Defense Budget: Improved Reviews Needed to Ensure Better
Management of Obligated Funds (30-JAN-03, GAO-03-275).
As of September 30, 2001, the Navy's operating appropriations had
$2.1 billion in unliquidated--or unpaid--funds that were
obligated during fiscal years 1997-99. Unliquidated obligations
that are no longer needed to pay for goods and services tie up
funds that could be used for other permissible purposes. In
addition, inaccurate obligation data result in misstatement of
budgetary information. Because of the large dollar value, we
examined the Navy's management of unliquidated obligations.
Specifically, we reviewed a statistically representative sample
of the Navy's $1.4 billion in unliquidated operating obligations
valued at $50,000 or more for fiscal years 1997-99 to determine
whether these obligations were (1) properly accounted for and (2)
reviewed in accordance with DOD regulations.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-275
ACCNO: A05980
TITLE: Defense Budget: Improved Reviews Needed to Ensure Better
Management of Obligated Funds
DATE: 01/30/2003
SUBJECT: Budget obligations
Defense budgets
Financial management
Funds management
Appropriated funds
Obligated budget balances
Accounting errors
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GAO-03-275
Report to the Secretary of Defense
United States General Accounting Office
GAO
January 2003 DEFENSE BUDGET Improved Reviews Needed to Ensure Better
Management of Obligated Funds
GAO- 03- 275
We estimated that $929 million of the $1.4 billion in unliquidated
operating obligations valued at $50,000 or more for fiscal years 1997- 99
was not properly accounted for (see table). Specifically, the Navy failed
to deobligate $452 million of unliquidated operating obligations that was
no
longer needed and potentially available for other permissible purposes,
such as contract modifications. In addition, $147 million of unliquidated
operating obligations was inaccurately recorded because of problem
disbursements* payments not properly matched to the correct obligation. A
further $330 million was inaccurately recorded due to unresolved errors,
such as bills that were not processed properly. The remaining $489 million
in unliquidated operating obligations was properly accounted for and still
needed for the original purpose.
An estimated two- thirds of the unliquidated operating obligations over
$50,000 were not properly accounted for as a result of the Navy*s failure
to review such obligations three times each year as required by DOD
regulations. In addition, the Navy did not fully adhere to the regulation
that unliquidated operating obligations of any value be reviewed at least
once each year. Consequently, the Navy did not know how much money was
tied up in unliquidated operating obligations that could potentially be
used for other appropriate needs, and its budgetary reports to Congress
and financial statements were inaccurate. Navy fund managers chose to
selectively review their operating obligations, citing obstacles such as
difficulties in obtaining accurate payment and billing data and the
extensive length of time needed to review large numbers of obligations.
Further, the Navy did not apply existing internal control activities to
ensure that fund managers performed obligation reviews in accordance with
DOD regulations, nor did it hold fund managers accountable for the
accuracy and completeness of the reviews. Estimate of Navy*s Unliquidated
Operating Obligations Valued at $50,000 or More for Fiscal
Years 1997- 99, as of September 30, 2001
Dollars in millions Category Estimated total Percentage of total
Still needed for original purpose $489 35 Not properly accounted for: No
longer needed for original purpose 452 32
Problem disbursements 147 10 Unresolved errors 330 23 Subtotal not
properly accounted for: 929 65
Total $1,419 a 100
Source: DOD. Note: GAO analysis of DOD data. a Amounts do not add to total
due to rounding. DEFENSE BUDGET
Improved Reviews Needed to Ensure Better Management of Obligated Funds
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 275. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Sharon Pickup at (202) 512- 9619 or pickups@ gao.
gov. Highlights of GAO- 03- 275, a report to the
Secretary of Defense
January 2003
As of September 30, 2001, the Navy*s operating appropriations had $2. 1
billion in unliquidated* or unpaid* funds that were obligated during
fiscal years 1997- 99. Unliquidated obligations that are no longer needed
to pay for goods
and services tie up funds that could be used for other permissible
purposes. In addition, inaccurate obligation data result in misstatement
of budgetary information.
Because of the large dollar value, we examined the Navy*s management of
unliquidated obligations. Specifically, we reviewed a statistically
representative sample of the Navy*s
$1. 4 billion in unliquidated operating obligations valued at $50, 000 or
more for fiscal years 1997- 99 to determine whether these obligations were
(1) properly
accounted for and (2) reviewed in accordance with DOD regulations. We are
recommending that the Navy adhere to obligation review regulations and
better apply existing internal controls to ensure fund managers adhere to
these
regulations and are accountable for accuracy and completeness. The Navy
partially concurred, but
stated that it prioritizes obligation reviews to enable it to also pursue
other efforts to improve financial reporting. We note that DOD regulations
require review of all unliquidated obligations and do not
allow for prioritization.
