oversight

DOD Financial Management: Improvements Needed in Prompt Payment Monitoring and Reporting

Published by the Government Accountability Office on 2012-06-26.

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

United States Government Accountability Office
Washington, DC 20548



           June 26, 2012


           The Honorable Carl Levin
           Chairman
           The Honorable John McCain
           Ranking Member
           Committee on Armed Services
           United States Senate

           Subject: DOD Financial Management: Improvements Needed in Prompt Payment Monitoring
           and Reporting

           The Prompt Payment Act, as amended, requires executive-branch agencies, including the
           Department of Defense (DOD), to pay late-payment penalties when they do not pay their
           invoices for commercial payments on time. DOD’s Prompt Payment Act implementing
           regulations provide that DOD components should take advantage of discounts offered when
           a contract or invoice allows an economically justified discount for early payment. 1 Given
           concern that DOD sometimes incurred late-payment penalties and had not taken full
           advantage of prompt-payment discounts, the committee report accompanying the 2012
           national defense authorization legislation directed that GAO review and report on the issue. 2
           To address this requirement, and as agreed upon with your offices, our objectives were to
           (1) determine whether DOD’s process for monitoring and reporting on its late-payment
           penalties and discounts lost accurately reflected the extent of such penalties paid and
           discounts lost and (2) report on any causes DOD identified for incurring late-payment
           penalties and forgoing prompt-payment discounts.

           To address our first objective, we analyzed applicable laws, regulations, and DOD
           documents to identify requirements related to prompt payments, reviewed documentation,
           and interviewed officials to obtain explanations and clarifications on DOD’s process and
           controls for tracking and reporting on late-payment penalties and discounts lost across
           DOD. To address our second objective, we interviewed DOD officials and reviewed
           documentation, including the problems and corrective actions DOD reported on its financial
           operations metrics briefings, to determine DOD’s identified causes of late-payment penalties
           incurred and discounts lost.

           We conducted this performance audit from October 2011 to June 2012 in accordance with
           generally accepted government auditing standards. Those standards require that we plan

           1
            Generally, the Prompt Payment Act requires agencies to make payment no later than 30 days after
           the date they receive an invoice or by a contractually established payment date. The Department of
           the Treasury establishes the rate used to calculate late-payment penalties. A discount is considered
           to be economically justified if the discount terms effectively equal or exceed the interest the federal
           government charges on overdue debt that it is owed.
           2
            S. Rep. No.112-26, at 151 (June 22, 2011).

           Page 1                                                     GAO-12-662R DOD Financial Management
and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.

Results in Brief

We found that while DOD has a process in place for monitoring and reporting on late-
payment penalties, this process has significant flaws and omissions that result in incomplete
and inaccurate data, thereby limiting the effectiveness of the process. Specifically, DOD’s
performance measure, or metric, for late-payment penalties did not include about $54 billion
of commercial payments subject to the Prompt Payment Act, and DOD did not assess the
data for accuracy or completeness. In addition, at the time of our review, DOD was not
monitoring or reporting on discounts lost across the department because, DOD officials
stated, the metric had consistently met its goal. The deficiencies we found in DOD’s process
for monitoring and reporting on late-payment penalties and discounts lost significantly
increase the risk to the accuracy and completeness of reported data, thus preventing DOD
officials and congressional oversight committees from obtaining the reliable and
comprehensive data they need for assessing the extent of any issues concerning late-
payment penalties and discounts lost across DOD. According to DOD officials and reports, a
major contributor to late-payment penalties incurred and discounts lost was the late receipt
of documents necessary to validate receipt and acceptance of goods or services and make
payments. We are recommending that DOD establish procedures for identifying all DOD
systems that process commercial payments, validating completeness and accuracy of late-
payment penalty metric data, and monitoring discounts lost. In commenting on a draft of our
report, DOD concurred with our recommendations and cited planned corrective actions to
address the issues that gave rise to our recommendations.

Background

DOD makes most of its commercial payments to vendors and contractors through systems
operated by the Defense Finance and Accounting Service (DFAS), the finance and
accounting organization for DOD. 3 In general, such payments are made after matching an
invoice with (1) a signed contract, purchase order, or other contractual document, to ensure
that the purchase of goods or services was authorized; (2) a receiving/acceptance report, to
ensure that the goods or services ordered have been received or accepted, or both; and
(3) the official accounting records, to ensure that funds have been obligated and are
available for use.

