oversight

Internal Controls: Funding of International Defense Research and Development Projects

Published by the Government Accountability Office on 1990-10-30.

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

                  United   States   General   Accounting   Office
                  Report to the Secretary of Defense



October   1990
                  INTERNAL
                  CONTROLS
                  Funding of
                  International Defense
                  Research and
                  Development Projects




GAO/NSIAD-91-27
                   united
                     states
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affah   Division

                   ES-237823

                   October 30,199o

                   The Honorable Richard B. Cheney
                   The Secretary of Defense

                   Dear Mr. Secretary:

                   We reviewed the practices and procedures the Navy and the Office of
                   the Secretary of Defense (OSD)used to disburse fiscal year 1988 funds
                   that were provided by your office for the North Atlantic Treaty Organi-
                   zation (NAID) cooperative research and development projects. Our work
                   focused on whether the Navy disbursed these funds for the purposes
                   intended by the Department of Defense Authorization Act of 1986 and
                   by subsequent authorizations and appropriations acts.


                   The Department of Defense Authorization Act of 1986 initiated the NA?~D
Background         Cooperative Research and Development Program. The act stated that
                   the purposes of the program were to support NATOconventional warfare
                   research and to encourage a more equitable sharing of research and
                   development costs among NATOnations. (See app. I for a more detailed
                   discussion of the program.)


                   Our review indicated that OSDand the Navy did not have sufficient
Results in Brief   internal controls to adequately ensure that funds disbursed for NATO
                   cooperative research and development projects are actually used for the
                   purposes intended and in accordance with authorizing legislation. There
                   are no written Department of Defense directives or instructions for the
                   NATOresearch and development project certification and funding
                   process.

                   The Navy’s International Research and Development Office realigned
                   program funding without first seeking required OSDapproval. For
                   example, of the $50.6 million of fiscal year 1988 funds OSDreleased to
                   the Navy for NATI cooperative research and development projects, $39
                   million was released by the Navy to specific research and development
                   projects approved by OSDbut not in the amounts CSDauthorized. (See
                   app. II.) In addition, $7.9 million was used by the Navy to fund adminis-
                   trative support services for the research and development office, but
                   only $3.7 million was authorized by OSDto be spent for this purpose. We
                   found that the Navy’s research and development office took actions that
                   made it difficult to account for these funds. (See app. III.) Furthermore,


                   Page1                                 GAO/NSLUbBl-27
                                                                      NAlU CooperativeFunding
                  B-227822                                                              7




                  the Navy did not report to OSDhow these funds were spent until April
                   1990. The services are required to report quarterly to OSDon how these
                  funds are spent.

                  Section 1103 of the Department of Defense Authorization Act of 1986
                  required that funded projects be conducted under memorandums of
                  understanding between the participating countries. However, some of
                  the approved projects did not have memorandums of understanding. As
                  of January 1,1990, the Navy had not completed memorandums of
                  understanding with other nations for 11 of the 17 research and develop-
                  ment projects that were funded in fiscal year 1988. (See app. IV.)

                  A NATOcooperative research and development project is statutorily
                  defined as a project “under a memorandum of understanding (or other
                  formal agreement).” We examined whether fiscal year 1988 funds allo-
                  cated in various committee reports for NAR)research and development
                  could be used for projects that were not NA?Dcooperative research and
                  development projects because they were not conducted under memoran-
                  dums of understanding. Because the fiscal year 1988 research and
                  development appropration was a lump sum, without funds specifically
                  earmarked for the NA?Dprojects, the fiscal year 1988 funds could legally
                  be used for all research and development activities, including those that
                  had the potential to be NATOcooperative projects but which then had no
                  memorandums of understanding. Nonetheless, House and Senate Com-
                  mittees on Armed Services and on Appropriations reports on the legisla-
                  tion show that funds were approved for NATOcooperative research and
                  development. In view of the committees’ actions and the continuing
                  requirement that NA'IDcooperative projects be conducted under memo-
                  randums of understanding, the release of funds from the Department of
                  Defense’s NA'IDresearch and development account for projects without a
                  memorandum of understanding seems contrary to the intent expressed
                  in the congressional committee reports.


                  We recommend that you (1) issue written instructions for the implemen-
Recommendations   tation of NAIU cooperative research and development programs and (2)
                  establish sufficient internal controls necessary for the Departments of
                  Defense and the Navy to ensure that the funds made available for the
                  program are used appropriately.




                  Page2                                 GAO/NSWBl-27NA!lOCooperativeFunding
                      R-237823




                      In its comments on a draft of this report, the Department of Defense
Agency Comments and   concurred with most of our findings. It did not agree that the Congress
Our Evaluation        originally intended that NATOresearch and development funds be dis-
                      bursed only to projects under completed memorandums of under-
                      standing. That question has been resolved because the Department now
                      requires the prerequisite memorandum of understanding or other formal
                      agreement.

                      The Department concurred with our recommendation for the issuance of
                      written instructions. The Department is preparing a handbook of guide-
                      lines that should be issued by January 1991.

                      The Department acknowledged that the Navy realigned funds without
                      authorization and concurred that internal controls are needed. To that
                      end, the Department has disbanded the Navy’s International Research
                      and Development Office and transferred its functions to the Interna-
                      tional Programs Office, which has an internal control program. The
                      Department stated that (1) the Navy will distribute funds directly to
                      responsible project offices, (2) the project managers will report on how
                      the funds were used, and (3) the Navy will submit timely and accurate
                      quarterly reports to the Department. (The Department of Defense’s com-
                      ments are included in app. VI.)

                      We believe that the Department has initiated the steps necessary to
                      establish the proper framework for handling future NATOcooperative
                      research and development funds, but implementation will be the key to
                      effective controls.


                      As you know, the head of a federal agency is required by 31 USC. 720
                      to submit a written statement on actions taken on these recommenda-
                      tions to the Senate Committee on Governmental Affairs and the House
                      Committee on Government Operations not later than 60 days after the
                      date of the report and to the House and Senate Committees on Appropri-
                      ations with the agency’s first request for appropriations made more
                      than 60 days after the date of the report.

