oversight

Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of Resources

Published by the Government Accountability Office on 1990-03-08.

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

                    United States General Accounting    Off’ice    / fony
                                                                               I

GAO                 Testimony


                                                                        140831

 For Release         Financial  Audit:    Air Force Does Not Effectively
 on Delivery         Account for Billions     of Dollars of Resources
 2:00 p.m. EST
 Thursday
 March 8,
 1990




                     Statement   of
                     Charles A. Bowsher
                     Comptroller    General    of the     United      States
                     Before the
                     Committee on Armed Services
                     Subcommittee  on Readiness
                     House of Representatives




                                                 Pt083J
GAO/T-AI'MD-90-11
                                                                        GAOForm160(12/87)
Mr.      Chairman           and Members of                the Committee:


             We are      pleased          to be here            today     to discuss                 our    recent       efforts
to audit             the Air         Force's       fiscal        year     1988 financial                    statements.
This         was the        first       time      that      a military              service          developed
financial             statements             and provided            them to GAO for                   audit.           We are
releasing             our     full      report          on our    review            to the Committee                  today,       and
our      testimony            will      summarize           some of       the        key results.                 Before
discussing              our      findings,         I would        like        to put          into     perspective               why
it      is    so important              now that          government           agencies--particularly                            the
Defense          organizations--                 take     the    initiative             to establish               the     kinds
of      systems,         controls,             and procedures             needed         to make them capable                          of
producing             acceptable             financial          statements            that       can be audited                  by an
independent              third        party.


             Quite      simply,         the      successful          preparation               of     financial
statements              demonstrates              that      an organization's                    systems          and
personnel             are     capable          of accumulating,                analyzing,              summarizing,               and
reporting             on its         financial           condition        and operating                    results.         This
capability              has long         been demanded by the                        federal          government           for
the      private         sector,         and more recently                    for     state          and local
government              sectors         as well.            More recently,               several            of    the major
civil         federal         agencies           have used        financial             statements               as a key
element          in their            efforts       to bring          financial           control,
accountability,                     and cost-effectiveness                     into      their         operations.
These         include         GSA, the           Departments            of Veterans             Affairs,
Agriculture,                and Labor,            as well        as the        Social          Security
Administration.                    Most recently,                          HUD, in reaction                 to the         scandals          in
its     housing          programs,               has launched                    comprehensive              initiatives               to
bring       financial             integrity                  to     its        operations.             The development                 of
financial            statements             for         audit             represents            a cornerstone              in HUD's
strategy          for      doing         this.               However,            the      taxpayers         should         not    be
expected          to wait          for      HUD scandals                        to occur         on a case by case basis
to get       proper            financial               and accounting                   procedures              implemented            one
agency       at a time.


          In candor,              I have to tell                          you that          getting       federal
organizations                  to prepare               acceptable                  financial          statements           is not          an
easy      task.          Change does not                          come easily               to federal           operations.                The
federal       government                 has always                     stressed        appropriation                  accounting           and
fund      control,             in other          words             the         budget       process.            This     is certainly
a critical              part      of government                         financial           management;           unfortunately,
in many organizations,                            it         may be the              only       part     that     is being
seriously          considered.                    In such situations,                            "How much can I spend?"
overshadows              the     equally               important                question,          "How well            am I managing
and controlling                   the      resources                    I already           have?"        The latter             question
becomes even more important                                       for      DOD in today's                environment             of
looming        reductions                to the defense                         budget.          The military             services
are     already          responsible                   for        huge amounts               of assets;           the     Air     Force
alone       is entrusted                with           assets             reportedly            valued      at    $275 billion.




                                                                           2
         Similarly,              today's            environment              will      require           greater         emphasis
on costs          and how to control                         them.          We have found                that      federal
agencies'          accounting                systems             do not      routinely           accumulate              and report
on the         costs      associated                with         their      various        operations.