The office of the Deputy Chief Financial Officer (DCFO) monitors DOD performance
measures and various aspects of DOD’s financial operations through its monthly financial
operations metrics, including the ratio of late-payment penalties paid per million dollars in
payments. 4 As part of its metrics process, each year the DCFO works with DFAS to
establish goals—including Prompt Payment Act goals—towards improved efficiencies,
financial stewardship, and productivity in its financial operations. DFAS compiles the results
of its financial operations metrics (metric data), and each month the DCFO tracks the metric
data—including data on late-payment penalties—and compares them against DOD’s goals.
The metric data are scored and receive a “green” rating when they meet the goal, and a
“yellow” or “red” rating—depending on severity—when they do not. Each month, DFAS

3
 Systems that make DOD commercial payments and that are not operated by DFAS include those
currently being implemented by the Army, Navy, and Air Force.
4
 The process for monitoring DOD financial operations using metrics is documented by the DCFO’s
Performance Measurement Team in its Performance Measurement Team Handbook.


Page 2                                                 GAO-12-662R DOD Financial Management
officials, the DCFO, and other DOD officials meet to discuss DOD-wide metric data that
received a “red” or “yellow” rating, determine the causes for metric data that do not meet the
goals, and agree on any corrective actions to address them. Metric data that meet or exceed
the goals and receive a “green” rating are generally not discussed at these monthly
meetings.

Incomplete and Inaccurate Data Undermine DOD’s Prompt Payment Act Monitoring

In our review of DOD’s monitoring of payments related to the Prompt Payment Act, we found
deficiencies in the completeness and accuracy of the data used to monitor and report on
late-payment penalties. The late-payment penalty metric data did not include nine systems
that process commercial payments, and the metric data had not been validated. Regarding
discounts lost, we found that monitoring had not been conducted DOD-wide since fiscal year
2007 and that there were deficiencies in the completeness of the data DOD provided us
from systems within DOD’s components.

Deficiencies in the Monitoring Process for Late-Payment Penalties

We found deficiencies in both the completeness and accuracy of the data the DCFO uses to
monitor and report on late-payment penalties. These deficiencies limit the effectiveness of
DOD’s monitoring and reporting process. According to DCFO reports, the ratio of late-
payment penalties paid to million dollars of invoices paid has decreased 81 percent since
2001, from an average of $343 in penalties in fiscal year 2001 to $65 in fiscal year 2011
(see fig. 1).

Figure 1: Late-Payment Penalties Paid per Million Dollars of Invoices Paid (DFAS
Systems Only), Fiscal Years 2001–2011




Note: Data are from September 2011 financial operations metric briefing.
a
 Total dollar amount for fiscal year 2011 based on DFAS-provided data does not include late-payment penalties for non-DFAS
systems.


While these data show a significant drop in late-payment penalties as a proportion of invoice
amounts paid, in our analysis of DOD data used to support this reporting, we found that the
trend may be misleading because in compiling the late-payment penalty metric data, DFAS
did not consider late-payment penalties on about $54 billion in payments subject to the
Prompt Payment Act from nine systems (see table 1). These systems were all systems that
process commercial payments. According to DOD officials, the nine systems we identified



Page 3                                                               GAO-12-662R DOD Financial Management
whose data were not considered in the late-payment penalty metric are systems run and
operated by DOD components and not DFAS.

