Background

Following the terrorist attacks of September 11, 2001, the United States  began military operations to combat terrorism both in the United States  and overseas.  Operations to defend the United States from terrorist  attacks are known as Operation Noble Eagle. Overseas operations to  combat terrorism are known as Operation Enduring Freedom, which takes  place principally in Afghanistan, and Operation Iraqi Freedom, which takes  place in and around Iraq.  Figure 1 shows the primary locations where U.S.  forces conducted operations to support GWOT in fiscal year 2004.
Since September 11, 2001, DOD reports that it obligated $191 billion  through May 2005 to conduct GWOT.  Factors that affect the cost of the war  include the number of deployed personnel, the special pays and allowances  that deployed personnel receive, the additional pay that mobilized  reservists receive when on active duty, the pace of operations, the extent to  which facilities have to be built to house and protect the deployed forces,  and the distance to the theater.  Congress has enacted a series of  supplemental appropriation acts, beginning in September 2001, to fund the  war.  These supplemental appropriation acts have included funding  authority for operations in Afghanistan and Iraq, homeland security, and  other global counterterrorism military and intelligence operations.
The costs of contingency operations are referred to as “incremental costs”  and are directly attributable costs that would not have been incurred, were  it not for the operation.  Specifically, the costs are above and beyond  baseline training, operations, and personnel costs. Incremental costs  include the pay of mobilized reservists as well as the special pays and  allowances of deployed personnel, such as imminent danger pay and  foreign duty pay for those personnel serving in Operation Iraqi Freedom  and Operation Enduring Freedom, the cost of transporting personnel and  materiel to the theater of operation and supporting them upon arrival, and  the operating cost of equipment, such as vehicles and aircraft, among many  other costs.  Costs that are incurred regardless of whether there is a  contingency operation, such as the base pay of active duty military  personnel, are not considered incremental.
DOD tracks the obligations incurred to support GWOT and produces a  monthly cost report, which is distributed throughout the department and  used by senior DOD leadership in discussing the cost of the war.  It is also  used in formulating future budget requests to fund GWOT.  The monthly  report, which, as noted earlier, was titled the Terrorist Response Cost  Report until January 2005, when it was renamed the Supplemental and  Cost of War Execution Report, identifies the monthly and cumulative  incremental GWOT obligations.  DOD reports the costs by service, defense  agency, contingency operation, and appropriation.  On October 1, 1998,  DOD implemented a standard contingency cost breakdown structure to  improve contingency cost reporting consistency between multiple services  and DOD agencies.  Furthermore, this cost breakdown structure was also  to facilitate future efforts to understand and interpret differences between  estimated and actual costs.  DOD Financial Management Regulation  7000.14-R, volume 12, chapter 23, generally establishes financial policy and  procedures related to DOD contingency operations.  The regulation  incorporates the common cost categories and multiple subcategories,  which were established in 1998 and updated in January 2005, that are used  to report DOD’s monthly GWOT costs.
We previously reported our concerns about the reliability of reported  contingency operations cost data.  Specifically, our 1996 report on the  reliability of reported contingency operations costs found inaccuracies  representing about 7 percent of the $4.1 billion in costs reported in fiscal  years 1994 and 1995, which we believe was indicative of a material  weakness in the accounting systems.   These included the following:  $104 million in overstated costs, primarily due to the failure of the Air  Force ($67 million) and the Navy ($3 million) to adjust reported flying  hour costs to reflect the value of free fuel being received at that time.
The services’ failure to adjust reported costs to reflect normal operating  and training costs. For example, one Army command reported operating  costs of $11 million that were not incurred because of deployments.
The services’ failure to report or fully report $171 million in understated  costs, including some military personnel costs such as imminent danger  pay and family separation pay, munitions the Navy used, and Air Force  mobility equipment and munitions.
We further reported that it was not feasible to examine all reported costs  and supporting data and that our results were not statistically projectable.   Consequently, we were unable to conclude, on the whole, if reported costs  were overstated or understated.  At that time, we recommended that DOD  clarify existing guidance for reporting costs, which DOD agreed to do.   Over the years DOD and the services have adopted a number of our  recommendations to improve their guidance for spending on contingency  operations.

	Reliability of DOD’s Reported Costs Is Unknown

We found numerous problems in DOD’s processes for recording and  reporting costs for the Global War on Terrorism, raising significant  concerns about the overall reliability of DOD’s reported cost data.  As a  result, neither DOD nor Congress (1) can reliably know how much the war  is costing and details on how appropriated funds are being spent or (2)  have historical data useful in considering future funding needs.  On the  basis of our work, DOD is taking steps to improve its cost reporting.   However, as was the case in our 1996 report, because it was not feasible to  examine all reported costs and significant data reliability problems existed,  we were not able to determine the extent that total costs were misstated.   DOD policy requires that controls, accounting systems, and procedures  provide, in financial records, the proper identification and recording of  costs incurred in supporting contingency operations.  However, our  examination of DOD’s reported costs in support of GWOT found a number  of problems affecting the accuracy of reported costs.  These problems  included long-standing deficiencies in DOD’s financial management  systems and business processes, reported military personnel obligations  that do not match payroll records, incorrectly categorizing operation and  maintenance obligations, the use of estimates instead of actual  information, and a lack of supporting documentation.  Problems  contributing to DOD’s challenges in reporting reliable GWOT cost data  include the previously cited long-standing deficiencies in DOD’s financial  management systems, the lack of a systematic process to ensure that data  are correct, the failure to use actual data when available, and a large  number of cost categories and little training on how to apply them.

		DOD’s Financial Management Regulation Addresses the Importance of Accurately Reporting Obligations

DOD’s Financial Management Regulation (FMR) emphasizes the  importance of accurate cost reporting.  Volume 6A, chapter 2 (sec. 020201)  of DOD’s FMR establishes the general financial responsibilities for DOD  components.  Components are responsible for the following:  ensuring the accuracy, completeness, timeliness, and documentary  support for all data generated by the customer and input into finance  and accounting systems;   or submitted to the Defense Finance and Accounting Service for input  and/or recording in the finance and accounting systems and inclusion in  financial reports;    establishing appropriate internal controls to ensure the accuracy of data  provided to the DFAS; and  reviewing all reports provided by the DFAS to assess the accuracy of the  financial information being reported.
In addition to volume 6A, chapter 2, volume 3, chapter 8 of the FMR has  several provisions that require funds holders to take steps to ensure that  transactions have been entered accurately.  Section 080401 requires that  funds holders conduct a triannual review of commitments and obligations.   During these reviews, officials are to review commitment and obligation  transactions for timeliness, accuracy, and completeness. The requirement  applies to all appropriations and funds of all DOD components.  Section  080403 establishes the responsibility of conducting reviews of outstanding  commitments and unliquidated obligations to funds holders.  According to  the FMR, this is true regardless of whether the funds holders or the  accounting office actually records the commitments or obligations in the  official accounting records.  This responsibility is placed on the funds  holders because the funds holder initiates those actions that result in  commitments and obligations and, therefore, is in the best position to  determine the accuracy and the status of such transactions.
Finally, volume 12, chapter 23 of the FMR establishes policies and  procedures for budgeting and cost reporting for contingency operations  and states that DOD policy requires that controls, accounting systems, and  procedures provide, in financial records, proper identification and  recording of costs incurred in supporting contingency operations.

