DCOMEZT RESOE 04024 - B30743301 4 jiJt/ Loss of Accounting Integrity in Air Force Procureseut Appropriations. FGMSD-77-81; B-13290C. November 1, 1977. 12 p. Report to Rep. George B. aho u , Chairman, douse Commitcee n Appropriations. by Robert F. Keller, Acting Ccaptrcller General. Issue Area: Accounting and Financial Reporting (2800). Contact: Financial and General a&nagement Studies Div. Budget Function: iscellaneous: inancial Management and Information Systems (1002). Organization concerned: Department of the Air Pcrce. Congressional Relevance: House Committee on Apropriations. Authority: Anti-Deficiency Act (31 U.S.C. 665). Budget and Accounting Procedures Act of 1950. The Air Force's use of imrroFer accounting procedures has resulted in a loss of integrity in its procurement several appropriations. Although the Aix orce has directed tt corrective actions be taken, there is still a need to change its accounting procedures so that advances received fzcm foreign countries under cooperative logistics arrangemints are properly recorded and that such advances now in the wrong accounts are transferred to the proper accounts. ecomaendations: The Secretary of Defense should have the Secretary of the Air Force direct the Air Force Audit Agency to review the revised accounting procedures the Air Force has implemented to: determine if they are adequate so that customer orders and related obligations are recorded in the proper fiscal year; determine whether it is feasible %,o ccrrect prior year fund resource balances resulting from the improper customer crier accounting procedures; verify that the improper entries in the fiscal year 1973 missile account have teen corrected and determine the validity of adjustments made in fiscal year 1977 which increased fund resources in that account; and determine whether unobliqated customer order balances in the expiring fiscal year 1975 accounts were properly transferred at the end of fiscal year 1977 and whether amounts improperly transferred at the end of fiscal years 1975 and 1976 have been recorded in the correct acouats. The Secretary of Defense should also have the Secretary of the Air Force revise Air ]orce accounting procedures so that the correct appropriaticn or stock fund is credited for advances received under cooperative logistics arrangements and adjust any advances not currently recorded in the proper account. (SC) COMMITTEE ON APPROPRIATIONS * , f.st% REPORT OF THE HOUE) COMPTROLLER GENERAL <ous° OF THE UNITED STATES Loss Of Accounting Integrity In Air Force Procurement Appropriations Because improper accoun;'ting procedures were used for several years, the Air Force does not know the status of its 18 procurement appro- priations fom fiscal years 1971 through 1976. Consequertly, t cannot determine whether it has ob;igated or expended more fund resources than are available in these accounts. Also, the Air Force Logistics Command recorded improper entries totalirng $7.5 million in 1976. Air Force officials told GAO this v.as Jone to avoid revealing an over- obligation in one of its procurement ac- counts. The Air Force has (1) acted to correct some of the improper accounting procedures and (2) directed that the improper entries be reversed. The Air Force should correct its procedures for recording advances received from foreign countries under cooperative logistics agree- ments. The Air Force Audit Agency should also evaluate the effectiveness of the revised accounting procedures and verify that the improper entries were corrected. FGMSD-77-81 NOVEMBER 1, 1977 COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON. O.C. WU B-132900 The Honorable George H. Mahon, Chairman Committee on Appropriations House of Representatives Dear Mr. Chairman: Your March 17, 1977, letter requested that we find out if the Air Force has experienced financial management prob- lems similar to those described in our November 5, 1976, re- port to the Congress entitled "Serious Breakdown in the Army's Financiaj Management Systems" (FGMSD-76-74). Among the problems discussed in the Army report were the improper recording of foreign military sales customer orders and the resultant loss of administrative control over several procurement appropriations. The Air Force has experienced problems similar to those of the Army which have resulted in a loss of accounting in- tegrity in its procurement appropriations from fiscal years 1971 thzough 1976. Also, improper entries were made in the fiscal year 1973 Missile Procurement Appropriation account. Air Force officials told us this was done to avoid showing an overobligation in the accounting records. SCOPE OF REVIEW Before we initiated our review, the Air Force Audit Agency had completed a comprehensive Air Force-wide audit of the foreign military sales program's administration. The audit, which required more than 7,300 staff-days to complete, resulted in two reports dated July 9, 1976, and February 16, 1977. TheFe reports revealed that most of the financial manage- ment prozlems pertaining to foreign military sales customer orders focused on Headquarters, Air Force, and the Air Force Logistics Command. Accordingly, we restricted our review to those two organizations. To the extent