Page i GAO- 03- 275 Defense Budget Letter 1 Results in Brief 2 Background
4 Navy Did Not Properly Account for Large Portion of Unliquidated
Operating Obligations 6 Navy Did Not Fully Adhere to DOD Review
Regulations 9 Conclusions 11 Recommendations for Executive Action 12
Agency Comments and Our Evaluation 12 Appendix I Scope and Methodology 16
Appendix II Agency Comments 19
Appendix III GAO Contacts and Staff Acknowledgments 21
Tables
Table 1: Estimate of Navy*s Unliquidated Operating Obligations for Fiscal
Years 1997- 99, as of September 30, 2001 7 Table 2: Dollar Value
Distribution of Fiscal Year 1997- 99
Obligations Reviewed in the GAO Sample, as of September 30, 2001 17
Abbreviations
DOD Department of Defense FMR Financial Management Regulations Contents
Page 1 GAO- 03- 275 Defense Budget
January 30, 2003 The Honorable Donald H. Rumsfeld Secretary of Defense
Dear Mr. Secretary: The Department of Defense (DOD) confronts pervasive
and complex financial management problems that can seriously diminish the
efficiency of the military services* support operations. Recent audits of
DOD*s
financial statements highlight ongoing financial management challenges
that affect the development of accurate and complete financial
information. Among the challenges facing DOD is the lack of accurate
obligation data needed for effective budget management and reliable
financial reporting.
To ensure accuracy, it is important for the services to liquidate
obligations if funds are no longer needed as originally planned and adjust
their financial records accordingly. Unliquidated obligations are those
that have not yet been paid. The unliquidated obligations that are no
longer needed to pay for goods and services tie up funds that could be
used for other
permissible purposes. Inaccurate obligation data result in misstatement of
budgetary information on federal financial statements and in the
President*s budget and contribute to the failure to provide basic
financial accountability. 1 DOD has recognized the need for the services
to identify and reduce the
number and amount of unliquidated obligations by requiring that fund
managers review these obligations. In 1996, the DOD Office of the Under
Secretary of Defense (Comptroller) issued a memorandum directing DOD
components to review three times each year the accuracy of unliquidated
operating obligations valued at $50,000 or more. DOD also directed
agencies to review all other unliquidated operating obligations at least
once a year. In reviewing service obligation data, we noted that the Navy
has significantly large amounts of unliquidated obligations. As of
1 *Providing basic financial accountability* has been identified by GAO as
a governmentwide high- risk area in need of attention. See U. S. General
Accounting Office,
High- Risk Series: An Update, GAO- 01- 263 (Washington, D. C.: Jan. 2001).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 275 Defense Budget
September 30, 2001, the Navy*s operating appropriations 2 had $2.1 billion
in unliquidated funds that were obligated during fiscal years 1997- 99, of
which $1.4 billion (67 percent) represented unliquidated operating
obligations of $50,000 or more. 3 Also, in 1999 and 2000, Navy auditors
reported inaccuracies in the Navy*s obligation data and found that fund
managers were not fully complying with DOD review regulations.
Because of the large dollar value of unliquidated obligations and Navy
audit findings, we reviewed the Navy*s management of its unliquidated
operating obligations. More specifically, we determined whether these
unliquidated operating obligations were (1) properly accounted for and (2)
periodically reviewed in accordance with DOD regulations. We reviewed a
statistically representative sample of the Navy*s unliquidated operating
obligations of $50,000 or more for fiscal years 1997- 99. We also analyzed
documentation related to DOD*s obligation review regulations and the
Navy*s guidance to adhere to the regulations, and interviewed Navy
officials. A more detailed description of our scope and methodology is
included in appendix I. On the basis of our sample, we estimated that $929
million of the
$1.4 billion in unliquidated operating obligations valued at $50,000 or
more for fiscal years 1997- 99 was not properly accounted for.
Specifically, the Navy failed to deobligate $452 million of unliquidated
operating obligations that was no longer needed and potentially available
for other
permissible purposes, such as contract cost overruns or contract
modifications. In addition, $477 million of unliquidated operating
obligations was not properly accounted for due to billing and recording
errors. For example, payments were made and recorded on behalf of the
wrong obligation, or payments were not made because bills were not
processed properly. In addition to tying up funds unnecessarily, these
obligation errors resulted in inaccurate reporting in the Navy*s budgetary
reports and in its financial statements. The remaining $489 million in
unliquidated operating obligations was properly accounted for and still
needed for the original purpose.
2 *Operating* appropriations include the Operation and Maintenance (O& M),
Defense- wide, and Defense Health Program appropriations. 3 The Navy
obligated a total of $25.6 billion in operating funds during fiscal years
1997- 99, as reported in its Standard Accounting and Reporting System,
which maintains approximately 90 percent of all operating appropriation
obligations. Results in Brief
Page 3 GAO- 03- 275 Defense Budget
An estimated two- thirds of the unliquidated operating obligations over
$50,000 were not properly accounted for as a result of the Navy*s failure
to review such obligations three times each year as required by DOD
regulations. In addition, the Navy did not fully adhere to the regulation
that unliquidated operating obligations of any value be reviewed at least
once each year. Consequently, the Navy did not know how much money was
tied up in unliquidated operating obligations that could potentially be
used for other permissible needs, and its budgetary reports to Congress
and financial statements were inaccurate. Navy fund managers chose to
selectively review their operating obligations, citing obstacles such as
difficulties in obtaining accurate payment and billing data and the
extensive length of time needed to review large numbers of obligations.