		Concerns Regarding the Reliability of Reported GWOT Costs Stem from a Variety of Factors

Our work has identified a number of concerns regarding the reliability of  reported GWOT costs.  These include deficiencies in DOD’s financial  management systems, discrepancies between some reported military  personnel obligations and DOD payroll information, incorrectly  categorized operation and maintenance costs, the use of estimates instead  of actual information, and a lack of supporting documentation.

			DOD Uses Its Existing Financial Management Systems and Business Processes to Record GWOT Costs, but These Systems Have Long-standing Deficiencies

Because DOD’s accounting systems cannot directly capture GWOT costs,  the department’s overall GWOT cost reporting is based on the military  services’ reports of obligations.  Volume 12, chapter 23 of the FMR requires  that the DOD components collect and report applicable costs related to  contingency operations.  Chapter 23 also requires that the services capture  their obligations in their existing accounting systems and at the lowest  possible level of organization.
However, DOD has long-standing deficiencies in its existing financial  management systems and business processes. As recently as September  2004, DOD acknowledged that agencywide financial statements were not  completely reliable as a result of inadequately designed systems. The  department reported that systemic deficiencies in its financial management  systems and business processes result in its inability to collect and report  financial and performance information that is accurate, reliable, and timely.  In March 2004, the Under Secretary of Defense (Comptroller) stated in a  memo that DOD’s fiscal year 2004 agencywide financial statements would  not substantially conform to generally accepted accounting principles.  The  department acknowledged that although it has made progress in its efforts  to resolve financial management shortfalls, its financial management  systems currently do not fully comply with the applicable requirements.
For years we have reported on DOD’s financial management deficiencies.  In 1995 we first designated DOD financial management as an area of high  risk. We concluded that DOD’s financial management deficiencies  adversely affect the department’s ability to control costs, ensure basic  accountability, anticipate future costs and claims on the budget, measure  performance, maintain funds control, prevent fraud, and address pressing  management issues. From 1995 through 2005, we continued to report on  deficiencies in DOD’s financial management processes.  In November 2004,  we testified that recent audits and investigations by our and DOD’s auditors  continue to confirm the existence of pervasive weaknesses in DOD’s  financial and related business processes and systems.  We found that  adverse conditions included discrepancies in military pay, logistical  support such as duplicate supply requisitions, and data reliability needed  by Congress and DOD to make sound sourcing decisions.  Most recently, in  June 2005 we testified that long-standing weaknesses in DOD’s financial  management and related business processes and systems have (1) resulted  in a lack of reliable information needed to make sound decisions and report  on the status of DOD activities, including the accountability of assets,  through financial and other reports to Congress and DOD decision makers;  (2) hindered its operational efficiency; (3) adversely affected mission  performance; and (4) left the department vulnerable to fraud, waste, and  abuse.

			Some Reported Military Personnel Obligations Are Not Consistent with Related Payroll Information

The Army did not have a reasonable and reliable process to identify and  report almost $12 billion of GWOT military personnel obligations in fiscal  year 2004.  Instead of using related DOD payroll information, the Army  based the GWOT military personnel obligations used in the GWOT cost  report primarily on its fiscal year 2004 obligation plan and, in the end,  forced, or “plugged,” obligations to match available supplemental budget  authority.  Effectively, the Army was reporting back to Congress exactly  what it had appropriated.  Army officials were unable to readily explain the  process for identifying and reporting GWOT military personnel obligations.   Specifically, the Army Budget Office lacked formal procedures to guide the  monthly reporting of GWOT military personnel obligations to DOD and a  process to ensure management’s review of the reported amounts.  Army  Budget Office officials stated that these problems were exacerbated by  staff losses in the September 11 terrorist attack on the Pentagon, personnel  turnover, and hiring difficulties.
Our analysis showed that obligations associated with Army military  personnel in the monthly GWOT cost report were not consistent with  related DOD payroll information, and the use of planned obligations  instead of actual payroll information might have resulted in reported Army  military personnel GWOT obligations being materially overstated.  For  fiscal year 2004, our analysis of the more than $7.1 billion in incremental  military personnel obligations listed in the GWOT cost report category for  mobilized Army reserve-component soldiers identified as much as $2.1  billion of reported obligations in excess of related DOD payroll  information.  Initially, the Army could not support this difference or its  reported GWOT military personnel obligations.  Over the next several  months, the Army and the Office of the Under Secretary of Defense  (Comptroller) provided us with several possible, though sometimes  inaccurate, explanations for this difference.  Some explanations appeared  valid while others did not and, taken together, they failed to fully account  for the difference.  For example, the Army Budget Office stated that a  portion of the difference was attributable to retirement pay and retirement  health care accruals.  We found that the retirement health care accrual did  not result in incremental costs and, therefore, was not a valid explanation  for the difference.  However, mobilized reserve-component personnel  receive an increase in retirement pay benefits over nonmobilized reservists  and, therefore, DOD incurs incremental costs related to this benefit.   According to the Army, the retirement pay accrual represents part of the  difference, and it reported this amount at $824 million.  This information  was provided too late in our audit to assess its accuracy and completeness.   Further details on our review of GWOT obligations for Army military  personnel are included in appendix II.
In addition to examining the obligations for mobilized Army reservists, we  also examined reported imminent danger pay and found wide monthly  swings and little correlation with the numbers of deployed personnel.   Imminent danger pay relates directly to the number of military personnel  deployed to eligible areas.  Beginning on October 1, 2002, all military  personnel—both Active and Reserve Component—in areas designated as  eligible for imminent danger pay receive $225 per month for each month for  which they qualify for such pay.  Eligible areas include, but are not limited  to, the countries of Iraq, Afghanistan, Kuwait, Qatar, Bahrain, and Saudi  Arabia.  The monthly amount is payable in full without being prorated or  reduced, for each month, during any part of which a service member  qualifies and regardless of the actual period of time served on active or  inactive duty during that month.
Month-to-month changes in reported imminent danger pay obligations for  GWOT should be consistent with the number of deployed forces in eligible  areas.  However, as shown in table 1, which depicts the amounts reported  for DOD as a whole and the implied number of people who should be  receiving the pay on the basis of dividing the amount per month—$225— into the reported obligations, there are wide monthly swings in the number  of deployed personnel, based on the amount of reported imminent danger  pay, that do not seem to correlate to the actual numbers of deployed  personnel.  For example, the reported imminent danger pay suggests that  173,000 personnel were deployed to support GWOT in July 2004 and that  the number of personnel rose to more than 1 million in August 2004 and  then declined to 264,000 in September 2004 and 61,000 in October 2004.
According to DOD, about 221,300 personnel from all the military services  were deployed throughout the region in December 2004 to support  Operation Enduring Freedom and Operation Iraqi Freedom, including  deployed personnel in Iraq, Afghanistan, and Kuwait.
In continuing discussions of our analysis, Army Budget Office officials  provided additional detail on the Army’s reported imminent danger pay  obligations, which comprise the bulk of DOD-wide reported imminent  danger pay obligations.  With respect to the August 2004 reported imminent  danger pay, which was by far the largest reported amount from April 2004  through April 2005, Army Budget Office officials said that their reported  portion—$217 million—of the DOD-wide $231 million was in error owing to  a misplaced decimal and that the Army’s August 2004 imminent danger pay  should have been reported as $21 million.  These officials attributed the  month-to-month fluctuations in reported imminent danger pay to the lack  of timeliness and consistency in adjusting costs between those baseline  and GWOT amounts.  Beginning in June 2005, the Army said that it adopted  a new process that uses accounting data, with the actual count of deployed  forces as a validation checkpoint.

