United States GAO General Accounting Office Washington, D.C. 20648 Accounting and Information Management Division B-282531 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 B-282531 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 Arabia. 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 B-282531 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, FJDirector, ack L. Brock, Jr. Governmentwide and Defense Information Systems Enclosure Page 3 GAO/AlMD-99-148R FMS Nonrecurring Costs Enclosure Comments From the Dewsrtment of Defense . OFFICE OF THE UNDER SECRE’TARY OF DEFENSE IloO DEFENSE PENTAGON WASHINGTON. DC 20301-l 100 MAYIO I999 Mr.GeaeL.Dodaro 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. Sincerely, /-L!LTL Nelson Toye Deputy Chief Fimmcial Officer Page 4 GAO/AIMD-99-148R FMS Nonrecurring Costs Enclosure GENE- ACCOUNTING OFFICE DRAFT REPORT, DATED APRIL 20,1999 (GAO CODE S1166ZOSD CASE 1798) “FOREIGN WARY SALES: RECOVERY OF NONRECURRXNG RESEARCH, 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 aircraf& 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 requirementsandensuringpaymentsremain 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 beenCoIIected. 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 collected (511662) Page 5 GAO/AIMD-99-148R FMS Nonreaming Costs Ordering Information The first copy of each GAO report and testimony is free. Additionai copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by tailing (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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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)