Further, the Navy did not apply existing internal control activities to
ensure that fund managers performed obligation reviews in accordance with
DOD regulations, nor did it hold fund managers accountable for the
accuracy and completeness of the reviews.
Accordingly, we are recommending that the Navy adhere to its obligation
review regulations and apply existing internal controls to ensure fund
manager adherence to these regulations. The Navy partially concurred with
our recommendations, acknowledging that more thorough efforts dedicated to
the review of obligations would increase the accuracy and reliability of
financial reports. The Navy, however, noted that because
numerous factors contribute to problems in financial reports, it has to
prioritize its remedial efforts and therefore focus on reviewing
unliquidated obligations in available appropriations, correcting systemic
problems, and pursuing broad improvements in financial management. When
appropriate requirements have arisen, the Navy commented that encumbrances
for unliquidated obligations have not been an impediment to obtaining
necessary funds. While we agree focusing on systemic issues offers
opportunities to improve the Navy*s financial information, we note DOD*s
obligation review regulations are in fact designed to minimize systemic
problems and do not allow for prioritization. Furthermore, the ability of
the Navy to gain access to funds when needs arise does not relieve it of
the responsibility to adhere to existing laws and regulations governing
sound financial management. We therefore are making no changes to the
recommendations in our report.
Page 4 GAO- 03- 275 Defense Budget
Obligations are recorded when an authorized agent of the federal
government enters into a legally binding agreement to purchase specific
goods or services. 4 As bills are received and payments are made, the
recorded obligation is reduced by the amount of the payments made. When
all services or goods have been received and paid for, the obligation is
considered *liquidated,* and any remaining amount of the unliquidated
(unpaid) obligation should be deobligated and reduced to zero. 5 Operating
funds must be obligated in the fiscal year for which they are
appropriated.
However, obligated funds may be spent over a period of 5 additional years,
as bills for goods and services are received and paid. 6 If the goods and
services are received and paid for in the first year of the obligation,
the remaining unliquidated obligation can be reused for other needs
consistent with the source appropriation. If the goods and services are
received and paid for in the subsequent 5 years, the remaining
unliquidated obligation
can still be used, if permissible, to modify contracts or to increase
existing obligations that might need more funds.
Accurate obligation information is essential for reliable budgeting
reports to Congress, agency financial statements, performance
measurements, and funds control. Inaccurate obligation data misstates the
amount of funds available from the appropriation, contributes to
inaccuracies in the Navy*s budget and financial reports, and subsequently
leads to inaccuracies in
federal financial statements. For example, the Navy*s unliquidated
obligations are reported in the Navy Statement of Budgetary Resources,
which are in turn incorporated in other DOD and federal budget reports and
financial statements.
We have documented weaknesses in DOD*s accounting practices and Navy
auditors have documented inaccuracies in the Navy*s obligations data. In
our 2001 Performance and Accountability Series report, we stated that
because of weaknesses in DOD*s budget execution accounting, the department
does not know with certainty the amount of funding it has
4 31 U. S. C. 1501; DOD Financial Management Regulation (FMR) volume 3,
chapter 8, section 080301. 5 DOD FMR volume 3, chapter 8, section 080405
A, requires all deobligations, adjustments or corrections to be documented
and processed within 10 working days of their identification.
6 31 U. S. C. 1552. Background
Page 5 GAO- 03- 275 Defense Budget
available. 7 Naval Audit Service reports published in February 1999 8 and
January 2000 9 reported that Navy fund managers were not complying with
obligation review regulations and documented inaccuracies in the Navy*s
obligation data. In July 2000 we reported that such inaccuracies in
obligation data not only hamper DOD*s ability to produce timely and
accurate financial information, but also significantly impair efforts to
improve the economy and efficiency of its operations. 10 To ensure that
obligation data are tracked and accurately reported, the DOD Financial
Management Regulations (FMR) require that the services, including the
Navy, review their unliquidated operating obligations valued $50,000 or
more three times a year to ensure that they are accurate and that the
funds are still needed. 11 All unliquidated operating obligations,
regardless of dollar value, must be reviewed at least once a year. 12
Also, Congress specifically established in chapter 15 of title 31, United
States Code, a framework for reviewing, adjusting, certifying to, and
reporting on, among other items, the status and amounts of unliquidated
obligations. 13 In addition, for many interagency obligations entered
under specific statutory authority, such as the Economy Act, 14 the
authorizing
7 U. S. General Accounting Office, High Risk Series: An Update, GAO- 01-
263 (Washington, D. C.: Jan. 1, 2001). 8 Naval Audit Service, Obligations
Associated Primarily with Indefinite Delivery Contracts and Basic Ordering
Agreements (Falls Church, Va.: February 18, 1999). 9 Naval Audit Service,
Validation of Selected Work Request Obligations in the Standard Accounting
and Reporting System (Washington, D. C.: Jan. 28, 2000).