practicable, we used the results of the Audit Agency's work. In addition, we B-132900 -- reviewed (1) Defense and Air Force directives, man- uals, and regulations on administrative control of funds and (2) Air Force records and reports; and -- interviewed cognizant Air Force and Defense officials. BACKGPOUND The Air Force's share of foreign military sales has grown from $419 million in fiscal year 1970 t $5 billion in fiscal year 1976. The Air Force Logistics Command ac- counts for about 70 percent of the number of sales and 30 percent of the total dollar value of sales in the Depart- ment. Procuring most material and services for foreign mili- tary sales is initially financed through various Air Force appropriations which are reimbursed as the material and services are delivered to customers. Most of the sales are financed through the Air Force's Aircraft Procurement, Mis- sile Procurement, and Other Procurement appropriations. To facilitate financing foreign military sales, the dollar amounts of customer orders received re treated as increases to the Air Force's obligational authority. To insure proper administrative control over appropriations, it is important that the accounting system be designed so that customer orders are recorded in the year received and that reimbursements are credited to the appropriation financ- ing the orders. The Budget and Accounting Procedures Act of 1950 places responsibility for establishing and maintaining adequate sys- tems of accounting and internal control upon the head of each executive agency. Further, the Anti-Deficiency Act (31 U.S.C. 665) requires officials responsible for control-- ling appropriations-to devise systems of administrative con- trol which will restrict obligations and expenditures to amounts apportioned and which will enable fixing responsi- bility for creating any obligation or for making any expend- iture in excess thereof. In letters dated May 16, 1977, to the Secretary of Defense and June 28, 1977, to other department and agency heads, the Director, Office of Manage- ment and Budget, emphasized the requirements of the act and the need to have adequate administrative controls to prevent overobligating and/or overexpending. 2 B-132900 LOSS OF ADMINISTRATIVE CONTROJL OVER AIR FORCE PROCUREMENT APROPRIATIONS Because of improper procedures the Air Force Logistics Command used in accounting for foreign military sales cus- tomer orders, the Air Force does not know the correct fund balances of its three procurement appropriations for each fiscal vear from 1971 through 1976. As a result, the Air Force cannot determine whether it has obligated and/or ex- pended more fund resources than are available. Foreign military sales cases are established when a Letter of Offer and Acceptance (DD Form 1513) is executed. The year in which the case is signed is referred to as the case year. DD Form 1513 represents authority to obligate funds on certain types of sales cases. However, under pro- cedures implemented in fiscal year 1974, most cases assigned to the Air Force Logistics Command require a subsequent firm, definitized customer order to be received before ob- ligational authority is established. Often they are re- ceived in fiscal years subsequent to the year in which the case was signed; obligations and earnings associated with the customer order often occur in even later years. In 1976 the Air Force Audit Agency reported that pro- cedures used to account for foreign military sales cases managed by the Air Force Logistics Command did not comply with the Department of Defense Accounting Guidance Hand- book. Customer orders, representing obligational authority, were being recorded in the year in which the case was signed regardless of when the orders were received and accepted or when funds to fill the orders were obligated. The related earnings and collections for these orders were also being recorded in the year in which the case was signed, even though obligations were incurred to support the order in subsequent fiscal year appropriations. The Logistics Com- mand used these procedures for at least 6 years. The Department of Defense Accounting Guidance Hand- book specifies that customer orders must be recorded in the most current appropriation account available when the orders are received. T maintain accounting control and appropriation integrit-y, it is imperative that subsequent related obligations, earnings, and collections be recorded in the same accounts where these orders were initially recorded. 