oversight

Design of Navy Reserve Pay System

Published by the Government Accountability Office on 1977-07-21.

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

                         DCCUMENT RESUME

034L,5 - [A2E33755]

[Design of Navy Reserve Pay System]. FGMSD-77-57; B-159797. Jujy
21, 1S77. 13 pp. + appendix (24 pp.).
Report to SEcretary, Department of Defense; by Elmer B. Staats,
Comptroller General.

Issue Area: Accounting and Financial Reporting (2800); Automatic
    Data Prccessirg (DOO)-
Contact: Financial and General Management Studies Div.
Budget Functicn: Miscellaneous: Financial Management and
    Information Systems (1002).
Organizaticn Concerned: Department oi the Navy: Naval Reserve;
    Department of the Navy: Navy Regional Finance Center,
    Cleveland, CH.
          The design of the Navy Reserve Pay System was approved.
The system was designed to pay Naval Reservists for: (1)
performing active duty for training; (2) performing temporary
active duty for less than 30 days; and (3) attending drills. The
automated portion of the system was designee to establish and
maintain individual pay accounts and to pay members from a
central site. It is located at the Navy Finance Center,
Cleveland, Chic, and processes data received from the Naval
Reserve Personnel Center. Findings/Conclusions: The internal
controls in the system appeared to be adequate. Interface data
that enter the system are edited and validated by the Personnel
Center's systems, and source documents pertaining to personnel
data are retained at the Personnel Center. Transactions can be
traced for audit through social security numbers and other
unique numbers assigned to forms and batches. Automated programs
can be used to extract accounts. Minor problems were identified;
there is a need for: (1) redesign of the software system to take
advantage of enhancements offered by the new computer
configuration being used; and (2) a contingency plan at the Navy
Finance Center's central site computer facility.
Recommendetions: Navy internal auditors should periodically
review the system to assure that it is operating as designed
with particular attention to preparation of field inppt, control
over input, and retention of documents supporting input and the
 timeliness cf reporting of events affecting a member's pay.
 (Author/HTW)
   \'~         ~      COCMPROLLER GENERAL Of TH U' iTDO SrAT          _         e   v
                                 WVIA8I4IMlNQTON.
                                             O.C. 20   .,I




B-159797                                                       JUL   a 1 977

The Honorable
The Secretary of Defense

         Attention:     Assistant Secretary of Defense
                          (Comptroller)

Dear Mr. Secretary:

     It is my pleasure to approve the design of the Navy Reserve Pay
System, as requested in your letter of July 1, 1977. The system is
designed to pay Naval Reservists for (1) performing active duty for
training, (2) performing temporary active duty for less than 30 days,
and (3) attending drills.

     In evaluating the system design, we looked at the automatic data
processing aspects primarily to determine their adequacy as to inter-
nai controls, audit trails, data integrity, and consistency with the
accounting specifications.

     Because the administrative conrrol of funds used to pay reserve
Navy personnel is maintained as part of the Bureau of Naval Personnel--
Military Personnel (Command Level) System rather than as part of the
Navy Reserve Pay System, we will evaluate these controls when that
system is submitted for approval.

     To maintain the approved status of the design, planned changes
should be discussed with our representatives and, if deemed signifi-
cant, submitted formally for approval.

     We suggest that the Navy internal auditors periodically review
the system to assure that it is operating as designed. The internal
auditors should pay particular attention to (1) the preparation of
field input, the control over the input, and retention of documents
suppurting the input because of the significance of field input upon
the accuracy of the master pay account, and (2) the timeliness of the
reporting of events affecting a member's pay.

     At some future date, we'will examine the system or selected aspects
thereof and advise you as to whether it is functioning effectively and
in.accordance with this approved design.




          s,
          ~                                                          FGCYSD-77-57
     We cormend you and the Navy for your continued efforts in improving
the Navy financial management systems

                                         Sincerely yours,

                              iG         D)
                                         ELMn B. TAATS

                                         Comptroller .General
                                         of the United States




                        . ~~~~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ,




                 \~~~~~~-2-



                                   -2-
   DEPABTENT OF THE NAVY

  NAVAL IESERVE PAY SYSTEM

        (CODE 93679)




  SUiARY OF ADP EVALUATION




RECOMMENDED ACTION:    APPROVAL
A.   INTRODUCTION

      1.   Name of Department:    Department of the Navy

     2.    System Being Evaluated:      Naval Reserve Pay System

     3.    Date Formally SubmiLted for Evaluation:         July 1977

           Date Informally Submitted:     April 1976

           Date Evaluation was Completed:       April t977

           Staff Dayj Expended:    38

     4.    Recomnended Action:    Approval



B. BACKGROUND

     1.    Approach Used in Evaluation:

            Normal procedures using the ADP Review Guide.         The accounting aspects

     were evaluated by the Detroit Regional Office, Cleveland Suboffice.


     2.    Nature and Scope ef the ADP Objectives:

           A reserve member can receive pay for performing any one of the fol-

     lowing duties:   drill performance, active duty for training, or temporary

     active duty for less than 30 days.         lay is   computed in two ways either

     manually or by the automated portion of the system.

           If a reserve member is on active duty for training, the member is

     paid manually by the disbursing officer at the activity where a_.igned.

     The member's orders are used as the authorizing document, and published

     pay schedules are used to deterrine base pay.           A copy of the orders and

     pay voucher are provided to the hazy Finance Center, Cleveland, Ohio,

     as an interface to the automated portion of the system by the disbursing

     office to preclude duplicate payment and to report FICA wage to Social

     Security Administration.




                                          -1-
  If a reserve member is on temporary duty for less than 30
                                                            days, the
 menberts pay is manually processed as a claim at the Navy
                                                           Finance Center.
 The payment is made based upon source documents received from
                                                               Bureau of
 Naval Personnel and the member; such as, orders, travel voucher,
                                                                  dependency
 application, and employee's withholding exemption certificate
                                                               (W-4).
      The remainder of this summary will address the automated portion
                                                                       of
 the system.   The manual portion is addressed in the accounting suimnary.

