oversight

Defense Management: DOD Needs to Strengthen Internal Controls over Funds Used to Support USO Activities

Published by the Government Accountability Office on 2003-12-05.

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

                United States General Accounting Office

GAO             Report to the Chairman, Committee on
                Appropriations, House of
                Representatives


December 2003
                DEFENSE
                MANAGEMENT
                DOD Needs to
                Strengthen Internal
                Controls over Funds
                Used to Support USO
                Activities




GAO-04-56
                                                December 2003


                                                DEFENSE MANAGEMENT

                                                DOD Needs to Strengthen Internal
Highlights of GAO-04-56, a report to the        Controls over Funds Used to Support
Chairman, Committee on Appropriations,
House of Representatives                        USO Activities



For more than 60 years, the United              During fiscal years 2000 through 2002, DOD provided USO with substantial
Services Organization (USO), in                 appropriated and nonappropriated support, but the total amount cannot be
partnership with the Department of              determined because of limitations in DOD’s and USO’s record-keeping systems.
Defense (DOD), has provided                     GAO identified at least $34.7 million in appropriated funds that DOD provided to
support and entertainment to U.S.               support USO during fiscal years 2000 through 2002. Of this amount, $20.8 million
armed forces, relying heavily on                was in congressionally appropriated grants to help USO establish the Spirit of
private contributions and on funds,             Hope Endowment Fund to ensure the continuation of USO’s programs and
goods, and services from DOD. To                services. Another $12.1 million was for reimbursements to USO, and at least $1.8
assist USO, Congress, beginning in              million was paid directly by DOD for tour-related expenses such as commercial
fiscal year 2000, provided a total of           airfares, visas, and passports. DOD also provided other appropriated support,
$23.8 million in grants to be                   such as lodging and transportation. However, GAO could not determine the total
awarded through DOD as seed                     monetary value of DOD’s support from appropriated funds because neither DOD
money for an endowment fund.
                                                nor USO has record-keeping systems that aggregate the needed information. DOD
The availability of these funds to
                                                also provides USO with nonappropriated support, largely in the form of in-kind
USO, along with DOD’s ongoing
                                                goods (e.g., food), services (e.g., Internet access), and infrastructure support (e.g.,
support funded in its regular
annual appropriations, represents a             performance facilities), to help sustain USO’s overseas tours, but the same
substantial financial commitment.               limitations precluded GAO from determining the total monetary value.

GAO determined (1) the source and               DOD and USO did not have sufficient financial and management controls to
amount of DOD’s support to USO                  reasonably ensure that all appropriated funds were used appropriately. DOD
in fiscal years 2000-2002 and (2) the           properly awarded grant funds to USO, and USO properly administered these funds.
sufficiency of internal controls to             However, USO did not require its independent auditor to fully test internal
provide reasonable assurance that               controls over grants or funds reimbursed to USO by DOD, as required by its
federal funds are used in an                    agreements with DOD. In terms of reimbursements to USO and direct payments
appropriate manner. GAO focused                 by DOD, DOD lacked clearly written supplemental guidance regarding allowable
its audit on USO World                          expenses, management oversight in reviewing USO’s invoices, and procedures for
Headquarters’ activities and                    capturing reimbursable expenses. In some cases, these weaknesses resulted in
audited a limited selection of USO              inappropriate expenditures of funds. As shown in the table below, based on
transactions for the 3 fiscal years.            limited testing, GAO found problems with payments totaling about $433,000,
                                                including about $86,000 in improper expenditures, $3,000 in questionable
                                                expenditures, and $344,000 for unsupported expenditures. Had USO’s
                                                independent auditor tested internal controls, the problems GAO identified might
GAO recommends that the                         have surfaced. As a result of GAO’s audit, DOD stated it has initiated several
Secretary of Defense develop and                actions to improve financial and management controls and to recover funds from
implement improvements in                       USO. As of September 2003, DOD had recovered about $19,000 from USO in
program guidance, record- keeping               improper payments for overseas tour expenses.
systems, and tests of internal
controls to improve the                         Examples of Improper, Questionable, or Unsupported Expenses Identified by GAO Based on
accountability and control of funds             Limited Testing (Fiscal Year 2002)
used to support USO’s operations.                Type of                                                                      Amount
                                                 payment       Description                 Reason                             Identified
In commenting on a draft of this                 Improper      Food, liquor, lodging, and  Unauthorized or not allowed by DOD
                                                               first- and business-class   or federal travel regulations
report, DOD generally concurred                                                                                               $85,967
                                                               travel
with GAO’s recommendations.                      Questionable Limousine service, airport   No explanation indicating why
www.gao.gov/cgi-bin/getrpt?GAO-04-56.                          VIP lounge                  needed for official government
                                                                                           business                           3,054
To view the full product, including the scope    Unsupported Production support, celebrity No explanation of or detailed
and methodology, click on the link above.                      honorarium                  support for expense                343,910
For more information, contact Sharon Pickup,     Total                                                                       $432,931
(202) 512-9619, or pickups@gao.gov.
                                                Source: GAO analysis of DOD data.
Contents


Letter                                                                                 1
               Results in Brief                                                        2
               Background                                                              3
               DOD Provided Substantial Appropriated and Nonappropriated
                 Support to USO, but Total Amount Cannot Be Determined                 5
               Sufficient Financial and Management Controls Did Not Exist to
                 Assure Appropriate Use of Appropriated Funds                         11
               Conclusions                                                            24
               Recommendations for Executive Action                                   25
               Agency Comments and Our Evaluation                                     25

Appendix I     Scope and Methodology                                                  28



Appendix II    Details of Improper First-Class and Business-Class
               Travel                                                                 32



Appendix III   Comments from the Department of Defense                                36



Appendix IV    Staff Acknowledgments                                                  40



Tables
               Table 1: Appropriated Funds Provided by DOD to Support USO
                        Activities for Fiscal Years 2000 through 2002                  7
               Table 2: Appropriated Funds Provided Via Direct Payments by
                        DOD for USO Activities as Identified by GAO for Fiscal
                        Year 2002                                                      9
               Table 3: Examples of Improper Payments for Items Reimbursed or
                        Paid by AFEO for USO Tours for Fiscal Year 2002               17
               Table 4: Examples of Questionable Payments for Items
                        Reimbursed or Paid by AFEO for USO Tours for Fiscal
                        Year 2002                                                     20
               Table 5: Examples of Unsupported Payments for Items Reimbursed
                        by AFEO for USO Tours for Fiscal Year 2002                    21



               Page i                                       GAO-04-56 Defense Management
         Table 6: Examples of Improper First-Class and Business-Class
                  Travel Paid by the Armed Forces Entertainment Office
                  Identified by GAO for Fiscal Year 2002                                           32


Figure
         Figure 1: Flow of DOD Funds to Support USO Activities during
                  Fiscal Years 2000 through 2002                                                    6




         Abbreviations

         AFEO              Armed Forces Entertainment Office
         DOD               Department of Defense
         GSA               General Services Administration
         JFTR              Joint Federal Travel Regulations
         JTR               Joint Travel Regulations
         O&M               operations and maintenance
         OMB               Office of Management and Budget
         OSD               Office of the Secretary of Defense
         USO               United Services Organization



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         Page ii                                                 GAO-04-56 Defense Management
United States General Accounting Office
Washington, DC 20548




                                   December 5, 2003

                                   The Honorable C.W. Bill Young
                                   Chairman, Committee on Appropriations
                                   House of Representatives

                                   Dear Mr. Chairman:

                                   For more than 60 years, the United Services Organizations (USO), a
                                   not-for-profit, nongovernmental but congressionally chartered
                                   organization, has offered support and entertainment to the men and
                                   women of America’s armed forces and their families. The USO mission is
                                   to enhance the quality of life of the personnel within the U.S. armed forces
                                   community wherever they are based.

                                   Throughout the years, USO has relied on corporate donors and individual
                                   contributors, as well as on funds, goods, and services provided by the
                                   Department of Defense (DOD), to support its operations. With the creation
                                   of a federal charter for USO in 1979, Pub. L. No. 96-165, DOD was granted
                                   statutory authority to make the department’s resources available to help
                                   USO achieve its mission. DOD provides both appropriated and
                                   nonappropriated resources to support USO’s operations. Appropriated
                                   support is derived from DOD’s operations and maintenance (O&M) funds,
                                   and nonappropriated support is provided largely through DOD-donated
                                   goods, services, and infrastructure. DOD’s Armed Forces Entertainment
                                   Office (AFEO), through its Armed Forces Professional Entertainment
                                   Program, is primarily responsible for coordinating with USO to deliver
                                   overseas entertainment. Under a contractual arrangement, USO solicits
                                   celebrity entertainers for gratis or reduced rates to perform at overseas
                                   DOD locations. AFEO reimburses USO for certain expenses incurred in
                                   securing celebrity entertainment, including honoraria,1 production
                                   support, and other administrative costs. AFEO and other DOD entities also
                                   pay directly from their respective O&M accounts, referred to as direct
                                   payments, for certain goods and services provided for USO tours, such as
                                   commercial airfare and military airlift services.




                                   1
                                    Honoraria are daily allowances paid for celebrity and noncelebrity performers, as well as
                                   tour managers and producers.



                                   Page 1                                                   GAO-04-56 Defense Management
                   At your request, we determined (1) the source and amount of support
                   provided to USO during fiscal years 2000 through 2002 and (2) the
                   sufficiency of the financial and management controls to provide
                   reasonable assurance that funds were used appropriately.

                   We focused our audit on DOD’s support for activities of the USO World
                   Headquarters, which operated USO’s overseas entertainment tours, and
                   did not include the activities of chartered, stateside USO affiliates, which
                   are financially autonomous from the USO World Headquarters. We did not
                   audit support provided to USO from nonfederal sources. Because of
                   limitations in AFEO and USO record keeping, we limited our audit to
                   support provided by DOD during fiscal years 2000 through 2002. To assess
                   financial and management controls, we evaluated the adequacy of the
                   overall control environment and management oversight of controls at USO
                   and AFEO, audited selected transactions between AFEO and USO for
                   fiscal year 2002, analyzed AFEO’s centrally billed account for fiscal year
                   2002, and reviewed AFEO’s purchase card account for fiscal years 2001
                   and 2002. We also reviewed annual audits of USO’s consolidated statement
                   of financial position and the related consolidated statement of activities
                   and cash flows prepared by an independent audit firm. For more details on
                   our scope and methodology, see appendix I.