         Meaningful              cost        control             requires          knowing       first          what      the costs
being      incurred             are.         Unfortunately,                  many federal                agencies          do not
have accounting                  systems            to provide              this      information               in a systematic
manner.           Until         they        do,     meaningful              efforts        to control              costs        and
achieve         financial              efficiency                cannot      take      place.


AIR FORCE FINANCIAL
SYSTEMS DO NOT PROVIDE
RELIABLE FINANCIAL                      DATA


         Specifically,                  with        regard          to    the Air         Force,         our     audit       noted
that     its      accounting                systems          do not         provide        accurate             cost     data      for
almost         80 percent              of    its     non-cash             resources,          such as weapons,
inventory,             and equipment.                      Its      accounting            and financial                 management
systems         can neither                 provide          complete          and reliable               financial           data
nor     be depended              upon to report                     accurately            on the         resources
entrusted          to     its     managers.                 Much information                  that        is produced              is
not     timely.           Financial                reports          can only          be developed               with
extensive,             time-consuming                  efforts            to compile          data        from         a variety         of
sources.           These conditions                        adversely           affected          financial              reporting
and management                  at all         levels,            ranging          from    the Air         Force

                                                                     3
consolidated                 financial             statements        down to base-level                        financial
reports.


           The General               Accounting          and Finance              System was intended                        to
serve        as the Air              Force's         general       ledger,             but     a number of very
significant                accounts          were not         included.                Certain         data,       such as
aircraft            values          ($82 billion)             and missiles                   ($10 billion)            had to be
derived            from      property          systems        and other           data,          such as accounts
payable            amounts          ($18 billion)             and expense               amounts          ($70 billion),
was extracted                 of budgetary             data       rather         than        from      a properly
designed            financial              management         system.            In short,             the Air        Force        does
not       have basic               double     entry      accounting              control          over     the       bulk     of       its
assets.


           One result               of     these     conditions            is    that        financial          reports           to
the       Office          of Management              and Budget         and the Treasury                       are    also
inaccurate                and unreliable.                In recent              years,         some Air         Force
components                failed         to submit       financial              data      in time         to be included
in    the        year-end           Treasury         reports.         As a result,                    March     31 data           was
used        in     lieu      of missing             September        30 data.                Furthermore,             over        $25
billion           of Air           Force     assets      were not           included             in    financial            reports
to the           Treasury           and an additional                $10 billion                 in    transactions               were
counted           twice.
                                                                                                                                        ,


         Air     Force         managers          often        did      not      take         advantage           of    the        limited
financial             information            which       was available                   to them.              Analysis            of       the
accounts         used         in preparing              the      financial             reports            showed obvious
errors         that        were not         corrected          and were not                    investigated                to
determine             if     a problem        existed.                As a minimum,                  obvious          mistakes              and
significant                changes         in account          balances               should         be followed                up to
make sure             that     serious        problems            are       addressed.                  Some examples                 of
accounts          that        warranted          further            review        are:


         --     The disbursement                  accounts             at    the       Air        Force       Systems
                Command declined                  by 64 percent                   between            fiscal         year
                1987 and 1988.                   This      could        indicate              that        information
                is not         being       properly           reported            by payment               centers           or
                that         the    rate     of progress               payments              is    slowing.
                Management             needs      to monitor                the       contracts            more closely
                based         on these        data.           The disbursement                       account
                decreased            at    the Aeronautical                     Systems            Division           by 97
                percent,            but     increased          at      the      Rome Air             Development
                Center.             For    the    same account,                   another            component--the
                Space Systems                Division         --reported               a zero           account
                balance            at the     end of          the      fiscal          year.            Obviously,              the
                Command needed                to follow               up on the              activity          in     this
                account            to determine            the        abnormal           changes           and
                reporting            by its       components.                   Air      Force          officials            had
                no explanations                  for     the      variances.



                                                                  5
           --   Air     bases      reported           credit          (negative)               balances              of     some
                inventory          accounts           and construction-in-progress
                accounts.            Negative          values          for       such asset              accounts
                indicate          with      virtual          certainty               that      they      are
                incorrect.               Yet management               did        not         investigate                  the
                cause      of     these      erroneous              balances,                and accordingly,
                accounting           records          and reports                for         these     assets              were
                of     limited       or no value               to Air         Force           managers.