3 B-132900 Recording obligations in one appropriation account while recording related customer orders, earnings, and collections in another appropriation account distorts the status of those accounts. For example, the Air Force Audit Agency found that, as of November 1975,. $82.3 million in customer orders recorded in the fiscal year 1973 Air Force Aircraft procurement account (representing additional ob- ligational authority to the appropriation) were received after fiscal year 1973. As of November 1975, $53.2 million in obligations against these orders were recorded in fiscal year 1974, 1975, and 1976 accounts. Logistics Command officials advised us that due huge volume of foreign military sales transactions andto the the absence of key data elements in the records for prior year transactions, it would be impossible to correct the accounts for reimbursements which were recorded in the wrong appro- priation year. Since the practice of recording customer orders in the wrong appropriation account apparently involved hundreds of millions of dollars in fiscal years 1971 through 1976 pro- curement appropriations, correcting adjustments, if they could be made, might dra:;tically change the amounts of resources available in any or 11 of those accounts. As indicated in the following schedule, several of the procurement appropriations have relatively small fund balances available. Consequently, adjustments to those accounts might show them to be in an overobligated status. 4 B-132900 Status of Procurement Appropriations July 21, 1977 Status Procurement - Unobligated Resources balance appropriation Year (note a) Obligations available (millions) 3010-Aircraft b/M $ - - $ 63.' 1973 3,478.5 3,469,5 9.0 1974 3,937.4 3,883.9 53.5 1975 4,539.4 4,348.5 190.9 1976 6,785.7 5,817.0 968.7 1977 6,800.6 4,030.4 2,770.2 3020-Missile b/M $ - $ - $ 64.0 1973 1,691.6 1,687.6 c/4.0 1974 1,499.2 1,489.7 9.5 1975 1,555.9 1,511.3 44.6 1976 1,968.0 1,804.8 163.2 1977 2,U21.0 1,072.7 948.3 3080-Other b/M $ $ - $ 7.7 1973 2,103.5 2,100.6 2.9 1974 1,733.3 1,710.0 23.3 1975 1,815.0 1,698.3 116.7 1976 2,519.4 2,248.0 271.4 1977 2,477.1 1,406.3 1,070.8 a/Resources include funds appropriated by the Congress for direct Air Force programs plus the total value of reim- bursable orders received. b/1972 and all prior year accounts. c/The fiscal year 1973 missile account is discussed further on p. 6. According to Air Force auditors, the Air Force was in fiscal year 1973 that reimbursements were not aware being recorded correctly. Even though Air Force officials knew for several years that there was a weakness in administrative controls over reimbursements, they told us that prompt action taken to correct the problem because a moratorium hd was not been placed on system changes. This was due to the high priority given to developing the Advanced Logistics System. 5 B-132900 Under new procedures implemented on customer orders, earnings, collections, October 1, 1976, tions are now required to be recorded and in the related obliga- same appzopria- tion year account. We did not evaluate these new procedures during our review. We believe the Air Force Audit Agency should review the new accounting procedures and also determine whether adjustments to correct improper recording of customer orders from fiscal years 1971 through 1976 are possible or feasible. (See p. 11.) IMPROPER AUGMENTATION OF THE FISCAL 1973 YEAR MISSILE PROCUREMENT ACCOUNT In June and July 1976, the Air Force recorded a series of accounting lTgistics Command entries which resulted in the improper transfer of about $7.5 collections from the fiscal year million in earnin'gs and account to the fiscal year 1973 1975 aircraft procu.ement missile procurement account. Air Force officials told us the entries were made to avoid showing an overobligation in the accounting records for the fiscal year 1973 missile procurement account. From July 1, 1972, to June 30, Logistics Command recorded customer 1975, the Air Force orders valued at $7.5 million related to a particular in the fiscal year 1973 missile foreign military sales case procurement account. Since these unfilled orders 1/ represented fund resources in the account were obligational authority, $7.5 million. After recording thereby increased by these ever, the Logistics Command changed unfilled orders, how-- its criteria for deter- mining which appropriation would be credited with earnings and collections ealized from customer was necessary to correct a systems orders. The change deficiency causing some customer orders, arnings, which was lated to foreign military sales and collections re- to be recorded in appropria- tions different from the appropriations ligations were rcorded. where related ob- This distorted the status of the appropriation accounts involved. As a result of lections related to this systems change, earnings and col- the $7.5 million in unfilled recorded in the fiscal year 1973 orders missile account were required I/Unfilled orders are amounts of fo:-ign military sales orders received for which no earnings have yet been realized. 6 B-132900 to be recorded in the fiscal year 1973 aircraft account. As the latter recordings were made the unfilled orders (and thus fund resources) were eliminated from the missile account. However, obligations for other purposes were already being incurred in the missile account under the assumption that $7.5 million in resources would be realized. As a result, obligations were almost exceeding obligational authority in the missile account. If this did happen, a violation of the Anti-Deficiency Act would have occurred. Air Force officials told us that, to prevent such an overobligation from showing on accounting records, the Air Force transferred $7.5 million in earnings and collections from the fiscal year 1975 aircraft appropriation account to the fiscal year 1973 missile account. Officials also told us that the transfer was made because