                   During fiscal years 2000 through 2002, DOD provided significant
Results in Brief   appropriated and nonappropriated support; however, the total amount
                   cannot be determined because of limitations in DOD’s and USO’s
                   record-keeping systems. For this 3-year period, we identified at least
                   $34.7 million in appropriated funds that DOD used to support USO’s
                   activities. Of this amount, $20.8 million was awarded in congressionally
                   appropriated grants, which USO used to help fund the Spirit of Hope
                   Endowment Fund, a restricted fund intended to ensure the continued
                   existence of USO’s programs and services. We also identified another
                   $12.1 million in reimbursements to USO under its contract with AFEO for
                   such costs as celebrity honoraria and production expenses for overseas
                   tours, and at least another $1.8 million in direct payments by AFEO and
                   other DOD entities for tour-related expenses, such as commercial airfares,
                   visas, passports, and military airlift services. DOD also provided other
                   appropriated support such as lodging, transportation, and use of facilities.
                   However, we could not determine the total monetary value of DOD’s
                   appropriated support because neither DOD nor USO has record-keeping
                   systems to aggregate or report the needed information. While DOD also
                   provided nonappropriated support, largely in the form of in-kind goods
                   (e.g., food and refreshments), services (e.g., Internet and telephone


                   Page 2                                          GAO-04-56 Defense Management
             access), and infrastructure support (some performance facilities), to help
             sustain USO’s overseas operations, the same limitations precluded us from
             determining the total monetary value of this support.

             DOD and USO did not have sufficient financial and management controls
             in place to provide reasonable assurance that all appropriated funds were
             used appropriately. DOD properly awarded grant funds to USO, and USO
             appropriately administered these funds. However, USO did not require its
             independent auditor to fully test internal controls over grant funds or
             funds reimbursed by DOD, as required under agreements with DOD. For
             support provided through contract reimbursements and direct payments,
             AFEO lacked clear written supplemental guidance regarding allowable
             expenses, effective management oversight in reviewing USO invoices, and
             adequate procedures for capturing reimbursable expenses. In some cases,
             these weaknesses resulted in inappropriate expenditures of funds.
             Specifically, based on our limited testing, we found problems with
             expenditures totaling about $433,000, including about $86,000 in improper
             expenditures, about $3,000 in questionable expenditures, and
             approximately $344,000 for unsupported expenditures. For example,
             AFEO improperly reimbursed USO about $9,000 for administrative
             services that had already been paid and about $1,300 for unallowable food,
             liquor, and other miscellaneous expenses. Also, AFEO improperly incurred
             approximately $67,000 for first-class and business-class travel expenses
             that were not authorized in accordance with DOD and federal travel
             regulations and around $9,000 for transportation expenses for
             unauthorized travelers. These latter expenses were paid by AFEO, but they
             should have been billed to and paid by USO. As a result of our audit, AFEO
             officials told us they initiated several actions to improve financial and
             management controls and to recover funds from USO. As of September
             2003, AFEO had recovered from USO about $19,000 in improper payments
             it made to support USO’s overseas tours.

             We are making recommendations to the Secretary of Defense to develop
             and implement improvements in program guidance, record-keeping
             systems, and tests of internal controls to improve the accountability and
             control of funds used to support USO operations. In commenting on a
             draft of this report, DOD generally concurred with our recommendations.


             USO is a congressionally chartered, nonprofit, nongovernmental, and
Background   charitable corporation whose mission is to enhance the quality of life for
             U.S. armed forces personnel and their families. The USO World
             Headquarters acts as the enabling body for the organization, sets overall


             Page 3                                         GAO-04-56 Defense Management
policy and strategy, is responsible for the operation of overseas USO
centers, and produces overseas celebrity entertainment tours in
partnership with AFEO. From World War II through the Vietnam War, USO
and DOD partnered to enhance troop morale and provide entertainment to
military outposts worldwide. Following the Vietnam War, legislation
establishing USO’s federal charter and various DOD directives and
instructions formalized this close association and made DOD resources,
including funds, available to the maximum extent possible to support
USO’s mission.2 DOD uses both appropriated and nonappropriated
resources to support USO’s operations. Appropriated support is derived
from DOD’s O&M funds, and nonappropriated support is provided largely
through DOD-donated goods, services, and infrastructure.

DOD regulations designate (1) the Under Secretary of Defense for
Personnel and Readiness as the official liaison between DOD and USO and
(2) AFEO, a joint-service operation, as the DOD liaison office for USO.
AFEO, established in 1951, administers DOD’s Armed Forces
Entertainment Program in partnership with USO. The U.S. Air Force is the
executive agent for AFEO, having assumed that role from the U.S. Army in
1997. AFEO’s mission is to provide free, high quality, live entertainment to
U.S. military personnel and their families stationed overseas. AFEO
supplies all noncelebrity entertainment, and USO is the primary provider
of celebrity entertainment. Noncelebrity entertainment is made up of up-
and-coming performers professionally managed by an agent; celebrity
entertainment consists of well-known entertainers, listed in Billboard or
with gold or platinum recordings.

Under a contractual arrangement with AFEO, USO recruits celebrity
performers for the Armed Forces Entertainment Program. AFEO
reimburses USO for certain tour-related expenses such as honoraria,
production support, and other direct costs. In some cases, AFEO and
other DOD entities also make arrangements to support USO overseas
tours and pay directly for these expenses, such as for commercial airfares,
visas, passports, and military airlift services, from their respective O&M
accounts. Also, USO has agreed to pay for certain tour-related costs, for
example, paying the difference between the cost of business-class and


2
  Pub. L. No. 96-165, § 8, 93 Stat. 1267 (1979) (codified as amended at 36 U.S.C. § 220107
(2002)); DOD/USO Memorandum of Understanding, November 9, 1987; DOD Directive
1330.12, United Services Organizations, Inc., November 9, 1987; DOD Directive 1330.12,
United Services Organizations, Inc., November 1, 2000; and DOD Instruction 1330.13,
Armed Forces Professional Entertainment Program Overseas, September 8, 1985.




Page 4                                                    GAO-04-56 Defense Management
                          first-class air travel and the travel costs for individuals accompanying
                          performers whose costs are not covered under the contract with AFEO.

                          Following the 1991 Gulf War, USO faced serious financial problems
                          because of declining contributions and therefore became concerned about
                          its continued ability to serve the military. To address these concerns,
                          USO’s Board of Governors established the Spirit of Hope Endowment
                          Fund in 1998. According to a former USO official, the intent of the fund
                          was to infuse USO with funds to provide for the perpetuity of its programs
                          and services. To assist USO, the Congress, beginning in fiscal year 2000,
                          provided a total of $23.8 million in O&M funds in the form of grants for
                          USO. As of September 2003, DOD had provided about $20.8 million to
                          USO. USO used these funds as seed money for the endowment.


                          During fiscal years 2000 through 2002, DOD provided substantial
DOD Provided              appropriated and nonappropriated support, but the total amount cannot
Substantial               be determined because of limitations in DOD’s and USO’s record-keeping
                          systems. For this 3-year period, we identified at least $34.7 million in
Appropriated and          appropriated funds that DOD provided to support USO activities in the
Nonappropriated           form of grants, contract reimbursements, and direct payments. DOD also
                          provided other appropriated support such as lodging, transportation, and
Support to USO, but       use of some facilities. However, we could not identify the total monetary
Total Amount Cannot       value of DOD’s support derived from appropriated funds because neither
Be Determined             DOD nor USO has record-keeping systems to aggregate or report the
                          needed information. While DOD also provides nonappropriated support,
                          largely in the form of in-kind goods (e.g., food and refreshments), services
                          (e.g., Internet and telephone access), and infrastructure support (some
                          performance facilities), to help sustain USO’s overseas operations, the
                          same limitations precluded us from determining the total monetary value
                          for this support.


USO Received              During fiscal years 2000 through 2002, USO received appropriated and
Appropriated and          nonappropriated support from a variety of DOD sources. As figure 1
Nonappropriated Support   shows, this appropriated money flowed to USO in the form of grants
                          awarded by the Office of the Secretary of Defense (OSD) and from
from Many DOD Sources     contract reimbursements and direct payments provided by AFEO and
                          other DOD components. Nonappropriated support was provided largely
                          through in-kind contributions that included goods (e.g., food and
                          refreshments), services (e.g., Internet and telephone access), and
                          infrastructure support (some performance facilities), contributed by
                          various DOD components.


                          Page 5                                          GAO-04-56 Defense Management
Figure 1: Flow of DOD Funds to Support USO Activities during Fiscal Years 2000 through 2002




Appropriated Funds                      We identified at least $34.7 million in appropriated funds that DOD
                                        provided to support USO’s activities during fiscal years 2000 through 2002.
                                        As table 1 shows, this funding included grants and contract
                                        reimbursements to USO and direct payments by DOD.




                                        Page 6                                                GAO-04-56 Defense Management
         Table 1: Appropriated Funds Provided by DOD to Support USO Activities for Fiscal
         Years 2000 through 2002

             Dollars in millions
                                             Fiscal year      Fiscal year      Fiscal year
             Funding resource                      2000             2001             2002              Total
             Grants                                 $4.8              $7.5             $8.5            $20.8
             Contract reimbursements                 4.3               3.5               4.3            12.1
                                                        a                 a
             Direct payments                                                             1.8              1.8
             Total appropriated
             funds                                  $9.1            $11.0            $ 14.6            $34.7
         Source: GAO analysis of DOD data.
         a
          AFEO officials could not provide a total amount for direct payments made to support USO’s activities
         during fiscal years 2000 and 2001, because of limitations in AFEO’s record-keeping system;
         therefore, there are no entries for those fiscal years.


         We also found that DOD components often provide in-kind support,
         derived from appropriated funds, to USO for its overseas tours such as
         transportation, free lodging, and some office and performance facilities.