                      Our objectives, scope, and methodology are detailed in appendix V.

                      Copies of this report are being sent to the Chairmen, House and Senate
                      Committees on Appropriations and on Armed Services, House Com-
                      mittee on Government Operations, and Senate Committee on Govem-
                      mental Affairs; the Secretary of the Navy; and the Director of the Office


                      Page3                                 GAO/h’SIADBl-27Bald Cooperative Funding
E227822




of Managementand Budget. Copies will also be made available to others
upon request.
Pleasecontact me at (202) 275-6504 if you or your staff have any ques-
tions concerning the report. Mar contributors to this report are listed
in appendix VII.

Sincerely yours,




Martin M Ferber
Director, Navy Issues




Page4
Contents


Letter
Appendix I
The NATO Cooperative
Researchand
Development Program
Appendix II
Funds Not Disbursed
in Accordance With
Authorization
Appendix III                                                 12
Funds Used for          Agency Actions                       13
Administrative
Support Services
Appendix IV                                                  15
Projects Without        Agency Comments and Our Evaluation   17
Memorandums of
Understanding Were
Authorized and
Funded
Appendix V                                                   18
Objectives, Scope,and
Methodology
Appendix VI                                                  19
Comments From the       GAO Comments                         26
Department of
Defense

                        Page6
                        Content9




Appendix VII                                                                                    27
Major Contributors to
This Report
Tables                  Table II. 1 NATO Cooperative R&D Program Fiscal Year                    11
                             1988 Funding
                        Table IV. 1: Status of MOUs for the Navy’s International                15
                            R&D Projects




                        Abbreviations

                        AAW        anti-air warfare
                        DOD        Department of Defense
                        MOU        memorandum of understanding
                        NATO       North Atlantic Treaty Organization
                        OSD        Office of the Secretary of Defense
                        R&D        research and development
                        SSTD       Surface Ship Torpedo Defense


                        Page7                                 GAO/NSIAIb91-27
                                                                            NAllI CooperativeFunding
Appendix I

The NATOCooperativeResearchand
DevelopmentProgram

                 The Congress initiated the NATOCooperative Research and Development
                 Program under section 1103 of the Department of Defense Authoriza-
                 tion Act of 1986.’ The program’s purposes were to support NATI conven-
                 tional warfare research and to encourage a more equitable sharing of
                 research and development (R&D) costs among NARI nations. This act
                 resulted from congressional concerns that, collectively, NA~ countries
                 had spent significantly more resources on defense than members of the
                 Warsaw Pact, but the Warsaw Pact had produced and deployed more
                 major combat items than the NA?Dcountries. The Congress concluded
                 that a major reason for this was inadequate cooperation among NAP
                 countries on research, development, and production of military
                 equipment.*

                 According to OSDofficials, written Department of Defense (DOD) direc-
                 tives or instructions for the NATO R&Dproject certification and funding
                 process do not exist. Instead, the Deputy Under Secretary of Defense
                 (Industrial and International Programs) certifies an international project
                 when it meets certain criteria specified in the act. To be selected as an
                 international cooperative project, OSDstipulates that a project must

             . meet a critical conventional force deficiency,
             . have a secure position in service/agency priorities,
             . be suitable for collaboration, and
             l be supported in the Five-Year Defense Plan or in the next Program
               Objectives Memorandum submission.

                 Once a cooperative R&Dproject is certified, the Deputy Under Secretary
                 grants authority to the services to negotiate a memorandum of under-
                 standing (MOU) with participating governments or potential interna-
                 tional partners. 06~ officials review the draft MOU to ensure that an
                 equitable arrangement exists for the United States and then authorize
                 the appropriate project official in the services to complete the
                 agreement.

                 In addition to certifying cooperative R&Dprojects, the Deputy Under Sec-
                 retary authorizes and determines funding levels for the projects.
                 According to OSDofficials, the two criteria to be used for releasing NATO
                 cooperative R&D funds to such a project are (1) it must be a certified
                 cooperative project and (2) an international MOU must be completed. The

                 ‘P. L. 99146,99 Stat. 712.
                 21n1987,the Congressexpandedthe program
                                                       to include five non-NAT0nations(Australia, Israel,
                 Egypt, South Korea,and Japan).



                 Page8                                          GAO/NSIAD9137NAT0CooperativeFundhug
AppendixI
TheNAKI Cooperativelleaead and
DevelopmentProgram




individual services allocate the funds to their certified projects. If proj-
ect managers are unable to obligate the funds or if other international
projects require a higher funding priority, the funds may be realigned.
However, officials from the services’ international R&Doffices must seek
CSDapproval before they realign these funds among projects.

DOD  concurred that there were no specific written directives and stated
that the Office of the Under Secretary of Defense for Acquisition is pre-
paring a handbook of guidelines.




 Page 9                                 GAO,./NSIALHU-27
                                                       NkKl %qm-ative Fundine
Appendix II

Funds Not Disbursedin Accordance
With Authorization

              OSD requires written justificationfor each project funding request and
              approves each request based on that documentation. It also requires
              project managers to (1) expend funds only for approved programs and
              within the amounts authorized, (2) obtain prior approval for realigning
              funds, and (3) report quarterly on how funds are being expended. These
              internal controls, however, have not been effectively implemented. The
              Navy’s R&Doffice did not follow OSDrequirements for using these funds
              and did not report to OSDon how fiscal year 1988 funds were spent until
              April 1990.

              During our review of the Navy’s fiscal year 1990 Research, Develop
              ment, Test, and Evaluation budget request, we noted a discrepancy
              between the amount ck3Dhad authorized in fiscal year 1988 to be spent
              on specific projects and the amount that the Navy’s international R&D
              projects had received from the R&D office. OSDreleased about $50.6 mil-
              lion-$46.9 million for specific R&Dprojects and $3.7 million for admin-
              istration and project start-up costs-to the R&Doffice, which, in turn,
              only released about $39 million to the authorized projects. The
              remaining funds were used for administrative services and for funding a
              program in which the Navy did not request funds.’ The R&D office did
              not seek required OSD approval for the added project, nor did it seek
              approval for realigning funds to pay for administrative expenses. Infor-
              mation on project funding is presented in table II. 1.