      The automated portion of the system is designed to establish
                                                                   and main-
 tain individual pay accounts and to pay members of the Naval
                                                              Reserves for
 drill performances from a central site.      The system pays a reserve member
 in o drill pay status and for drills performed while in a
                                                           temporary drill
 pay status.   A member is paid on the basis of drill performance data sub-

 otitted by a reserve unit commanding officer through any one
                                                              of the 372 de-
 centralized Naval Reserve Centers to the Naval Reserv. Personnel
                                                                  Center,
New Orleans, Louisiana.


3.   Description of Operational Environment

      iThe pay system is centrally located at the Navy Filance Center,

Cleveland, Ohio, and is des`3ned to process data received
                                                          from the Naval
Reserve Personnel Center on magnetic tape via air dxpress.
                                                                The system
was desirgned and developed in-house using COBOL as the programming
                                                                    language.
     The system is designed to process data using the computer
                                                               facility
that processes data to pay active, reserve, and retired
                                                        personnel.       The
data are processed on two IBM 370/158 computers using multiprogramming
                                                                       with
a fixed number of tasks operating systems.     An IBM 1401 computer is used
to perform edit, validation, and block proofing on key-punched
                                                               data.      An
IBM 360/30 is used to convert cards to tape, punch and print
                                                             reports.        The
computer vendor's standard operating system software is
                                                        used to perform
utility type tasks, e.g., routine sorts.


                                -2 -
      4.   Degree of Automation and Interface:

              The system is a centealized, tape-oriented, batch processing system

      designed to compute pay for reserve members based on drill performance

      data.      The system interfaces with:

              a.   Reserve Field Reporting System (see page 4, pard. b}

            b.     Manpower and Personnel Marngement Information System

            c.     Navy Regional Finance Center Disbursing Offices

            a.     Universal Check System     (See Appendix)

            eo     bureau of Naval Personnel Financial Management System

            f.     Centralized Expenditure ani Reimbursement Processing System

            g.     Social Security Admin.istration

            h.     Internal Revenue Service

            i.     Department of Commerce (see page 6, para. f)

            j.     Veterans Administration

            k.     Treasury Department



C.   ESSENTIAL FEATURES OF THE SYSTEM

      1.   System Description:

           The system design consists of seven subsystems:         (1) 1401 Card Edit/

     Validation and Block Proof List, (2) Input Edit and Validation, (3) Master

     Update and Pay Computation,         (4) End-of-Month Report Processing, (5) FtJ-

     of Year/Microfiche,      (6) Search/Sort, an, (7) Servicemen's Group Life In-

     surance.      Approximately 105,000 drill performance transactions and 31,000

     personnel change transactions are processed by the system each month.         During
     the summer months approximately 88,000 active duty orders and pay records

     are processed.      The various functions performed by each subsystem are dis-

     cussed below.




                                            -3-
      a.   The 1401 Card Edit/Validation Subsystem is      designed to edit and

validate data keypunched at the Finance Center from source documents on

 a weekly basis.    This method is   used to enter the acti7re duty for training

data and to enter unit and individual member data when difficulty is         ex-

perienced through the regular channel,      i.e.,   via magnetic tape from the

Naval Reserve Per:sonnel Center.      The source documents are blocked and

Predetermined totals are established.       Eqch card is   edited and the data

is validated.      Cards that are in error are listed, and error codes are

indicated,     Totals are accumulated, and a block proof list is produced.

A block of cards is reentered until all cards are error free, and the block

is in balance.

     b.    The Input Edit and Validaticn Subsystem is the entry point for

all input into the system.     It is designed to edit and validate all input

data weekly.     The data which are not acceptable are rejected and are re-

entered after correction.     Two types of data are entered:     the first is all

data keypunched into cards from source documents at the Finance Center, and

the second is all data received from the Reserve Personnel Center via mag-

netic tape which includes personnel data and the scanned drill performance

data reported through the Reserve Field ReTorting System.

     The subsystem creates a transaction file to be used to update the

master file and two mini-master files.      The first is the FICA mini-master,

which is an accumulation of reservist's FICA wages earned while on active

duty for training.     Every six months, this mini-master file is used to creat~

a tape file for the Social Security Administration for the purpose of up-

dating the member's social security account.        The second is the unit mini-

naster which contains the name of each of the 3,500 reserve activities,

authorized drills, and the appropriate fiscal year code authorization.

This information is later used to      verify drill performances.

                                     -4-
         c. The Master Update and Pay Computation Subsystem is designed to

 update each member's account on the master file on a weekly basis and to

 compute drill pay monthly.    The master file contains 12 to 18 months-of drill

 performance and personnel information.     It is also designed to-   (1)
 produce a case jacket label for each new member, (2) compute the base pay

 rate, (3) compute the incentive pay rate, if applicable, (4) draw off

 accounts where the social security number has changed and resequence the

 accounts for pay computation purposes and (5) produce a check issue tape.

Other functions performed by the subsystem are to disqualiy prior paid

drills because of the change in personnel information, produce a hard

 copy    -ecord for research purposes based upon a search request, compute

withholding tax and year-to-date totals for the calendar and fiscal year,

deduct servicemen's group life insurance premiums, compute retroactive pay

adjustments based 'on requalification, produce a listing reflecting drills

not paid and reason for non-payment, and produce print files for various

other reports such as earning statements and W-2(s) when applicable.

        d. The End-of-Month Report Processing Subsystem is designed to

prepare various reports which are generated by the Master Update      and
Pay Computation     Subsystem in the proper format.

        Two of the most important reports that awe printed and sent to each

of the 3,500 units in the field are the money list and the non-pay list.

The money liEt displays the member's name and amount paid, and the non-

pay list indicates what drills'were not paid and the reason for non-pay-

ment.

        A print tape of all obligations incurred for the month is produced

and forwarded to Chief of Naval Personnel'_ Financial Management System.



                                   -5-
        Another report produced is a listing, which contains history for a

 12-month period, of pay accounts having had a discrepancy or which were subject

 to an inquiry.       This document is used by the payclerks to answer inquiries

 concerning non-payments.