Grants   During fiscal years 2000 through 2003, the Congress authorized DOD to
         provide a total of $23.8 million in grants to support USO’s activities. As of
         September 2003, in fiscal years 2000 through 2002, DOD had provided a
         total of $20.8 million in grants to USO as seed money to fund the Spirit of
         Hope Endowment Fund, which is intended to ensure the continued
         existence of USO’s programs and services. The Congress provided the
         funds through DOD’s O&M appropriation in four annual defense
         appropriations acts.3 The funds, appropriated only for grants to USO, were
         first allocated to the Deputy Assistant Secretary of Defense for Personnel
         Support, Families and Education. In 1998, USO established the Spirit of
         Hope Endowment Fund and, after receiving the grants from DOD,
         transferred the funds into the endowment fund. According to USO policy,
         the USO Board of Governors established the Spirit of Hope Endowment
         Fund, which is a restricted account. Money placed into the fund is to be
         considered as principal and must remain in the account. USO can use the



         3
          Department of Defense Appropriations Act, 2000, Pub. L. No. 106-79, § 8143, 113 Stat.
         1212, 1270 (1999); Department of Defense Appropriations Act, 2001, Pub. L. No. 106-259,
         § 8112, 114 Stat. 656, 699 (2000); Department of Defense and Emergency Supplemental
         Appropriations for Recovery From and Response to Terrorist Attacks on the United States
         Act, 2002, Pub. L. No. 107-117, § 8111, 115 Stat. 2230, 2272 (2002); and Department of
         Defense Appropriations Act, 2003, Pub. L. No. 107-248, § 8129, 116 Stat. 1519, 1567 (2002).




         Page 7                                                         GAO-04-56 Defense Management
                income (e.g. interest and dividends) that accrues on the balance held in
                the endowment fund to support its operations. USO used about $333,000 in
                investment income in calendar years 1999 and 2000 for its operations.

Contracts       AFEO provided USO with about $12.1 million in contract reimbursements
                during fiscal years 2000 through 2002. In September 1999, AFEO awarded
                an $8.7 million sole source, indefinite delivery, indefinite quantity contract
                to USO. 4 The purpose of this contract was to provide celebrity
                entertainment for U.S. armed forces at military installations overseas. The
                contract performance period was for 3 years (October 1, 1999, to
                September 30, 2002) with five 1-year option periods (October 1, 2002, to
                September 30, 2007). According to AFEO and Air Force contracting
                officials, AFEO spent the entire $8.7 million before the end of the first
                3-year period, and it is currently amending the contract to increase the
                amount of funding. In addition to the $8.7 million contract, AFEO
                negotiated separate purchase orders for costs associated with specific
                USO tours. The terms of the $8.7 million contract applied to each of these
                separately negotiated purchase orders. Specifically, the contract provided
                reimbursements to USO for

            •   administrative support services—accounting and administrative services
                needed to plan and execute overseas tours, including compiling and
                submitting voucher packages to AFEO for expense reimbursements;
            •   celebrity honoraria—payments to celebrity entertainers or groups and
                their production and/or tour managers to help defray day-to-day expenses;
                and
            •   other direct costs—tour production and equipment rental costs; travel
                costs to include commercial airfare, car rental or bus fares; lodging and
                per diem if authorized by DOD’s Joint Travel Regulations; miscellaneous
                expenses such as shipping, visas, and equipment repair or replacement for
                celebrity tours; and a 19 percent management fee, calculated using the
                total of other direct costs expended for noncelebrity tours.5




                4
                 This type of contract does not specify a firm quantity of supplies or services (other than a
                minimum or maximum quantity) and provides for the issuance of orders for the delivery of
                supplies or the performance of tasks during the period of the contract.
                5
                 According to AFEO officials, USO generally does not produce noncelebrity tours.
                However, USO provides the funds to pay those who are not celebrities about 70 percent of
                their honoraria just prior to tour commencement. USO requests reimbursement for the
                payments plus a 19 percent fee, after the tours are completed.




                Page 8                                                     GAO-04-56 Defense Management
Direct Payments           AFEO and the Air Mobility Command used appropriated O&M funds to
                          pay directly for USO tour-related expenses, such as commercial airfares,
                          visas and passports, and military airlift services. As table 2 shows, during
                          fiscal year 2002 alone, we identified direct payments that totaled at least
                          about $1.8 million. However, because of record-keeping limitations, AFEO
                          officials could not assure that these amounts represented all direct
                          payments.

                          Table 2: Appropriated Funds Provided Via Direct Payments by DOD for USO
                          Activities as Identified by GAO for Fiscal Year 2002

                              Funding source                                                              Fiscal year 2002
                              Direct payments—AFEO
                                Centrally billed account                                                           $783,684
                                                   a
                                Purchase card                                                                          2,466
                                Appropriated funds cite                                                             602,212
                              Direct payments—Air Mobility
                              Command
                                Appropriated funds cite                                                             412,227
                              Total direct payments                                                              $1,800,589
                          Source: GAO analysis of DOD data.
                          a
                          AFEO could not assure that this total includes all funds used in support of USO overseas tours.


                          AFEO used its centrally billed account to pay about $783,000 for its
                          personnel travel expenses and commercial airfares for USO personnel and
                          tour entertainers; its purchase card account to pay around $2,500 for visas,
                          passports, and shipping expenses for entertainment equipment; and its
                          appropriated funds cite to make direct payments totaling about $602,200
                          for its personnel travel expenses and airlift services provided by the U.S.
                          Air Force, Air Mobility Command. We also identified about $412,000 that
                          the Air Mobility Command paid directly for airlift services for one USO
                          tour. According to AFEO and Air Mobility Command officials, the
                          command’s airlift services included the movement of passengers and
                          baggage either on regularly scheduled flights or on special assignment
                          airlift missions from designated U.S. stateside military locations to
                          overseas military locations. These special assignment airlift missions
                          involve chartering a military aircraft for a specific purpose.

Nonappropriated Support   DOD components provide nonappropriated support largely in the form of
                          in-kind goods, services, and infrastructure, such as food and refreshments,
                          Internet and telephone access, and free office space, lodging, and some
                          performance facilities, to help sustain USO’s overseas tours.


                          Page 9                                                         GAO-04-56 Defense Management
Total Amount of Support     We could not determine the total amount of appropriated and
Could Not Be Determined     nonappropriated support to USO’s activities because of limitations in
Because of Limitations in   DOD’s and USO’s record-keeping systems. Specifically, we were unable to
                            identify the total value of appropriated support for the fiscal year 2000
DOD’s and USO’s Record-     through 2002 period because DOD’s records were incomplete. For
keeping Systems             example, AFEO could not readily provide an accurate accounting of
                            contract reimbursements or direct payments for charges to its centrally
                            billed and purchase card accounts, primarily because it did not track and
                            identify which transactions were for USO celebrity tours and which
                            transactions were for noncelebrity tours that did not involve USO. (Most
                            federal funds that are provided to support USO’s activities are provided for
                            celebrity tours. The cost of noncelebrity tours is paid by AFEO.) Our audit
                            of AFEO’s purchase card transactions confirmed that one could not
                            distinguish between USO and non-USO activities. Without such detail,
                            AFEO could not provide complete reports on funding for USO’s activities.

                            During our audit, AFEO provided us with total amounts for contract
                            reimbursements and some direct payments for fiscal year 2002, but it
                            could not ensure that the totals included all appropriated funds provided
                            in support of USO’s overseas tours. Moreover, AFEO could not provide the
                            same information for fiscal years 2000 and 2001 because the records for
                            those years were less complete, and the time and resources required to
                            gather and verify the information were more than AFEO could expend
                            given the unit’s workload.

                            Additionally, AFEO could not provide data on how much appropriated
                            funds were spent for military airlift services to support USO’s overseas
                            tours because neither AFEO nor the Air Mobility Command has
                            record-keeping systems to aggregate or report the needed information. For
                            example, the command’s records can track and report all airlift services
                            charged to AFEO, but those records do not indicate whether the services
                            were provided to support USO’s tours, nor do they differentiate between
                            celebrity and noncelebrity tours. Furthermore, neither AFEO nor the Air
                            Mobility Command maintains records of the cost of airlift services that
                            other U.S. military units (such as the Army and the Navy) provided in
                            support of USO’s tours.

                            We also could not identify the monetary value for other support derived
                            from appropriated funds, such as transportation, free lodging, and some
                            office and performance facilities provided by military units other than the
                            Air Mobility Command. We could not identify the value of this support
                            because neither DOD nor its components have record-keeping systems to
                            aggregate or report the needed information.


                            Page 10                                        GAO-04-56 Defense Management
                            Finally, we could not identify the value of DOD’s nonappropriated support
                            to USO, provided largely through in-kind contributions that included
                            goods (e.g., food and refreshments), services (e.g., Internet and telephone
                            access), and infrastructure support (some performance facilities) again,
                            because neither DOD nor its components have record-keeping systems to
                            aggregate or report the needed information. Furthermore, USO’s records
                            for in-kind contributions do not clearly identify all private sector and DOD
                            contributions.


                            DOD and USO did not have sufficient financial and management controls
Sufficient Financial        in place to provide reasonable assurance that all appropriated funds were
and Management              used appropriately. DOD properly awarded grant funds to USO, and USO
                            appropriately administered these funds. However, USO did not require its
Controls Did Not            independent auditor to fully test internal controls over grant funds or
Exist to Assure             funds reimbursed by DOD, as required under grant and contractual
                            agreements with DOD. For support provided through contract
Appropriate Use of          reimbursements and direct payments, AFEO lacked clearly written
Appropriated Funds          supplemental guidance regarding allowable expenses, effective
                            management oversight in reviewing USO invoices, and adequate
                            procedures for capturing reimbursable expenses. In some cases, these
                            weaknesses resulted in inappropriate expenditures of funds. Specifically,
                            we found problems with expenditures totaling about $433,000, including
                            approximately $86,000 in improper expenditures, $3,000 in questionable
                            expenditures, and $344,000 for unsupported expenditures. As a result of
                            our audit, AFEO officials told us they have initiated several actions to
                            improve financial and management controls and to recover funds from
                            USO.


DOD and USO Had             During fiscal years 2000 through 2002, DOD awarded about $20.8 million in
Sufficient Procedures for   congressionally appropriated grants to USO. DOD properly transferred
Administering Grants, but   these funds. Specifically, before transferring funds, it entered into grant
                            agreements with USO that included conditions for the use of these funds.
USO Did Not Fully Comply    For example, these agreements allowed USO to deposit the funds in the
with Audit Requirements     Spirit of Hope Endowment Fund or use any investment income earned
                            from the funds for operational expenses.

