United States General Accounting Office GAO Report to the Honorable Charles E. Grassley, U.S. Senate August 1999 FOREIGN MILITARY SALES Navy’s Accounting for Sales to Foreign Customers Needs Improvement GAO/AIMD-99-213 United States General Accounting Office Accounting and Information Washington, D.C. 20548 Management Division B-281171 Letter August 24, 1999 The Honorable Charles E. Grassley United States Senate Dear Senator Grassley: This report responds to your request that we review the Department of Defense’s (DOD) accounting for and reporting on the costs of the foreign military sales (FMS) program.1 The report focuses specifically on whether the Navy has properly charged its FMS customers for goods and services already provided. As of September 30, 1998, Navy’s open FMS sales cases totaled a reported $60.1 billion. Of this amount, the Navy reported that it had $25 billion of undelivered orders representing goods and services that had not yet been delivered to FMS customers. As agreed with your office, we will subsequently review and report on whether the Army and Air Force are properly charging FMS customers for goods and services already provided. Results in Brief The Navy did not always (1) charge FMS customer trust fund accounts when goods and services were delivered under the FMS program or (2) maintain accurate and reliable information on trust fund charges. As of October 1998, Navy’s FMS accounting records indicated that it had not charged FMS customer trust fund accounts for $582 million of delivered goods and services. According to our review of $75 million of this amount, FMS customer accounts had not been charged for $11.3 million for goods and services provided between April 1987 and December 1997.2 For example, in 1996, the Navy provided support services valued at $1.1 million for Canada’s Navy Patrol Frigate Harpoon Shipboard Command and Launch System. Instead of charging Canada’s trust fund 1 In response to this request, we have also issued two reports that identified a total of over $335 million of nonrecurring research, development, and production costs for major defense equipment that had not been charged to FMS customer trust fund accounts. See Foreign Military Sales: Millions of Dollars of Nonrecurring Research and Development Costs Have Not Been Recovered (GAO/AIMD-99-11, October 20, 1998) and Foreign Military Sales: Recovery of Nonrecurring Research, Development, and Production Costs (GAO/AIMD-99-148R, May 19, 1999). 2 The Navy’s accounting system inaccurately reported this amount as $12.9 million. Leter Page 1 GAO/AIMD-99-213 FMS Expenditures B-281171 account for the $1.1 million, the Navy incorrectly charged (1) $636,123 to its appropriations and (2) $450,882 to the trust fund accounts of Greece and Japan. Further, although the remaining $18,507 was charged to Canada’s account, it was recorded incorrectly in the Navy’s system. Navy officials agreed with our findings and told us that they plan to correct the erroneous charges to the Greece and Japan accounts and will also charge Canada’s account in order to reimburse the Navy appropriation for the $636,123. For the remaining $62 million of balances in our sample, we found that the Navy’s accounting records included inaccurate data on the status of charges to FMS customer trust fund accounts, making it difficult for Navy managers to accurately account for and report on the FMS program. For example, Navy’s accounting records showed that Kuwait’s trust fund account had not been charged $54 million for three F-18 aircraft it received in 1993. However, we found that Kuwait’s trust fund account had, in fact, been charged for the full amount and that the Navy’s accounting system did not reflect the charges because erroneous data had been entered in the system. We are recommending that the Navy (1) recover the amounts we identified as owed by FMS customers and (2) correct errors in its accounting system. We are also recommending that the Navy work with the DOD Comptroller to develop and implement a plan to review the remaining $507 million of transactions recorded in the Navy’s system that were reportedly not charged to foreign customer trust fund accounts and (1) charge FMS customer accounts for goods and services already provided, (2) correct erroneous transactions, and (3) address the problems causing these errors to occur. In commenting on a draft of our report, the Defense Deputy Chief Financial Officer generally concurred with our findings and recommendations. He stated that the Navy and the Defense Finance and Accounting Service (DFAS) have taken significant steps in correcting the situation we identified. For example, he pointed out that they have taken steps to properly charge the FMS trust fund accounts for $8.8 million of the $11.3 million identified in this report as not properly charged to FMS customer accounts. He said that the processing of the remaining $2.5 million will be completed by October 1999. He also described several other current or planned initiatives that will result in the implementation of our recommendations. Leter Page 2 GAO/AIMD-99-213 FMS Expenditures B-281171 Background The Arms Export Control Act gives the President authority to sell defense articles and services to eligible foreign countries, generally at no cost to the U.S. government. While the Defense Security