			Operation and Maintenance Obligations Are Not Always Properly Categorized

Obligations are the foundation of all GWOT cost reporting.  Operation and  maintenance obligations in support of GWOT represent tens of thousands,  if not hundreds of thousands, of individual transactions ranging in value  from 1 penny to millions of dollars.  When obligations are incurred, the  services enter them into their accounting systems using accounting codes.   For example, an Army budget activity, such as an installation or unit,  initially obligates funds for acquired goods and services by using the  Standard Army Accounting Classification Code.  An obligation entry  includes information on the funding source; the operational mission, such  as Operation Iraqi Freedom; and the category of cost.  The cost categories  are established by the services.  In the Army, the cost category is called the  element of resource (EOR).
Because DOD’s Financial Management Regulation volume 12, chapter 23  requires that the services capture costs within their existing accounting  systems and report them in a common cost format known as the cost- breakdown structure, the services must translate—or “cross-walk”— their  obligations into 1 of 55 cost categories in the cost breakdown structure  established by the Office of the Under Secretary of Defense (Comptroller)  and used in the monthly GWOT cost reports.  For the Army, this involves  translating obligations recorded by EOR into the chapter 23 GWOT cost  categories.  To meet DOD’s reporting requirements, each month Army  resource management officials must cross-walk costs in the EOR  categories into the GWOT cost categories, sometimes manually.  For  example, in fiscal year 2004, ARCENT resource management officials  manually cross-walked 266 EORs into 14 GWOT cost categories.
If obligations are not identified in the correct cost category in the services’  accounting system, they can affect the overall reliability of DOD’s GWOT  cost reporting.  In the Army, ARCENT resource management officials told  us that on the basis of their reviews of GWOT obligations, they had  confidence in the accuracy of the total dollar obligations as identified in the  GWOT cost report but felt that obligations were being incorrectly  categorized.  At two Army divisions, we observed obligations being  assigned to the wrong EOR.  In our limited testing of transactions at one of  the divisions, which deployed to Iraq as part of Operation Iraqi Freedom,  we found errors in assigning costs to the correct EOR, which resulted in  overstated costs in some categories and understated costs in others.  We  reviewed 31 transactions valued at $15 million and found coding errors in  11, or 35 percent of the transactions, valued at $770,134, or 5 percent of the  amount we reviewed.  One example of an error we found involved $383,147  in obligations for communications services, which was entered into the  division’s financial management systems under an EOR that corresponded  with DOD’s GWOT cost report’s category of Other Services and  Miscellaneous Contracts.  A senior division resource management official  stated that it would have been better to use an EOR that corresponded with  the Facilities/Base Support category.  As a result, the Other Services and  Miscellaneous Contracts category was overstated by $383,147 while the  Facilities/Base Support cost category was understated by the same  amount.  At the other Army division, which deployed to Afghanistan as part  of Operation Enduring Freedom, we also found errors in assigning costs to  the correct EOR that resulted in overstated costs in some categories and  understated costs in others.  We reviewed 146 of 237 transactions valued at  more than $14 million and found coding errors in 32 transactions, or 22  percent of the transactions, valued at more than $4 million, or 30 percent of  the amount we reviewed.  For example, the division obligated $6,995 for a  printer, which it originally coded with the EOR for automated data- processing equipment.  However, once the purchase request reached the  contracting office, it was recoded as general supplies and not as automated  data-processing equipment.  After reviewing this example and others, a  senior resource management official at the division concurred with our  assessment of these coding errors.
In related reporting, we have raised concerns about reported equipment  reconstitution costs.  Reconstitution is one of the cost categories in  DOD’s GWOT cost report.  We reported that DOD has not accurately  tracked and reported its reconstitution costs because the services are  unable to segregate equipment reconstitution from other maintenance  requirements, as required.  In the case of the Air Force, we reported that it  does not break out its equipment reconstitution obligations from other  GWOT obligations in the cost report and was reporting no reconstitution  costs.  In further discussions Air Force officials told us that their  reconstitution costs were being captured in their flying hour (operating  tempo) costs.  Regarding the Army and the Navy, we reported that  equipment reconstitution obligations reported by those two services are  likely overstated because (1) the Army includes costs other than those  required for reconstitution and (2) the Navy is unable to segregate regular  maintenance from reconstitution maintenance for ship overhauls.  We  recommended and DOD agreed to direct the services to develop  comprehensive and consistent methods for tracking and reporting  equipment reconstitution obligations.  In agreeing with our  recommendation, the Office of the Under Secretary of Defense  (Comptroller) said that the office had already revised its financial  management regulation to improve the reporting of equipment  reconstitution, but we observed that until additional actions are taken,  such as improving the services’ financial management systems’ ability to  track obligations, our recommendation will not be fully implemented.   Beginning in October 2004, DOD revised its reconstitution cost category to  include four subcategories, and the Air Force is reporting reconstitution  obligations in two of those categories.
In addition to the concerns with properly categorizing costs that we  identified, officials from the Army Budget Office believe that the Army’s  operating support obligation data are reliable at the broad category levels  (personnel support, operating support, and transportation), but  distribution within categories is likely to contain errors.  These officials  said that the Army is taking two immediate actions.  First, it has refined its  EOR to cost breakdown structure code cross-walk.  The Army has  specifically identified approximately 135 EORs that directly associate with  the cost breakdown structure.  Additionally, Army officials said that they  have added an additional data element (the Functional Cost Account code,  which describes the programmatic function), which will provide one more  reference point to validate entries.  This revision was effective with the  June 2005 reporting cycle.  Second, Army officials said that the Army is  developing a standard operating procedure with a follow-on “train the  trainers” program for Army-wide distribution.  It will prescribe the  methodology for capturing GWOT execution data from the accounting  systems and source documents.  This is a longer-term solution that the  Army believes should contribute materially to improved data entry at the  originating organizational levels.
The Air Force Audit Agency, in a June 2005 report on Air Force GWOT  spending, also identified errors in properly categorizing GWOT costs.
Specifically, the audit agency found that in fiscal year 2003, 159 of 923  transactions it reviewed, or about 17 percent of GWOT transactions valued  at more than $163 million, were inaccurately recorded in the Air Force’s  accounting system.  The report stated that this condition occurred because  resource management officials were uncertain of which costs were GWOT  related and because reported costs were not compared with  documentation as required by DOD’s financial management regulation.   The audit agency concluded that inaccurate cost reporting may lead to  questionable cost-of-war information, distorted command resource  allocation and spending plans, and unreliable summary DOD financial  reports.  The audit agency made several recommendations, including one  that cognizant Air Force officials review transaction data and notify  accounting liaison office personnel of inaccurate entries monthly, and one  that the liaison office personnel request data correction from appropriate  accounting offices.  The Air Force agreed with the recommendations and  stated that it would make the recommended changes.  In advance of the  report’s issuance, in a March 2, 2005, memo, the Assistant Secretary of the  Air Force, Financial Management and Comptroller, addressed and agreed  to revise guidance to emphasize increased management oversight over  transaction approval, accuracy, and documentation completeness.