                            The agreements also set forth administrative and accounting requirements,
                            to include compliance with the Office of Management and Budget (OMB)




                            Page 11                                         GAO-04-56 Defense Management
Circular A-133, Audits of States, Local Governments, and Non-Profit
Organizations, as revised June 1997, which implements the Single Audit
Act, as amended.6 The Single Audit Act is intended to promote sound
financial management, including effective internal controls over federal
funds. The single audit is an important tool utilized by federal agencies—
including DOD—to monitor federal awards to nonprofit organizations and
ensure that the federal funds are properly used.7 OMB Circular A-133
§_.500 requires an audit of the financial statement(s) for the program
receiving federal funds in accordance with generally accepted government
audit standards. The audit should be an organizationwide audit that
focuses on the recipient’s internal controls and compliance with laws and
regulations governing federal awards and be designed to test the
program’s internal controls in a manner sufficient to illustrate that a low
level of risk exists for the program.8

Furthermore, OMB Circular A-133, subpart B, §.200, requires nonfederal
entities expending $300,000 or more a year in federal awards to have a
single or program-specific audit conducted for that year in accordance
with the provisions of the circular. Specifically, §.205 states that the
determination of when an award is expended should be based on when the
activity related to the award occurs. Generally, the activity pertains to the
expenditure or expense transactions associated with grants. Specifically,
the cumulative balance of federal awards for endowment funds, which are
federally restricted, is considered expended in each year in which the
funds are restricted.

Consistent with the grant agreements, USO deposited the entire
$20.8 million in grant funds in investment accounts designated specifically
for the Spirit of Hope Endowment Fund, and used investment income
earned on these funds for operational expenses. With respect to these
deposits, USO invested the funds in income-producing assets such as
stocks, bonds and U.S. Treasury bills. USO used about $333,000 drawn


6
 31 U.S.C. § 7501-7507; Office of Management and Budget (OMB) Circular A-133, Audits of
States, Local Governments, and Non-Profit Organizations.
7
 Federal awards include grants, loans, loan guarantees, property, cooperative agreements,
interest subsidies, insurance, food commodities, direct appropriations, and federal cost
reimbursement contracts.
8
 According to GAO standards, management and employees should establish and maintain
a control environment throughout the organization that sets a positive and supportive
attitude toward internal control. See GAO’s Standards for Internal Control in the Federal
Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999).




Page 12                                                 GAO-04-56 Defense Management
                                from investment income for operational expenses, and the entire amount
                                of deposited grant funds remained invested. However, USO did not fully
                                comply with the agreements’ audit requirements in identifying the scope of
                                work to be performed by its independent auditor in performing annual
                                audits. While USO arranges for its independent auditor to perform an
                                annual audit, this audit focuses on verifying the sources and accuracy of
                                amounts included in USO’s financial statements and does not
                                comprehensively test internal controls on the receipt and use of grant
                                funds or document tests performed as required by OMB Circular A-133.
                                USO officials initially believed there was no need for an audit that
                                complied with the Single Audit Act, since it spent only investment income
                                from the grant funds and none of the actual grant funds. Based on our
                                review, USO officials now agree that the act applies and that the annual
                                audit should be performed in accordance with the act’s requirements and
                                OMB Circular A-133.


Internal Control                For contract reimbursements and direct payments, we found significant
Weaknesses Led to               problems with DOD and USO controls over these funds. For example,
Problem Expenditures for        AFEO lacked clearly written supplemental guidance regarding allowable
                                expenses, effective management oversight in reviewing USO’s invoices,
Contract Reimbursements         and adequate procedures for capturing reimbursable expenses. Also,
and Direct Payments             similar to the grant funds, USO did not fully comply with audit
                                requirements contained in its contracts with DOD.

Lack of Clear and Current       At the time of our audit, the guidance in effect concerning the expenses
Written Supplemental            AFEO will pay in support of USO’s overseas tours was not sufficiently
Guidance                        detailed to provide clear, consistent instructions to be followed by AFEO
                                or USO. This guidance included the contract agreement between AFEO
                                and USO, general rules regarding AFEO’s direct payment accounts, federal
                                acquisition and travel regulations, and DOD Instruction 1330.13.

                                AFEO refers to the aforementioned guidance in paying for USO overseas
                                tour expenses through contract reimbursements and direct charges to its
                                centrally billed and purchase card accounts. However, as described below,
                                we found several weaknesses in the guidance.

                            •   Contract reimbursements. The contract between AFEO and USO
                                identifies the general categories of tour-related expenses for which USO
                                can be reimbursed to include administrative support services; honoraria;
                                and other direct costs such as production support/equipment rental, travel,
                                lodging, and miscellaneous expenses. The contract contains numerous
                                clauses and statements that indicate reimbursements will be made in the



                                Page 13                                        GAO-04-56 Defense Management
                              accordance with Joint Travel Regulations and the Federal Acquisition
                              Regulation. However, the contract is not specific concerning the types of
                              costs—such as the type of production support and other incidental direct
                              costs—and the supporting documentation needed to ensure that AFEO
                              only pays for costs that are allowable and proper. AFEO officials stated
                              that they follow additional policies related to the allowable contract
                              reimbursements for tour-related expenses, such as “thank you” dinners,
                              but these policies are not documented in writing.
                          •   Centrally billed account. AFEO stated that it uses the account primarily
                              to pay for commercial airfares for USO personnel and entertainers covered
                              under invitational travel orders.9 Federal travel regulations contain
                              stringent circumstances under which first-class and business-class travel
                              can be authorized. However, according to AFEO and USO officials, neither
                              has more detailed, written, and program specific guidance to determine
                              when and how USO will pay for first- or business-class travel.
                          •   Other direct charges. AFEO provides additional support to USO by
                              directly charging the cost of travel-related expenses, such as visas and
                              passports, to its purchase card account, and by allowing its O&M funds
                              account cite to be charged for Air Mobility Command airlift services.
                              However, AFEO has no specific program guidance regarding how USO
                              should be billed for unauthorized travelers on Air Mobility Command
                              flights.

                              Furthermore, DOD Instruction 1330.13, last updated September 8, 1985,
                              establishes policy and assigns responsibility for carrying out the Armed
                              Forces Professional Entertainment Program for entertaining troops
                              overseas. This instruction states that the Secretary of the Army has
                              responsibility for administering the program; however, the Air Force
                              assumed responsibility in fiscal year 1997. An AFEO official acknowledged
                              that this instruction is out of date. Also, this policy lacks clear statements
                              regarding expenses that should be paid by AFEO and USO, respectively.

Insufficient Management       The lack of sufficient management oversight of funds provided to USO
Oversight                     was also a key internal control problem. For example, AFEO officials
                              generally did not closely review or question expenses USO submitted for
                              reimbursement. Additionally, AFEO’s review and reconciliation process
                              for its centrally billed account and billings from the Air Mobility Command



                              9
                               Invitational travel orders are prepared for individuals not employed by the U.S.
                              government who are traveling for official government business. Individuals taking part in
                              the entertainment program are authorized to tour based on these orders. These orders
                              contain guidance governing the conditions under which the individual or group is touring.




                              Page 14                                                  GAO-04-56 Defense Management
was not sufficient to identify airlift expenses that should be charged to
USO. Furthermore, during our audit of contract files at the Air Force
contracting office responsible for administering the contracts between
AFEO and USO, we found no evidence of contract reviews. An Air Force
contracting official stated its office sometimes questioned the need for
some expenses for celebrity tours when modifications to the contracts
were requested. At these times, the expenses were questioned because the
supporting documentation provided to the contracting office by AFEO was
not always adequate. However, according to the Air Force contracting
officer currently responsible for the contracts, the existing workload and
higher priorities require her to perform more detailed oversight of high-
dollar defense contracts. Because celebrity tour costs generally ranged
from $10,000 to $300,000, they are given lower priority for contract
oversight.

Furthermore, we found that USO did not perform the type of audit
required under the terms of its contracts with AFEO. Similar to the grant
agreements, the contracts contain a requirement for a single audit that
would focus on USO’s internal controls as they relate to the federal funds
provided through contracts to USO to support the Armed Forces
Entertainment Program. USO signed the contracts with AFEO. These
contracts were to provide celebrity entertainment for U.S. armed forces at
military installations overseas, on a fixed price and cost reimbursable
basis. When USO signed these contractual agreements, it agreed to comply
with all contractual requirements. These contractual agreements set forth
accounting requirements to be met in accordance with Federal Acquisition
Regulation 52.215-2, Alternate II, which requires compliance with OMB
Circular A-133. As previously discussed, this circular implements the
Single Audit Act, as amended, and is intended to promote sound financial
management, including effective internal controls over federal funds.

Our review of USO’s audited financial statements, discussions with the
independent auditor responsible for performing the audit, and discussions
with USO officials indicated that the single audit requirement set forth in
the contractual agreements was not met. As discussed previously, USO
arranges for an annual audit of its financial statements, but this audit does
not include comprehensive testing of internal controls and the
documentation of tests performed that is required by OMB Circular A-133.
USO officials initially believed there was no need for an audit that
complied with the Single Audit Act, since USO is merely a vendor
providing services for AFEO, but now, based on our audit, it agrees that
such an audit is required.



Page 15                                         GAO-04-56 Defense Management
Payment of Improper,            In the absence of strong internal controls, we found numerous instances
Questionable, and Unsupported   where AFEO paid for improper, questionable, and unsupported expenses
Expenses                        in support of USO’s overseas celebrity tours. Based on our limited testing
                                of six celebrity tour files, our analysis of AFEO’s centrally billed account,
                                and our examination of Air Mobility Command records, we identified a
                                total of about $433,000 in problem expenditures during fiscal years 2000 to
                                2002 including improper and questionable expenses totaling around
                                $89,021 and unsupported expenses totaling approximately $344,000. We
                                defined an expense as improper when an item was not authorized or
                                properly justified in accordance with the contracts between AFEO and
                                USO, the Joint Travel Regulations and the Joint Federal Travel Regulations
                                issued by DOD, and the Federal Travel Regulation issued by the General
                                Services Administration.10 For example, we found improper
                                reimbursements for expenses such as alcoholic beverages, meals, lodging,
                                and duplicate billings for administrative services. AFEO also
                                inappropriately paid for first-class and business-class travel and some
                                military airlift services. We identified numerous examples of questionable
                                payments of USO tour costs by AFEO for items such as limousine services,
                                hotels, and airport VIP lounge services. We defined a questionable
                                payment as any item that was reimbursed without documentation showing
                                that the item was necessary for official government business under the
                                Armed Forces Entertainment Program. We also identified numerous
                                unsupported payments. We defined an unsupported payment as any item
                                that was reimbursed without documentation detailing the nature of the
                                expense and the way the price for the expense was determined.