        Various other reports are produced which aid in researching and

managing the master file.

        e.    The End-of-Year/Microfiche   Subsystem is designed to produce a

microfiche record of the master file and prepare it        for the new fiscal

year.        The master file is designed to store 18 months of data, but every

6 months the oldest 6 months of data in each account is microfiched for

audit purposes and removed.       The processing is done semi-annually based

on the fiscal year.       During the processing at the end of the fiscal year,

additional functions are performed, i.e., the accounts of members who

have become inactive are removed and certain fields in =ach account are-

set to zero.

        f. The Search/Sort Subsystem is designed to provide the pay depart-

ment with the ability to identify and locate accounts on the master file.

and have a hard copy printout prepared for research purposes on an as required

basis.       The subsystem also performs some miscellaneous functions such as

preparing self-sticking address labels for mailing member's pay checks,

updating a member's address in his account if an address change arrives

after the regular monthly update, producing a listing of all activity

addresses, and producing a report for the Department of Commerce indicating

by totals the number of checks and the amount being distributed by zip

code.



                                     -6-
      g.   The Servicemenrs Group Life Insurance Subsystem is       designed to

update a master file     weekly, prepare semi-annual payment notices for

participating reservist in     a non-pay status, record premium paymer..s

deducted from the reservist's drill       performance pay and payments submitted

by members in   a non-pay status, and prepare various reports for management

and the Veterans Administration.      A reservist can elect to have either no

insurance or full time coverage in multiples of $5,000 up to $20,000.

At the death of a reservist, the Navy Bureau of Personnel verifies with

the Navy Finance Center the status of the deceased member's account.           If

the premium payments are not up to date,       the amount owed is   deducted from

the face value of the policy.


2.   System Controls:

     The internal controls in the system appear to be adequate.          All

interface data that enter the system have been edited and validated by the

Personnel Center's systems.      The data that are entered at the Finance

Center are edited and validated by the system and controlled using batch

totals.

     Source documents pertaining to personnel data are retained at the

Personnel Center.      The Personnel Center provides the Finance Center with

a microfiche copy of the drill performance source documents for research

and audit purposes.

     Drill performance information is recorded daily on a drill recording

form using plastic "credit" cards and the rotary wheels of a data recorder.

Each unit batches its drill recording forms and provides a block total on

the drill recording control form for each batch submitted.          The drill re-

cording form must be cer:ified by the reservist or his commanding officer



                                   - 7-
 in his absence, and the drill recording control form must be certified

by the commanding officer or his designated representative.

      Through the use of optical character recognition scanners and data

recorders, the manual transcription of data has been eliminated in the

 system except for the entry of data at the Finance Center for active

duty for training and temporary active duty for less than 30 days.      Using
automated source data procedures for capturing data, payments are possible

by the twelfth of the month following an en--of-the-month cutoff.

     The system is designed to perform additional edits on the interface

data received from the Personnel Center.      Drill performance or personnel

data errors detected by the system are returned to the Personnel Center

for correction to keep the master pay file synchronized with pay effecting

data on the master personnel file.      The corrected data re-enters using the

same control procedures as original data.*

     An automated suspense file is not used to control rejected trans-

actions.   Rejects are controlled manually by batch using error listings

and batch totals.

     A copy of the weekly drill performance transaction tape is air ex-

pressed from the Personnel Center to the Finance Center and retained for

90 days for backup.

     Checkpoints are taken during processing for restart purposes in case

of malfunction.

     Separation of duties and the initiation of transactions are adequately

provided for.     Program change requests and their implementation must be

approved in writing before the ADP department can proceed.     Procedures

exist that appear adequate to implement the provisions of the Privacy Act

of 1974;



                                  -8-
      3, Auditability:

           Transactions can be traced by the reservists' Social Security number

      and unique numbers preassigned to the drill recording forms and the unique

      number assigned to the batch on the drill recording control form which

      indicates the total number of drill recording forms in the batch and

      beginning and ending numbers on the drill recording form.

           The master file is microfiched every 6 months prior to the removal.

      of the oldest 6 months of data in each account.    The microfiche file is

      retained a minimum of 3 years on site for research and audit purposes

      then forwarded to the record center for retention.

           The automated programs in the Search/Sort Subsystem can be used to

      extract an account or a group of accounts from the master file for audit.


      4. Security:

           The procedures 'or controlling access to the computer facility and

      off-site storage were evaluated previously in the Navy JUMPS design.



D.   PROBLEM AREAS

           1. It would appear that this system has evolved from a system pre-

     viously designed for an earlier generation of computers.     There is a need

     to redesign the software system to take advantage of the enhancements

     offered by the computer configuration now being used and at the same time

     upgrade the system documentation.

          2. The need for a contingency plan at the Navy Finance Center's

     central site computer facility was called to the Navy's attention in the

     evaluation ce the JUMPS design,     A study is being performed by personnel

     at the Finance Center to determine how this requirement can be satisfied.



                                       -9-
           The above problems are not of a significant nature to withhold

      approval.   However, they will be highlighted in a management letter to

     bring them to the Navy's attention for resolution.



E.   STATUS OF THE SYSTEM DEVELOPMENT

          This system has been operational since July 1965.

          There should be only limited involvement of FGMSD staff during the

     next 12-month period.