			Some GWOT Cost Data Are Based on Estimates

Because ships at sea incur the same types of costs whether in normal  forward-deployed operations or in support of GWOT, the Navy allocates the  costs between normal and GWOT operating costs.  The Navy’s major  commands use a variety of approaches for allocating these costs.  For  example, we found that the Atlantic and Pacific surface commands, which  are responsible for managing the Navy’s surface ships, use two different  approaches in order to allocate a portion of each ship’s normal operating  costs to GWOT for those ships that have been used to support GWOT  missions.  The Atlantic Fleet uses an approach whereby the portion of a  ship’s normal operating costs becomes GWOT costs when (1) the ship has  been engaged in a GWOT mission during that month and (2) the ship  exceeds its monthly baseline budget.  Once the baseline budget has been  exceeded, the additional cost above that baseline is considered  incremental and is recorded as a GWOT cost.  The Pacific Fleet uses a  different approach, which utilizes a model that has evolved over many  years.  This model takes a number of factors into consideration in order to  calculate how much of a ship’s costs should be allocated to GWOT.  These  factors include a running 3-year average of the costs of operating each  individual ship, the cost of maintaining that general class of ships, and  whether the ship has performed GWOT missions.  This model calculates an  amount for each ship that should be recorded as a GWOT cost.

			Documentation Is Not Always Available

Documentation related to goods and services purchased in support of the  Global War on Terrorism is not always available.  Without documentation,  one cannot attest to the reliability and applicability of reported costs to  GWOT.  At one of the Marine Expeditionary Forces, we were able to link  reported costs to the supporting documentation for contractual purchases.   However, when we compared a limited number of documents from the  ARCENT document register with documentation controlled by DFAS- Rome, New York, we found instances where (1) document register  descriptions did not match invoices maintained by DFAS and (2) invoices  did not match dollar amounts associated with the ARCENT documentation  number.  For example, one item we identified was listed in the document  register as a purchase of unit coins for $200,000.  However, we found no  evidence indicating that the $200,000 was actually obligated for the  purchase of unit coins.  The EOR listed in the document register indicated  that the item was for furniture.  When we reviewed the invoices, we found  that the documentation supported the purchase of furniture for $18,959 but  nothing for unit coins or for $200,000.  In another example, a purchase was  listed in the document register for $21,900 toward an operational fund.   When we reviewed the invoice, we found that the documentation  supported the purchase of translator services for $3,950.
Several audit agencies also had mixed success with linking reported GWOT  costs to supporting documentation.  In many cases, documentation was not  available or the available documentation was not sufficient enough to  determine the applicability of costs, as shown in the following examples:   The Air Force Audit Agency, in its previously cited June 2005 report on  Air Force GWOT funds management, reported that financial managers  could not provide documentation to support approximately 14 percent  of 1,037 fiscal year 2003 transactions reviewed.  The transactions had an  absolute value of more than $16 million.  The audit agency reported that  the inability to provide documentation occurred for three primary  reasons: (1) Air Force financial managers did not require funds holders  and resource advisors to maintain supporting documents for a minimum  of 24 months, (2) comptrollers did not provide funds holders and  resource managers with documentation requirements training, and (3)  Air Force organizations did not always comply with records  management guidance.  The agency concluded that maintaining  documentation provides an audit trail and assurance that Air Force  personnel properly expended these funds.  The agency made several  recommendations to strengthen controls over documentation, which  the Air Force agreed to implement.  In the previously cited March 2,  2005, memo issued in advance of the issuance of the Air Force Audit  Agency’s report, the Assistant Secretary of the Air Force, Financial  Management and Comptroller also addressed this finding and agreed to  revise Air Force guidance to require funds holders and resource  advisors to maintain supporting documentation for a minimum of 24  months for all financial transactions, modify the Web-based Resource  Advisor Tutorial to highlight the need for funds holders and resource  advisors to maintain documentation for financial transactions, and to  require comptroller personnel to include documentation requirements  in all funds holders’ training and resource advisor training.
The Naval Audit Service reported that it could not find supporting  documentation for 11 percent of the reported fiscal year 2002 Operation  Enduring Freedom costs for the 14 units it reviewed.  The Naval Audit  Service found that more than half of these unsupported costs resulted  from one unit’s not retaining documentation over a 2-month period.   This same unit’s costs for other months reviewed were well  documented; so, overall, the audit service was not overly concerned  with the 2-month gap.  For the other units reviewed, documentation was  available, but the units could not always identify the portion of those  items reported as being incremental costs of Operation Enduring  Freedom.  The Naval Audit Service concluded that internal controls  were adequate and that an expanded review was not warranted at that  time.  It made no recommendations.
The U.S. Army Audit Agency found that 58, or about 2 percent, of the  2,751 transactions it reviewed for fiscal year 2003 valued at $37.4 million  lacked supporting documentation.  As a consequence, the agency was  unable to determine if the transactions were valid. The Army Audit  Agency also discovered documentation problems involving government  purchase cards.  These problems included a lack of documentation  authorizing purchases and inadequate justification of purchases to  ensure that they were related to contingency operations.  The agency  concluded that without adequate justifications and support to ensure  that the transactions are related to contingency operations, these types  of obligations appear questionable.  The agency recommended that  Army financial management leadership emphasize the consistent  application of guidance for justifying and documenting contingency  operations requirements, and the Army financial management  leadership said that it would emphasize the need to fully justify and  document expenditures as related contingency operations and that it  had already completed or will complete action through the distribution  of additional guidance by December 2005.

