oversight

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)

                               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
<ousĀ°     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.




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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.




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     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.




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                 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,)




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 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


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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.)




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 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)


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