Improper Expenses               We found payments for improper expenses for items such as unallowable
                                alcoholic beverages, meals, and lodging, honorarium, and production
                                support for an entertainer who did not participate in a tour for which
                                expenses were reimbursed, and a duplicate billing for administrative
                                services. Moreover, AFEO inappropriately paid for first-class and business-
                                class travel and some military airlift services. AFEO acknowledged that
                                these expenses should not have been reimbursed or paid. For example,
                                AFEO explained that meal expenses for celebrities receiving honorarium
                                are not reimbursable because the honorarium is intended to help defray
                                the cost of meals and other essentials, and the invitational travel orders we
                                reviewed specifically stated that meal expenses were not authorized.
                                Expenses for alcoholic beverages are never allowable in conjunction with



                                10
                                  The Joint Federal Travel Regulations apply to uniformed service members and the Joint
                                Travel Regulations applies to DOD civilian personnel.




                                Page 16                                                GAO-04-56 Defense Management
                                                 government travel. The cost for first-class travel, and the cost for
                                                 unauthorized travelers on Air Mobility Command airlifts, should have been
                                                 borne by USO. Table 3 highlights the improper payments we identified.

Table 3: Examples of Improper Payments for Items Reimbursed or Paid by AFEO for USO Tours for Fiscal Year 2002

 Improper expenses                                               Reason item was improper                                            Amount
 Alcoholic beverages                                             Not allowed under DOD and federal travel regulations                       $ 56
 Hotel meals                                                     Per diem was not authorized for travelers                                  252
 Lodging for one individual                                      No travel orders authorizing lodging expenses                               61
 Celebrity honorarium                                            Traveler did not participate in tour                                       600
 Production support                                              Traveler did not participate in tour                                       300
 Duplicate billing for administrative services                   Expense already paid                                                   8,894
 First-class travel                                              First-class travel was not authorized or properly
                                                                 documented in accordance with DOD and federal travel
                                                                 regulations                                                          29,586
 Business-class travel                                           Justification for travel was not authorized or properly
                                                                 documented in accordance with DOD and federal travel
                                                                 regulations                                                          37,153
 Air Mobility Command airlift services                           No travel orders authorizing payment of airlift services               9,065
 Total improper expenses identified                                                                                                  $85,967
Source: GAO analysis of DOD data.



                                                 Improper expenses of particular note are explained in more detail below:

                                           •     Duplicate billing for administrative services. In calendar year 2002,
                                                 AFEO paid USO twice for administrative expenses associated with
                                                 overseas tours. We identified improper payments totaling about $9,000. A
                                                 USO contract employee, responsible for preparing the expense reports for
                                                 overseas tours, included invoices for these services in several of the tour
                                                 files we audited. According to the contract employee, USO officials
                                                 directed that the invoices be submitted to AFEO for payment. The Air
                                                 Force contracting officials responsible for managing the contract stated
                                                 that in accordance with the terms of the contract between AFEO and USO,
                                                 USO is paid a monthly administrative fee that covers numerous
                                                 administrative tasks, including preparing the expense reports for USO
                                                 tours.11 Contracting officials stated that the monthly administrative fee



                                                 11
                                                   The monthly administrative fee was $3,647 from fiscal years 1999 through 2002. It
                                                 increases incrementally through fiscal year 2007. The fiscal year 2003 fee is $3,868 per
                                                 month.




                                                 Page 17                                                    GAO-04-56 Defense Management
    included the cost for all accounting services, including those performed by
    the contractor.12 Neither AFEO nor USO could provide an estimate of how
    long the double billings occurred. However, one USO official believed that
    the contract employee started to submit the invoices with the inception of
    the contract in 1999 and ended with the termination of the contractor’s
    services in May 2003. Based on our review of documentation provided by
    USO for calendar years 2001 and 2002, the amount billed could have
    totaled $78,000. We found no indication that the individual was paid twice
    for the services performed.
•   Improper payments for first-class and business-class travel. Our
    analysis of AFEO’s centrally billed account13 for fiscal year 2002 and
    selected tour files revealed numerous instances of improper payments by
    DOD for first-class and business-class travel totaling about $66,000. These
    first-class and business-class airline tickets were considered improper
    because they were not authorized and/or properly justified in accordance
    with the Joint Travel Regulations14 and the Joint Federal Travel
    Regulations issued by DOD and the Federal Travel Regulation15 issued by
    the General Services Administration (GSA).

    AFEO’s policy, while not written, is to authorize up to business-class travel
    for overseas flights for USO celebrity tours. According to an AFEO official,
    AFEO’s policy is to not authorize first-class travel, and the Director of
    Services, Air Force Office of Installations & Logistics, the office to which
    AFEO reports, is required to approve business-class travel. If first-class
    travel is requested, USO is supposed to pay for the cost of the upgrade
    from business-class to first-class. However, contrary to the stated policy
    and statements made by AFEO officials, this was not always the case. In
    each case, we found AFEO purchased and paid for either the unauthorized
    first-class or business-class ticket. We found no instances in which AFEO
    requested reimbursement from USO for the cost difference between
    business-class and first-class airline tickets. Further, neither AFEO nor
    USO could provide any documentation that indicated that USO paid the
    additional cost of first-class travel at the time the tickets were purchased.


    12
      The contractor performed additional tasks for USO, but her primary role was to prepare
    invoice packages. According to USO, this comprised the majority of the individual’s work.
    13
       DOD activities use centrally billed accounts for transportation purchases such as airline
    tickets, train tickets, and other travel-related items.
    14
     The Joint Travel Regulations authorize travel and transportation allowances for non-DOD
    employees on the same basis as DOD employees.
    15
         41 C.F.R. Parts 300-304.




    Page 18                                                   GAO-04-56 Defense Management
    USO officials stated that they were unaware that first-class airline tickets
    were charged to AFEO’s centrally billed account for USO tours. USO
    officials stated they would have reimbursed AFEO for the cost of the
    upgrade from business-class to first-class if AFEO had notified them or if
    they were provided documentation of the first-class charges. AFEO
    officials acknowledged that closer scrutiny of the documentation received
    from USO should have identified those instances in which first-class and
    business-class airline tickets were improperly paid by AFEO. Additionally,
    AFEO noted that the monthly reconciliation of the centrally billed account
    statement to the individual airline ticket transactions16 should have
    identified the discrepancies we found. Our review of the monthly
    reconciliations showed that first-class travel was clearly identified, but
    AFEO failed to seek reimbursement from USO. A more in-depth discussion
    of our analysis of the improper first-class and business-class travel we
    identified is detailed in appendix II.

•   Improper payments for Air Mobility Command Airlift Services. Our
    analysis of AFEO-issued invitational travel orders and Air Mobility
    Command billing data for airlift services showed that AFEO paid around
    $9,000 for airlift services provided by the Air Mobility Command, for
    individuals traveling on “no cost” travel orders. According to AFEO, no
    cost travel orders are issued to USO tour support personnel and some
    entertainers in those cases where AFEO has stated the government will
    not pay the transportation costs. These orders enable certain support
    personnel or guests of entertainers to utilize government transportation
    with the costs of their transportation being the ultimate responsibility of
    USO. In cases where AFEO has paid for travel conducted on no cost
    orders, it is necessary for USO to reimburse AFEO.

    According to AFEO, these improper charges and payments occurred
    because it was unaware that the travel was being billed to its appropriated
    fund cite. An AFEO official believed that the Air Mobility Command was
    billing USO directly for the airlift services. According to an Air Mobility
    Command official, its billing system recognizes airlift charges incurred by
    AFEO personnel and personnel traveling in support of AFEO’s mission,
    but the system does not identify if the travel is USO related. Nor can the
    Air Mobility Command bill a nongovernmental entity for airlift services
    unless that entity has an account in the command’s billing system.


    16
      As part of the reconciliation process, AFEO includes the travelers’ itineraries to match
    the airline ticket transactions in the summary statement. The itinerary document identifies
    the type of airline fare taken by the traveler (i.e., first-class, business-class, or coach).




    Page 19                                                    GAO-04-56 Defense Management
Questionable Expenses                     We identified numerous examples of questionable payments of USO tour
                                          costs by AFEO totaling about $3,000, as shown in table 4.

Table 4: Examples of Questionable Payments for Items Reimbursed or Paid by AFEO for USO Tours for Fiscal Year 2002

 Questionable expenses                                  Reason item was questionable                              Amount
 Limousine services                                     Appears to be excessive with no explanation or
                                                        documentation showing why it was necessary                  $1,656
 Miscellaneous hotel expenses for tour members          No existing guidance consistent with DOD and GSA
                                                        regulations                                                   579
 Airport VIP lounge                                     Appears excessive with no explanation or documentation
                                                        showing why it was necessary                                  375
 USO dinner                                             No existing guidance consistent with DOD and GSA
                                                        regulations                                                   330
 USO tour producer meals                                No existing guidance consistent with DOD and GSA
                                                        regulations                                                   114
 Total questionable expenses identified                                                                             $3,054
Source: GAO analysis of DOD data.

                                          More specifically, we found that AFEO paid for

                                      •   19 hours of limousine services from hotels in the Washington, D.C., area to
                                          Andrews Air Force Base, Maryland, at a cost of $1,656 before an overseas
                                          tour began and
                                      •   several USO thank you dinners for the USO entertainers at the end of a
                                          tour.

                                          We could find no documentation to indicate why these expenses were
                                          necessary. For example, concerning the thank you dinners, AFEO officials
                                          said it was their policy, although unwritten, to reimburse USO for one
                                          dinner per tour. Our audit of the documentation indicated that this
                                          practice was inconsistently applied. In one instance, we found that AFEO
                                          disallowed a thank you dinner for one tour, but it paid for several meals
                                          that were classified as thank you dinners for another tour. Additionally,
                                          the documentation was not always adequate to identify whether these
                                          expenses were for meals for celebrities or for other individuals on the
                                          tour. For example, we found that tour managers and a USO tour
                                          producer’s meals were reimbursed over a number of days. An AFEO
                                          official acknowledged that there was no existing guidance that identified
                                          these items as allowable expenses. AFEO officials told us that they plan to
                                          discontinue the practice of reimbursing USO for thank you dinners.




                                          Page 20                                             GAO-04-56 Defense Management
Unsupported Expenses   We identified numerous examples of unsupported payments by AFEO
                       totaling approximately $344,000 for production support for USO tours.
                       Table 5 highlights the unsupported payments we identified.