Table 1: DOD Systems and Payment Amounts Considered and Not Considered in the
Late-Payment Penalty Metric, Fiscal Year 2011
    Dollars in millions
                                                                                                Payments
                                                                                                        not
                                                                                               considered
                                                                                                   in late-
                                                                                Payments         payment
                                                                           considered in           penalty
                                                                            late-payment      metric (from
                                                                           penalty metric       nine non-
                                                                              (from DFAS            DFAS
                                                                                          a               a
    System name                                                                  systems)       systems)
    Mechanization of Contract Administration Services (MOCAS)                   $161,298.6
    Computerized Accounts Payable System–Windows (CAPS-W)                         39,525.4
    U.S. Army Corps of Engineers Financial Management System
    (CEFMS)                                                                                       28,047.9
    Enterprise Business System (EBS)                                              23,721.9
    Automated Voucher Examining and Disbursing System
    (AVEDS)                                                                       18,396.7
    Integrated Accounts Payable (IAPS)                                            18,388.0
    OnePay (OP)                                                                   18,104.1
    TRICARE Oracle Federal Financials (OFF)                                                       16,869.8
    Standard Automated Voucher Examination System (SAVES)                          6,056.8
    Defense Enterprise Accounting and Management System
    (DEAMS)                                                                                         4,374.3
    General Fund Enterprise Business System (GFEBS)                                                 2,528.7
    Transportation Financial Management System (TFMS)                              2,333.1
    Military Sealift Command Financial Management System (MSC-
    FMS)                                                                                            1,625.8
    Financial Accounting and Budget System (FABS)                                  1,119.7
    Defense Agencies Initiative (DAI)                                                                 474.3
    Nonappropriated Fund Information Standard System (NAFISS)                                         370.8
    Transportation Management System (TMS)                                                            119.1
    Computerized Accounts Payable System–Clipper (CAPS-C)                               7.3
                                                                                                           b
    Navy Enterprise Resource Planning (ERP) System                                                      –
          c
    Total                                                                      $288,951.5        $54,410.6
Source: GAO analysis of DOD data.
a
 Commercial payments reported by DOD as subject to the Prompt Payment Act.
b
 Navy ERP could not provide the amount of commercial payments subject to the Prompt Payment Act because it does not
systemically identify whether commercial payments are subject to the Prompt Payment Act.
c
  Due to rounding, the total amounts do not equal the sum of the individual system amounts in the table.


While DFAS reported a total of about $19 million in late-payment penalties for fiscal year
2011 (see fig. 1), these data are incomplete because the DCFO did not consider the
complete population of commercial payments when reporting late-payment penalties in
fiscal year 2011. For example, DOD provided us information that indicates that the nine non-
DFAS systems we identified incurred almost $2 million in late-payment penalties in 2011,
bringing fiscal year 2011 late-payment penalties to almost $21 million. Although DOD took
steps to include some of these commercial payments in the data for its late-payment penalty




Page 4                                                             GAO-12-662R DOD Financial Management
metric during the course of our work, 5 additional payments and late-payment penalties that
are associated with non-DFAS systems may still be unidentified.

We also found—and DOD officials confirmed—that the DCFO does not assess its late-
payment penalty metric data for accuracy or completeness. Standards for Internal Control in
the Federal Government states that for organizational performance measures, controls
should be in place to validate the propriety and integrity of the measures. 6 Further, the
DCFO handbook states that successful measures need to be reliable, and should be verified
to ensure that they represent the desired data. Although the late-payment penalty amounts
provided to us are relatively small compared to DOD’s total commercial payment amounts,
we are unable to conclude as to the completeness and accuracy of the $21 million in late-
payment penalties due to questions about the completeness of the population of systems
that process commercial payments and the lack of validation and verification control. In
addition, these issues prevent DOD officials and congressional oversight from obtaining
reliable and comprehensive data on the extent of any issues concerning late-payment
penalties across DOD.

DCFO Is Not Monitoring Discounts Lost DOD-Wide

The DCFO has not monitored discounts lost at the DOD-wide level since fiscal year 2007
and does not have procedures to evaluate the risk and magnitude of discounts lost to
determine whether it should resume monitoring discounts lost in DOD-wide metrics if the risk
increases beyond an acceptable level. Standards for Internal Control in the Federal
Government states that separate evaluation of controls is useful, and that the scope and
frequency of such evaluations should depend primarily on risk assessments and the
effectiveness of ongoing monitoring procedures. Officials stated the DCFO ceased
monitoring discounts lost because the metrics consistently delivered results that ranked
“green” (i.e., met their goal) and no longer warranted DOD-wide monitoring. However, as
reflected in figure 2, we found that the reported discounts-lost metric only met its goal of 4
percent for 2 months in fiscal year 2007.




5
 For example, DOD started including commercial payments from the U.S. Army Corps of Engineers
Financial Management System in the December 2011 metric.
6
 GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington,
D.C.: November 1999). These standards provide the overall framework for establishing and
maintaining internal control and for identifying and addressing areas at greatest risk of fraud, waste,
abuse, and mismanagement.