           We also       found       that      billions             of dollars                in adjustments                      to the
accounting             records      were made which                   could            not     be supported                     or
explained             by Air      Force      officials.               There            can be legitimate                         and
necessary             purposes       for     adjustments.                    For example,                if         a control
account         balance          does not       agree          with      the         total       per     its         underlying
records,         the      two balances              should          be investigated                    and reconciled,
and appropriate                  adjustments           made to correct                        the    errors           causing              the
out    of balance              condition.             However,          without               adequate              safeguards,
adjustments             can also           be used          improperly               to cover          up defalcations,
hide       losses,       or mask errors.                     Examples            of     improper              adjustments                  and
lack       of   reconciliations                were:


           --   The Space Systems                  Division's                trial          balance           for     March          31,
                1988 differed               from      its      subsidiary               records          by $2.4                billion.
                In order          to get       the     two systems                   to agree,           they         "plugged"
                the accounts.                In other           words,           they         made an unsupported
       *        adjustment           for     $2.4      billion,           without              finding              out     why the

                                                                6
,

                                                                                      .


         records         did     not     agree.          Further,            they     had not          reconciled
         detailed         contract            files      with       the      payments          to contractors
         for     about         2 years.          This        reconciliation                 is a key control                in
         ensuring         payments         do not            exceed       obligations               on contracts
         and that         funds        are properly                spent.           As a result,
         accountability                was lost          and the          opportunity               to deal        with
         possible         instances             of mismanagement,                    fraud,         or abuse was
         missed.


    --   Similarly,             at    the Systems             Command, our                audit       tests
         disclosed         unsupported                adjustments             of $500,000              that    were
         made increasing                the      obligation            and expenditure                  accounts           for
         Operations             and Maintenance                 appropriations                 in September
         1988.        These adjustments                      used previously                 available         fund
         authority         without         documentation.                     Officials             could     not
         explain         the     adjustments,                nor could         they         find      any
         documentation                to show why they                 were made.


    --   At Warner         Robins         Air     Logistics            Center,            control       accounts
         were not         routinely             reconciled            with     supporting              records.           0r.e
         account       balance          had a negative                 balance            of $2.1       billion,
         although         the        account      balance           should        normally            be positive           or
         zero.        The general               ledger        accountant             said      that     he had no
         documentation                to support             the    account          balance          and that       the
         account       had been in error                      since       1983.



                                                         7
         At Sembach Air                    Force       Base,        we found         that      over         $214,000        in
         undocumented                adjustments,                a material           amount          for     an air
         base,       were made to force                         control        accounts           to agree          with
         subsidiary             records.               When we researched                     these         adjustments,
         we found            that         some of        the     unsupported            adjustments                were
         attributed             to the           actions         of a disgruntled                  employee           in    the
         finance         office            who failed            to properly            process             transactions,
         entered         erroneous               data,      and destroyed               source         documents.
         This      case       is being             investigated               to determine             whether         fraud
         occurred.


    --   At three            ALCs,         the     interfaces             between       the       perpetual
         inventory            tracking             system        and inventory                accounting            system
         did      not    function             properly.              As a result,              the     two systems
         reported            different             amounts          on hand for             the    same items.               To
         compensate,                either        each month              or each quarter,                   the    ALC's
         accounting             and finance                office         adjusted          the    accounts          in     the
         inventory            accounting               system        to force         them to agree                 with     the
         perpetual            inventory               tracking         system's         balances.               However,
         the discrepancies                       between         the      systems       were not             researched
         to determine                their        causes.            The net         effect        of such
         adjustments                for      fiscal       year       1988 decreased                the       inventory
         accounts            by about            $361 million.                 At our         request,          Ogden ALC
         officials            researched               $241 million             of    its      September            30,
         1988,       adjustments                 and found           that      $114 million                 was the

*        result         of    inventory               system        errors,      while         $127 million

                                                            8
                                    ,

               resulted            from coding              and timing          errors.         These errors                 had
               been masked by the                      improper       adjustments             and would              not
               likely         have been detected                    had we not            asked        base officials
               to investigate.