10 U. S. General Accounting Office, Department of Defense: Implications of
Financial Management Issues, GAO/ T- AIMD/ NSIAD- 00- 264 (Washington, D.
C.: July 20, 2000). 11 DOD FMR volume 3, chapter 8, section 080403 B. DOD
first implemented this requirement in May 1996 via a memorandum issued by
the Office of the Under Secretary of Defense to all military services,
including the Navy. DOD formally added the requirement to volume 3,
chapter 8 of the FMR in November 2000.
12 DOD FMR volume 3, chapter 8, section 080403 E. 13 31 U. S. C., chapter
15, subchapter IV. 31 U. S. C. S: 1554( b) specifically directs heads of
agencies to report to the President and the Secretary of the Treasury, and
to certify to those reports, regarding unliquidated obligations and other
balances and adjustments. Section 1554( c) directs agencies to establish
controls to assure that an adequate review of obligated balances is
performed.
14 31 U. S. C. S: 1535.
Page 6 GAO- 03- 275 Defense Budget
statute may mandate the deobligation of appropriations at specific times
or when certain conditions arise. 15 The DOD regulation also directs the
services to implement effective
internal controls to ensure that the required reviews are completed and
that identified corrective actions are completed in a timely manner. 16
Further, the Federal Managers* Financial Integrity Act of 1982 17 requires
that agencies* controls reasonably ensure that (1) obligations and costs
comply with applicable law and (2) revenues and expenditures applicable to
agency operations are properly recorded and accounted for so that agency
accounts and reliable financial and statistical reports may be prepared
and the accountability of assets may be maintained. 18 An estimated two-
thirds of the Navy*s unliquidated operating obligations
valued at $50,000 or more from the fiscal years 1997- 99 operating
appropriations was not properly accounted for. Specifically, we estimated
that $929 million of the $1.4 billion in unliquidated operating
obligations was not properly accounted for. As shown in table 1, $452
million of the unliquidated operating obligations was no longer needed for
its original purpose. These funds could have been used for other
permissible purposes of the same appropriation and fiscal year, such as
contract modifications. In addition, $477 million was not properly
accounted for due to billing and
recording errors, including $147 million in problem disbursements and $330
million in unresolved accounting and recording errors. Finally, $489
million in unliquidated operating obligations was properly accounted for
and still needed for the original purpose.
15 Section 1535( d) of the Economy Act, for example, requires deobligation
of funds at the end of their period of availability if the performing
agency has not performed or otherwise made authorized contracts.
16 DOD FMR volume 3, chapter 8, section 080404. 17 P. L. 97- 255, S: 2, 96
Stat. 814, September 8, 1982 (codified at 31 U. S. C. S: 3512( b) and
(c)), and is commonly called the Federal Managers* Financial Integrity Act
of 1982. 18 31 U. S. C. S: 3512( c)( 1). Navy Did Not
Properly Account for Large Portion of Unliquidated Operating Obligations
Page 7 GAO- 03- 275 Defense Budget
Table 1: Estimate of Navy*s Unliquidated Operating Obligations for Fiscal
Years 1997- 99, as of September 30, 2001
Dollars in millions
Category Estimated total Percentage of total
Still needed for original purpose $489 35 Not properly accounted for: No
longer needed for original purpose 452 32
Problem disbursements 147 10 Unresolved errors 330 23 Subtotal not
properly accounted for: 929 65
Total $1,419 a 100
Source: DOD. Note: GAO analysis of DOD data. a Amounts do not add to total
due to rounding.
The Navy failed to deobligate an estimated $452 million that was no longer
needed for the original obligated purpose. According to DOD regulations,
these unliquidated funds should have been deobligated once services had
been performed, final payment issued, and the funds made available for
other purposes consistent with the appropriation. In many of our sample
cases, the entire amount of an obligation was not required to meet billing
needs and resulted in funds remaining over. For example, in one of the
cases we reviewed, $4.7 million had been disbursed from a 1997 obligation,
valued at $6 million, to support the San Diego Harbor Tug Charter;
however, the last disbursement was made in October 1999. We discovered
that the remaining unliquidated funds were no longer needed and the Navy
subsequently deobligated the unliquidated $1.3 million. Similarly, we
reviewed a 1996 (fiscal year 1997) obligation to fund systems development
at the Bureau of Naval Personnel. When the responsible Navy fund manager
reviewed the unliquidated obligation at our request, he determined that
the outstanding balance of $1.4 million attached to this obligation was no
longer required and deobligated it. In both of these cases, if Navy
personnel had reviewed these obligations in accordance with DOD
regulations, they would have detected the error and deobligated the funds
years ago, thereby possibly allowing Navy to use the funds for other
permissible purposes, including contract modifications, or other
obligation needs of the same appropriation and fiscal year.