                       Table 5: Examples of Unsupported Payments for Items Reimbursed by AFEO for
                       USO Tours for Fiscal Year 2002

                           Unsupported expenses                    Reason item was unsupported                    Amount
                                                  a
                           Production support                      Lack of detailed supporting
                                                                   documentation                                 $260,660
                           Production tour manager expense         Lack of detailed supporting
                                                                   documentation                                    56,250
                           Celebrity honorarium                    Lack of detailed supporting
                                                                   documentation                                    27,000
                           Total unsupported expenses
                           identified                                                                            $343,910
                       Source: GAO analysis of DOD data.
                       a
                        We identified four instances of unsupported production support. The total amount includes the
                       unsupported expenses for all four instances.


                       We found that supporting documentation for the six celebrity tour files we
                       audited was inadequate for a number of invoices, and therefore AFEO had
                       no assurance that the reimbursed costs were proper. We asked AFEO to
                       provide additional documentation on these invoices. AFEO could not
                       provide the necessary documentation and stated that this was the only
                       documentation USO provided. We asked USO for detailed support for a
                       number of selected invoices. USO did not have support readily available in
                       its records. In response to our request for additional documentation, USO
                       contacted the vendors and received details on several invoices. USO
                       provided additional support for $43,910 of the $343,910 included in table 5.

                       For the largest case in our testing, AFEO reimbursed $216,750 for
                       production support based on a single entry on an invoice. In contrast, our
                       examination of another invoice for production support included an
                       itemized list of specific items such as microphone stands, speakers, and
                       stage supports. Additionally, based on our audit of five noncelebrity tours,
                       we found that documentation was far more comprehensive in support of
                       the expenses paid by AFEO.

                       Additionally, in some instances we were unable to identify which
                       individuals received celebrity honoraria. We traced names from the
                       invitational travel orders on the six tours audited but were unable to verify
                       which individuals were being paid honoraria and which ones were not. In



                       Page 21                                                        GAO-04-56 Defense Management
                           some cases, individuals who were part of a celebrity’s entourage were
                           classified as celebrities and received honoraria while others were not.
                           AFEO agreed that it was not always possible to identify which names
                           listed on invitational travel orders received honoraria. In one instance,
                           honoraria and production support costs were charged for 13 individuals,
                           but the supporting documentation indicated that only 12 individuals
                           participated in the tour. An AFEO official stated that the individual’s
                           itinerary must have changed and acknowledged that this should have been
                           documented in the file. Based on available documentation, AFEO was
                           charged $900 in honoraria and production support costs for an individual
                           who did not participate in the tour. As a result of our analysis, AFEO
                           verified that this individual did not participate in the tour, and it is seeking
                           reimbursement from USO.

                           USO officials acknowledged the problems we identified with the
                           transactions we reviewed. They stated they did not have a clear
                           understanding of AFEO’s policy as to which expenses were reimbursable
                           and which ones were not. They stated that they submitted invoices based
                           on prior verbal agreements and past practices with AFEO. USO officials
                           stated that AFEO’s practice over the last several years was inconsistent
                           and that reimbursement for certain expense items was “hit or miss” from
                           one tour to the next. According to USO officials, it was their intention to
                           submit invoices and vouchers for expenses in accordance with federal
                           laws and regulations. However, because they had no specific instructions
                           identifying which costs were allowable and which costs were not
                           allowable, it was sometimes frustrating for them to decide what to include
                           as an expense item in an invoice package.


Actions Taken to Improve   USO and AFEO acknowledged that they need better policies and
Controls over Support      procedures to provide reasonable assurance that expenses are authorized
Provided to USO            in an appropriate manner and are reimbursable based upon the contracts
                           between the organizations. As a result of our audit, USO and AFEO
                           officials told us they have initiated some actions to improve accountability
                           and controls over federal funds used to support USO’s activities and to
                           recover funds paid by AFEO that USO should have paid. For example, a
                           USO official told us USO is in the process of developing written guidance
                           for its celebrity tour managers and accounting staff that specifies those
                           expenses that are reimbursable under the contracts with AFEO and those
                           that are not.

                           AFEO officials told us that to improve financial and management controls,
                           their office, in conjunction with the Air Force Directorate of Services, is in


                           Page 22                                           GAO-04-56 Defense Management
    the process of drafting an operating instruction for AFEO. They stated that
    this operating instruction will address AFEO roles and responsibilities,
    overseas areas served, points of contact, promotional package selection
    process, tour projections, authorized reimbursements, invitational travel
    orders, passports, visas, immunizations, military and commercial
    transportation, final payment process, and tour evaluation forms.
    Additionally, according to AFEO officials, they have taken the following
    actions.

•   Established procedures to track those contract reimbursement and
    purchase card transactions used to fund USO celebrity tours versus
    noncelebrity tours.
•   Created a listing of reimbursable items, specified by contract line item
    number, allowed and the required documents needed for final payment
    processing. The listing was provided to USO, as well as to the U.S. Air
    Force contracting office responsible for administering the contracts
    between AFEO and USO for a modification to the basic contract.
•   Improved controls over the purchase of airline tickets charged to the
    centrally billed account by implementing procedures for processing
    requests for approval of upgrades to business-class travel through the U.S.
    Air Force, Director of Services. According to AFEO officials, they now
    document cost comparisons of economy-class airline tickets versus
    business-class travel in the AFEO business-class authorization letter. A
    copy of the approved upgrade letter will be provided to the contract travel
    office and maintained in the individual tour folders with copies of the
    annotated invitational travel orders.17 For those portions of overseas travel
    that are upgraded to business-class because no other class of travel is
    available, the commercial travel office will certify these circumstances by
    entering a statement on the itinerary as required by the Joint Travel
    Regulations. No prior approval is necessary under these circumstances.
    USO will fund any domestic portion of travel that incurs additional costs
    above economy- and/or coach-class standards. If any other type of upgrade
    is provided, at no additional cost to AFEO, the change in travel class will
    be noted with a memorandum for the record and filed in the tour folder.
•   Improved oversight of expenses reimbursed to USO for overseas tours.
    According to AFEO officials, now, at least three individuals are reviewing
    expense packages for payment certification. First, the applicable AFEO
    circuit manager reviews the voucher package to assure receipts and
    requests for reimbursement match the itinerary and are appropriate.



    17
      The commercial travel office is the travel agent contracted by AFEO and is authorized to
    issue tickets for commercial transportation.




    Page 23                                                  GAO-04-56 Defense Management
              Second, the AFEO financial advisor reviews the package to assure
              reimbursements are authorized and properly documented, then signs the
              package as the acceptance officer. Third, either the AFEO administrative
              assistant or the AFEO deputy director performs a final review and certifies
              the package for payment. The Defense Finance and Accounting Form 250
              is prepared and certified by two signatures. Additionally, as of September
              2003, AFEO had recovered about $19,000 in improper and questionable
              payments it made to support USO overseas tours.

              We have not audited any transactions since AFEO officials stated these
              actions have been taken and thus cannot conclude whether these actions
              have actually taken place or have resulted in improved financial and
              management controls.


              As U.S. armed forces continue to be actively engaged in operations
Conclusions   throughout the world, it is important that troop morale is maintained at
              high levels. USO’s overseas entertainment tours have provided quality
              entertainment to the troops, and DOD’s financial and in-kind support has
              been key to the Armed Forces Professional Entertainment Program’s
              continued success. When a nongovernmental organization, such as USO,
              receives federal funds to assist a government organization, such as DOD,
              that organization is accountable for the proper use of the funds. A key
              factor in helping achieve that accountability is to implement appropriate
              internal controls. However, our audit found that DOD’s program lacks
              effective financial and management controls to provide reasonable
              assurance that federal funds are used consistent with the terms specified
              in grant and contract agreements. Neither AFEO nor USO can determine
              the total amount of financial or in-kind support DOD provides to sustain
              USO’s overseas tours. Furthermore, without adequate supplemental
              guidance to identify allowable costs for overseas tours and effective
              management oversight, AFEO does not have reasonable assurance that it
              is paying for only allowable costs and that appropriated funds are being
              spent in accordance with federal laws and regulations. Moreover, USO’s
              failure to fully comply with audit requirements in grant and contract
              agreements reduces DOD’s assurance that USO has adequate internal
              controls over federal program funds, leaving the program vulnerable to
              fraud, waste, and abuse. Had USO’s independent auditor fully tested
              internal controls, the problems we identified might have surfaced. AFEO
              officials stated they have taken action to improve management oversight
              during the review of invoice packages and to develop written policies and
              procedures consistent with DOD and federal travel regulations. Although
              these actions, if implemented, should assist AFEO in achieving a stronger



              Page 24                                        GAO-04-56 Defense Management
                         control environment, an earnest commitment by DOD and USO
                         management is also needed to ensure proper controls and use of DOD
                         funds.


                         To improve financial and management controls over support provided to
Recommendations for      USO, we recommend that the Secretary of Defense direct the Under
Executive Action         Secretary of Defense for Personnel and Readiness, in consultation with the
                         Secretary of the Air Force, to take the following actions.

                     •   Develop and implement a record-keeping system capable of reporting all
                         appropriated and nonappropriated funds, including all in-kind goods,
                         services, and infrastructure provided by DOD in support of USO overseas
                         tours and operations. Among other things, this system should clearly
                         identify airlift services provided in support of USO tours.
                     •   Take steps to ensure USO complies with the Single Audit Act as stipulated
                         in its grant and contractual agreements with DOD, which require an
                         annual audit that tests internal controls over federal funds to assess
                         control risk.
                     •   Develop and consistently implement supplemental guidance, in
                         accordance with contract terms, and federal travel and acquisition
                         regulations, to identify allowable expenses and reimbursements and
                         appropriate documentation for
                         • travel-related USO expenses, including commercial air travel,
                         • honoraria, and
                         • services and equipment provided for USO.
                     •   Identify all expenses AFEO inappropriately paid, which should have been
                         paid by USO, and request that USO fully reimburse AFEO for the
                         expenses.
                     •   Arrange for DOD’s Inspector General to perform internal control audits
                         periodically to determine if the control weaknesses we identified are
                         resolved, and report the results of these audits to the Secretary of Defense
                         and the Secretary of the Air Force.