		Several Factors Contribute to Data Reliability Concerns

Data reliability is affected by the previously discussed long-standing  deficiencies in DOD’s financial management systems, which affect the  ability to capture costs in a completely systematic manner.  This is  compounded by the lack of a systematic process for ensuring that the data  in the GWOT cost reports are accurate, less-than-adequate management  oversight on the preparation and accuracy of the reports, the failure to use  actual data when available, and a large number of cost categories and little  training on how to apply them.

			There Is No Systematic Process to Ensure That GWOT Data Are Accurately Recorded and Ensure Adequate Management Oversight

For the most part, DOD does not have a systematic process to review  reported GWOT costs to ensure that they are accurate.  To ensure the  accuracy of DOD’s GWOT cost reports, the military services and the Office  of the Under Secretary of Defense (Comptroller) compare each new  month’s cost report with previous months’ reports to ascertain if there are  large variances from previous reports and, if so, determine what caused  them and make revisions as appropriate.  For GWOT cost reporting,  individual obligation data that are coded as being in support of GWOT are  aggregated at successively higher command levels and sent through the  services’ chain of command.  At each command level, financial  management officials review costs for large anomalies.  The services take  different approaches to ensure that GWOT obligation data are correctly  recorded.  For example, the Army gains assurance that reported obligations  are accurate by reviewing the monthly obligation data provided by units.   However, the Army does not follow specific guidelines to determine the  extent to which obligations are accurately reported.  For example, U.S.  Army Forces Command and ARCENT financial management officials  ensure that reported obligations are correct by using historical knowledge  of cost trends to review obligation reports for large anomalies.  If a large  anomaly is identified, it is further investigated to determine the cause and  resolve any differences.  However, the two commands do not have specific  criteria to determine how large an anomaly has to be before it is  investigated.  As a result, financial management officials at the commands  use their judgment to determine which anomalies to investigate.  The Navy  also reviews GWOT cost data for anomalies but lacks a systematic method  for gaining assurance that the data are reliable.  According to the Financial  Management and Budget official who manages the process, there is no  systematic approach for reviewing the submissions received from each of  the claimants.
The Marine Corps has adopted additional measures to gain further  assurance that its GWOT obligations are accurately reported.  For example,  resource management officials at one Marine Expeditionary Force told us  that they periodically visit subordinate units to reaffirm that these units are  following Marine Corps standard operating procedures for entering and  recording obligation data.  During these visits, officials use a checklist that  highlights areas that the visiting officials should emphasize.  These areas  include assessing the unit’s knowledge of Marine Corps policies and  procedures, reviewing purchases made by the unit, and checking to ensure  that the unit correctly entered obligations into the Marine Corps’  accounting system.  Marine Expeditionary Force resource management  officials told us that this process plays an important role in ensuring that  GWOT obligation data are reliable.
Once the services complete their review of GWOT obligations they submit  their obligation reports to DFAS, which aggregates the individual  submissions into the monthly GWOT cost report.  The Office of the Under  Secretary of Defense (Comptroller) gains assurance that the services’  reported obligations are reliable by reviewing the monthly DFAS cost  reports for anomalies.  If a discrepancy is identified, the Comptroller’s  office contacts the responsible DOD component, attempts to determine  reasons for the discrepancy, and directs that necessary corrections be  made before distributing the cost report within DOD.
Despite the efforts to review reported costs, there is less-than-adequate  management oversight on the preparation and accuracy of the reports.  We  found instances where the services did not identify wide swings in monthly  costs, such as the swings discussed earlier in imminent danger pay in the  GWOT cost reports for DOD as a whole, as well as errors in the overall  GWOT cost reports that amounted to hundreds of millions of dollars  monthly.  Specifically, in reviewing the Navy’s and Marine Corps’ fiscal year  2005 operation and maintenance and investment GWOT obligations as part  of a separate effort, we found that the obligations reported in DOD’s  summary GWOT cost report were inadvertently being overstated by  hundreds of millions of dollars monthly between the November 2004 and  the April 2005 cost reports.  In total, we found that the two services  overstated their obligations during that period by almost $1.8 billion—$1.5  billion in the case of the Marine Corps and $300 million in the case of the  Navy.  Each month DOD prepares a separate report for each of the  appropriations acts that are used to provide funding authority to support  GWOT and an overall summary cost report.  In discussions with Marine  Corps and Navy budget officials, it was determined that operation and  maintenance and investment obligations associated with funding authority  provided through title IX of the fiscal year 2005 Defense Appropriations Act  were inadvertently being double counted in the GWOT cost report: once in  the title IX report and once again in the report on funding authority  provided in other fiscal year 2005 appropriations acts, resulting in inflated  figures in the summary report.  These reporting problems were present in  all of the GWOT cost reports from November 2004 through April 2005.   Once this matter came to light, Navy and Marine Corps officials took action  to reflect the accurate obligations for the title IX and other fiscal year 2005  appropriations reports.  The May 2005 report reflects the corrected  cumulative obligations through May 2005.
Volume 3, chapter 8 of DOD’s Financial Management Regulation requires  that steps be taken to verify that transactions are correctly entered into the  services’ accounting systems by comparing financial transactions with  supporting documents.  However, as discussed earlier, in a detailed review  of fiscal year 2003 GWOT obligations, the Air Force Audit Agency found  that in addition to not properly categorizing costs, officials at 16 of 29  locations visited failed to verify that 159 of 923 transactions, or 17 percent  of the transactions the agency reviewed, were accurately entered into the  Air Force’s financial accounting system.  The audit agency said that this  condition occurred because funds holders were uncertain of which costs  should be coded as GWOT expenditures and did not compare financial  transactions with supporting documents as required by DOD’s financial  management regulation.  The audit agency concluded that as a result,  financial managers may inadvertently provide questionable “cost of war”  information when data are inaccurately processed in the system.   Furthermore, command resource allocation and spending plans may be  distorted by faulty data.  Finally, summary DOD financial reports may be  unreliable.  The audit agency made recommendations to the Air Force to  review transaction data; correct inaccurate data; and develop, publish, and  implement guidelines on the appropriate use of GWOT cost codes, which  the Air Force agreed to do.

			Estimated Obligations Are Used Instead of Actual Payroll Information

As previously discussed, in reviewing the Army’s military personnel GWOT  obligations for fiscal year 2004, we found that the reported amounts for  mobilized Army reservists were inconsistent with related DOD payroll  information.  We found that the Army’s military personnel GWOT  obligations reported in the GWOT cost report were based primarily on  monthly estimates in the Army obligation plan rather than actual payroll  information.
The practice of using estimates in reporting military personnel costs  related to contingency operations rather than payroll data has been  ongoing for almost a decade.  In our previously cited 1996 report on the  reliability of contingency operations costs, we reported that the services  used estimates rather than actual data to derive incremental personnel  costs for reservists called to active duty in contingency operations.  We also  reported that the services used estimates in reporting the special pays and  allowances, such as imminent danger pay, which all military personnel  become eligible for during deployments, and that they did not reconcile  those costs to actual payroll data.  At that time, we reported that DOD had  plans under way to link its payroll and personnel systems, which would  allow the extraction of actual cost data.  Until the two systems were linked,  we reported that it would not be possible to test the accuracy of estimated  costs.  As of June 2005, more than 9 years after our earlier report, at least  one service, the Army, was still not using actual payroll information to  report its GWOT military personnel obligations.  Army officials advised us  in July 2005 that, on the basis of our findings on reported military personnel  obligations, they will now use related DOD payroll information where  applicable.