Cooperation Agency (DSCA) has overall responsibility for administering the FMS program, the Army, Navy, and Air Force generally execute the sales agreements, which are commonly referred to as sales cases. Foreign military sales are made on an individual case basis. A foreign country representative initiates a case by sending a letter of request to DOD asking for information such as the price and availability of goods and services, training, technical assistance, and follow-on support. Once the customer decides to proceed with the purchase, DOD prepares a Letter of Offer and Acceptance (LOA) stating the terms of the sale for the items and services being provided. After the LOA is accepted, the FMS customer is generally required to pay, in advance, amounts necessary to cover costs associated with the services or items purchased from DOD. The Department of the Treasury holds these advance payments in an FMS trust fund. DOD then uses these funds to pay private contractors--commonly referred to as direct cite payment transactions--and/or reimburse DOD activities for the costs of goods and services provided and other costs related to executing and administering the FMS sales agreement, commonly referred to as reimbursable payment transactions. If for some reason DOD fails to process the appropriate charges against the FMS trust fund accounts, amounts FMS customers paid in advance to cover the costs of goods and services could eventually be returned to them. Objective, Scope, and The objective of this review was to determine whether the Navy was charging FMS customer trust fund accounts for goods and services already Methodology provided. To determine the requirements and procedures for charging the FMS trust fund for goods and services, we obtained and reviewed applicable laws, regulations, policies, and procedures. During our visits to DOD locations, we gathered and analyzed financial information from pertinent accounting records and reports to identify data on deliveries of goods and services and related charges to the FMS trust fund accounts. To select transactions for detailed review, we obtained a database from the Navy’s Management Information System International Logistics (MISIL) which included 25,993 delivery transactions totaling $582 million for which there were no corresponding charges to the FMS customer trust fund accounts to show that the customers had been charged for the goods and Page 3 GAO/AIMD-99-213 FMS Expenditures B-281171 services provided. Our analysis showed that there were 14,173 reimbursable and 11,820 direct cite transactions totaling $71,092,232 and $510,837,316, respectively.3 We judgmentally selected 20 of the 25,993 transactions for detailed review based primarily on (1) large dollar amounts and (2) the type of financing involved to ensure that both reimbursable and direct cite transactions were included. We did not independently verify the integrity of the MISIL database. The 20 transactions are listed in appendix I. To determine whether an FMS customer had received the goods and services and its trust fund account had been charged, we contacted the staff responsible for managing the FMS case and/or other officials knowledgeable about the case to identify the (1) number, type, and value of goods and services the FMS customer received, (2) date the FMS customer received the goods or services, and (3) amount that the FMS customer’s trust fund account had been charged for the goods and services. We also asked the officials to independently calculate how much the FMS customer should have been charged, compared it with our calculated amounts, and resolved any differences. In those instances where it was determined that the FMS customer’s trust fund account had not been charged, we asked responsible FMS program officials to provide an explanation. We performed our work at and obtained documents from headquarters of the Defense Security Cooperation Agency, Office of the Under Secretary of Defense (Comptroller), and the Naval Sea Systems Command, Arlington, Virginia; Naval Air Systems Command, Patuxent River, Maryland; Naval Inventory Control Point, Philadelphia, Pennsylvania; Naval Ordnance Command, Indian Head, Maryland; and Defense Finance and Accounting Service locations in Denver, Colorado; Columbus and Cleveland, Ohio; and Charleston, South Carolina. We performed our work between September 1998 and June 1999 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 Deputy Chief Financial Officer provided 3 Under the reimbursable method, the Navy uses its own appropriation to initially purchase the goods or services being provided. Upon sale to an FMS customer, the FMS customer’s trust fund account is charged for the value of the goods and services and the Navy appropriation is reimbursed. Conversely, under the direct cite method, reimbursement is not required because the FMS customer’s trust fund account is used as the source of funding to pay the vendor who provided the goods and services. Page 4 GAO/AIMD-99-213 FMS Expenditures B-281171 written comments, which are discussed in the “Agency Comments and Our Evaluation” section and are reprinted in appendix II. The Navy Has The Navy did not always promptly charge foreign customer trust fund accounts when goods and services were delivered under the FMS program. Experienced Problems In addition, the