                                        10=
                 Name of Agency    Deuartment of the Navy
                 Name of System Naval Reserve Pay System
                 Da;e Review Completed       april 29, 1977

                         ADP APPLICATION WITHI3T A
            -   .FINANCIAL        ACCOUNTING SYSTEM


                                                                  .YES       IO              N/A
 1. General ledger                 .                          .                              X
 2. Accounts receivable analysis                                             .               X
 3. Invoice billing and customer statements_                                                 X
 4. Merchandise inventory analysis                                                       _   X
 5. Fixed asset analysis
        Buildings, improvements, and leaseholds                                              X
        Machinery and equipment                                                              X
        Office furniture and equipment__
 6.   Depreciation                                                                           X
 7.   Journal entries_                                                                       X
 8. Accounts payable                                                                         X
 9. Payroll & Leave
        Timekeeping                                                                          X
        Payroll checks and register                               X
        Forms W-2 _                                               X
        FICA reports                                              X
        State unemployment reports           _                                               X
10.   Sales analysis                                                                         X
11.   Cost analysis                                                                          X
12.   Budget analysis                                                                        .
        Appropriations
        Contract authority_ '                                                                X
        Limitations                                                                          X
       Apportionments                    .                               _           .       X
       Reimbursements                                                                        X
       Obligations                               _
       Accrued expenditures                                                                  X
        Expenditures                                                                         X
13. Financial statements
      Balance Sheet                                                                          X
       Statement of Income and Expense_                   _                                  X
14.   Does the agency use an automated audit program?
        If yes, please furnish name                                              X
                                                              Appendix



                         Universal Check System

      The Navy Finance Center designed and developed an automated system

 to produce the checks for five interfacing pay systems:    (1) Navy
 Reserve? (2) Navy Reserve Officers Training Corps, (3) Navy Armed

 Forces Health Scholarship Program, (4) Navy Retired, and (5) Allotments

 for JUMPS.   The interfacing systems provide check issue tape files.

     Eich tape file.has a specially constructed trailer rtz'-A that

provides the Universal Check System with the number of checks to be

issued and the total dollar value.    The Universal Check System is de-

signed to accumulate the number of checks I oduced and the total dollar

value and make a comparison.    Check production is terminated until the
out-of-balance condition is corrected.    A money list and a pay group
totals report are produced.    These reports are used to manually reconcile
each check.

     The procedures for controlling blank negotiable instruments and

facsimile plates appear adequate.    Separation of duties is provided for
in the procedures by assigning the responsibilities of handling the
                                                                    blank
checks and mailing the printed checks to different departments.

     The   JP department receive:s the blank checks and must account for

lzsed and unused checks through the use of a control log.
     DEPARTMENT OF THE NAVY
        NAVAL RESERVE PAY
             SYSTEM
          (CODE 93679)




        SUMMARY REPORT ON
       ACCOUNTING FEATURES




SUBMITTED FOR APPROVAL ON: JULY 1977
   RECOMMENDED ACTION:  APPROVAL
  A.    INTRODUCTION
      This summary is a report on the
                                       Detroit Regional Office
  evaluation of the accounting features
                                         of the Naval Reserve
  Pay System. The FGMSD/FM staff
                                  has evaluated  the ADP features
  of the system and has prepared
                                 a summary on their evaluation.
      .. Le Navy submitted the system
                                      design for our informal
 evaluation on April 30, 1976.
                                   Based on our evaluation of the
 design documentation for compliance
                                        with Titles 2 and 6 of
 the GAO Manual for Guidance of
                                   Federal Agencies, we recommend
 approval of the ac ounting features
                                        of the system.
 B.    BACKGROUND
       1.   Nature and Scope of Operations

            The design provides for paying
                                            Naval Reservists for
  (1) attending drills, (2) performing
                                         active duty for training
  (ACDUTIRA) and (3) performing temporary
                                           active duty (TEMAC) for
 less than 30 days. Reservists
                                   who perform TEMAC for 30 days
 or longer are paid under the Joint
                                       Uniform Military Pay System.
           A pay record is maintained at
                                          the Navy Finance Center
 (NAVFINCEN), Cleveland, Ohio,
                                 on magnetic tape for each reservist
eligible for drill pay. These
                                  records are updated weekly with
personnel changes and drill performance
                                            data. Drill pay is
computed and paid monthly by
                                checks issued at NAVFINCEN.
Reservists are paid for ACDUTRA
                                by local disbursing officers




                                 -1-
 where the training is performed.      The ACDUTRA dates are
 reported by the disbursing officers to NAVFINCEN
                                                  and entered
 on the drill pay records to prevent concurrent payments
                                                          for
 drills and ACDUTRA. Payments for TEMAC are processed
                                                       as
 claims at NAVFINCEN.

           In 1976 about 94,000 reservists were eligible for
 drill pay and about 85,600 periods of ACDUTRA were
                                                    reported
 to NAVFINCEN for entering on pay records. In addition,

 NAVFINCEN paid 154 TEMAC claims.

      2.   Organizational Environment

           Naval Reserve Centers at 372 locations record and
report drill attendance and personnel changes under
                                                     the Reserve
Field Reporting System. Reports are sent to the Naval
                                                         Reserve
Personnel Center (NRPC), New Orleans, where the data
                                                      is
transferred to magnetic tapes. The drill attendance
                                                      capes
are then sent to NAVFINCEN for input to t:he pay system.

Personnel changes tapes are processed th:rough the
                                                   Manpower
and Personnel Management Information System (MAPMIS)
                                                     at
NRPC and sent to NAVFINCEN for input to the pay system.
ACDUTRA periods and FICA taxes are reported to NAVFINCEN
                                                               by
local disbursing officers.




                                 -2-
      The Commanding Officer, NAVFINCEN, is responsible for

all central site functions of the system, including:        establishing,
up-dating, and maintaining drill pay accounts; settling claims

arising from Naval Reserve status; preparing checks and earning

statements; reporting on taxable income and taxes withheld;

and reporting financial obligation data to the appropriation
manager.

     3.     Annual Funding Level

            Funds for paying reservists for drills and ACDUTRA

are included in Reserve Personnel, Navy, appropriations and

funds for payments for TEMAC are included in Military Personnel,

Navy, appropriations.     The estimated funding level for drills
and ACDUTRA for fiscal year 1976 was $165 million.       Estimates

of the costs of TEMAC are not readily available.       The appro-
priations    are managed by the Chief of Naval Operations and
administered by the Chief, Bureau of Naval Personnel (CHNAVPERS).

Obligations for drillt are reported monthly to CHNAVPERS by

NAVFINCEN and all disbursements are reported to CHNAVPERS

through the Centralized Expenditure and Reimbursement

Processing System (CERPS).

