroller) had issued a
memorandum on April 29,1999, to the Director, DSCA, emphasizing the department’s
financial policy requirements for such collections and requested DSCA to provide the
Under Secretary with a plan for collecting all outstanding amounts owed by Saudi

With respect to the review of other FMS cases involving nonrecurring costs, the
Deputy Chief Financial Officer cited a December 11,1998, memorandum that the
Under Secretary issued in response to a recommendation in our October 1998 report.
Because we found, in April 1999, that the Air Force was stiIl not fully complying with
the recoupment requirements of the December 1998 memorandum, we are now
recommending that the Under Secretary reemphasize his December 1998 position to
the military services. The Deputy Chief Financial Officer’s written comments are
reprinted in the enclosure.

 Within 60 days of the date of this letter, we would appreciate receiving a written
 statement on actions taken to address our recommendations.

 We are sending copies of this letter to Senator Charles E. Grassley. We are also
 sending copies of this letter to Senator Ted Stevens, Senator Fred Thompson, Senator
 John W. Warner, Senator Robert C. Byrd, Senator Carl Levin, Senator Joseph I.
 Lieberman, Representative Dan Burton, Representative Stephen Horn, Representative
 David R. Obey, Representative Ike Skelton, Representative Floyd D. Spence,

 Page 2                                    GAO/AIMD-99-148R FMS Nonrecurring Costs

   Representative Jim Turner, Representative Henry A. Waxman, and Representative C.
   W. Bill Young in their capacities as Chair or Ranking Minority Member of Senate and
   House Committees and Subcommittees. We are also sending copies of this letter to
   the Honorable F. Whitten Peters, the Acting Secretary of the Air Force, and the
   Honorable Jacob J. Lew, Director, Office of Management and Budget. We will make
   copies available to others upon request.

   If you have any questions or need any additional information, please contact me on
   (202) 512-6240or Larry W. Logsdon, Assistant Director, on (703) 6957510.

    Sincerely yours,

   ack L. Brock, Jr.
     and Defense Information Systems


   Page 3                                 GAO/AlMD-99-148R FMS Nonrecurring Costs

            Comments         From the Dewsrtment                  of Defense .

                          OFFICE    OF THE     UNDER SECRE’TARY             OF DEFENSE
                                             IloO DEFENSE PENTAGON
                                           WASHINGTON.   DC 20301-l   100

                                                                                     MAYIO     I999
            AssistantComplder General
            Accounting and InformationManagementDivision
            United StatesGeneralAccounting Office
            Washington,DC 20548

                   This is the Deparbnentof Defenseresponseto the GeneralAccounting Office (GAO)
            draft report, “Foreign Military Saks: Recoveryof No mecuing Research,Development,and
            ProductionCosts,”datedApril 20,1999 (GAO Code 51166ZOSD Case 1798).

                   The Department’scommentson the recommendationscontainedin the report are provided
            in the enclosure.

                  The Departmentappreciatesthe oppohty       to comment on the draft report My point of
            contact on this matter is Ms. Kay O’Brien. She may be reached by telephoneat (703) 697-0586.


                                                                    Nelson Toye
                                                            Deputy Chief Fimmcial Officer

 Page 4                                        GAO/AIMD-99-148R FMS Nonrecurring Costs

                                   (GAO CODE S1166ZOSD CASE 1798)

                           DEVELOPMENT, AND PRODUCTION COSTS’

                                 DEPARTMENT OF DEFENSE COMMENTS TO
                                     TFIE GAO RECOMMENDATIONS

            RECOMMENDATION 1: The GAO reco~~~~ended            that the Umier Secxztaryof Defense
            (Compeokr) take the actionsnecessaryto ensurethat the Air Forcepromptly bills and collects
            the over $152 million of outstandiugnormxurrh g costs owedby SaudiArabii for the 26 F- 15

            DOD RESPONSE: The Air Force deferredthe coJkction of nomecuhg costsrecoupment
            chargesfor the 26 F-l 5 akcraft basedon direction fiom the Deft   Security Cooperation
            Agency (DSCA). Acuxding to the DSCA, this dhction was mzssary duetotheiinancial
            position of the SaudiArabia FMS trust fund account The UnderSeccetaryof Defense
            (Comptdler) issueda memorandumto the Director, DSCA, datedAprii 29,1999, emphasizing
            the financial policy nzqirements of the Departmentand requestinga plau for cokcting
            paymentsfrom SaudiArabia for all outstau”                       Sales(EMS) payment

            RECOMMFJVDATION 2: The GAO recommendedthat the Under Secretaryof Defense
            (Comptroller) reemphasizeto the military servicestb+they needto expeditiouslycomplete the
            review of other FMS casesinvolving nonrenvring coststo ensurethat alI amountsowed have

            DOD RESPONSE: The Under Seaetary of Defense(Comptroller),in a memorandumdated
            December 11I 1998,emphasizedthe poky requirementsiuvolviug the recoupmentof nomxcur-
            ringcoststothemilitaryselviws that failed to recoup nonrecurringresear& Qvelopment, and
            production costs from FMS customers. In the samememoraadum,the Under Secretmy of
            Defense(Comptrokr) also directedappropriateactions to occur on a defiuitive schedule. One
            of the actions dire&d was to review all Open FMS casesto ensuretbat amountsowed have been


Page 5                                         GAO/AIMD-99-148R            FMS Nonreaming               Costs
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