The Navy had also not properly accounted for an estimated $147 million in
unliquidated operating obligations due to expenditures that were not
properly matched to a specific obligation recorded in the Navy*s records*
problem disbursements. We previously reported that the Navy*s financial
Page 8 GAO- 03- 275 Defense Budget
control policy and procedures do not ensure that the Navy can match
payments to corresponding obligations before or at the time a payment is
made. 19 Consequently, if the Navy cannot resolve these problem
disbursements by matching the disbursement to the original obligation, it
must record a new obligation to cover the disbursement after a payment is
made. For example, one of our sample items had an unliquidated obligation
balance of $1,362,790 on September 30, 2001. The fund manager of this 1998
obligation stated that all of the funds had been disbursed; however, the
Navy*s Standard Accounting and Reporting System indicated that no
disbursements had been made. We discovered that in fact all of the
funds had been disbursed for this obligation, but the disbursements had
been posted to the wrong obligation in the accounting system. Funds that
remain unliquidated due to a problem disbursement may not be deobligated
and used for other purposes because the funds are still needed
to reimburse the obligation that was erroneously charged for the
disbursement.
The Navy had not properly accounted for an estimated $330 million due to
unresolved accounting and recording errors. These obligations remained
unliquidated for several reasons. Most unresolved errors in our sample
occurred because fund managers were unable to identify whether the
providers of goods or services had been paid in full for services
rendered. The fund managers claimed that providers were often slow to bill
or had not sent a final bill. For example, we reviewed a 1997 obligation
for aircraft maintenance that had an unliquidated balance of $14.4
million. The fund managers said that they had not received a bill from the
Air Force, which provided the maintenance service. In this case, the $14.4
million remained on the books as unresolved, because the fund managers
still expected to receive a bill for the services. An example of a
recording error is illustrated in a $12 million obligation to support
alterations on the USS LaSalle. A disbursement was input twice and then
reversed twice instead of once. The second reversal of the disbursement
left an unliquidated
balance on the obligation that should have been disbursed. Funds that
remain unliquidated due to unresolved accounting and recording errors
cannot be deobligated and used for other purposes, because the Navy needs
to have funds available to pay providers after the errors have been
resolved.
19 U. S. General Accounting Office, Financial Management: Problems in
Accounting for Navy Transactions Impair Funds Control and Financial
Reporting, GAO/ AIMD- 99- 19 (Washington, D. C.: Jan. 19, 1999).
Page 9 GAO- 03- 275 Defense Budget
The Navy did not fully adhere to DOD regulations to review all
unliquidated operating obligations, including those obligations valued at
$50,000 or more three times per year and those obligations valued at less
than $50,000 once every year. Furthermore, the Navy did not utilize
internal controls to determine the accuracy of the review process or the
outcomes of the reviews. As a result, the Navy did not know how much money
was tied up in unliquidated operating obligations that could potentially
be used for other permissible needs.
According to DOD regulations, obligation reviews are to be conducted by
fund managers within 14 days following the end of January, May, and
September. DOD regulations also require the services to implement
effective internal controls to ensure that the reviews are completed and
corrective actions are implemented in a timely manner. The purpose of
these reviews is to ensure that the unliquidated balances are accurate and
still needed. The Navy issued implementing guidance that (1) restates the
three deadlines provided in the DOD regulations, (2) requires that
internal controls be implemented by each entity as described in DOD
regulations, and (3) requires each fund manager to complete a checklist of
the review steps performed. For example, one required step is to follow up
and ensure the obligation is still needed. The guidance also requires the
comptroller of each major command to consolidate the review results from
the fund managers and include a list of all fund managers who did not
fully adhere to DOD regulations and the reason why. The major command
confirmation statement is to be forwarded to the Assistant Secretary of
the Navy (Financial Management and Comptroller), Office of Budget.
Although DOD regulations require Navy fund managers to review all
operating obligations once annually and those $50,000 and above three
times each year, fund managers have not fully adhered. Fund managers
stated that they selectively reviewed some unliquidated operating
obligations, but were unable to make all the required reviews or complete
all the steps on some of the cases they reviewed. For example, fund
managers first prioritize for review the high- value unliquidated
operating obligations in the current fiscal year to accommodate immediate
funding
requirements. That frees the funds for reobligation during the same fiscal
year. Unliquidated operating obligations that are approximately 5 years
old and, based on appropriations that will cancel at the end of the fiscal
year, are also a high priority for review in order to pay outstanding
bills while
funds are available. As a result of prioritized and selective obligations
review, some operating obligations are not reviewed three times a year as
required by DOD regulations and some are not reviewed at all. Navy Did Not
Fully
Adhere to DOD Review Regulations
Page 10 GAO- 03- 275 Defense Budget
Navy fund managers provided several reasons why they selectively reviewed
obligations and did not review all of them. They stated that the process
of reviewing an obligation can be time- consuming due to a lack of
automated tools and, often, a lack of accurate billing information needed
to assess the validity of an obligation, especially for older obligations.