FULL COSTS OF WEAPONS SYSTEMS
NOT ACCUMULATED AND REPORTED


         The development                   and acquisition                of'weapons          systems             represents
a major        fiscal         commitment              for    DOD and the           taxpayers.              One of          the
greatest        challenges               facing        DOD today          is    to manage reduced                    spending
after      a period           of    large        peacetime          defense        buildup.             Since        the mid-
198Os,      DOD's five-year                     defense       planning          has been fiscally
unrealistic.              More weapons                 were being          planned         and developed               than
could      be produced              in an economic               manner         or supported             once they            were
produced.            Since         1982,        DOD five-year             spending         plans        have exceeded
actual      and current                 estimated           funding       by over         $2 trillion.                This        is
not     an effective               way for         DOD to manage,               nor does          it    facilitate
congressional             oversight              of    the defense             budget.


         The Air         Force's           costs       of weapons          systems         reported              in the
accounting           system         are     vastly          understated.            Aircraft,            missiles,
and engines             are    valued           at estimated          standard            or purported               "average
acquisition"             costs          which      do not       reflect         actual       costs       incurred            to
acquire        the      items.           We compared            the   accounting             system        costs       to
Selected        Acquisition                Reports          (SARs) and to expenditures                           'from the

                                                                9




                                                                                                          ,. .
budgetary              reports      and found          that      actual        costs       are    not    recorded         in
the      accounting              systems.          For example,              the B-1B bomber             is     recorded
in    the    accounting             system         at $150 million               each.          The SARs reported
$215 million               for     each,         and we estimated              $219 million             each.       While
the      SARs costs              more closely          approximated              our     estimate        of actual
costs,       we have previously                     reported          that     the     SARs do not            adequately
disclose          all      costs      associated          with      major        weapons         systems.          For
example,          SARs often             do not      include        actual        contractor            costs      incurred
to date          or a schedule              comparing          funded         quantities          to planned            and
actual       contractor             deliveries.               The SARs also              do not      reflect
anticipated,               but     not     yet     approved,        cost       estimate          changes.


          The SARs costs                 are derived           from     Air     Force       budgetary           data,     as
are      other         documents         the Air      Force        uses       to portray          weapons        systems
costs.           However,          OMB Circular          A-127         requires          that     budgeting         and
accounting              should      be done on the               same basis            through       integrated
budgeting              and accounting              systems.         Cost       information,             whether
reported          in general             ledger      accounts          and financial              reports        or SARs,
should       be consistent.                  There      should         not     be a variety             of different
numbers          for     similar         items      to choose          from.




                                                              10
       Other        costs         that        were not            included          in the       weapons         systems
valuations          are:


       --    Government-furnished                            materials,             such as parts,               components,
             assemblies                and raw materials,                       provided         to contractors                 and
             incorporated                    into      the weapons              systems       are       not     included         in
             the         value      of       the     end items.             We have previously                       reported
             that         long-standing                 problems           in controlling                and accounting
             for         government&furnished                        materials          preclude          DOD from
             knowing             the     exact        amount         of    these      items        in contractors'
             hands.              DOD and the                services         have no overall                  management          or
             financial              systems            to     independently             verify          contractor
             records             and measure                the    value        of government-furnished
             materials             ultimately                included           in end items.


       --    Over $25 billion                        of modifications                 which       enhance            the mission
             capabilities                 and/or            extend        the    service         life     of weapons
             systems             generally            are      not     included         in the          valuation         of     the
             assets.