     4.     Relationship to Other Management Systems

            The Naval Reserve Pay System interfaces with (1)
CHNAVPERS' financial management system,    (2) CERPS, and




                                   -3-
(3) MAPMIS.      The interface with the financial management system

is by monthly reports produced by the system on obligations

for drill pay.      The CERPS interface occurs at the Navy Accounting

and Finance Center, Washington, D.C., where disbursement data

extracted from vouchers in all Navy disbursing officers' accounts

by the five Navy Regional Finance Centers and NAVFINCEN is con-

solidated and reported to CHNAVPERS.        The -interfaces with MAPMIS

are through system input (personnel changes) and system output

(drill performance and ACDUTRA data).

            In addition, the system generates information for
reports to the Social Security Administration and Internal

Revenue Service on taxable income and taxes withheld, the

Veterans Administration on life insurance premiums, and the

Treasury Department on checks issued (check number and amount).

      5.    Degree of Automation

            The system is a highly automated pay system operating

with one general equipment group, an IBM 360/30 operating

system "Multi duty" and two IBM 370/158 operating systems -

OS Multiple Fixed Tasks.      Details of the ADP operation are

included in the ADP summary.

C.   ESSENTIAL FEATURES OF THE SYSTEM

     1.    System Characteristics

           a.   Application of accrual basis of accounting

                The Naval Reserve Pay System is a payroll system



                                    - 4 -
 that does not involve accrual accounting.         It provides information
 to the appropriation manager where accrual accounting methods
 are used.
             b.    System for the administrative control of funds
                   The administrative control of funds is maintained
by CHNAVPERS.
          c.       Control over and accountability for assets

                   (1) Cash

                       Payments for drill attendance and TEMAC are
made by checks printed at NAVFINCEN and mailed directly to

reservists.       Payments for ACDUTRA are made by local disbursing
officers either by check or cash.          In either event, all payments
are accounted for by local disbursing officers or the disbursing

officer at NAVFINCEN in their monthly financial returns.

                  (2) Receivables

                     Indebtedness of reservists is centrally
controlled by the Naval Reserve Department, NAVFINCEN.          The
indebtedness is recorded in the pay account and collection is

automatic provided the member has entitlement to pay.          Any
indebtedness remaining upon separation from the Naval Reserve

is referred to another department within NAVFINCEN for collection

action.




                                     -5-
            d.     Internal controls

                   The system provides for the complete separation
 of functional duties and for the internal controls c            inly
 used in automated data handling systems.       These include controls
 over input, processing, programming and output.       The NDP
 controls are discussed in the ADP summar:y.      Examples of manual
 controls are:

      -- predetermined totals for all system hard copy

          input,
     -- individual pay jacket for hard copy input/output,

     -- certification of drill performance, and

     -- record of disposition of rejected transactions.

           e.      Basic types of reports

                 The system provides management with monthly internal
reports showing obligation and disbursement data.

                 External reports are prepared. for the Veterans
Administration, the Treasury Department, th.e Internal Revenue

Service and the Social Security Administration, covering life

insurance premiums, and wage, check, and tax data.

     2.    Evaluation by ADP Staff

           The ADP portion of the system design has been    evaluated
by FGMSD/FM staff.




                                       - 6-
D,   PROBLEM AREAS

     The problem discussed below is not significant enough to delay

approval of the system.   However, we believe that it should be men-

tioned in the management letter if the Navy has not completed. correctiva

action by the time the letter is issued.

     Concurrent Drill and TEMAC Pay

     The system provides no controls to prevent :oncurrent payment for

drills and TEMAC for less than 30 days.    We disc tssed this problem with

NAVFINCEN representatives and suggested that proceduras be changed to

require periods of TEMAC for less than 30 days be recorded on the auto-

mated drill pay record--similar procedures are used to prevent conctrrent

payments for drills and ACDUTRA.     NAVFINCEN representatives agreed to

change the procedures as suggested.

E.   STATUS OF SYSTEMS DEVELOPMENT

     This system has been operational since July 1965 without significant

operating problems or major changes.

     The Navy Accounting Principles and Standards approved March 7, 1973

apply to the system design.

     Incomplete Documentation Package

     The documentation package does not include complete information on

a change in Procedures for automating source data.     The change will be

effective January 1, 1978, when the function of automating source data

on drill attendance will be transferred from NAVFINCEN to NRPC.     That

change will speed up data flow and is expected to result in prompter




                                   -7-
drill payments and fewer input data errors.   We reviewed a draft of the

                                                       the procedures ap-
documentation, which was provided in January 1977, and

per: adequate.   NA'FINCEN will provide a copy of the final version of the

document when it is published.   It will be reviewed prior to incorporating

it into the documentation package.
                                                                   period
     We expect involvement of FGMSD staff during the next 12-month
                                                          now in progress
to be limited to the evaluation of the corrective actions

as discussed in Section D..




                                  - 8 -
          SUMMAR'.' REPCRT

                OF

     ACCOUNTING SYSTEM DESIGN

    FIELD ACTIVITY LEVEL SYSTEM,

GENERAL ACCOUNTING, FLEET (SURFACE)

       DEPARTMENT OF THE NAVY




SUBMITTED FOR APPROVAL JUNE 21, 1977

    REMMENDED ACTION:   APPROVAL
                       Field Activity Level System,_
                    General Acoiuttin, ;'Fleet (Sutfaee)'


A.   INTRODUCTION

     1.   Department of the Navy

     2.   Accounting system design: Field Activity Level System,
            General Accounting, Fleet (Surface)

     3.   Informal submission received July 1976
     4.   Recommended action: Approval
            Advise the Department of the Navy to formally
              submit the system design for approval.