Page 5                                                    GAO-12-662R DOD Financial Management
Figure 2: Percentage of the Number of Offered Discounts Lost in Fiscal Year 2007




Note: Data are from fiscal year 2007 financial operations metric briefings.


For the systems it operates, DFAS tracks both the number of discounts lost and the dollar
value of the discounts lost, and reports its findings to the managers of DOD activities. While
these figures are useful for management, they are not discussed at DFAS’s monthly
meeting with the DCFO, and thus fall outside of the DCFO’s monitoring process.

Although the DCFO stopped monitoring discounts lost, DFAS provided us information that
indicates the ratios of both the number and dollars of discounts lost have generally been
increasing (see fig. 3). Discounts lost, as a percentage of the number of discounts offered,
equaled 8 percent in fiscal year 2011, twice the fiscal year 2007 DCFO goal of 4 percent,
which was the last goal set by the DCFO for discounts lost. DFAS currently has a goal for
the number of discounts lost of 5 percent. The DFAS data further show that although the
ratio of the number of discounts lost decreased from fiscal years 2010 to 2011, the ratio of
the dollars of discounts lost increased to 25 percent. DFAS currently has a goal for the
percentage of discounts lost in dollars of 4 percent.




Page 6                                                                   GAO-12-662R DOD Financial Management
Figure 3: Percentage of the Value and Number of Offered Discounts Lost, Fiscal Years
2005–2011




Note: Data are from DFAS metrics data.
a
 Total dollar amount and number of discounts lost for fiscal year 2011 based on DFAS-provided data does not include
discounts lost for non-DFAS systems. In addition, the goal amounts for both the percentage of dollars and numbers of
discounts lost are not shown because they vary and have not been set or monitored by the DCFO since fiscal year 2007.


Although the ratios for discounts lost have generally been increasing, the amount of
discounts lost is relatively small compared to DOD’s total commercial payment amounts.
DFAS provided us information that indicates that there was about $8 million in discounts lost
for fiscal year 2011. However, as with the late-payment penalty metric, we found that for
discounts lost, DFAS did not include about $78 billion in commercial payments subject to the
Prompt Payment Act 7 both from systems that it operates and does not operate. DOD-
provided information, covering some of the systems not included, 8 indicates almost
$700,000 in discounts lost in fiscal year 2011, bringing the fiscal year 2011 discounts lost to
almost $9 million. However, because DOD has not established procedures to identify and
include all systems that process commercial payments, we are unable to conclude as to the
completeness and accuracy of the almost $9 million in DOD-identified discounts lost. In
addition, these issues prevent DOD officials and congressional oversight committees from
obtaining reliable and comprehensive data on the extent of any issues concerning discounts
lost across DOD. Absent DOD-wide monitoring of discount information, potential cost
savings may be missed.




7
 The Navy ERP system, accounting for about $1 billion in fiscal year 2011 commercial payments,
could not provide an amount subject to the Prompt Payment Act.
8
 The Navy ERP system, as well as EBS, which accounts for $24 billion in fiscal year 2011 commercial
payments subject to the Prompt Payment Act, could not provide an amount for discounts lost.


Page 7                                                               GAO-12-662R DOD Financial Management
DOD-Reported Causes for Late-Payment Penalties Incurred and Discounts
Lost

On the basis of our discussions with DOD officials and our review of reports, we found
DFAS’s late receipt of necessary documents was a major contributor to late-payment
penalties and discounts lost. The documents DOD officials most often cited in this regard
were receiving reports, which are used to confirm DOD’s receipt or acceptance, or both, of
goods or services ordered and which must be submitted to DFAS before payment can be
made. DOD officials told us that one of the reasons receiving reports are often late is reports
are often mailed by DOD components to DFAS rather than submitted electronically. As part
of its metric reporting process, DFAS tracks the reasons for the payment of late-payment
penalties on commercial payments that DFAS’s systems process. DFAS reported that for
the payments it made in fiscal year 2011, 57 percent of the late-payment penalties were due
to a delay in DFAS’s receiving contract, invoice, and receipt and acceptance information
from DOD components, contractors, and vendors, and 23 percent were caused by DFAS
processing delays and a backlog of invoices to process. DOD reported that as it continues
to deploy the Wide Area Workflow and take other measures, it will see a decline in late-
payment penalties because of efficiencies gained with the electronic transmission of
contract documents. 9 Such efficiencies gained may similarly improve DOD’s ability to take
advantage of discounts offered and thus realize cost savings.