      Additionally,                    the     Air      Force        accounting            systems        do not
capture      all         operating            and support              costs        associated           with        weapons
systems.           In 1987,            the     Senate         Committee             on Appropriations
expressed          its     concern            over      the       long-term          implications               of
procuring          weapons         systems            which        have      increasingly               expensive
opergting          and support                costs.           During        that     same year,              we attempted

                                                                  11
to review            such costs          but      were      force'd           to terminate                 the      review
because            the     needed      cost      data      were simply                not        available.               There        is
no logical               reason       in today's           world        that         a large,         complex
organization                such as the Air                Force        should             not     have a sound cost
accounting               system.        Such a system                  is     absolutely             essential             for
measuring            costs        and improving             efficiency.


INVENTORY SYSTEMS DO NOT
PROVIDE ACCURATE DATA


            Inventory          management          for      the        Air         Force      is    an extremely
complex         task        due to the           size      of    its         operations,             frequent
technological                obsolescence,               and decentralization                         of      storage            for
national            security          reasons.           To maintain                 and support              its
operations               and weapons           systems,          the         Air     Force         manages about                 1.6
million         different             spare     parts       and supply                 items        valued          at about
$64 billion.                 This      is about          eight         times         larger         than      the
inventories                reported      by General              Motors.              Unfortunately,                     systems
used to         track        and value          these       immense inventories                         do not maintain
accurate            data     supporting           either         the quantities                     or values.               Yet
these        are     the     systems          upon which           managers            must depend                  in
determining                whether      new items           need to be p.urchased.                               Using
inaccurate               information           to base purchase                      decisions          can result                in
unnecessary                procurements           and excess                 inventories             in some
instances,               and shortages            in others.

        P




                                                                 12
.

    Excess       Inventories               Are Increasing


              Unrequired            inventories             have grown               tremendously              in the
    1980s.           The Air        Force         is    estimated           to have at             least       $10 billion
    of unrequired                inventory.               The growth            in unrequired               inventpry           is
    related          to several            factors.             The most common causes                         of   this
    growth       are      overestimated                 use rates           and modifications                     of aircraft
    and equipment.                  Other         causes        include         faster           than    expected          phase-
    outs      of older           aircraft,             fluctuating             war reserve              and safety          level
    requirements,                improved          item     reliability,                  and items         being
    reclassified               as repairable.                   Also,       orders         for     items       in excess         of
    requirements               were    not        terminated,             and procurement                  lead     times       were
    overestimated.                  This      problem           is    not      Air     Force       specific;          the
    amount       of excess            inventory            in    the      Department              of Defense          as a
    whole       is estimated               at $29 billion.                     We currently              have ongoing
    work      that      will      address          matters           related         to    inventory           on a DOD-wide
    basis.


    Inadequate           Accountability                  Precludes
    Effective           Inventory            Management


              Accountability                 systems        used to track                  the     location         and
    quantities            of over          half        the Air        Force's          inventory           items      do not
    provide          reliable,         accurate            inventory            data       to managers.
    Inaccurate            inventory            records          can cause            critical           supply      shortages,
    prolonged
          D             delays        in     filling        requisitions,                  or unnecessary

                                                                     13
procurements                resulting            in accumulation                    of excess          inventory.
Although          the Air             Force. has recently                    improved          the     accuracy            of    its
data      in automated                 perpetual           inventory            systems         and generally                   takes
accurate          physical             inventory           counts,           we believe           the     perpetual
records         are     still          too     unreliable             for     managers          to use in            their
attempt         to make effective                     and efficient                  decisions.


Inventory           Valuations
Are     Inaccurate


          The Air           Force       did     not       consistently               apply      its      inventory
pricing         policies              to value          inventories             of    investment               items.           The
Air     Force       assigns            values        to    inventories               of spare          parts        and
supplies         based          on the         item's        latest          acquisition              cost.
Basically,            the       Air     Force        multiplies              this     cost      times         the    number of
units      in stock             to arrive            at the       total         inventory             value.         Air
Force      policy           states       that        the    standard            price        generally           represents
the     last     acquisition                  cost    of an inventory                   item      plus        a surcharge
for     government-furnished                         materials              and transportation                   costs.
Therefore,            all       items        of a particular                  stock      number are              valued          at
the     same price.