              ‘06D authorizedthe SAXONprogram     asaninternational cooperativeR&J3project.However,the
              Navy did not requestfiscal year 1988funding for this pmject.



              Page10                                         GAO/NSlAD-fM-27
                                                                          NA!IOCooperativePnnding
                                   AppendixII
                                   FundsNot Disbursedin Accordance
                                   With Authorization




Table 11.1NATO Cooperative RID
Program Fiscal Year 1989 Funding                                                      Amount         Expenditure
                                                                               authorixe$Sbr;  authorized by the
                                   Project                                                             R&D office    Difference
                                   Automatrc Ship Classification                     $200,000             $200,000              .
                                                                                                                      --__
                                   Coastal/Harbor Defense                              300,000             256,000      - 44,000
                                   E2C Drsplay Software                                400,000              16,316    - 303,664
                                   Fiber Optic Sensor Array                            500,000             500,000                .
                                   Hull Degaussmg System                             1,300,000           1,110,000    - 190,000
                                   Magnetrc Anomaly Detector                           300,000             700,OOo    + 400,000
                                   Maritime Patrol Arrcraft 90                       1,ooo,ooo           1.400.000    + 400.000
                                   Mass Memory Module                                  200,000             200,000             .
                                   NATO AntI-Air Warfare System                      9,000,000           7,517,876   -1462,124
                                   NATO Frigate Replacement                          1,oOO,OOo             927,000      - 73,006
                                   Nrqht Attack Avionics                             8,900.000           3.818.000   -5.082.000
                                   Radar Upgrade for Fighter Aircraft                6,300,OOO           4,980,ooO   - 1,320,OOO
                                   Remotely Piloted Vehicle                          2,700,OOO             776,667   - 1,923,333
                                   Rolling Airframe Missile Upgrade                  2,600,000           3,800,OOO   +1,200,000
                                   Surface Ship Torpedo Defense                     11,400,000           9,570,ooo   - 1,830,006
                                   Tactical Command for Over-the-
                                     Horizon                                          800,000           3,170,000    +2.370,000
                                     Subtotal                                    $46,900,000         $36,941,659

                                   Other Projects
                                   SAXON-FPN                                                    a       3.373.000    +3.373.000
                                   Cooperatrve Opportuntties
                                     Documentsb                                     3,700,oOO           7,902,530    +4.202,530
                                   Total                                         550.600.000         $50.217.389
                                   aFunds not requested.
                                   bAdminrstratrve support for the Navy’s international R&D office

                                   DOD  concurred that the Navy did not disburse funds as authorized and
                                   stated that it has taken several steps to preclude recurrence. A new
                                   organization, the Navy’s International Programs Office, will assume the
                                   function of the Navy’s R&D office and will be responsible and account-
                                   able to the Assistant Secretary of the Navy (Research, Development and
                                   Acquisition). In ,addition, the Navy established a management control
                                   directive that should ensure that DOD controls are followed. Further-
                                   more, the Navy has assured OSDthat it will submit accurate, timely,
                                   quarterly reports. Finally, DOD stated that the Navy no longer receives
                                   funds unless the reports are complete. We agree with DOD'S opinion that
                                   these additional internal controls should be sufficient to ensure that the
                                   Navy uses the NATOcooperative R&D funds according to DOD’S
                                   authorization.


                                   Page11                                                GAO/NSIADSl-27NAlOCooperativeFunding
Appendix III

Funds Used for Administrative
support services

               OSDauthorized the Navy to spend about 7 percent, or $3.7 million, of its
               total fiscal year 1988 allocation of $60.6 million for administrative sup-
               port services. However, the Navy expended 16 percent, or $7.9 million,
               of the allocation for this purpose. In addition, we found that the Navy
               (1) did not report to OSDon how the funds were used, (2) made mis-
               leading statements of purpose on contracts and work orders to show
               that funds were used for authorized projects, and (3) used multiple
               agents to disburse the funds, which made it difficult to account for the
               funds.

               The R&Doffice channeled funds for administrative support for itself
               through several activities, including the NATOAnti-Air Warfare (AAW)
               Office in the Naval Sea Systems Command in Washington, D.C.; the Air
               Force Air Development Center in Rome, New York; the Naval Ocean Sys-
               tems Center in San Diego, California; the Naval Underwater Systems
               Center in Newport, Rhode Island; and the Naval Ordnance Station in
               Indian Head, Maryland. The projects through which funds were chan-
               neled did not receive benefits or deliveries from the contractors. The fol-
               lowing four cases show how funds were used to obtain administrative
               support services with NATOcooperative R&Dfunding.

               In the first case, the R&Doffice provided $697,124 to the NATOAAWproj-
               ect office in the Naval Sea Systems Command for work on AAWsystems.
               As arranged with the R&Doffice, the NATOAAWproject office, in turn,
               allocated these funds to the Air Force Development Center, Rome, New
               York, which contracted to develop prototype software for an R&Doffice
               document tracking system. This software development was performed
               by the contractor that was conducting ongoing research for the Defense
               Advanced Research Projects Agency to develop an expert management
               information system.

               Because the R&Doffice had problems tracking large quantities of docu-
               ments, its officials arranged for the R&Doffice to be the model office for
               the development of the Defense Advanced Research Projects Agency’s
               information system. Consequently, the R&Doffice requested the NAID AIW
               project office to submit this contract through its account, giving the
               appearance that the funding was for the NATOm project. NAVI AKWoffi-
               cials never saw the actual contract, and work on the NA?DAAWsystems
               was never undertaken. As of April 1990, the Navy had not received the
               software delivery required by the contract.