DOD officials stated that contracts containing unclear descriptions of the items being
purchased and unclear definitions of units of measure are a significant issue for a relatively
few contracts that account for a relatively large amount in late-payment penalties. 10 For
example, although a contract line-item may describe the unit of measure as “one lot,” the lot
may consist of a variety of items and quantities delivered over time. DOD officials further
stated that multiple contract modifications had resulted in contracts having extremely
complex line-item structures, causing invoice processing delays due to difficulties in
comparing or associating the contractor invoices to the related contract line-item. The lack of
clarity can result in ambiguity regarding both the items to accept and the amount to pay for
each delivery, thereby causing DOD to incur late-payment penalties and miss opportunities
to obtain discounts. DOD officials told us they were addressing these issues by providing
training on writing contracts and issuing DOD-wide memorandums requiring contracts to
clearly define the quantity and unit of measure of the product to be delivered.

Conclusions

Although the amounts DOD provided us for late-payment penalties and discounts lost
appear to be relatively small compared to the amount of DOD-reported commercial
payments subject to the Prompt Payment Act, deficiencies in DOD’s monitoring process
prevent it from comprehensively and reliably reporting the magnitude of late-payment
penalties and discounts lost DOD-wide. As DOD implements new systems run and operated
by the components, the percentage of the complete data population processed by DFAS
systems will decrease, and the potential gap between actual and reported amounts will
increase if flaws and omissions in DOD’s current process for monitoring these activities are
not corrected.



9
 The Wide Area Workflow is an interactive application that allows contractors and vendors to
electronically submit invoices and receiving reports, and the federal government to inspect, accept,
receive, and pay electronically.
10
  DOD analysis was done using late-payment penalties paid in fiscal year 2010.


Page 8                                                    GAO-12-662R DOD Financial Management
Recommendations for Executive Action

To ensure that the Department of Defense accurately reports and effectively monitors late-
payment penalties and discounts lost on commercial payments subject to the Prompt
Payment Act, we recommend that the Secretary of Defense direct the Deputy Chief
Financial Officer, through the Office of the Under Secretary of Defense (Comptroller), to
establish procedures for

(1) identifying all DOD systems that process commercial payments and assuring that the
late-payment penalties metric data are compiled from the complete population of
commercial payments subject to the Prompt Payment Act,

(2) validating the accuracy and completeness of the data compiled and reported as DOD’s
late-payment penalties metric, and

(3) monitoring discounts lost DOD-wide based on periodic risk assessments.

Agency Comments and Our Evaluation

We provided a draft of this report to DOD for comment. In its written comments, which are
reprinted in enclosure I, DOD concurred with all three of our recommendations. DOD also
stated that it is taking actions to address our recommendations, which includes (1)
identifying and reporting DOD-wide late payment penalty metrics beginning in October 2012;
(2) assigning responsibility to each reporting entity for the accuracy, completeness, and
validation of data reported; and (3) identifying and issuing procedures to address monitoring
and reporting of discounts lost. If fully and effectively implemented, DOD’s proposed actions
should address the intent of our recommendations.

                                             -----

We are sending copies of this report to the appropriate congressional committees; the
Secretary of Defense, the Deputy Secretary of Defense, the Deputy Chief Management
Officer, the Under Secretary of Defense (Comptroller), and other interested parties. In
addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-
9869 or khana@gao.gov. Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this report. GAO staff who made key
contributions to this report are listed in enclosure II.




Asif A. Khan
Director, Financial Management and Assurance



Enclosures


Page 9                                               GAO-12-662R DOD Financial Management
Enclosure I: Comments from the Department of Defense




Page 10                                      GAO-12-662R DOD Financial Management
Page 11   GAO-12-662R DOD Financial Management
Enclosure II: GAO Contact and Staff Acknowledgments


GAO Contact

Asif A. Khan, (202) 512-9869 or khana@gao.gov


Staff Acknowledgments

In addition to the contact named above, Michael LaForge, Assistant Director; Justin Fisher;
Patrick Frey; Maxine Hattery; Jason Kelly; Jason Kirwan; Laura Pacheco; J. Mark Yoder;
and Leonard Zapata made key contributions to this report.




(197107)




Page 12                                             GAO-12-662R DOD Financial Management
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