B.   BACKGROUND

     1.   Nature and Scope of Operation

     The surface fleets are responsible for the operation and mainte-

nance of floating ships and staff units.    The ship operating forces comprise

ships, ship commands, headquarters commands, and administration staffs.
     The accounting and reporting system was designed in accordance with

requirements of NAVSO P-3013, Financial Management of Resources - Operating

Forces, November 1974.    The system is based essentially on the Resource

Management System, implemented within the Department of Defense on
July 1, 1968.     The objective of the hesource Management System is to

provide management with an accounting and reporting system encompassing

the total cost and measurement of resources consumed or applied in
accomplishing a task or mission.     It is concerned with operating resources,

as contrasted with investment resources.     Thus the system is limited to
accounting for resources that are financed under the Operation and
Maintenance and Military Personnel appropriations; and not with

appropriations for Procurement, Construction, or Research and

Development.

     2.    Crganizational Environment
     Fleet Commanders, Atlantic and Pacific, have overall responsibility

for the operation of the surface forces as well as other operating
forces under their respective commands.     Type Commanders, Atlantic

and Pacific, the next lower level, are directly responsible for the

operations of the surface ships under their respective commands.

Their financial responsibility involves the development of resource
requirements, and the administration of available funds, including the
efficient and effective use of resources.     Ships or staff units under the

Type Commanders are the basic operating units or cost centers, whose

funds and costs are budgeted through operating targets (OPTARs).
     Official accounting and reporting is centralized at Navy Regional

Finance Center (NRFC)   at Norfclk, Va., for the Atlantic forces, and

at San Diego, Calif., for the Pacific forces.     The role of the NRFC

is to provide end-use accounting services for the fleet and type
commanders within the Operation and Maintenance and Military Personnel
appropriations,   and the several minor allotments granted to Type

Commanders for specific purposes.




                                    -2-
       3.      Annual Funding

       Surface Ship Operating activities are financed under an annual

Operation and Maintenance, Navy (O&MN) appropriation which is budgeted

in terms of the following Five Year Defense Program (FYDP):        (1) Strategic

Forces, (2) General Purposes Forces, (3) Intelligence and Communications,

and (4) Training, Medical, and General Personnel Activities (Atlantic
Fleet only).

       The Operation and Maintenance appropriation for fiscal year 1975

programmed $1,876 million to the ship forces.        Of this amount, $1,107

million was for ship overhaul and maintenance, $391 million for fuel,

$317 million for supplies and equipage, $46 million for maintenance of
real property, and $15 million for travel.

       4.      Relationship t' Other Accounting System

       Disbursement data for input te the Fleet Accounting System(Surface)is

provided by the Navy Regional Finance Centers and the Navy Supply Centerf

Accounting systems.        Military personnel standard cost data is provided

by the Military Labor Cost System.
       The Fleet Accounting System (Surface) provides financial data for

consolidation at the two ^ommand level systems, Major Command/Fund Manage-

-ent, Pacific and Atlantic Fleets, with data of rither operating forces
            General Accounting, Fleet (Air)) financed under the O&MN appro-

   -   cion.     Ultimately, these systems pr,..ide data for input into the Navy

Cost Information System (NCIS).

                                        -3-
     5.      Degree of Automation

     Official accounting for the Fleet Surface operation is substantially
automated.     The system is a batch processing system which provides end

use accounting services for the Type Commanders through the recording
of obligations and disbursements at the operating target holder level.

General ledgers are maintained manually, and except for those reports
extracted directly from accounts in the general ledger, the reports and

listings are automated in the ADP system.     Details of the ADP system

are covered in the attached ADP summary.

C.   ESSENTAIL FEATURES OF THE SYSTEM

     The basic characteristics of the system include (1) double entry

method of accounting, (2) a modified application of the accrual basis of

accounting, (3) an effective system for the administrative control of

funds, (4) internal control of all transactions, (5) integration of ex-
pense (cost) accounting records with the general books of account, and

(6) the production of financial reports from the official accounting
records on a timely basis to meet the needs and objectives of internal
management, and to ccmply with external requirements.
     1.      System characteristics

          a. Application of accrual basis of accounting-
             (1) Accrual of expense (costs)

                Expense generally are applied simultaneously with the

processing of detail unfilled order (obligation) documentation by the Navy
Regional Finance Center.     Although this practice may appear to deviate


                                      -4-
from accepted accrual accounting principles, in effect it results in a
reasonable and timely equating of costs with resource consumption.

     A recent study by the Navy revealed that about 82 percent of the

costs incurred in fleet operations consist of ship maintenance, fuel,

maintenance of real property, and minor construction.     Ship maintenance

is overhaul and significant maintenance projects (restricted availability

and technical availability) represented by work orders.     The work'is per-

formed by the Navy industrially funded work centers or by contract.       Ship

maintenance costs are reported on the accrual basis.     For fuel, obligations

for such requisitions are reported and recorded on the basis of fuel
receipts.   Since there are no inventories maintained in this operation,

the fuel receipts represent a replenishment of fuel consumed.     It would

be considered that the recorded obligations and consumption costs occur
simultaneously.

     Maintenance of real property and minor construction are performed

under reimbursable orders or contracts.    The performing activity will

send monthly billings based en : st     icur ed to the   eqijesting activity.

The billings will then be costed -. 'n received.

     Anproximately 17 percent of the costs involve primarily supplies

ard ecuipage of the ships.   Acquisitions in supplies and equipage category

are obtained for the inost part from the Navy Stock Fund.    The rationale

for assigning costs on the basis of requisitions is that the requisitions

generally are initiated to replace items which have been consumed in



                                  -5-
 operations.     The rationale appears reasonable since the original out-
 fitting of ships, designated "shipboard allowance list" material, is
 provided at no current cost to the ship,

      The remaining 1 percent is for travel expenses.     Although these
expenses are handled similarly to those described above, that is,
expenses are charged simultaneously with the issuance of a travel
order, the same rationale should not apply.      Although this is a deviation
in accrual principles in the current documentation, a revision will be made
to the system at an early date which will correct the handling of travel

expenses.      (See Problem Area on page 15   for further discussion.)
      (2) Accrual of expenditures
     As stated immediately above, expenditures for about 82 percent of

the cost incurred are on a true accrual basis insofar as recognizing

accrued expenditures on the basis of goods and services received.        With
respect to the 17 percent, consisting primarily of Navy Stock Account

purchases, accrued expenditures or accrued liabflities are-to be deter-

mn:led at month-end on a percentage basis due to the impracticability of

arriving at a nrecise -it-off (dropped inventory basis) because of the
wide-spread sources of supply anr    the resulting delays in the receipt of
data for timeLy ?eporting.     The a .crual of travel expenditures, consisting
of 1 percent of te remain'rig funds provided, is an apparent deviation

from accrual prIncipies.     (See Problem Area on page   15   for further
discussion.)