Navy’s accounting system contained inaccurate data on the in Accounting for and status of charges to the FMS customer trust fund accounts, making it difficult for Navy managers to monitor the status of the FMS program. As Charging FMS of October 1998, the Navy’s MISIL accounting records indicated that FMS Customers for Goods customer trust fund accounts had not been charged for goods and services and Services amounting to $582 million—79 percent of which had been reported as delivered over 3 years ago. Table 1 provides additional details. Table 1: Aging Schedule for Delivered Goods and Services Reportedly Not Charged to FMS Customer Trust Fund Accounts Number of Time period Delivered dollar amount transactions Up to 1 year $56,761,184 12,832 1 to 2 years 31,812,557 1,865 2 to 3 years 32,360,014 2,787 More than 3 years 460,995,793 8,509 Total $581,929,548 25,993 Source: Navy’s MISIL accounting records data as of October 1998. FMS Customer Accounts Volume 15 of DOD’s Financial Management Regulation 7000.14-R, entitled Are to Be Charged Upon Security Assistance Policy and Procedures, states that implementing agencies shall report accrued expenditures and physical deliveries to the Receipt of Goods or DFAS Denver Center within 30 days of date of shipment or performance. Services The regulation also requires the Center to charge the FMS customer’s trust fund account within 20 days after receiving notification that the goods or services have been delivered. The following describes what generally should be a typical transaction flow to report the delivery of items and services and to charge FMS customer trust fund accounts. Navy program and logistical offices responsible for managing and reporting on the delivery of items and services generally receive shipping documents Page 5 GAO/AIMD-99-213 FMS Expenditures B-281171 from those activities providing the items and services to FMS customers.4 As expenditures against the trust fund accounts are accrued and the goods and services are delivered, this information is to be recorded in MISIL. MISIL then transmits the expenditure and delivery information to the DFAS Denver Center, which maintains the records on each country’s trust fund balance and issues quarterly statements to FMS customers summarizing amounts charged to their cases. If the goods and services were paid for using the reimbursable method, the Center will process vouchers charging the FMS customer’s trust fund account and reimbursing the Navy’s appropriation account. If the goods and services were paid for using the direct cite method, which does not require a reimbursement, the Center only has to record the charges against the appropriate FMS customer’s trust fund account. Charges Are Not Processed Navy did not always promptly charge FMS customers for goods and Promptly services already provided. We found that FMS customer trust fund accounts had not been charged $11.3 million for the goods and services provided under all 14 of the reimbursable-type transactions in our sample and for 1 of the 6 direct cite transactions. The following are examples of transactions where FMS customer trust fund accounts had not been charged for the goods and services already provided. Navy reported that one of its inventory stock points shipped a total of 280,000 rounds of 20 millimeter ammunition to Canada in 1997. Since this was a reimbursable transaction, Canada’s trust fund account should have been charged $3,393,600 for the costs of the ammunition and the Navy’s appropriation account should have been reimbursed for the same amount. However, our review disclosed that Canada’s trust fund account had not been charged for these items as of February 1999. While Navy program officials agreed with our finding, they could not explain why Canada’s trust fund account had not been charged. They added that they were not aware of the problem until we brought it to their attention and now plan to take the necessary actions to charge Canada’s trust fund account for the amount owed. Navy’s MISIL system indicated that seven helicopters from Navy’s inventory of excess defense articles had been shipped to New Zealand 4 Activities providing items and services can consist of Army, Navy, and Air Force locations, or other DOD locations, as well as private sector contractors doing business in the FMS program. Page 6 GAO/AIMD-99-213 FMS Expenditures B-281171 between January 1997 and December 1997. Our review of these seven reimbursable transactions disclosed that the Navy should have charged New Zealand’s trust fund account a total of $4,184,733, or $597,819 for each helicopter. We found, however, that New Zealand’s trust fund had not been charged. The FMS case manager acknowledged that New Zealand’s account had not been charged for the seven helicopters but could not tell us why. After we brought the situation to the Navy’s attention, Navy officials told us they plan to charge New Zealand’s trust fund account for the amount owed. In 1996, the Navy provided support services valued at $1.1 million for Canada’s Navy Patrol Frigate Harpoon Shipboard Command and Launch System. Our review of this direct cite transaction found a combination of errors resulting in undercharges and incorrect postings to the MISIL accounting records. For example, instead of charging Canada’s trust fund account for the $1.1 