they did not feel that an account should be overobligated because of a systems change intended to improve accounting procedures. We agree that this change was necessary to correct a system deficiency. The effect of the change on the $7.5 million in reimbursements discussed above was to put the earnings an, collections in the proper account--where the related obligations were recorded. We see no basis, however, for te subsequent Air Force action moving earnings and col- lections back to the wrong account to avoid showing an over- obligation in the accounting records. On Septemoer 14, 1977, after we suggested that the above entries be reversed, Headquarters, Department of the Air Force, directed the Air Force Logistics Command to record entries to return the $7.5 million in reimbursements from the missile account to the aircraft account before September 30, 1977. Air Force officials told us that because adjustment to the fiscal year 1973 missile appropriation account since our review resulted in increased fund resources, it seems that removing the $7.5 million in reimbursements will not cause a fund deficiency. We believe the Air orce Audit Agency should review the recent adjustments which increased available resources !n the fiscal year 1973 missile account and verify that the $7.5 million in reversals were recorded by the Air Force. (See p. 11,) 7 B-132900 IMPROPER TRANSFERS OF UNFILLED, UNOBLIGATED CUSTOMER OERDR BALANCES During its 1975 and 1976 fiscal yearend closeout and adjusting process, the Air Force recorded entries which im- properly transferred to current procurement accounts from expiring accounts $64 million in unobligated fund resources related to customer orders. Frequently, all 'bligations necessary to completely fill various foreign military sales orders have not been in- curred by the time the account expires for obligational purposes. To be able to use remaining obligational authority to complete filling these orders, the related unobligated balances mist be moved out of the expiring account to a cur- rent account. To do this, the Dartment of Defense Accounting Guid- ance Handbook provides hat, in the case of expiring appro- priation accounts, "* * * balances of uncollected unearned (or unob- ligated) but still valid customer orders will be eliminate(] from the epiring (or expired) account and recorded under the ensuing fiscal year account Department of Defense officials informed us that the intent of this provision is to allow moving unobligated balances related to customer orders out of expiring accounts into the most current year account of that appropriation. For example fiscal year 1973 procurement appropriation accounts, each f which had a 3-year life, expired at the end of fis- cal year 1975. Defense requires unobligated balances in an expiring fiscal year 1973 procurement account to be moved to the corresponding fiscal year 1976 procurement account. Under this provision, the Air Force has moved large amounts of fund resources from expiring accounts to more current accounts. However, rather than consistently moving these balances to the ensuing fiscal year account, they have b-en arbitrarily moved to any of the three current accounts for that appropriation. The following examples illustrate this. At the end of fiscal year 1976, the fiscal year 97- procurement appropriation accounts were expiring for ob- ligational purposes. The Air Force determined that there was a total of $46.1 million in customer order unobligated 8 B-132900 balances in the expiring accounts and made the following transfers: Expiring fiscal year 1974 procurement account from Fiscal year account which unobligated balances to which unobligated were moved Amount balances were moved (millions) 3010-Aircraft $36.5 1975 3020-Missile 1.9 1976 3080-Other 7.7 1977 At the end of fiscal year 1975, when the fiscal year 1973 procurement accounts were expiring, $26 million in customer order unobligated balances were moved to accounts other than the fiscal year 916 accounts. Under the Department f Defense provision for moving forward unobligated balancez. amounts in expiring fiscal year 1974 procurement accounts should have been move to the related fiscal year 197% accounts. Amounts in expiring fiscal year 1973 procurement accounts should have been moved to the related fiscal year 1976 accounts. As a result of these entries, sme fiscal year 1975 and 1976 accounts have overstated fund resource balances while other fiscal year 1976 and 1977 accounts have understated fund resource balances. Because these transfers of fund resources did not meet the intent of the Department of Defense Accounting Guidance Handbook provisions, we suggested that the Air Force adjust the appropriation accounts involved to reflect balances which would exist had the original transfers been made to the most current accounts. On September 14, 1977, Headqua.- ters, Air Force, directed that unfilled, unobligated cutcs- mer order balances moved improperly at the end of fiscal years 1975 and 1976 be moved to the correct fiscal year be- fore September 30, 1977. We believe the Air Force Audit Agency should determine whether these customer order unobligated balances are now being transferred properly and whether amounts improperly transferred in the past have been corrected. (See p. 11.) 