			Assigning Correct EORs Are Complicated by a Number of Factors

As also discussed earlier, if obligations are not categorized in the correct  cost categories in the services’ accounting system, it can affect the overall  reliability of DOD’s GWOT cost reporting.  The large number of EORs used  by Army units to assign costs to categories, literally in the thousands,  complicates properly categorizing GWOT obligations.  We found that the  large number of EORs encourages Army units to adopt shortcuts to  simplify categorization, which can result in incorrectly categorizing  obligations.  For example, a resource management official in one Army  division indicated that the division used one particular EOR as a catch-all  category.  This EOR corresponded with DOD’s GWOT cost-reporting  category of “Other Services and Miscellaneous Contracts.”  Placing costs in  this category inflates this cost category.  At another Army division,  resource management officials reviewed the EOR list in order to streamline  the number of EORs that the division used.  After reviewing about 3,700  EORs, resource management officials concluded that about 15 were most  appropriate for the purpose of categorizing its GWOT obligations.
The use of a single standardized EOR to categorize obligations for varying  types of goods and services also affects proper cost categorization.  For  example, there is one EOR for all purchases made with a Government  Purchase Card (GPC), regardless of the item or service purchased. In  another example, resource management officials at one Army division told  us that while deployed to Afghanistan, cash purchases made by its field  ordering officers were always coded to the EOR for general supplies, no  matter what item or service was obtained.  Finally, ARCENT resource  management officials told us that the command identified contracts that  should have been allocated to several EORs but were consolidated under  one EOR.  These contracts inflated the costs for that EOR category.
When coding errors are made, they are not always corrected.  Resource  management officials at one Army division told us that it was too time- consuming to fix miscoded EORs, as it involves having to coordinate with  customers and make changes in the Army’s financial accounting system.   As a result, inaccurate information remains in the accounting system.  This  division’s Comptroller acknowledged that better attention should be paid  to coding purchase requests at the comptroller level and that oversight  should be a higher concern.
People responsible for categorizing purchases by the EOR are not always  properly trained, which further complicates correct categorization.   Resource management officials at an Army command we visited told us  that there were training concerns with staff in the Comptroller’s office,  particularly given the frequent rotation in and out of the office that is  typical of military staff.  These officials told us that, often, the person  responsible for entering EORs into the system has not been trained to do  so.  Obligations are often entered by lower-ranked enlisted soldiers who  have been assigned to the position because they have downtime and are  computer literate.  These soldiers may not have any experience with  entering obligation data and might have received little or no training on  how to do so.  According to the officials, inexperience is not a major issue  with more straightforward obligation categories such as transportation;  however, when applied to more complicated categories, such as supplies,  many errors can occur.
Like the Army, the Marine Corps also captures GWOT obligations using  cost categories, known in the Marine Corps as cost account codes.   However, because the Marine Corps uses fewer categories, converting data  into the contingency cost categories is simpler than for the other services.   For example, Marine Corps Forces Pacific resource management officials  established 31 cost account codes that translate into 25 of the 55 GWOT  cost report categories.  Resource management officials at one Marine  Expeditionary Force told us that utilizing a simple system helps to improve  the accuracy of their obligation data.

			Processes for Recording GWOT Costs Can Lead to Errors

Processes used to enter and monitor operation and maintenance  obligations may also contribute to unreliable cost data.  For example, in the  Army, resource management officials from two divisions that had deployed  to Iraq and one division that had deployed to Afghanistan reported that,  when deployed, the divisions were junior users of the Army’s database  Commitment Accounting System and did not have access to the Army’s  principal accounting system, the Standard Army Financial System.  As a  result, the three divisions had to submit their document registers to  ARCENT to record obligations and commit funds.  Resource management  officials at two of the three divisions stated that the amounts recorded in  ARCENT’s ledger could not be relied upon because of manipulations and  adjustments made to the data by ARCENT.  One official stated that  obligations or commitments would sometimes be doubled or eliminated  entirely from the ledger.  For example, one division had to reenter $40  million in obligations that ARCENT dropped from the ledger during the  fiscal year 2003 closeout.  This official also told us that the system that the  Army uses to track commitments was antiquated and did not support the  data needed to accurately track and analyze costs.

		The Use of Existing GWOT Cost Data Affects Multiple DOD Financial Processes

Notwithstanding concerns about data reliability, according to the Office of  the Under Secretary of Defense (Comptroller), which develops GWOT  budget requests in concert with the military services and other DOD  components, a metric is needed and the GWOT cost reports are the only  available data.  In discussing the implications of improperly categorizing  GWOT obligations, the Comptroller’s office told us that it adversely affects  decision making and the ability to use the data for analysis.  In discussing  how the detailed cost data are used, a Comptroller representative told us  that he uses the detailed information presented in the cost breakdown  structure categories in the report for several purposes, as follows:  to make billion-dollar decisions in developing supplemental funding   to cross-check the cost data as presented in the cost breakdown  structure with the estimates developed by the Contingency Operations  Support Tool (COST) model; and  as a management tool to adjust the cost factors in the COST model and  revise the model, prepare supplemental funding budget requests, and  inform DOD leadership of detailed costs incurred for GWOT.

	DOD Is Using Regulations to Guide GWOT Budgeting, Reporting, and Spending That Were Not Designed for Wartime Operations

Office of the Under Secretary of Defense (Comptroller) and military service  officials are using DOD’s existing financial management regulation that  addresses contingency operation funding for guiding budget submissions,  cost reporting, and spending for GWOT.  However, DOD’s Financial  Management Regulation, which contains these policies and procedures,  was designed for small-scale contingency operations and has language  expressly stating that it is not intended to address wartime activities such  as those that DOD is confronted with in the current war.  Furthermore,  specific provisions in this regulation conflict with the GWOT funding  procedures and, in some cases, the needs of the war.  Without an updated  policy on GWOT budgeting, cost reporting, and spending, the military  services and other DOD agencies cannot make informed judgments on the  appropriate use of GWOT funding authorities.  In response to our work, the  Office of the Under Secretary of Defense (Comptroller) has updated its  regulation to address GWOT spending.