               Page12
                 Appendtsill
                 Pun& Usedfor Adahistrative
                 support !!wvices




                 In the second case, an administrative contract for the R&Doffice was
                 managed through the Naval Ocean Systems Center, San Diego, Cali-
                 fornia. The R&Doffice provided $1 million to the Center, which con-
                 tracted for what was supposed to be a prototype system to be used for
                 developing and testing new automation concepts for assessment of anti-
                 submarine warfare technology. According to the contractor, the contract
                 was actually to develop prototype software to track Data Exchange
                 Agreements. The contract was not specifically tied to research on anti-
                 submarine technology. As of April 1990, the Navy had not received the
                 prototype software from the contractor.

                 In the third case, the R&Doffice disbursed funds to the Naval Under-
                 water Systems Center, Newport, Rhode Island, which entered into two
                 contracts for a total of about $2.7 million. The statement of work for
                 these contracts describes tasks to support the Surface Ship Torpedo
                 Defense (SSTD)project. However, SSTDproject officials did not see these
                 contracts, did not know about them, and did not work with the contrac-
                 tors involved. When we showed the contracts to these officials, they
                 stated that the contracts did not support the SSTDproject and that they
                 had not received any benefits from these contracts. Our review of the
                 actual tasks cited in the statement of work for these contracts revealed
                 that their scopes were limited to providing administrative support to the
                 RBtDoffice.

                 In the fourth case, the F&D office provided $3.1 million to the Naval Ord-
                 nance Station, Indian Head, Maryland, stating on the work order that
                 the work was for the SSTDproject. However, it was not. Rather, it was
                 for this station to perform administrative services such as the develop-
                 ment of a financial software data program for the R&Doffice to better
                 manage itself. For example, engineers evaluated various project candi-
                 date proposals and cooperative agreements and reviewed new requests
                 for proposals for contract support. Some of the funding was used to
                 purchase computer systems for the station’s research facility and hard-
                 ware for the R.&LIoffice. In addition, the station purchased a facsimile
                  and a copier machine, and it was developing a financial accounting
                 system for the R&Doffice. All of these items were procured with KATO
                  R&Dprogram funding.


Agency Actions    port services. Both OSDand Navy officials have taken steps to control
                  the flow of funds for administrative uses. OSDasked the Navy to provide
                  justification and documentation on how fiscal year 1988 funds were


                  Page13                                GAO/NSIADSl-27NKlU CooperativeFunding
AppendixIIl
FbndaUsedfor Administrative
support services




used, which the Navy provided in April 1990. Also, the R&Doffice has
suspended and/or allowed to expire all contracts and work orders for
administrative support. The Naval Investigative Service and the Naval
Audit Service are investigating the use of these funds.




 Page14                              GAO/NSIADSl-27NATOCooperativeFunding
Appendix IV

ProjectsWithout Memorandumsof
UnderstandingWereAuthorized and Funded

                                            Eleven of the 17 Navy international R&Dprojects were approved for
                                            funding through fiscal year 1988 R&Dappropriations without first
                                            having obtained memorandums of understanding between the partici-
                                            pating countries and the Navy. The status of MOUSfor these projects as
                                            of January 1, 1990, is shown in table IV. 1.

Table IV.l: Status of MOUs for the Navy’s
International R&D Projects                  Program title                                                   Completed   MOU
                                            Automatic Ship Classification                                                 No
                                            Coastal/Harbor Defense                                                        No
                                            E2C Display Software                                                          No
                                            Fiber Optic Sensor Array                                                      No
                                            Hull Degaussing System                                                        No
                                            Magnetic Anomaly Detector                                                     No
                                            Maritime Patrol Aircraft 90                                                  Yesa
                                            Mass Memory Module                                                            No
                                            NATO Anti-Air Warfare System                                                 Yesb
                                            NATO Frigate Replacement                                                     Yes”
                                            Night Attack Awonics                                                          No
                                            Radar Upgrade for Fighter Aircraft                                            No
                                            Remotely Piloted Vehicle                                                     Yesd
                                            Rolling Airframe Missile Upgrade                                             Yes%
                                            Surface Ship Torpedo Defense                                                 Yes’
                                            Tactical Command for Over-the-Horizon                                         No
                                            SAXON-FPN (not authorized bv OSD to be funded)                                No
                                            %gned   April 5, 1989.

                                            bSigned October 19, 1987.

                                            ‘Signed January 25, 1988

                                            dSigned June 7, 1968.
                                            %igned August 16, 1989.

                                            ‘Signed October 26, 1988.


                                            We assessed whether these projects complied with the 1986 legislation
                                            and were appropriately funded. The legislation originally authorizing
                                            the NA?Dcooperative R&Dprojects, specifically section 1103 (c)(2),
                                            required that MOUSbe completed before the projects could be considered
                                            NATDcooperative projects. In addition, section 1103 (c)(l) earmarked
                                            $200 million that could only be used for such projects. Section (c)(l) per-
                                            tained only to 1986 R&Dfunding and, subsequently, lapsed, while the
                                            requirement of section 1103 (c)(2), now stated in 10 U.S.C. 2350a, still
                                            applies to NATOcooperative projects. Concerning projects funded with



                                            Page16                                      GAO/NSIAD-Sl-27NAlOCooperatlveF'unding
Appendix l-V                                                                    .
ProjectaWithout Memomndumeof
Undemtandin2WereAuthorizedandFunded




1988 R&D appropriations, Senate and House Committees on Armed Ser-
vices and on Appropriations reports stated the amounts of R&Dfunds
that were to be appropriated for NATDcooperative F&D projects. These
reports allocated funds by program, such as “NAKI Research and Devel-
opment.” However; the fiscal year 1988 authorization1 and appropria-
tion2 legislation authorize and appropriate F&D funds on a lump sum
basis. Consequently, since neither law specifically addresses NATOR&D
projects, legally fiscal year 1988 R&D funds were available for any R&D
activity without regard to what the various committees may have indi-
cated in their committee reports. Nonetheless, in view of the committees’
actions and the continuing statutory requirement that a NATDcoopera-
tive project be under an MOU(or other formal agreement), release of
funds from DOD’S NA?DR&Daccount for R&Dprojects without MOUs seems
contrary to the intent expressed in the congressional committee reports.