                                    -6-
    b.   Administration control of funds'

    The administration control of funds conform to the system prescribed.

by the Department of Defense (Secretary of Defense Directive 7200.1),
approved by the Office of Management and Budget on April 19, 1963.

    Under the Department of Defense Resource Management System concept,

resources (funds) are administered at the command level where resource
trade-off decisions can best be made.   In line with this concept, funds

for certain expense elements are centrally controlled at the level of
Fleet Commanders (e.g., propulsion fuel), or at the Type Commi der

level (e.g., military personnel services and travel of personnel).      Other

expense elements are controlled at the operating or cost center levels.
    Resources are identifed, budgeted, and accounted for in terms of

the Five Year Defense Plan -- budget activities.   The system for the

administrative control of funds is designed as follows:

     (1) Funds identified by budget activities are allocated
          by the Chief of Naval Operations to major claimants--

          the Commanders-in-Chief, Atlantic and Pacific Fleets.
     (2) The Fleet Commanders issue fund limitations in the

          form of operating budgets for each budget activity to

          themselves for fleet level functions, and to their
          respective Type Commanders for expenses under their
          control.

     (3) Type Commanders, in turn, issue separate operating
          budgets for each budget activity to themselves, and to


                                   7
      shore (field) activities designated as responsibility

      centers.    Operating budget holders at this level are

      subject to violations under Section 3679 R.S.     Reim-
      bursable orders are allotted separately and accounted

      for separately.
(4)   From operating budgets issued to themselves, Type Commanders
      issue operating targets (OPTARs)    to themselves for staff

      operations, and to ships, staffs, and other operating units,

      designated as cost centers.     Fleet Type Commanders likewise
      issue OPTAHRsto their staffs under which operating units,

      may incur obligations for centrally controlled expenses.

      OPTAR holders are not subject to violations under Section

      3679 R.S.   Nonetheless, the OPTARs are used as a tool for

      day-to-day obligations control since they are administrative
      limitations.

(5) Each OPTAR holder is required to maintain a Requisitbn/OPTAR

      Log to record OPTARs and the value of transactions authorized

      to be incurred.   Although OPTAR holders are not subject to
      Section 3679 R.S., prevalidation of obligations is accomplished

      through this media.   The procedures are equally applicable to
      accounting for operating targets for those costs controlled
      centrally at the fleet/type commander level.    The requisition/

      OPTAR Logs parallel and provide a check on the official

      accounting records maintained at the Navy Regional Finance Center.



                               - 8-
     (6) Separate general ledgers are maintained by the Navy Regional

          Finance Center for each operating budget or responsibility

          center, which include budgetary accounts Indicating the status

          of fund authorizations.
     (7) Monthly reports on the status of operating targets and operating

          budgets are produced by the Naval Regional Finance Center for use

          by Fleet and Type Commanders.

     c.   Basic structure of accounts

     The general ledger structure consists of asset, liability, expense (cost),

and disbursement accounts.     Manual postings to the general ledgers are based

on journal vouchers prepared from fund distribution documents and from

mechanized listings for fund usage.       A cross-checking process shows general

ledger control by matching totals of various ADP listings, the data base
used to produce financial reports,and voucher postings with the balances in

the general ledger accounts.
     Separate general ledgers are established for each operating budget on a

fiscal year basis.   Since an operating budget is provided for each reim-

bursable order, separate general ledgers are maintained accordingly.       With res-

pect to billings and collections for reimbursable projects, several accounts
are maintained, as prescribed in NAVSO P-3006, in support of reports prepared

and submitted to the major claimants (Fleet Commanders), for consolidation
and further submission.

     Subsidiary records consisting of machine listings/tapes are maintained

in support of various control accounts as follows:       (1) Expense Control -

further summarized at the cost center and expense element levels,
(2) Undistributed Disbursements - disbursements which have not

                                    -9-
                                                          (3) Unfilled
been validated by matching with a related unfilled order,

Orders, (4) Accounts Payable, and (5) Travel Advances.

     d. Asset accountability and conttol'
     Assets under the system consist of the operating budget, accounts
                                                                The
receivable, travel advances, and reimbursable orders received.
                                                             assets,
fleet accounting system does not account for investment-type
                                                                    forces.
such as inventories or nonexpendable property held by the operating
     Inventories consisting of repair parts and reparables are maintained
                                                              maintenance
aboard designated ships for intermediate level operation and
                                                                 List"
of embarked ships, designated "Consolidated Shipboard Allowance
                                                               stock
(COSAL) inventories. The COSAL operates as an on-board local
                                                              for items
fund (under control of Type Commanders) whose replenishments
                                                             from users.
issued are derived from transfers of obligational authority
                                                            consolidating
The Navy Regional Finance Center is merely responsible for
                                                             the COSAL
the annual (end of fiscal yead COSAL reports received from
                                                              Naval
reporting activities and for transmitting them to the Chief,

Material Command with copies to the Type Commanders.

     e. Criteria for capitalization of nonexpendable property
                                                                 Surface
     Investment-type items are not accounted for under the Fleet

 System.
      f. Controls for each type of liability
      Provision is made in the account structure to distinguish between

 amounts owed to Government agencies and to the public.