Officials acknowledged that the Navy*s Standard Accounting and Reporting
System provides users with the capability to conduct ad hoc queries of the
obligation database, but they claim these tools are not userfriendly
because users must be familiar with the system*s databaseprogramming code
to take full advantage of its capabilities. Few of the staff assigned to
perform obligation reviews had the required computer training or knowledge
to write queries. Some of the fund managers also told us that they were
reluctant to review the large volume of low dollar unliquidated operating
obligations because they felt the expected rate of return was not cost
beneficial given the magnitude of resources required
to conduct the review. To illustrate the large volume, Atlantic Fleet
officials reported that they had 579,904 unliquidated operating
obligations valued $50, 000 or less, 20 and officials at the Pacific Fleet
reported 724,266 such unliquidated operating obligations. 21 Further, some
fund managers
stated that it was impossible for them to comply with the requirement to
review all such unliquidated operating obligations even once a year,
because they did not have enough staff to review the large number of such
obligations. Officials in the Navy Comptroller Office acknowledged that
fund managers
have reported difficulties performing obligation reviews. Navy officials
also acknowledged that inaccurate obligation data compromises the
reliability of their financial statements, and therefore it is reasonable
that they review their obligations according to the regulations.
Consequently,
the Navy has not sought relief from DOD obligation review regulations. The
Navy did not utilize internal control activities necessary to ensure that
fund managers performed thorough obligation reviews in accordance with DOD
regulations. Although some major commands had developed written standard
operating procedures or checklists to track whether fund managers had
reviewed their unliquidated operating obligations, they did not hold
managers accountable for the accuracy and completeness of the reviews.
Fund managers submitted obligation- review confirmation
20 As of Mar. 10, 2002. 21 As of June 14, 2002.
Page 11 GAO- 03- 275 Defense Budget
statements to their major commands, but often the commands could not
determine specific details about the obligations, including the number of
unliquidated operating obligations reviewed, the amount of the obligations
reviewed, and the resolution of any problems identified during the review.
For example, one major command has a process to review whether fund
managers submit the required obligation review paperwork. However, the
command does not spot- check obligations to determine if they are valid as
claimed by the fund managers and accepts the fund managers obligations
review paperwork as is. Officials in the Navy Comptroller Office stated
that fund managers should
place more emphasis on reviewing obligations in accordance with DOD
regulations. However, they did not think it would be productive to
discipline fund managers for failure to adhere to the regulations. Rather,
they believe that the Navy should rely on financial system upgrades to
improve the accuracy of obligation data.
As highlighted in our 2001 Performance and Accountability Series reports,
financial management is one of the major management challenges facing DOD.
22 The large dollar value of unliquidated Navy obligations that were
not properly accounted for contributes to inaccuracies in the Navy*s
budget and financial reports, and subsequently leads to inaccuracies in
federal financial statements and the President*s budget. Moreover, the
Navy will not be able to pass the test of an independent financial audit
until it corrects inaccurate obligation data.
DOD regulations and Navy guidance provide for unliquidated obligations to
be reviewed by fund managers on a regular basis. The fund managers*
ability to deobligate or resolve the errors on many of our sample items
demonstrates that the review process could be effective. But the fund
managers have chosen to only selectively follow the requirements for
review because they said they were constrained by too little time to
review the large number of transactions, inaccurate billing information,
and the lack of automated tools. Although the Navy recognized the
potential benefits of timely identification of funds that are no longer
needed or in error, its internal controls have not ensured that required
reviews were made and corrective action taken. We note that fund managers
were able
22 U. S. General Accounting Office, High Risk Series: An Update, GAO- 01-
263 (Washington, D. C.: Jan. 1, 2001). Conclusions
Page 12 GAO- 03- 275 Defense Budget
to successfully resolve nearly all of the unliquidated operating
obligations in our sample even though the resolution of some of the
obligations required an extensive amount of time and effort. Therefore, it
is likely that many of the unliquidated obligations in our sample that
were not properly accounted for could have been identified and accounting
errors could have been corrected prior to our review had fund managers
performed obligation reviews in accordance with the DOD regulations.
We recommend that the Secretary of Defense direct the Secretary of Navy
to: adhere to DOD unliquidated operating obligation review regulations;
and better apply existing internal control activities to ensure
adherence to
these regulations, and to hold fund managers accountable for the accuracy
and completeness of their reviews.
As you know, 31 U. S. C. requires the head of a federal agency to submit a
written statement of the actions taken on our recommendations to the
Senate Committee on Government Affairs and the House Committee on
Government Reform not later than 60 days after the dare of this report. A
written statement must also be sent to the House and Senate Committees on
Appropriations with the agency*s first request for appropriations made
more than 60 days after the date of this report.
The Director, Office of the Budget, Department of the Navy provided DOD*s
written comments on a draft of this report, which are provided in their
entirety in appendix II. The Navy partially concurred with our
recommendations and noted that more thorough efforts dedicated to the
review of obligations would increase the accuracy and reliability of
financial reports. It also plans to make the review process a part of its
management structure and stress the importance of accurate financial
statements. The Navy, however, commented that because numerous factors
contribute to problems in financial reports, it has to prioritize its
remedial efforts. Specifically, the Navy places a premium on reviewing
unliquidated obligations in available appropriations, correcting systemic
problems, and pursuing broad improvements in financial management. For
example, the Navy stated it made significant improvements in correcting
systemic issues* such as problem disbursements* and is working to provide
automated tools and correct systemic issues that would positively impact
the fund managers* ability to conduct obligation reviews. While it noted
validating unliquidated obligations is desirable and important, the
Recommendations for
Executive Action Agency Comments and Our Evaluation
Page 13 GAO- 03- 275 Defense Budget
Navy emphasized that systemic improvement of its financial information
offers the better opportunity for success.