According to Navy and DODofficials, an MQU was generally considered a
prerequisite for funding projects, but they frequently made exceptions
in order to start projects. For example, the Navy F/A-18 radar upgrade
received about $5 million in fiscal year 1988 funding from the F&D
office, even though an MOUhad not been completed. This project is
funded through the Navy’s fiscal year 1990 budget, and it also will
receive additional funds from Canada once an agreement is completed.

On January 28,1988, the Deputy Secretary of Defense issued a memo-
randum to the secretaries of the military departments regarding the
selection of NATDand non-NAm cooperative R&Dprojects for fiscal year
1988. The memorandum stated that:

Since MOU negotiations can take up to a year or more, and not ail proposals are
likely to result in MOUs,Nunn Amendment (NAT0 and non-NATOcooperative) funds
will be provided to the project sponsors as satisfactory MOUs are achieved. If neces-
sary, projects will be initiated with FYr1989 funds. This approach allows the Ser-
vices and Agencies more time to conclude MOUsand to ensure that outyear funds
are programmed.

In fiscal year 1988, the Navy requested $30 million in start-up funds
from 0s~ for potential NATOR&Dprojects without ~0~s. On March 3,
1988, OSDofficials requested a DODGeneral Counsel opinion on whether
an MOU was necessary before releasing yA’l0 cooperative R&D funds to the
Navy. On March 10, 1988, the General Counsel concluded that fiscal

‘P.L. 100-180!4201,101stat. 1046.
2P.L.100-202,101stat. 1329-69.



Page 16                                    GAO/NSLkD-Sl-27
                                                        NAl0 CoopemtiveFunding
                      AppendixIV
                      ProjectaWithout Memorandumsof
                      UnderstandingWereAuthorizedandFunded




                      year 1988 funds could be legally released to international projects
                      before MOUS are completed. However, the General Counsel cautioned
                      that it appeared that the Congress appropriated the 1988 funds to carry
                      out the continuation of the NAI~I cooperative R&D Program and suggested
                      that not doing so might “present an issue of relationships with the Con-
                      gress”. He further suggested that the NATI cooperative R&D funds be
                      used in accordance with the original statutory framework. Notwith-
                      standing this caution, OSDauthorized the Navy to fund projects that did
                      not have MOUs.

                      OSDofficials told us that for fiscal year 1990 and beyond, they have
                      revised their policy to reflect the 1989 codification of section 2350a,
                      Public Law 101-189, which they said now requires an MOU before
                      releasing funds to a NATO cooperative R&D project.


                      DOD did not concur that the intent of the Congress was that an MOU be in
Agency Comments and   place before the start of a project. DOD stated that the requirement for
Our Evaluation        an MOU had been consistently interpreted by the Navy as meaning there
                      was intent and progress toward an MOU. The Navy did not believe it was
                      necessary to have a completed agreement. DOD also commented that
                      because the fiscal year 1988 legislation was silent, DOD officials made
                      several attempts within DOD to find a correct interpretation.

                      Our review of the initiating legislation, the Defense Authorization Act of
                      1986, indicated that the original intent of the Congress was to require an
                      MOU (or other formal agreement). Since the enactment of section 1103 of
                      Public Law 99-146 on November 8, 1985, a NATD cooperative R&D project
                      by definition requires an MOU or formal agreement to be a NATOcoopera-
                      tive R&D project. In view of this continuing requirement, the use of funds
                      allocated by committee reports and by OSD for NATOR&D projects to
                      projects without MOUS seems to be contrary to congressional intentions.
                      Notwithstanding DOD and Navy noncurrence with the position we have
                      taken in this appendix, 0s~ subsequently adopted a policy of requiring a
                      completed MOU before funds are disbursed.




                      Page17                                 GAO/NSIAD91-27
                                                                          NAlI3CooperativeFunding
Appendix V

Objectives,Scope,and Methodology


-
              Our objectives were to determine how the Navy’s International Research
              and Development Office distributes and uses funds provided by OSDfor
              international cooperative projects. To achieve these objectives, we inter-
              viewed officials from the Departments of Defense and the Navy in
              Washington, D.C.; representatives from defense research laboratories
              and defense contractors; and officials from 20 Navy international pro-
              grams, 17 of which received fiscal year 1988 funding. We also examined
              OSD,Navy Comptroller, and individual Navy program funding docu-
              ments. On the basis of information that the Naval Investigative Service
              and the Naval Audit Service provided, we limited the review to the dis-
              tribution of funds appropriated for fiscal year 1988, most of which were
              distributed to the services during fiscal year 1989.’ To verify the R&D
              office’s accounting records and to determine how the funds were spent,
              we compared funding documents and information provided by indi-
              vidual Navy international R.&D program managers with OSD records.

              Our review was conducted in cooperation with the Naval Investigative
              Service and the Naval Audit Service. Our review also was conducted
              from October 1989 to April 1990 in accordance with generally accepted
              government auditing standards.




              ‘Research, development, test and evaluation funds may be obligated during a 2-year period. Fiscal
              year 1988 funds expired on September 30,1989.



              Page18                                             GAO/NSIAl%91-27
                                                                              NAlQCooperativeFunding
Appendix VI

CommentsFrom the Department of Defense


Note: GAO comments
supplementing those in the
report text appear at the
                                                     THE   UNDER    SECRETARY        OF DEFENSE
end of this appendix.
                                                             WASHINGTON.        DC   20301




                                                                   1 5 AUCi 1990




                             Mr. Frank C. Conahan
                             Assistant   Comptroller      General
                             General Accounting      Office
                             Washington,   D.C.     20548
                             Dear Mr.    Conahan:
                                   This is the Department of Defense (DOD) response to the
                             General Accounting  Office   (GAO) draft    report, "INTERNAL CONTROLS:
                             Concerns About Controls    Over Fuhding of International    Defense
                             Research and Development Projects,"      dated June 28, 1990 (GAO Code
                             39434l/OSD Case 8401).
                                    The DOD    basically     concurs in most of the report       findings.
                             The Department        only partially    concurs in the second
                             recommendation        and the corresponding      finding  that concludes      new
                             controls   are    now required.       The Navy did not properly       follow   the
                             controls   that     were in place and has subsequently         improved its
                             control.     It   is the DOD position       that if the in-place      and new
                             controls   are    followed,     there will    be adequate control.
                                     Detailed    comments on the findings      and recommendations     are
                             included      in the enclosure.    Corrective     actions    have been taken as
                             outlined.        Thank you for this opportunity        to review and to
                             comment on the subject        GAO draft   report.
                                                                      Aincerely,