		Current Spending Policy Was Developed for Smaller- Scale Operations

DOD’s current regulation was designed for small-scale contingency  operations and is not intended to address wartime activities.  In February  1995, DOD added a chapter to its financial management regulation to  establish policies and procedures for estimating the budget and reporting  the costs of contingency operations (vol. 12, ch. 23—Contingency  Operations).  In 1998 the Office of the Under Secretary of Defense  (Comptroller) implemented a standard cost breakdown structure for  standard contingency operations to improve the budgeting and reporting of  these costs.  This structure was incorporated in the 2001 version of chapter  23 and has been expanded in the latest January 2005 version.  The Office of  the Under Secretary of Defense (Comptroller) has also supplemented its  regulation through messages regarding cost reporting and formulating  specific fiscal year budget requests.  Since its publication in 1995,  Comptroller officials have used chapter 23 and later the cost breakdown  structure in particular, to budget, capture the costs, and fund or seek  supplemental funding for contingency operations.  Comptroller officials  have also directed the services to prepare budget estimates and report the  costs of contingency operations (to include the various missions that  support the Global War on Terrorism), according to chapter 23’s provisions.   During our visits to the military commands and installations that have been  involved in supporting GWOT contingency operations, service financial  managers indicated that they use chapter 23 as a primary source to guide  all war-related spending.
Although Office of the Under Secretary of Defense (Comptroller) and  service financial management officials are continuing to use the provisions  in chapter 23 to guide their GWOT budget submissions, cost reporting, and  spending, it is not clear to what extent these provisions should apply,  especially given that, on its face, chapter 23 states that its policies and  procedures do not address wartime activities or circumstances that require  U.S. military forces to be placed on a wartime footing.  Moreover,  numerous specific provisions in chapter 23 conflict with the GWOT funding  procedures and, in some cases, the needs of the war.
In addition to the express language that states that chapter 23 does not  apply to wartime activities, the overall structure of chapter 23 and many of  its specific provisions are not intended to address the types of costs  incurred or funding authorities provided to support GWOT.  For example,  although the fiscal year 2004 GWOT budget estimates and cost reporting  contained significant amounts of investment costs, chapter 23, given that it  was designed to address small-scale contingency operations, which usually  would not involve such costs, did not include policies and procedures to  guide the budgeting or reporting of these costs.  Moreover, another  specific provision in chapter 23 states that these costs should not be  considered as incremental costs of a contingency operation.  Recognizing  that large-scale contingency operations lasting as long as GWOT and  affecting a large portion of U.S. military units may necessarily incur  investment costs, these provisions illustrate an inconsistency between the  needs to support the war and the current DOD policies and procedures  used to guide the preparation of GWOT budgets, cost reporting, and  spending.  This lack of clarity could lead to uncertainty at all levels within  DOD over what policies actually are intended to guide the funding for the  war.

		Use of GWOT Funds for Home Station Operations Is Most Affected by the Lack of Updated Policy

There is confusion over DOD’s policies and procedures for guiding the  preparation of GWOT budgets, cost reporting, and the spending of billions  of dollars in GWOT funding for base operation activities at the home  stations of the military units that are preparing to deploy or have deployed  on GWOT missions.  Chapter 23 expressly states that costs associated with  facilities/base support activities may be budgeted and reported only if the  activities occur away from a unit’s home station.  Despite this  administrative limitation, many installations have been budgeting and  recognizing as GWOT-related costs base support costs for home station  activities.  For example, in fiscal year 2003 the Navy spent $42.5 million for  wharf repairs at Pearl Harbor, Hawaii.  In fiscal years 2003 and 2004, the Air  Force spent a total of more than $117 million at Anderson Air Force base in  Guam for a variety of installation-related costs (e.g., support facilities for  bomber aircraft and storm damage repair).  The Army’s Installation and  Management Agency, which manages all Army installations, obligated $1.52  billion in fiscal year 2004 and has budgeted about $2.07 billion in fiscal year  2005 expressly for GWOT-related “home station” base support activities. All  of these costs conflict with the home station spending limitation in chapter  23.
Notwithstanding chapter 23’s administrative limitation on budgeting and  reporting costs for home station facilities/base support activities, some of  these reported costs appear to meet the definition of “incremental costs,”  which guides all GWOT spending.  DOD policy states that costs associated  with contingency operations are limited to the incremental costs of the  operations, that is, costs that are above and beyond baseline training,  operations, and personnel costs or costs that would not have been incurred  had the contingency operation not been supported (i.e., costs that are  directly attributable to the operation).  During our review, we noted a  number of instances in which GWOT costs were recorded relating to home  station base operation activities that appear to be directly attributable to  the war.  At one Army installation—an installation that helped prepare  reserve military personnel for deployments in support of GWOT—we found  reported GWOT costs for the renovation of barracks, dining facilities, and  latrines to accommodate increased numbers of reserve personnel using  those facilities.  However, we also found some home station costs that did  not appear to support the war or only to tangentially support it.  For  example, at this same installation we found that it also reported GWOT  costs for renovating unneeded vehicles for redistribution within the Army  even though they were not used in any contingency operation and had been  declared excess to the unit before it deployed.  At another Army  installation, we found GWOT costs to improve the readiness condition of  equipment not deployed for contingency operations.  In addition, we found  that one Navy Command reported GWOT costs for improving the condition  of floating docks that were not properly stored while the unit responsible  for their upkeep was deployed on a GWOT mission.  The docks were  seriously corroded as a result of not being stored properly and left in salt  water for more than a year.  Navy officials said that nearly $6 million in  GWOT funding had been used in fiscal year 2003 to pay for these repairs.   Navy officials disagreed with our view that these costs were at best  tangential to the support of the war and noted that the justification for the  repairs was that these docks were a requirement and would likely be  needed in the future to support GWOT.  However, we believe that GWOT  costs are limited by the provisions of chapter 23 to those costs that are in  direct support of the war.
In response to our concerns about the inconsistencies contained in chapter  23, in August 2005, the Office of the Under Secretary of Defense  (Comptroller) officials approved a revision to chapter 23 to clarify the  policy on both base operations and investment costs for contingency  operations.  This clarification should assist the military services and other  DOD agencies in making informed judgments on the appropriate use of  GWOT funding authorities.

	Cost Controls Can Be Strengthened As Operations Mature

DOD and Office of Management and Budget policies emphasize the need to  spend funds prudently.  Individual commands and commanders have  implemented a variety of cost controls for GWOT spending.  Current cost  controls include acquisition review boards, command review of purchases,  limits on some categories of spending, and a cost reduction goal in Iraq.   However, DOD’s policies and guidance do not go beyond advising DOD  officials of their financial management responsibilities with regard to the  prudent use of contingency funding authorities and provide no guidelines  on steps that should be taken to control costs, particularly as operations  mature, while ensuring mission accomplishment.  Resource managers from  a number of Army divisions that have deployed to Iraq or Afghanistan have  told us that cost controls can be strengthened as operations mature.