The Navy did not agree that the difficulty the fund managers have had in
reviewing unliquidated obligations precluded the use of funds for other
appropriate needs. It noted that Congress has intentionally and
progressively limited the availability of funds from prior year
appropriations, clearly establishing that the appropriateness of use
outweighs the efficiency of use. When appropriate requirements for the
application of available funds from prior year appropriations have arisen,
the Navy commented that encumbrances for unliquidated obligations have not
been an impediment to obtaining necessary funds.
While we understand numerous factors, including systemic issues, affect
the accuracy of Navy financial reports, DOD regulations require that fund
managers annually review all unliquidated obligations and, as currently
written, do not provide for prioritization of such reviews. We recognize
the Navy has taken steps to significantly reduce the amount of outstanding
problem disbursements; however, as our report points out, problem
disbursements are only part of the reason for the significant amount of
unliquidated obligations. For example, about $782 million of the $929
million in unliquidated obligations in our sample were improperly
accounted for due to reasons unrelated to problem disbursements.
Specifically, the aggregate of these transactions involved funds that were
no longer needed for their original purpose or involved unresolved
accounting and recording errors. While we agree that focusing on systemic
issues offers opportunities to improve the Navy*s financial information,
we also note that the internal control procedures reflected in DOD*s
obligation review regulations are in fact designed to minimize systemic
problems such as problem disbursements. To the extent that the Navy*s
efforts to make systemic improvements include automated tools designed to
assist the fund managers in complying with obligation review requirements,
we believe these efforts represent a positive step.
We disagree with the Navy*s views regarding the impact of failing to
review all unliquidated obligations as required under current DOD
regulations. Regardless of whether the Navy is able to gain the funds
necessary from unliquidated obligations to satisfy appropriate
requirements as they arise, inaccurate obligation data in the Navy*s
financial system has broader implications, such as inaccurate financial
reports and misstatements of budgetary information on federal financial
statements and in the President*s budget. While we agree Congress has
placed statutory limitations on the availability of appropriated funds,
DOD,
Page 14 GAO- 03- 275 Defense Budget
like all agencies, is responsible for effectively and efficiently
implementing its activities within the limitations applicable to the
appropriations it receives. Indeed, Congress specifically established in
chapter 15 of title 31, United States Code, a framework for reviewing,
adjusting, certifying to, and reporting on, among other items, the status
and amounts of unliquidated obligations. 23 In addition, the Federal
Managers* Financial Integrity Act of 1982 24 requires that agencies have
controls to reasonably ensure that revenues and expenditures applicable to
agency operations are recorded and accounted for properly so that accounts
and reliable financial and statistical reports may be prepared and
accountability of assets may be maintained. 25 Finally, for many
interagency obligations entered under a specific statutory authority* such
as the Economy Act 26 * the authorizing statute may mandate the
deobligation of appropriations at specific times or when certain
conditions arise. 27 In this context, the ability of the Navy to access
funds encumbered by unliquidated obligations does not relieve it of the
responsibility to adhere to existing laws and
regulations governing sound financial management. We therefore are making
no changes to the recommendations in our report.
We are sending copies of this report to congressional committees with
jurisdiction over DOD*s budget and the Secretary of the Navy. We will also
make copies available to others upon request. In addition, the report will
be available at no charge on the GAO Web site at http:// www. gao. gov.
23 31 U. S. C., chapter 15, subchapter IV. 31 U. S. C. S: 1554( b)
specifically directs heads of agencies to report to the President and the
Secretary of the Treasury, and to certify to those reports regarding
unliquidated obligations and other balances and adjustments. Section 1554(
c) directs agencies to establish controls to assure that an adequate
review of obligated balances is performed.
24 P. L. 97- 255, S: 2, 96 Stat. 814, September 8, 1982 (codified at 31 U.
S. C. S: 3512( b) and (c)), and is commonly called the Federal Managers*
Financial Integrity Act of 1982. 25 31 U. S. C. S: 3512( c)( 1).
26 31 U. S. C. S: 1535. 27 Section 1535( d) of the Economy Act, for
example, requires deobligation of funds at the end of their period of
availability if the performing agency has not performed or otherwise made
authorized contracts.
Page 15 GAO- 03- 275 Defense Budget
If you or your staff have any questions about this report, please call me
at (202) 512- 9619. Key contributors to this report are listed in appendix
III.
Sharon Pickup Director, Defense Capabilities and Management
Appendix I: Scope and Methodology Page 16 GAO- 03- 275 Defense Budget
Our objective was to determine whether the Navy*s unliquidated operating
obligations were (1) properly accounted for and (2) periodically reviewed
in accordance with DOD regulations.