                                                                           Donald J/Yo&ey
                                                                           Deputy Under Secretary
                             Enclosure                                       for Acquisition




                                     Page19                                                  GAO/NSIADSl-27 NAl0Cooperativr Funding
                                  AppendixW
                                  CommentaPromtheDepartmentofDefense




                                                GAO DRAFT REPORT - DATED JUNE 2&1990
                                                   (GAO CODE 394331) OSD CASE 8401

                                     “INTERNAL CONTROLS: CONCERNS ABOUT CONTROLS OVER
                                        FUNDING OF INTERNATIONAL DEFENSE RESEARCH AND
                                                     DEVELOPMENT PROJECTS”

                                                   DEPARTMENT        OF DEFENSE COMMENTS




                                                                      FINDINGS

                        giImmL&            gtion           .
                        Bgg                                                  . The GAO reported               the Congress
                        concluded      that there was inadequate                  cooperation           among North
                        Atlantic      Treaty Organization               countries      on research,           development,
                        and production           of military         equipment:       and, consequently,             the
                        Department of Defense Authorization                       Act of 1986 initiated                the
                        North Atlantic           Treaty Organization             cooperative          research      and
                        development         program.          The GAO noted that,            according        to DOD
                        officials,        there are no written              DoD directives            or instructions
                        for the North Atlantic                 Treaty Organization             research       and
                        development         certification          and funding        process.          Instead,     the GAO
                        found that the Deputy Under Secretary                         of Defense (Industrial                 and
                        International          Programs) certifies              an international            project       when
                        it meets certain             criteria      specified       in the Act.            The GAO also
                        found that,         once a project           is certified,         the Deputy Under
                        Secretary      grants authority              to the Services           to negotiate         a
                        memorandum of understanding                    with participating             governments         or
                        potential       internationsl            partners.       The GAO observed             that,     in
                        addition,      the Deputy Under Secretary                    authorizes         and determines
                        funding     levels        for the Military           Services*       international          research
                        and development            projects.         The GAO further           observed that,
                        according      to officials            of the Office         of the Secretary            of Defense,
                        the two criteria             to be used for releasing                North Atlantic           Treaty
                        Organization          research        and development         funds for these projects
                        are (1) it must be a certified                     international           project      and (2) an
                        international          memorandum of understanding                   must be signed for the
                        project.       The GAO also noted that officials                         from the Services'
                        international           research       and development          offices       must seek Office
                        of the Secretary             of Defense approval             before they realign              the
Now on pp. 1 and 8-9.    funds among projects.                  (p. 1, pp. 8-lo/GAO Draft                 Report)
                        s~ornnents:          Concur.     There are no written    directives
                        specifically      relating    to the North Atlantic     Treaty Organization
                        research      and development     certification  and funding.       There are,
                        however, guidelines        which cover all funds       (DoD Accounting    Manual
                        DOD 7220.9-M chapter         21 Funding Controls    and Chapter 28
                        International       Agreements).

                                                                                                 ENCLOSURE




                                   Page20
                          FINDMG:           Clone                                                                          .
                          g                                             . The GAO reported that the Office
                          Of the Secretary            of Defense requires            project    managers to
                          (1) expend funds only for approved programs and within                                 the
                          amounts authorized,              (2) obtain prior          approval     for realigning
                          funds, and (3) report               quarterly       on how funds are being expended.
                          The GAO concluded,             however, that the cited internal                   controls     have
                          not been effectively              implemented.           The GAO reported         that the
                          Navy's International              Research and Mvelopment               Office      realigned
                          program funding without               first       seeking required        Office      of the
                          Secretary        of Defense approval.               The GAO found that the Office               of
                          the Secretary           of Defense released             about $47 million         for specific
Sea comment 1             FY 1988 projects            to the Navy office--which,               in turn,       only
                          released        about $39 million           to the authorized          projects.         The GAO
                          further       found that the remaining                funds were used for
                          adminimtrative            services (in addition            to the $3.7 million            that was
                          authorized         for that purpose) and for funding                   of the SAXON-FPM
                          program (an authoritmd               program for which the Navy had not
                          requested        funds).       In report        table 11.1. the GAO met out the
                          mpecific        amOtUtt8 authorized           for FY 1988 projects           and the amounts
                          actually        spent.      The GAO almo found that the Navy did not report
                          to the Office            of the Secretary          of Defense until         April     1990 how PY
                           1988 funds were spent.                In l ummmry, the GAO concluded                 that the
                          Office      of the Secretary           of Defense and the Navy do not have
                           sufficient        intmrnal      controls       to adequatmly       ensure that funds
                          disbursed        for North Atlantic             Treaty Organization          cooperative
                           research       and developmmnt projects                are actually      used for the
                          purposes intended             and in accordance with the authorizing
Nowonpp.l-2and   10-11.    legislation.            (pp. 2-3, pp 12-13/GAO Draft Report)
                          s:                  Concur.    The primary control    function    from the
                          Office    of the Secretary     of Defense to the Services      is the
                          quarterly    report   required    on every release of funds.        The
                          preparation     and review of this report forcmm a careful           analysis
                          of how the funds are spent.          In the past, the Navy failed        to
                          complete the report       accurately   and in a timely    manner.     The Navy
                          no longer receives       funds unless the reports     are complete.
                                    Am a result       of the Dmfenme Management Review,                 the Department
                           of the Navy has established              a new organization             (Navy
                           International          Programm office)        responsible       and accountable       to the
                           Assistant       Secretary      of the Navy (Research,            Development and
                           Acquisition)          for management control           of Defense Research &
                           Development          (Nunn) funds.      Additionally,         the Navy has established
                           a management control             program directive         (IPD-89-27),        which is in
                           place and which will             ensure that the Do0 management control
                           criteria      for ume of theme funds are followed.                     Finally,     the Navy
                           International           Programs office      management oversight             of the Navy
                           Defense Research and Development international                         program efforts
                           will     ensure that the Navy project               managers     follow     the management
                           control      criteria       for use of theme        funds.      The Navy ham assured
                           the Office         of the Secretary      of Defense #at            it will      submit
                           accurate,        timely     quarterly   reports in the future.