9 B-132900 APPROPRIATION FUND RESOURCES DISTORTED BY IMPROPER CREDIT OF REIMBURSEMENTS Because the Air Force Logistics Command used improper procedures to record advances received .from foreign tries under cooperative logistics arrangements, coun- fund re- sources in the Aircraft Procurement Appropriation stated by an estimated $50 million and fund are ove;- other accounts are understated by a similar resources in amount. Under cooperative logistics arrangements foreign countries invest in military services' inventories vancing cash to cover a substantial portion by ad- of the estimated cost of providing supplies over a 17-month period. advances are used to fund the initial anticipated These requirements of foreign countries for the first supply 5 months of the case. The Air Force is not recording the advances correct appropriation. Its procedures require in the that reimbursement advances received under cooperative all logistics arrangements be credited to the Aircraft Procurement priation. Appro- This is improper because other appropriations and stock funds, such as the Missile Procurement tion and the Air Force Stock Fund, are also Appropria- used to finance cooperative logistics arrangements. As of Au:ust 1977, advances to the Air Force under cooperative logistics arrangements which are renegotiated periodically, totaled an estimated $98 million. examining logistics sales data we estimate Through that roughly $50 million should have been credited to appropriations funds other than the Aircraft Procurement Appropriation. and According to the Air Force, as of September it has not determined whether action will be 30, 1977, taken to change its procedures so that the advances are recorded proper account. in the CONCLUSIONS The Air Force's use of improper accounting procedures has resulted in a loss of integrity in its procurement appropriations. Although the Air Force has directed that several corrective actions be taken there is still a need to change its accounting procedures so that advances received from i' B-132900 foreign countries under cooperative logistics arrangements are properly recorded and that such advances now in the wrong accounts are transferred to the proper accounts. Further, there is a need for the Air Force Audit Agency to determine whether (1) the Air Force has properly imple- mented its new accounting procedures, (2) those procedures are adequate, and (3) the accounting adjustments directed by Headquarters, Air Force, were properly recorded. Also the Agency should find out whether it is feasible for the Air Force to correct the errors in accounting records for fiscal years 1971 through 1976 procurement appropriations which were caused by recording orders and related obliga- tions in different years. RECOMMENDATIONS We recommend that the Secretary of Defense have the Secretary of the Air Force direct the Air Force Audit Agency to -- review the revised accounting procedures the Air Force implemented on October 1, 1976, to determine if they are adequate so that customer orders and re- lated obligations are recorded in the proper fiscal year, -- determine whether it is feasible to correct prior year fund resource balances resulting from the improper customer order accounting procedures, -- verify that the $7.5 million in improper entries in the fiscal year 1973 missile account have been cor- rected and determine the validity of adjustments made in fiscal year 1977 which increased fund re- sources in that account, -- determine whether unobligated customer order balances in the expiring fiscal year 1975 accounts were prop- erly transferred at the end of fiscal year 1977 and whether amounts improperly transferred at the end of fiscal years 1975 and 1976 have been recorded in the correct accounts. we also recommend that the Secretary of Defense have the Secretary of the Air Force revise Air Force accounting procedures so that the correct appropriation or stock fund 11 B-132900 is credited for advances received under cooperative logis- tics arrangements and to adjust any advances not currently recorded in the proper account. We discussed our findings with Air Force and Department of Defense officials and where appropriate their comments are included in the report. As you know, section tion Act of 1970 requires 236 of the Legislative Reorganiza- the head of a Federal agency submit a written statement on actions to taken on our recommen- dations to the House Committee on Government Operations and the Senate Committee on Governmental 60 days after the date of the report Affairs not later than Senate Committees on Appropriations and to the House and request for appropriations made more with the agency's first than 60 days after the date of the report. After the report will contact your office to arrange has been issued, we for of the report so that these requirements further distribution can be met. Sincerely yours, ACTING Comptroller General of the United States (90362) 12
Loss of Accounting Integrity in Air Force Procurement Appropriations
Published by the Government Accountability Office on 1977-11-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)