          Under       this       practice,            when items              are purchased               at higher
prices,         the values              of all        such       items        are     adjusted           upward.            Unless
the     accounting              statements            reflect          such         increases          as occurring
from,changes                in valuation,                 they    are misleading                 because            the

                                                                  14
.




    readers       cannot            readily              determine            whether         the      growth            represents             an
    increase          in      items         on hand or simply                        increased             values           of current
    stock.


    Inventory          Values              Are Not
    Adjusted          for      Condition


              Inventory             values              are    not      adjusted         to reflect                   the      condition
    of     the   items         in     inventory.                  Although            about         $7 billion                 of    the
    inventory          items          at     the         three        ALC's     we visited                 were unserviceable,
    they      were valued                  the     same as new inventory                            items.              This        practice
    results       in a significant                            overstatement              of     inventory                values         and is
    misleading              because              (1)     the     true      inventory            value            is     less        than
    shown and           (2)        there          is a substantial                    additional                 cost       to bring
    unserviceable                  items          to usable             condition.


              The military                  services             maintain          a large            number of
    unserviceable                  items          in     their        inventories             for      a variety                of
    reasons.           For example,                      components            that     are         very         expensive            to
    repair       and not            in high              demand can be better                         controlled                and
    scheduled          for         repair          only        when needed.               The Air                Force         has
    determined              that      it     is more efficient                        to maintain                 the       unusable
    item      under         normal          inventory             control          and repair               it        when necessary.
    Although          this         approach              may be effective                 for         certain            inventory
    management             purposes,               it     is not         acceptable             for        financial                reporting
    purposes.               To show these                     items      at    the     same value                 as fully

                                                                          15
serviceable            items,      when many require                       the     investment          of
significant         dollars         before            they    can be used,                distorts          the
financial        statements.                 The Air         Force         needs        to develop          a
methodology            to regularly             adjust            the   unserviceable                portion         of     its
inventory        to reflect            costs         associated             with     repairing             the      items.


FINANCIAL        STATEMENTS AND
AUDITS SHOULD BE REQUIRED
FOR ALL FEDERAL AGENCIES


       The Air          Force      audit        illustrates                why we do need reliable
financial        statements            for      federal            agencies.             There       are    still         some
who insist        that       traditional               federal          financial          management
practices        are      adequate           and that         financial             statements             and audits
are   not     needed       in    federal         operations.                   I would       like      to put          these
notions       to rest.


       Almost       universally,                our      financial             audits       of civil            agencies,
as well       as the       Air     Force,        have revealed                   systems       problems             which
are   so severe           that     the       financial             information            needed       to manage
agency      operations           as well         as prepare                agency        financial          statements
are   seriously           deficient.             These problems                    are    generally             more
serious       and deep-seated                 than       either         we or the           agency         managers
realized       before        the    audit.            We believe               the process            of    trying          to
prepare       financial          statements              forces         full       recognition             of    the
systems       problems.            The process               is     like       an early       warning            system,

                                                             16
an often        overlooked             value       which        derives          from     the    preparation              of
agency        financial            statements.


          Our financial              audits        have disclosed                 that     those        systems         which
do exist        are       not      designed        to aid          government            managers        to operate
in a cost-effective                    manner          or to prevent             mismanagement,                  fraud,
waste,        and abuse.             These essentials                     must be addressed                when
reliable         financial           statements            must          be prepared.            This         is because
statements            cannot        be prepared            without          addressing           systems          issues
and related              internal          controls.


          Reliable          cost     information               needed       to manage in a cost-
effective         manner           flows       from     the     good accounting                 systems          necessary
to prepare            financial            statements.              Management            controls        which
operate        to prevent            mismanagement,                  fraud,       waste,        and abuse are
also      required          to produce           reliable           financial            statements.              The
appalling         list       of high-risk               areas        recently       published            by OMB
highlights            the    need for           reliable           financial        statements            prepared             by
federal        agencies.             Many of the               items       OMB identified               result       from
or are        related        to accounting                systems          problems.