                                     Page21                                             GAO/IWAD91-27 NKlU Cooperative Pnndin8
                                     AppendixvI
                                     Comment8FTomtheDepartmentofDefenae




                                                                             . . trative          SIJQQO~~ Services.              The
                         FRSDING:              F.!anUsedlS
                         GAO reported            that the Office           of the Secretary             of Defense
                         authorized          the Navy to spend services                   about 7 percent--or
                         $3.7 million            of its total          FY 1988 allocation              of $50.6 million--
                         for administrative                 support.       The GAO found, however, that the
                         Navy actually             expended $7.9 million               for that purpose.                The GAO
                         further      found that the Navy research                       and development            office
                         channeled        funds for administrative                   support to itself              through
                         several      activities.              In one case, for example, the GAO found that
                         $597,124 provided               the North Atlantic              Treaty Organization                Anti-Air
                         Warfare project              office      was used to develop software                     for a
                         document tracking                system in the Navy research                    and development
                         office.        In a second case, the GAO identified                             cited a $1 million
                         contract       relating          to antisubmarine           warfare        technology,         managed
                         through the Naval Ocean System Center,                             which (according              to the
                         contractor),            was actually          used to develop software                  to track Data
                         Exchange Agreements.                    In a third      case, the GAO found that that
                         same center entered                 into two contracts,              totalling         about
                         $2.7 million,             which were described              as support          for the Surface
                         Ship Torpedo Defense project.                        The GAO reported               that the actual
                         tasks in the statement                    of work for the cited projects                     were to
                         provide      administrative               support to the research                 and development
                         office.        Finally,          the GAO found that the $3.1 million                         provided
                         the Naval Ordnance Station,                      Indian Head, Maryland,                 for work on
                         the torpedo defense project                     was also for administrative                      support
                         to the research              and development           office.         The GAO noted that both
                         office      of The Secretary               of Defense and Navy officials                      have taken
                         steps to control               the flow of funds for administrative                           uses,
                          including         (1) requiring           the report       finally        delivered        in April
                          1990, (2) the suspension                    or expiration          of all contracts             and work
                         orders for administrative                     support,      and (3) examinations                 by the
                          Naval Investigative                 Service and Naval Audit Service.                         The GAO
                          concluded       that the Navy did not report                       to the Office           of the
                          Secretary        of Defense how the funds were used.                             The GAO also
                          concluded        that the Navy made misleading                       statements         of purpose on
                          contracts        and work orders in order to show that funds were used
                          for authorized             projects        and used multiple             agents to disburse             the
                          funds (thus making it difficult                       to account for them).                   The GAO
                          also concluded             that 1988 research             and development             appropriations
                          expended for administrative                     costs were not inconsistent                      with the
Now on pp. 2 and 12-14    legislation           authorizing          or appropriating            the funding.            (PP 2-4,
                          pp 14-17/GAO Draft Report)
                         JloD Ce:                   Concur.  The 1988 research       and development
                         appropriations             expended for administrative       costs were not
                         inconsistent            with the legislation    authorizing      or appropriating
                         the funding.
                         -D:                    proiects
                                                     Without Memoranda of Understanding                                .      The GAO
                          reported       thatsection   1103 (c) (2) of the Department of                                   Defense
                         Authorization       Act of 1986 (now 10 U.S.C. 2350a) requires                                     that
                         memoranda of understanding          be completed before projects                                  can be
                         considered      North Atlantic    Treaty Organization     cooperative
                         research      and development    projects.     The GAO pointed    out                             that




                                     Page22                                                 GAO/NSIAD91-27NATOC~operativeFunding
                                    AppendfxyI
                                    CommentaFkomtheDepartmentofDefenee




                          FY 1988 Senate, House of Representatives                                 and conference
                          appropriations             reports         stated the amounts of appropriated                         funds
                          that were to be used for such projects.                                  The GAO found, however,
                          that the FY 1988 authorization                          and appropariations               legislation
                          actually       authorized           and appropriated               research       and development
                          funds on a lump mum basis--and,                          thus, FY 1988 research and
                          development           funds were legally                available        for any research and
                          development           activity.            The GAO observed,             therefore,         that although
                          the intent          of the Congress was that memoranda of understanding                                       be
                          in place for such projects,                        the lump mum nature of the FY 1988
                          legislation           provided         the Navy with the opportunity                      to fund
                          projects        legally         without       the intended           memoranda of understanding.
                          The GAO found that,                 am a result,            11 of the 17 Navy international
                          research        and development               projects       were approved for FY 1988
                           funding      without        first       having memoranda of understanding                        between
                          the participating                countries         and the Navy.            In report         table IV.l,
                          the GAO provided                a list       showing those memoranda of understanding
                          which had been signed for the Navy's international                                        research and
                          development           projects         as of January 1, 1990.                   The GAO noted that,
                          according         to a Navy official,                 the DoD policy            has always been to
                          release       funds after           a memorandum of understanding                       has been
                           signed.        The GAO noted that,                  on January 28, 1990, the Deputy
                          Secretary         of Defense issued a memorandum pointing                                out
                          negotiations            on memoranda of understanding                        could take up to a
                           year or more.              The GAO reported              that,      in FY 1988, the Navy
                           requested        $30 million            in start-up         funds for projects               without
                          memoranda of understanding.                          The GAO noted that Office                   of the
                           Secretary        of Defense officials                  requested         a DOD General Counsel
                           opinion      on whether a signed memorandum of understanding                                      was
                           necessary         for a project             to receive        North Atlantic            Treaty
                           Organization           cooperative            research      and development             funds.       The GAO
                           noted that,          on March 10, 1988, the General Counsel stated that
                            funds could be released                    to international             projects       before
                           memoranda of understanding                       were signed,          but that such
                           disbureementa            might be contrary               to congressional             intentions.           The
                           GAO found that             the Office           of the Secretary            of Defense
                           nevertheless           authorized           the Navy to fund projects                   that did not
                           have a memorandum of understanding                             in effect.          The GAO noted that
                           Office      of the Secretary                of Defense officials                stated that,          for FY
                            1989 and beyond, they have revised                            their     policy     to reflect          the
                            codification           of Sec. 2350a, P:ublic                   Law 101-189, which now
                            requires       a memorandum of understanding                         before releasing            funds to
                            a North Atlantic              Treaty Organization                 cooperative        research        and
Now on pp. 2 and 15-l 7     development          project.           (p. 3-4, pp. 18-22/GAO Draft Report)
                          s:                Nonconcur.    Most of the facts are correct,          but
                          there is some ambiguity      as to their   interpretation.        The DOD
                          takes exception     to the GAO observation       that the intent    of the
                          Congress was that a Memorandum of Agreement be in place prior                to
                          the initiation    of a project.      The requirement       that the project
                          have a Memorandum of Understanding        had consistently       been
                          interpreted    by the Navy as meaning there was intent           and progress
                          toward a Memorandum of Understanding          type of project.      In
                          FY 1987, when the Navy had full       authority      on all the funds it,      in