million of services, the Navy incorrectly charged $636,123 to its appropriations and $450,882 to the trust fund accounts of Greece and Japan. Further, although the remaining $18,507 was charged to Canada’s trust fund, it was recorded incorrectly in MISIL. According to the Navy program manager, errors in entering two contract modifications affected the obligation and expenditure balances in MISIL. As a result of these errors, actual charges to Canada’s trust fund account were reduced and the Navy, Greece, and Japan accounts were charged by mistake. Navy officials agreed with our finding and told us that they plan to correct the erroneous charges to the Greece and Japan accounts. They also agreed to correct the erroneous charge to the Navy appropriation account by correctly charging Canada and reimbursing the Navy appropriation for $636,123. The results of the 15 transactions where FMS customers’ accounts were not properly charged are summarized in table 2. Page 7 GAO/AIMD-99-213 FMS Expenditures B-281171 Table 2: Amounts Not Properly Charged to FMS Customer Trust Fund Accounts Country and case Goods and services Amount not charged to FMS code delivered to customers trust funds Canada-ANB Ammunition $3,393,600 Pakistan-ABU Rocket motors 1,628,305 Greece-GCV Packing, crating, handling 414,781 Greece-GCV Transportation 444,408 Egypt-ABN Ammunition 3,026 New Zealand-SAA Helicopter 597,819 New Zealand-SAA Helicopter 597,819 New Zealand-SAA Helicopter 597,819 New Zealand-SAA Helicopter 597,819 New Zealand-SAA Helicopter 597,819 New Zealand-SAA Helicopter 597,819 New Zealand-SAA Helicopter 597,819 Philippines-LBX Ground handling equipment 336,000 Turkey-AGJ Projectiles 5 inch 243,936 Canada-GKJ Harpoon system services 636,123 Total $11,284,912a a Navy’s MISIL incorrectly reported that the 15 transactions totaled $12.9 million. Some MISIL Information Our analysis and discussions with program officials for the remaining five Was Incorrect direct cite transactions in our sample totaling $62 million found that FMS customer trust fund accounts had, in fact, been charged. However, because of various accounting errors, the Navy’s MISIL system did not accurately reflect the charges. As a result, MISIL was not providing accurate and reliable information for managers to use when monitoring delivery and billing transactions. The following example involves three direct cite transactions where the MISIL system did not accurately reflect a charge to the customer’s account. MISIL showed that in 1993 Kuwait received three separate deliveries of F-18 aircraft, each valued at $18,127,142, for a total of over $54 million. While we found that the Navy had in fact charged Kuwait’s account for this amount, the MISIL system did not reflect the charges as of October 1998. After we brought this to the attention of Navy officials, they told us that their research showed that the failure to record the charges to the trust fund account occurred because the contractor submitted incorrect delivery Page 8 GAO/AIMD-99-213 FMS Expenditures B-281171 reports to the Navy that contained accounting errors and were rejected by the accounting system. However, they could not tell us why the 5-year-old rejected transactions had not been corrected. They told us that they now plan to correct the information in MISIL. Conclusion The Navy is not always charging FMS customers in a timely manner to recover its costs for delivered goods and services. Without ensuring that accounts are promptly charged and that the MISIL system accurately reflects charges, the Navy will not be able to effectively ensure that FMS customers are paying the full cost for goods and services, as required by the Arms Export Control Act. Furthermore, because our review focused on only 13 percent of the $582 million reported as not charged to FMS customer trust fund accounts, it is important that the remaining balances be reviewed and that amounts still owed be promptly collected. Recommendations We recommend that the Secretary of Defense direct the Secretary of the Navy to (1) collect from the FMS trust fund accounts the $11.3 million identified in this report that has not been charged to FMS customer trust fund accounts for goods and services already provided and (2) place increased management emphasis on monitoring and follow-up efforts to ensure that foreign customer trust fund accounts are promptly charged for all goods and services and errors recorded in MISIL are promptly identified and corrected. We also recommend that the Secretary of Defense direct the Secretary of the Navy and the Under Secretary of Defense (Comptroller) to develop and implement a plan to review the remaining $507 million of transactions recorded in the Navy’s MISIL system to (1) identify and collect amounts FMS customers owe for goods and services already provided, (2) correct erroneous transactions in MISIL, and (3) determine the causes for these type of errors and take action to eliminate similar errors in the future. With respect to the remaining $507 million of MISIL transactions, the review could initially focus on the reimbursable transactions since we found that 100 percent of the reimbursable transactions in our limited sample represented amounts where FMS customer accounts had not been charged for the goods and services already provided. Page 9 GAO/AIMD-99-213 