To determine whether Navy*s unliquidated operating obligations were
properly accounted for, we requested that the Defense Finance Accounting
Office provide us with a database that identified all unliquidated
operating obligations outstanding on September 30, 2001. We relied on the
completeness and accuracy of that database based on the
office*s representations and did not independently test or reconcile the
validity of their database. For our review, we selected unliquidated
operating obligations for fiscal years 1997- 99. Older obligations are
more likely to be in error and thus provided a better test of the Navy*s
obligation management practices. We then divided the individual
unliquidated operating obligations into two groups* those valued at less
than $50,000 and those valued at $50,000 or more. Those valued at $50,000
or more represented $1.4 billion, or 67 percent of the value of all
outstanding operating obligations for fiscal years 1997- 99.
From the population of obligations valued at $50,000 or more, we drew a
stratified random sample of 205 unliquidated operating obligations to
review. For each transaction, we obtained the following documentation: (1)
documentary support describing each obligation, including amendments and
modifications for each sample transaction; (2) responses
from Navy officials regarding whether each unliquidated operating
obligation in our sample was still needed for its original purpose
according to the criteria in the DOD Financial Management Regulation 1
(FMR); and (3) support for how to classify each unliquidated operating
obligation in our sample as still needed, no- longer- needed, problem
disbursement, or an unresolved accounting and recording error.
The sample was selected from three strata defined by the dollar value of
the obligations, as shown in table 3. 1 DOD FMR volume 3, chapter 8,
section 080303 A. Appendix I: Scope and Methodology
Appendix I: Scope and Methodology Page 17 GAO- 03- 275 Defense Budget
Table 2: Dollar Value Distribution of Fiscal Year 1997- 99 Obligations
Reviewed in the GAO Sample, as of September 30, 2001
Strata Number of items Total value
Over $10,000,000 5 $240,382,914.38 $500,000 to $10, 000,000 100
113,190,918.46 $50,000 to $499, 999 100 14,571,125.75
Total 205 $368,144,958.59
Source: DOD. Note: GAO analysis of DOD data. To determine whether the
amount of each unliquidated operating
obligation was properly accounted for, we reviewed support provided by the
Navy, discussed the status of the unliquidated obligation with the primary
Navy official responsible for the individual transaction, and used the
criteria set forth in DOD*s regulations. We classified unliquidated
operating obligation transactions as *still needed* and properly accounted
for when the Navy provided documentation to support that the contracted
goods or services were still needed; thus, the transaction passed a bona
fide needs test. Items not properly accounted for fell into three
categories. We classified the transaction *no longer needed for original
purposes*
when the Navy could not provide support that a bona fide need existed. We
classified transactions as *problem disbursements* when specific
disbursements were not properly matched to corresponding obligations
recorded in the department*s records. We classified the remaining
unliquidated operating obligation transactions as *unresolved accounting
and recording errors* when they did not clearly meet the criteria for
needed, no- longer- needed, or problem disbursements.
To determine if the Navy*s unliquidated operating obligations were
periodically reviewed in accordance with DOD regulations, we requested
that the Navy provide documentation and guidance on the Navy*s
implementation of the regulations. We also interviewed officials at 12
locations to discuss (1) their procedures for performing obligation
reviews, (2) the magnitude of transactions involved to perform the review
as set forth in the DOD obligation review regulations, and (3) whether the
officials had difficulty meeting the obligation review requirements,
including the reasons why. We visited the Commander in Chief of the
Atlantic Fleet in Norfolk, Va.; the Commander, Navy Mid- Atlantic Region
in Norfolk, Va.; the Commander, Naval Sea Systems Command in Washington,
D. C.; the Naval Facilities Engineering Command in Washington, D. C.; the
Director of Strategic Systems Programs in
Washington, D. C.; the Commander in Chief of the Pacific Fleet in Pearl
Appendix I: Scope and Methodology Page 18 GAO- 03- 275 Defense Budget
Harbor, Hawaii; the Commander, Naval Region in Pearl Harbor, Hawaii; the
Commander, Naval Air Force Command of the Pacific Fleet in San Diego,
Calif.; the Commander, Naval Surface Force Command of the Pacific Fleet in
San Diego, Calif.; the Space and Naval Warfare Systems Command in San
Diego, Calif.; the Commander, Naval Air Systems Command in Patuxent River,
Md.; and the Bureau of Medicine and Surgery in Washington, D. C.
We conducted our review from October 2001 through October 2002 in
accordance with generally accepted government auditing standards.
Appendix II: Agency Comments Page 19 GAO- 03- 275 Defense Budget
Appendix II: Agency Comments
Appendix II: Agency Comments Page 20 GAO- 03- 275 Defense Budget
Appendix III: GAO Contacts and Staff Acknowledgments
Page 21 GAO- 03- 275 Defense Bud
Sharon Pickup (202) 512- 9619 Gary L. Billen (214) 777- 5703
In addition to the individuals named above, Lori Adams, Linda Garrison,
Gregory Kutz, Steve L. Pruitt, Rhonda P. Rose, and R. K. Wild made key
contributions to this report. Appendix III: GAO Contacts and Staff
Acknowledgments GAO Contacts Staff Acknowledgments
(350126)
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