          Why can't          the     agencies           just       fix     the    systems        and not          bother
with      financial          statements?                Theoretically              possible,            but
practically              impossible.             The agencies               need the        discipline             of
having        to prepare            reliable           financial           statements           which      satisfy
standards         set       by independent                auditors            in order       to focus            on fixing

                                                               17
the     underlying           systems.             One might             view       audited              financial
statements            as a report              card       which       will        point       out        seriously
deficient          systems,           help       quantify            the     extent         of     the problem,                and
highlight          what      needs       to be done.                  Until        an agency              can achieve
unqualified              financial           statements,              its     systems            will       be seriously
deficient,            the    information               derived          from        those        systems            that      goes
to the       Congress          and others              will         be incorrect,                and it          cannot        be
cost-effective.                   That's         the      financial           statement                 report       card.


          Also,       I want         to emphasize              that         improving            financial
management            in    the      federal       government                has been an important
objective          of GAO, OMB, and Treasury.                                 In 1988,             the      Secretary           of
the     Treasury;           Director,            Office        of Management                  and Budget;                  and I
collectively               issued       standards             for     core        financial              system
requirements.                Those standards                   represent             a major             step       in
improving          federal           financial          management                systems         and will               provide
greater          consistency            and reliability                     to department                 and agency
financial          systems           and improve              financial            reporting.


          What we have found                     in our        audits         of     the Air             Force       and other
agencies          and government                 corporations                is    that       the
true      financial          situation            of these            entities            had not           been disclosed
to the       public,         the Congress,                 OMB, and the               Treasury.                  What we have
found       is    that      the      agency       managers            did     not     understand                  the
financial          condition            of     their       agencies           before          they        tried          to
prodAce          auditable           financial           statements.                 As the             report

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demonstrates,                   the         financial           information               reported            to the Congress
and OMB by the Air                           Force       was wrong by significant                               amounts.


         In addition,                   we noted               that      Air     Force       statement               line        items
should         be adjusted                   by amounts               which      are      not      calculable               at    this
point         in    time.         We roughly                   estimate           that     equipment             and missiles
are misstated                 by billions                   of dollars,                and aircraft              and
inventories               are misstated                     by tens            of billions             of dollars.


         Moreover,               additional                 analysis            during       our       fiscal         year        1989
audit       shows that                 the budgetary                   system          processed           about        $12 billion
in budgetary                transactions                    (expenditures)                  in      1988 that           was not
recorded            in    the     general               ledger         accounting            system.             For        fiscal
year     1989,           we estimate                 that       an additional                $23 billion                was not
recorded            in the        system.                Air     Force          finance           officials           estimate
'that    several            billions             of dollars               of expenditures                     were      for
classified               assets         which           are not          recorded           in     the     accounting                system
for     security            reasons.               While          they         could      not      specify           the      amounts
for     the        remaining            expenditures,                    they      agreed          that       they      represent
assets         that       are         (1)     recorded            in the         accounting               systems           at
different             costs       than          actually              incurred           (e.g.,        weapons          systems),
(2) government-furnished                                 materials              provided           to contractors,                    and
(3)     consumed            inventories.




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        Despite           the     conditions             I have described,                   I would          like    to end
my testimony              on a positive                note.         The Air         Force     showed
initiative           and leadership                   in being        the    first      DOD organization                   to
attempt        to prepare               financial         statements.                That     task      proved        to be
more formidable                  than        either      GAO or the          Air      Force        anticipated;
nonetheless,              both      of us have learned                    a great       deal         and much has
been accomplished.                       Our report            provides        a blueprint              for
corrective           action         and DOD has concurred                      or partially                 concurred
with    all        of our        recommendations.                    You may be sure                 that      we will
continue           our    efforts            with     the Air        Force     to     improve         its      financial
operations,              and it         is    our     intention        to review             the     Army next          and
later        the    Navy.


        Mr. Chairman,                this           concludes        my prepared             statement.              I will
be pleased           to answer               any questions            from     you and other                  Committee
members.




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