                                  - 10 -
     Liabilities resulting from acquisitions of fuel are readily

identified as payables on the basis of fuel receipts, and are traced

to specific documents on file in that status.       Accrued liabilities

resulting from Navy Stock Account purchases which are to be determined

on a percentage basis, however, are not individually identified in the
payable category.     The documents in this category remain in the unfilled

order file until notification of receipt or constructive receipt

(dropped inventory).
     g. Cost accounting for major organizational segments,
        budget activities, and programs
     The classification of expenses (costs) is accomplished through a

uniform expense account coding structure.       Nine fields provide the auto-

mated accounting classifications for all types of transactions.         Among

these are classifications for (1) location - Atlantic or Pacific fleets,
(2) the budget activity - FYDP, (3) expense element, and (4) cost center

designation.     Reimbursable costs are charged directly to each reim-
bursable order.

     h. Treatment of unfunded costs
     The system does not account for unfunded leave or depreciation

costs.     Military personnel costs funded by the Military Personnel

Appropriation are recorded as statistical costs.      These costs are

provided by the Bureau of Navy Personnel and are compiled on the basis

of strength data contained in the personnel accounting machine records

as of the first day of each month; computed on the basis of standard

rates.     The costs are distributed to the benefiting operating cost

centers.



                                   -   ]1   -
     i. Internal controls

     Our evaluation of the system design disclosed that the assignment

of duties both organizationally and functionally provides adequate
controls which result in accuracy, timeliness, and reliability of inputs

to the system, and the resultant effect of the outputs.   By conducting

all the divisional control log procedures, by bumping the totals of the
various files against the data base used to produce reports, and by
crosscheck of the several reports, reasonable assurances o f the accuracy

and control is attained over obligations, disbursements, cost distribution,
and reimbursements.

     All financial documents are controlled through (1) the assignment

and use of specific sequence of numbers, (2) the systematic flow of
documents, (3) the maintenance of registers and other appropriate controls

by the Navy Regional Finance Center to assure that all documents are
received promptly, and have been approved by authorized officials.     All

financial transactions recorded in the accounts of record must be

supported by documentary evidence which becomes part of the accounting

records.   Through the assignment of a batch control number to every

transaction, combined with the transaction document number, all trans-
actions are traceable back to their origin.

     The ADP support provides the necessary data for postings to general
ledger accounts.   Detail: o? the ADP internal controls are covered in the

ADP summary attached.


                                - 12 -
     j. Cost-based operating budgets
     The system provides for the projection and accumulation of costs

at the cost center operating level.   These costs, with the exception of

statistical personnel costs are based essentially on current operation
and maintenance funding requirements.
     k. Basic types of reports

     The General Ledger and subsidiary records are the bases for
accumulating and summarizing financial transactions for each operating

budget and for the preparation of financial reports.   The principal

financial reports produced and their general contents and frequency was
as follows:
         (1) Trial Balance (monthly) - A separate report is prepared
             for each operating budget for use by the grantor of the
             operating budget and the operating budget holder.
         (2) Budget Classification/Functional Category/Expense Report -
             Detail by Chargeable UIC (monthly) - This report provides
             detail input to claimants for summarization and submission
             to the Navy Cost Information System (NLIS) at the NavCompt
             level, and consists of accrued expenses and gross adjusted
             obligations for the month and fiscal year to date, in terms
             of budget classification, functional/subfunctional cate-
             gories, expense elements and subhead.
         (3) Budget Classification/Functional Category/Expense Report -
             (monthly - This report provides similar information as
             (2) above, but, instead, shows obligations and expenses
             categorized as they are budgeted at the operating budget
             level, also for input to the NCIS.
         (4) Report of Expense Within Functional/Subfunctional Category
             and Overall Expense Element Totals 'mothly) - This report
             is prepared as a supplement to (3) bove, and contains the
             same data as that report, but in different arrangement.


                                  - 13 -
          (5)    Ship/Staff Status      t (monthly) - This report provides
                                      tp-~

                 the status.of opel    .g targets and operating budgets to
                 the fleet and type connanders.

          (6) Reconeiliati' Report (Expenditue/Collectihs) (Quarterly)
              This.report is prepared for each operating budget, and dis-
              tributed to.the operating budget holder.and major claimant
              (fleet commander). It is used by the major claimant to
              monitor and reconcile undistributed disbursements at the
              appropriation anti fleet level.

           (7) Summary Restricted Availability/Technical Availability,
               Ship Overhaul Project Order/Work Request Report (monthly) -
               This report is to provide status information on project
               orders and work requests for major maintenance work. It
               displays accrued.costs against authorized amounts,
               remaining balances, and matched and unmatched expenditures.
               This report is provided to the fleet commanders.

           (8) Excessive Difference Listing (monthly) - This report shows
               transactions in excess of $500 which have not been matched,
               and allows the fleeting accounting offices to research the
               transactions which are believed to be potLintially erroneous.

           (9) Selected OPTAR Date Information Report (monthlv' - This
               report is a by-product of the reconciliation process.
               It provides data for analysis of the threshold concept-
               unmatched charges of less than $50.01 and over $50.00.

          (10)   Report of Outstanding Travel Advances (monthly) - This
                 report provides the detail data on the Travel Advance
                 general ledger account. It provides an aged listing
                 for follow-up.

     1.  Control over and accountability for pay, leave, and allowances
    Accountability for all military payroll related activities is the

responsibility of separate pay systems.
    2.     ADP Review

     The computerized portion of the system has been reviewed by Mr.

Wysong's staff and recommended its approval.     Details of the ADP system

are covered in tha attachment.


                                  -     N    -
D.   PROBLEM AREA
     The documentation contains provisions for recording travel expense

at the time the tyrvel orders are issued.      This is not in accordance
with the accrual principle that expenses should be recorded based on

actual performance.   This had been a problem in the Department of Defense
Accounting Guidance Handbook.     However, the Handbook was revised in
February 1977 tr corrLc; the accrual method of handling travel expense.

The Navy w ll incorporat-e I    the   design documentation the accrual
accounting revision at an early date.      We believe that the approval should
be given Iith thr understanding that the revisions will be made and the

approval letter should be so qualified.
E.   STATUS OF SYSTEMS DEVELOPMENT
     1. The design submitted for approval is in operation at both the
Atlantic and Pacific Navy Regional Finance Centers.

     2. We anticipate no involvement of the FGMSD/FM staff with the
system in the ensuing 12-month period.




                                  - 15 -