FMS Expenditures B-281171 Agency Comments and In commenting on a draft of this report, the Defense Deputy Chief Financial Officer (CFO) generally concurred with our findings and Our Evaluation recommendations. He stated that the Navy and DFAS have initiated actions to address our findings and recommendations. For example, the Deputy CFO commented that Navy and DFAS have already taken steps to charge the FMS trust fund accounts for $8.8 million of the $11.3 million this review found had not been properly charged. He stated that the processing of the remaining $2.5 million to properly charge the FMS trust fund accounts is expected to be completed by October 1999. He also stated that the Navy and DFAS have made significant progress in developing and implementing a plan to review the remaining $507 million of MISIL transactions. Finally, he stated that the Navy and DFAS have already implemented several measures designed to ensure that foreign customer trust fund accounts are promptly charged for goods and services when received. We are sending copies of this report to Senator Robert C. Byrd, Senator Carl Levin, Senator Joseph I. Lieberman, Senator Ted Stevens, Senator Fred Thompson, Senator John W. Warner, Representative Dan Burton, Representative Benjamin A. Gilman, Representative Stephen Horn, Representative David R. Obey, Representative Ike Skelton, Representative Floyd D. Spence, 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 report to the Honorable William S. Cohen, Secretary of Defense; the Honorable Richard Danzig, Secretary of the Navy; and the Honorable Jacob J. Lew, Director, Office of Management and Budget. We will make copies available to others upon request. Page 10 GAO/AIMD-99-213 FMS Expenditures B-281171 If you have any questions regarding this report, please contact me at (202) 512-6240 or Larry W. Logsdon at (703) 695-7510. Other key contributors to this report were Harold P. Santarelli and John A. Spence. Sincerely yours, Jack L. Brock, Jr. Director, Governmentwide and Defense Information Systems Issues Page 11 GAO/AIMD-99-213 FMS Expenditures Contents Letter 1 Appendix I 14 List of Selected Transactions Appendix II 15 Comments From the Department of Defense Tables Table 1: Aging Schedule for Delivered Goods and Services Reportedly Not Charged to FMS Customer Trust Fund Accounts 5 Table 2: Amounts Not Properly Charged to FMS Customer Trust Fund Accounts 8 Abbreviations CFO chief financial officer DFAS Defense Finance and Accounting Service DOD Department of Defense DSCA Defense Security Cooperation Agency FMS foreign military sales LOA Letter of Offer and Acceptance MISIL Management Information System International Logistics Page 12 GAO/AIMD-99-213 FMS Expenditures Page 13 GAO/AIMD-99-213 FMS Expenditures Appendix I List of Selected Transactions Appenx Idi Country and case code Type of transaction Estimated item value recorded in MISIL Canada-ANB Reimbursable $3,337,600 Pakistan-ABU Reimbursable 1,628,305 Greece-GCV Reimbursable 693,311 Greece-GCV Reimbursable 742,829 Egypt-ABN Reimbursable 605,200 New Zealand-SAA Reimbursable 597,820 New Zealand-SAA Reimbursable 597,820 New Zealand-SAA Reimbursable 597,820 New Zealand-SAA Reimbursable 597,820 New Zealand-SAA Reimbursable 597,820 New Zealand-SAA Reimbursable 597,820 New Zealand-SAA Reimbursable 597,820 Philippines-LBX Reimbursable 336,000 Turkey-AGJ Reimbursable 268,330 Finland-SAA Direct cite 1,000,000 Canada-GKJ Direct cite 1,105,512 Kuwait-SAO Direct cite 6,630,000 Kuwait-SAO Direct cite 18,127,142 Kuwait-SAO Direct cite 18,127,142 Kuwait-SAO Direct cite 18,127,142 Total $74,913,253 Page 14 GAO/AIMD-99-213 FMS Expenditures Appendix II Comments From the Department of Defense AppenIx di Note: GAO comment supplementing those in the report text appears at the end of this appendix. Page 15 GAO/AIMD-99-213 FMS Expenditures Appendix II Comments From the Department of Defense See comment 1. Page 16 GAO/AIMD-99-213 FMS Expenditures Appendix II Comments From the Department of Defense Page 17 GAO/AIMD-99-213 FMS Expenditures Appendix II Comments From the Department of Defense The following is GAO’s comment on the Department of Defense’s letter dated July 29, 1999. GAO Comment 1. In many of the transactions we reviewed, we found that the Navy was not aware that funds had not been transferred from the FMS customer trust fund accounts to the Navy accounts to pay for the goods and services they had received. This oversight represents poor financial management practices that resulted in long periods of time when the Navy used its own funds to finance sales to foreign customers. It also significantly increased the risk that amounts will never be charged to the FMS trust fund accounts and that the earlier collections, deposited in advance into the FMS trust fund for the purpose of paying for goods and services, will be erroneously returned to foreign customers. (511649) Letr Page 18 GAO/AIMD-99-213 FMS Expenditures Ordering Information The first copy of each GAO report and testimony is free. Additional 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. 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Foreign Military Sales: Navy's Accounting for Sales to Foreign Customers Needs Improvement
Published by the Government Accountability Office on 1999-08-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)