                         In commenting on a draft of this report, the Principal Deputy Under
Agency Comments          Secretary of Defense for Personnel and Readiness concurred with four of
and Our Evaluation       our recommendations and partially concurred with the fifth. The Principal
                         Deputy Under Secretary indicated that actions are underway or completed
                         to address our recommendations and correct the deficiencies noted in our
                         report. Furthermore, although he concurred with our first
                         recommendation, he acknowledged that DOD financial systems do not
                         support an automated means for reporting the type of information we
                         suggested. However, he noted that AFEO continues to implement and


                         Page 25                                         GAO-04-56 Defense Management
improve its record-keeping systems to clearly identify and report USO tour
costs by establishing

•   a separate Bank of America centrally billed account for all commercial
    transportation costs associated with USO celebrity tours;

•   a separate purchase card account for visas, excess baggage, printing,
    shipping, and miscellaneous costs associated with USO celebrity tours;
    and

•   an accounting line in the Air Mobility Command billing process to
    identify, where possible, military airlift transportation costs associated
    with USO celebrity tours.

The Principal Deputy Under Secretary further indicated AFEO has taken
action to identify and recoup expenses inappropriately reimbursed to
USO, and that DOD Instruction 1330.13, Armed Forces Entertainment, will
also be revised to require the military services to submit to AFEO an
annual report identifying appropriated funds, nonappropriated funds, and
in-kind goods or services provided to USO. According to the Principal
Deputy Under Secretary, all actions are to be completed by April 30, 2004.

Finally, the Principal Deputy Under Secretary partially concurred with our
final recommendation, agreeing that periodic internal control audits are
necessary to determine whether control weaknesses we identified are
resolved. He believes, however, that USO’s independent auditor’s annual
audit, performed in accordance with the Single Audit Act, rather than
audits performed by the DOD Inspector General, would meet the
requirement to test internal controls over federal funds to assess control
risk, and that the DOD Inspector General would provide periodic oversight
of the single audits performed for USO. We agree that these actions meet
the intent of our recommendation.

The Principal Deputy Under Secretary’s comments are included in
appendix III of this report.


Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 10 days from the date of this letter. At that
time, we will send copies of this report to interested congressional
committees with jurisdiction over DOD’s budget, as well as to the
Secretary of Defense, the Secretary of the Air Force, and the President and
Chief Executive Officer of USO. We will make copies available to others


Page 26                                          GAO-04-56 Defense Management
on request. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov.

Please contact Sharon L. Pickup on (202) 512-9619 or Greg D. Kutz on
(202) 512-9505 if you or staff have any questions. You may also contact
George F. Poindexter, Assistant Director, on (202) 512-7213, or Darby W.
Smith, Assistant Director, on (202) 512-7803. Major contributors to this
report are listed in appendix IV.




Sharon L. Pickup
Director
Defense Capabilities and Management




Gregory D. Kutz
Director
Financial Management and Assurance




Page 27                                         GAO-04-56 Defense Management
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             We reviewed the Department of Defense’s (DOD) Armed Forces
             Entertainment Program and its partnership with the United Services
             Organization (USO) in providing U.S. armed forces with celebrity
             entertainment overseas. We collected, reviewed, and analyzed relevant
             program information and conducted interviews with DOD and USO
             officials responsible for administering the Armed Forces Entertainment
             Program, specifically officials from the Office of the Under Secretary of
             Defense (Personnel and Readiness), Morale, Welfare and Recreation
             Policy; Armed Forces Entertainment Office (AFEO); Defense Supply
             Service—Washington, Department of the Army; 11th Contracting
             Squadron, Department of the Air Force, Bolling Air Force Base, District of
             Columbia; and USO. Additionally, we interviewed personnel with the
             Deloitte and Touche Accounting Firm, the independent auditing firm
             responsible for auditing USO’s annual consolidated financial statements
             and supplemental schedules.

             To determine the source and amount of federal funding provided to
             support USO, we reviewed and analyzed relevant congressional
             authorization and appropriations acts. We also reviewed and analyzed
             applicable grant agreements; contract negotiation files; DOD and Air Force
             operations and maintenance budget data; USO’s annual audited financial
             statements and supporting documentation and annual financial reports;
             AFEO financial records, including the centrally billed and purchase card
             accounts; and Air Mobility Command billing data for passengers and
             baggage for selected airlift missions. We discussed discrepancies that
             existed among the various financial records with AFEO, USO, Air Force
             Contracting Squadron, and Air Mobility Command officials. Other than for
             the grants, we were unable to obtain complete appropriated funding data
             for fiscal years 2000 through 2002 for federal funds provided to USO for
             overseas tours. We could not obtain complete funding data because of
             limitations in DOD’s record-keeping systems, which did not differentiate
             between costs for celebrity versus noncelebrity tours. Therefore, AFEO
             officials agreed to take the steps necessary to provide, to the extent
             possible, complete funding data for fiscal year 2002. However, AFEO
             officials could not assure us that the totals included all appropriated funds
             provided in support of USO overseas tours. Additionally, they told us they
             could not provide the same information for fiscal years 2000 and 2001,
             because the records for those years were less complete, and the time and
             resources required to gather and verify the information were more than
             could be expended given the unit’s current workload. DOD officials could
             not provide sources and amounts for total nonappropriated support
             provided to USO because their recording-keeping systems do not
             aggregate or report the needed information. We reviewed USO records for


             Page 28                                         GAO-04-56 Defense Management
Appendix I: Scope and Methodology




in-kind contributions, but those records do not clearly distinguish private
sector contributions from federal contributions.

To assess the adequacy of internal controls in place to provide reasonable
assurance that appropriated federal funds are used consistent with the
terms specified, we reviewed applicable federal laws and regulations, DOD
policies and procedures, and GAO’s Standards for Internal Control in the
Federal Government.1 Additionally, we audited the contract between USO
and AFEO. We interviewed USO and AFEO officials to gain an
understanding of internal controls, and reviewed the payment process for
celebrity and noncelebrity tours. In gathering this information, we
concluded that internal controls over the payment process were
ineffective, and therefore we limited our auditing to a nonrepresentative
selection of tours. We audited selected USO tour transactions to evaluate
the design and implementation of key internal control procedures and
activities. We selected 11 tours—6 celebrity and 5 noncelebrity tours. We
traced expenses that were paid by AFEO to supporting invoices and
receipts, requesting additional documentation from AFEO as well as from
vendors for certain transactions. In addition to our audit of selected
transactions, we looked at whether indications existed of potentially
improper and questionable transactions as well as invoices that were
reimbursed without adequate documentation. We discussed discrepancies
with AFEO, USO or contract officials at Bolling Air Force, District of
Columbia, who were responsible for administering the contract between
USO and AFEO. Additionally, we interviewed the USO contract
accountant to determine the relationship between accounting fees
collected under the contract and those billed as part of tour expenses that
were submitted to AFEO by USO for reimbursement. Based on our initial
review of the tour files, we also audited AFEO’s centrally billed and
purchase card accounts for fiscal year 2002.

We audited AFEO’s centrally billed account for fiscal year 2002 to
determine if the amount spent on first-class and business-class airline
travel in support of USO tours was in accordance with DOD and federal
policies and procedures. To assess the magnitude of first-class and
business-class travel, we isolated those transactions billed to AFEO’s
centrally billed account specifically related to airline travel. We created a
new file that contained only the first-class and business-class travel billed
to AFEO’s centrally account. The airline industry uses certain fare and


1
    Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1).




Page 29                                                 GAO-04-56 Defense Management
Appendix I: Scope and Methodology




service codes to indicate the class of service purchased and provided. The
database contained transaction specific information, including the fare
and service code to price the tickets AFEO purchased. Using data-mining
techniques, we identified the fare basis codes that corresponded to the
issuance of first-, business-, and coach-class travel. Using these codes, we
selected all airline transactions that contained at least one leg in which
AFEO paid for first-class and business-class travel accommodations. We
estimated the cost of coach travel using the government rates established
by General Services Administration (GSA). For flights not covered by GSA,
we estimated coach travel using the lowest current rates identified from
Expedia.com. We also analyzed purchase card transactions for fiscal years
2001 and 2002 to provide reasonable assurance that charges were in
accordance with DOD policies and procedures and in support of USO
tours.

We also reviewed USO’s independent auditor’s reports and management
letters for calendar years 1996 through 2001, as well as the independent
auditor’s work papers for audit work related to USO transactions with
AFEO for calendar year 2001. The 2001 audit was the most recently
completed audit that was available through the end of our field work.

In performing this audit, we used the same accounting records and
financial reports DOD and USO use to manage the Armed Forces
Entertainment Program. We did not independently determine the
reliability of all the reported financial information. However, our recent
audits addressing the reliability of DOD’s financial statements question the
reliability of reported financial information.2 Furthermore, our recent
audits of DOD’s travel card and purchase card accounts identified
weaknesses in the overall control environments and breakdowns in key




2
 U.S. General Accounting Office, Department of Defense: Status of Financial
Management Weaknesses and Progress Toward Reform, GAO-03-931T (Washington, D.C.:
June 25, 2003); U.S. General Accounting Office, DOD Financial Management: Important
Steps Underway But Reform Will Require a Long-term Commitment, GAO-02-784T
(Washington, D.C.: June 4, 2002); U.S. General Accounting Office, DOD Financial
Management: Integrated Approach, Accountability, Transparency, and Incentives Are
Keys to Effective Reform, GAO-02-537T (Washington, D.C.: Mar. 20, 2002).




Page 30                                              GAO-04-56 Defense Management
Appendix I: Scope and Methodology




controls relied on to manage these programs, leaving them vulnerable to
fraud, waste, and abuse.3

We performed our audit from March 2003 through September 2003 in
accordance with generally accepted government auditing standards.




3
 U.S. General Accounting Office, Travel Cards: Internal Control Weaknesses at DOD Led
to Improper Use of First and Business Class Travel, GAO-04-88 (Washington, D.C.:
Oct. 24, 2003); U.S. General Accounting Office, Purchase Cards: Control Weaknesses Leave
the Air Force Vulnerable to Fraud, Waste, and Abuse, GAO-03-292 (Washington, D.C.:
Dec. 20, 2002); U.S. General Accounting Office, Travel Cards: Control Weaknesses Leave
Army Vulnerable to Potential Fraud and Abuse, GAO-03-169 (Washington, D.C.: Oct. 11,
2002); U.S. General Accounting Office, Purchase Cards: Navy Vulnerable to Fraud and
Abuse but Is Taking Action to Resolve Control Weaknesses, GAO-03-154T (Washington,
D.C.: Oct. 8, 2002).