                                     Page23                                                     GAO/N~91-27NA3OCoeperatlveF'undiag
               fact,     allocated      funds for several         projects     that did not yet have
               an Agrarment.          The FY 1988 legislation            was silent      as to the
               agreement and it was widely              understood       #at     congress meant
               Memoranda of Agreement projects                 and, in deference         to common Navy
               practice,      deliberately       avoided any mention of it.                Since this was
               the first      year that Office         of the Secretary          of Defense had the
               remponsibility         to distribute        the funds, several         attempts     were
               made to find a correct            interpretation.           They were:        (a) the
Comment 2.     General Counsel office            stated there ware no legal restrictions                  to
               the ume of post FY 1986 Nunn funds prior                     to agreement signing.
                (b) the Navy       Asmimtant Secretary           made a determination          that it was
               appropriate       to spend the funds and requested they be released,
               and (c) prior        to release      of the funds, the funding reguemt was
               sent to General Counsel with the statement                      that this is an
               appropriate       use of the funds.            The General Counsel provided
               concurrence.         It is unclear what is meant that a Navy official
Comment 3,     indicated      there always       was a policy        of requiring      the Memorandum
               of Agreement be signed before expenditure                      of funds, mince this
               was the first        year of the Office           of the Secretary        of Defense fund
               allocation       and, previously,         the Navy had conmimtently              used funds
               prior    to Memoranda of Agreement signing.

                                                     *******

                                                   RECDHMRNDATIONS
               mu:                      The GAO recommended that the Secretary         of
               Lhfenme    issue specific    written  instructions       for the
               implementation      of the North Atlantic       Treaty Organization
Now on p. 2.   cooperative     research   and development      program.     (p. 5/GAO Draft
               RmpoW
               s:                    Concur.    The office        of the Under Secretary         of
               Defense for Acquisition          is preparing         a handbook of guidelines
               that will      consolidate    useful      information      for identifying,
               submitting,      and funding     International          Cooperative     projects.    The
               handbook will        be completed by January 1991.               The guidelines
               required     for the treatment        of the funds addressed in this report,
               however, were explicitly           clear.       Each time the funds were
               transmittmd,       the authorizing        document identified         the specific
               project,     the fact that the funds could be used only on that
               project,     and that a report covering              fund usage was required         each
               quarter.
               -2:                   The GAO recommended that the Secretary             of
               Defense   establish  sufficient      internal    controls   necessary for the
               Department of Defense and the Navy to assure that the funds made
               available    for the North Atlantic        Treaty Organization     cooperative
               research   and development      program are used appropriately.
Now on p. 2.    (p. 5/GAO Draft Report)
               s:                         Concur.  The recommendation  is mout, however, and
               concurrence           is   based on the fact that appropriate   controls are




                         Page24
already     in place.        While it is tNe that the Navy realigned                      funds
without     authorization,         additional       internal     COntrOlS are no longer
needed.       At that     time,    the funds dimburming           office      co-mingled     all
the    Nunn funds      and relied       on the Program office            (OP-098F) to make
allocation       decimionm.        Since that time, OP-098P haa been
dimemtablished         and its functions          transferred        to the Navy
International        Progrmmm Office.           That office       ham in place a formal
 internal     controla program.             The Navy will       henceforth segregate
NUIUI project      accounting        lines.     All project        funds will      be
dimtributed       directly      to the ~esponmible           project     office    with all
 funding    requirements        stated.       Project     managers will         be required
to report       on planning       and execution        of all funds.          In addition,
 the Navy will        accurately       complete the required           quarterly      reports
and submit them to the Office                 of the Secretary         of Defense in a
 timely    manner.




          Page25
               AppendixVI
               Comment9From the Department of Defense




               1. DOD released a total of $50.6 million of fiscal year 1988 funds for
GAO Comments   Navy NA?D cooperative research and development. About $47 million
               was designated for specific projects, and $3.6 million was designated for
               administrative purposes.

               2. DOD’S comments must be tempered by the fact that the DOD Office of
               General Counsel cautioned DOD officials that release of funds to
               nonagreement projects may be contrary to congressional intentions
               because the original authorization stipulated that agreements were
               necessary.

               3. The text of the report has been revised based on this comment.




               Page26                                   GAO/NSIAD91-27
                                                                     Bald CooperativePunding
Appendix VII

Major Contributors to This Report


                             Brad Hathaway, Associate Director
National Security and        John J. D’Esopo, Assistant Director
International Affairs        Paul J. O’Brien, Evaluator-in-Charge
Division,      Washington,   Debra L. Logan, Evaluator

DC.




 (394341)                     Page 27