Page 31                                                GAO-04-56 Defense Management
                                          Appendix II: Details of Improper First-Class
Appendix II: Details of Improper First-Class
                                          and Business-Class Travel



and Business-Class Travel

                                          Table 1 details our analysis of the improper first-class and business-class
                                          travel we identified based on our limited testing. Without authorization or
                                          adequate justification, these cases illustrate the improper use of first-class
                                          and business-class travel and the resulting increase in travel costs.
                                          Following the table is more detailed information on some of these cases.

Table 6: Examples of Improper First-Class and Business-Class Travel Paid by the Armed Forces Entertainment Office
Identified by GAO for Fiscal Year 2002

                                                                                                 Estimated
                                                                                             pretax cost of
 Example    Type of                                 Class of tickets               Cost of      coach fare      Reason travel
 number     tour         Itinerary                  purchased                 tickets paid          tickets     was improper
 1          Celebrity    Los Angeles to             8 first-class tickets         $16,658           $1,680      First-class travel
                         Washington, D.C., and                                                                  was not authorized.
                         back; San Francisco to
                         Washington, D.C.;
                         Philadelphia to
                         Cincinnati; Philadelphia
                         to Dallas
 2          Celebrity    Los Angeles to             6 first-class tickets           8,397            1,901      First-class travel
                         Washington, D.C., and                                                                  was not authorized.
                         back; San Francisco to
                         Washington, D.C.;
                         Philadelphia to
                         Cincinnati; Philadelphia
                         to Dallas
 3          Celebrity    Washington, D.C., to       7 business-class               13,488            1,400      Business-class
                         Atlanta to Las Vegas;      tickets                                                     was not authorized.
                         Dallas to Washington,
                         D.C.; Boston to
                         Washington, D.C., and
                         back; and Albuquerque
                         to Dallas
 4          Noncelebrity Washington, D.C., to       3 business-class                2,193            2,193a     Lacked specific
                         Atlanta to Las Vegas;      tickets                                                     documentation
                         Dallas to Washington,                                                                  justifying business-
                         D.C.; Boston to                                                                        class travel.
                         Washington, D.C., and
                         back; and Albuquerque
                         to Dallas
                                                                                                            b
 5          Celebrity    Los Angeles to             2 first-class tickets           1,556             720       Only business-
                         Washington, D.C., and                                                                  class was
                         back; Pittsburg to                                                                     authorized.
                         Washington, D.C.
 6          Celebrity    Los Angeles to             2 business-class               15,660            7,694      Lacked specific
                         Washington, D.C.;          tickets                                                     documentation
                         Frankfurt, Germany;                                                                    justifying business-
                         Cairo, Egypt, and back                                                                 class travel.




                                          Page 32                                                 GAO-04-56 Defense Management
                                                     Appendix II: Details of Improper First-Class
                                                     and Business-Class Travel




                                                                                                                        Estimated
                                                                                                                    pretax cost of
 Example          Type of                                           Class of tickets                    Cost of        coach fare    Reason travel
 number           tour              Itinerary                       purchased                      tickets paid            tickets   was improper
 7                Celebrity         Los Angeles to                  1 business-class                     8,005              4,085    Lacked specific
                                    Vancouver, British              ticket                                                           documentation
                                    Columbia; London,                                                                                justifying business-
                                    England; Doha, Qatar;                                                                            class travel.
                                    Amman, Jordan, and
                                    back
 8                Noncelebrity Cairo, Egypt, to Istanbul,           4 business-class                     5,052              4,863    Lacked specific
                               Turkey, to Athens,                   tickets                                                          documentation
                               Greece, to various cities                                                                             justifying business-
                               in Italy                                                                                              class travel.
                                                                                                                c
 9                Noncelebrity Cairo, Egypt, to Istanbul,           13 business-class                    4,441              3,650    Lacked specific
                               Turkey                               tickets                                                          documentation
                                                                                                                                     justifying business-
                                                                                                                                     class travel.
                                                                                                                d
 10               Celebrity         Atlanta and Little Rock,        2 first-class tickets               2,975               1,402    First-class travel
                                    to Washington, D.C.;                                                                             was not authorized.
                                    New York and Chicago
                                    to Tulsa, Okla.
 Total                                                                                                 $78,425            $29,588
Source: GAO analysis of DOD data.
                                                     a
                                                         Estimated leg of business-class travel.
                                                     b
                                                         Estimated business-class fare.
                                                     c
                                                         Estimated legs of first-class fare.
                                                     d
                                                         Estimated legs of first-class fare.


                                                     Example 1 involved five individuals traveling first class at a cost to the
                                                     government of $16,658. An audit of the tour files and the travel order
                                                     indicated that the travel order specifically states that travel at government
                                                     expense shall not exceed the cost of common carrier (i.e., the rate
                                                     authorized under the government contract). However, the individuals were
                                                     issued first-class tickets for this trip, resulting in an additional cost to the
                                                     government of $14,978 compared to an estimated total cost of about $1,680
                                                     for eight coach tickets.

                                                     Example 2 involved six individuals traveling first class at a cost to the
                                                     government of $8,397. An audit of the tour files and the travel order
                                                     indicated that the travel order specifically states that travel at government
                                                     expense shall not exceed the cost of common carrier. However, the
                                                     individuals were issued first-class tickets for this trip, resulting in an
                                                     additional cost to the government of $6,496 compared to an estimated total
                                                     cost of about $1,901 for six coach tickets. This tour also had seven


                                                     Page 33                                                             GAO-04-56 Defense Management
Appendix II: Details of Improper First-Class
and Business-Class Travel




individuals traveling business-class at a cost to the government of $13,488
for domestic flights. According to AFEO, business-class is only authorized
for overseas flights, not domestic flights. This resulted in an additional
cost to the government of $12,088 compared to an estimated cost of about
$1,400 for coach-class tickets.

Example 5 involved two individuals who traveled first class from New
York–LaGuardia to Jacksonville, Florida. Supporting documentation
indicates that business-class was authorized. The cost of two business-
class tickets amounted to $7201 compared to the two first-class tickets of
$1,556. Without authorization or valid justification, the additional $836
spent on the first-class ticket was improper. Furthermore, our audit
showed that the difference in the cost of first-class travel and the cost of
economy class can be significant. For example, during a review of one
tour, we found that the cost of one first-class round trip ticket was $3,982,
whereas an economy-class airline ticket for the same trip cost $280.

GSA and DOD travel regulations specify stringent circumstances under
which premium-class travel (e.g., first-class, business-class) can be
authorized. For example, the Joint Travel Regulations (JTR)2 and the Joint
Federal Travel Regulations (JFTR) limit the authority to authorize first-
class travel to the Secretary of Defense, his Deputy, or another authority
as designated by the Secretary of Defense. Further, the delegation of
authority to authorize and/or approve first-class travel is to be held at “as
high an administrative level as practicable to ensure adequate
consideration and review of the circumstances necessitating the first-class
accommodations.” A DOD directive3 on transportation and management
specifically states that the secretaries for personnel within the military
services and secretariats are the approving authorities for first-class travel.
The military service secretaries may delegate approval authority for first-
class travel to under secretaries, service chiefs of staff or their vice and/or
deputy chief of staff, and four-star major commanders or their three-star
vice and/or deputy commander. The directive explicitly states that
approving authority cannot be delegated to anyone lower than these
officials. DOD and GSA policies also require that authorization for
premium-class airline accommodations be made in advance of the actual



1
    We derived the estimated coach fares from an online Web site, www.expedia.com.
2
    JTR ¶2204 A3 – A5.
3
    DOD Directive 4500.9, December 29, 1993.




Page 34                                                  GAO-04-56 Defense Management
    Appendix II: Details of Improper First-Class
    and Business-Class Travel




    travel unless extenuating circumstances or emergency situations make
    advance authorization impossible.

    Specifically, JTR and JFTR require that first-class accommodation be
    authorized only when:

•   coach-class airline accommodations or premium-class other than first-
    class airline accommodations are not reasonably available;
•   first-class airline accommodations are necessary because the employee
    and/or dependent is so handicapped or otherwise physically impaired that
    other accommodations cannot be used, and such condition is
    substantiated by competent medical authority; or
•   first-class airline accommodations are needed when exceptional security
    circumstances require such travel.

    JTR and JFTR allow the transportation officer, in conjunction with the
    official who issued the travel order, to approve premium-class travel (i.e.
    business-class) other than first-class travel. DOD restricts premium-class
    travel to the following eight circumstances:

•   Regularly scheduled flights between origin and destination provide only
    premium-class accommodations and it is certified on the travel voucher.
•   Coach-class travel is not available in time to accomplish the purpose of the
    official travel, which is so urgent it cannot be postponed.
•   The traveler’s disability or other physical impairment requires use of other
    than first-class service and the condition is substantiated in writing.
•   Premium-class accommodations are required for security purposes or
    because exceptional circumstances make the use essential to the
    successful performance of the mission.
•   Coach-class service on authorized and/or approved foreign carriers does
    not provide adequate sanitation or meet health standards.
•   Premium-class accommodations would result in overall savings to the
    government because of subsistence costs, overtime, or lost productive
    time that would be incurred while awaiting coach-class accommodations.
•   Transportation is paid in full by a nonfederal source.
•   Travel is to or from a destination outside the continental United States,
    and the scheduled flight time (including stopovers) is in excess of 14
    hours. However, a rest stop is prohibited when travel is authorized by
    premium-class accommodations.

    Both GSA and DOD regulations allow a traveler to upgrade to premium-
    class, other than first-class travel at personal expense, including through
    redemption of frequent traveler benefits. GSA also identified agency
    mission as one of the criteria for premium-class travel.


    Page 35                                         GAO-04-56 Defense Management
              Appendix III: Comments from the Department
Appendix III: Comments from the
              of Defense



Department of Defense




              Page 36                                      GAO-04-56 Defense Management
Appendix III: Comments from the Department
of Defense




Page 37                                      GAO-04-56 Defense Management
Appendix III: Comments from the Department
of Defense




Page 38                                      GAO-04-56 Defense Management
Appendix III: Comments from the Department
of Defense




Page 39                                      GAO-04-56 Defense Management
             Appendix IV: Staff Acknowledgments
Appendix IV: Staff Acknowledgments


             Claudia J. Dickey, Stephen P. Donahue, Johnny R. Bowen, Wayne A,.
             Ekblad, Kenneth E. Patton, M. Jane Hunt, Nancy L. Benco, and Julio A.
             Luna made significant contributions to this report.




(350320)
             Page 40                                      GAO-04-56 Defense Management
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