		Policy Emphasizes the Need for Prudent Spending

OMB circular A-123 requires all mangers of federal funds to ensure that  cost-effective controls be implemented for the expenditure of appropriated  funds.  Section 230108 of DOD’s financial management regulation for  contingency operations, which was added in January 2005, advises DOD  officials of their financial management responsibilities to ensure the  prudent use of contingency funding authorities.  The section emphasizes  that it is vital for civilian and military personnel authorized to obligate and  expend funds in support of contingency operations to employ a fiduciary  approach to ensure that funds are used in a prudent manner.
GWOT spending has risen steadily since the attacks of September 11, 2001,  as operations have expanded.  As shown in figure 2, from fiscal year 2002  through fiscal year 2004, reported costs rose from $11 billion to $71 billion  annually and, from our projection of reported fiscal year 2005 obligations  through May 2005, could reach about $71.5 billion again in fiscal year 2005.   The large amount of spending and its growth underscore the need for cost  controls.

		Individual Commands Have Developed a Variety of Cost Controls for GWOT Spending, but There Is No Systematic DOD Effort to Ensure That All Commands Pursue Cost Controls

Some commands have taken steps to seek economy and efficiency in  performing tasks by reviewing existing requirements and seeking more  efficient methods to perform required tasks.  Over the years, we have  reported that when the government seeks opportunities to control costs,  savings are usually realized.  For example, in July 2004 we reported that  savings are generally realized when the customer reviews logistics support  contractors’ work for economy and efficiency but that these reviews have  not been routinely conducted at all work locations.  We reported that U.S.  Army Europe saved $200 million dollars, or 10 percent of the contract  ceiling price, on its Balkans Support Contract; Third Army would save $31  million annually in Kuwait, or 43 percent by changing food service  contractors; and the Marine Corps saved $8.6 million, or 18 percent, from  an estimated $48 million in work in Djibouti, which is one of the Operation  Enduring Freedom locations.
Military commands and individual commanders involved in GWOT as well  as in earlier operations have put in place a variety of controls on their own  initiative designed to control costs.  Some examples are as follows:  Acquisition review boards are being used in Iraq, Afghanistan, and  Kuwait to assess if requirements are valid and, if so, decide how best to  satisfy them.  In addition, in an August 2004 order, the commander of  Multinational Forces-Iraq established a stewardship council intended to  reinforce fiscal discipline in order to ensure that limited financial  resources are effectively and efficiently employed to accomplish the  command’s strategic objectives.
Individual Army divisions have taken steps to control costs.  One Army  division we visited has restricted the use of its Government Purchase  Cards for GWOT reconstitution obligations until the card holders  complete a training class detailing the appropriate use of the cards.  The  division Comptroller stated that this action was taken to limit spending  and ensure that purchases made in support of GWOT were appropriate.   Another Army division implemented a Program Budget Advisory  Committee to review its GWOT predeployment requirements.  One  example of economies directed by the committee was to consolidate  requirements for medical supplies, batteries, and ballistic blankets into  a single division purchase.  The committee was reestablished upon the  division’s return from Afghanistan for the review and approval of GWOT  reconstitution requirements.
Third Army, which obligated almost $17 billion in fiscal year 2004 to  support GWOT, has taken a number of steps to control costs.  Among  other things, it reviews requisitions of items obtained through the stock  fund that are not reviewed by the review boards in Iraq, Afghanistan,  and Kuwait—specifically, items that have a high dollar value, involve  large quantities, are pilferable, or are personal items.  In a March 2005  message to the Vice Chief of Staff of the Army, the Third Army  commander also described cost control measures implemented by  organizations funded by Third Army.  These included management  controls placed on requests to expand the use of LOGCAP, reducing the  cost of transporting cargo into the theater, and reducing demurrage  charges associated with commercial containers by identifying and  returning excess containers.
The Army has also set limits on certain kinds of spending.  For example, the  Army set a $6.5 billion limit on LOGCAP spending in fiscal year 2004 on the  basis of the estimated cost of required work and a $6.6 billion limit for  fiscal year 2005.  On a much smaller scale, in July 2004, Third Army issued a  policy memorandum setting forth procedures for purchasing and awarding  unit coins to limit coins purchased with contingency operations funds.   The policy recommends a funding ceiling for coin purchases from  operating funds of $1,000 per battalion and $3,000 per brigade.
One command has also set spending reduction targets to constrain  spending.  The commander of coalition forces in Iraq has set a 10 percent  cost reduction target in Iraq.  According to the Deputy Chief of Staff for  Resource Management for Multinational Forces-Iraq, the cost-reduction  goal was intended as a direction to take the command rather than as a hard  target.  While realizing that many factors driving costs were outside his  control, the commanding general wanted the command to manage those  areas that the command could affect.  The cost-reduction plan was broken  down into three lines of operation—stock fund, LOGCAP, and nonstock  fund.  As a result the command reports the following:    Efforts to control stock fund costs have met with mixed results.  The  command has encountered difficulties in controlling stock fund costs in  part because units can order items directly from the supplying  command, bypassing the command in Iraq.  However, some control  procedures have been established, which reduced direct orders from  approximately $50 million per month to $5 million in April 2005.
The command reports that it has been working to control LOGCAP  costs, but additional requirements were subsequently identified that  were expected to drive up LOGCAP costs beyond the initial $4.3 billion  goal.  The commanding general has asked the Army Audit Agency to  help evaluate the use of the LOGCAP program in Iraq and provide  recommendations for cost savings and improved processes.
The command reports that it is well on its way to achieving its goal of  $2.25 billion for nonstock fund spending.  As of April 30, 2005, the  command reported that it had obligated only about $1 billion in  nonstock funds and was well on its way to come in under the initial  savings goal.
ARCENT, the Army command responsible for funding the command in Iraq,  was aware of the initiative but not its details and was not aware of whether  there were similar efforts in other countries, specifically in Afghanistan and  Kuwait.
While DOD policy emphasizes commanders’ fiduciary responsibility to  spend funds prudently, it has not directed any systematic effort for the  services and combatant commands to seek opportunities to reduce costs or  provided guidelines for doing so.  In discussions with resource  management personnel in Army units that were deployed to Iraq and/or  Afghanistan, there was a consensus that cost controls can be strengthened  as an operation matures.  For example, resource managers at one Army  division that deployed to Iraq told us that the division’s experience is that  spending can be managed at all stages of a contingency operation, even  under high-operating-tempo combat operations.  Another Army division  resource manager who deployed to Iraq told us that he could have operated  under a budget after his third month of deployment to Iraq.  He preferred to  operate under a budget where he knew the amount of funding that was  available and could tell commanders that they had to prioritize their  requirements.  A third Army division resource manager, who deployed to  Afghanistan, told us that as an operation matures, cost controls can be  strengthened.
In discussing efforts to control costs with the Office of the Under Secretary  of Defense (Comptroller), the view was expressed that on the basis of the  varying combat situations, steps to control costs were best left to the  individual commands.  As described above, individual commands have  done much to control costs, but efforts vary by command, and there is  limited knowledge of such efforts outside each command.  The  Comptroller’s office has no direct knowledge of the commands’ cost  control efforts and has not asked to be kept informed of cost control steps.   We believe that more can be done and that absent DOD-wide guidelines on  cost control efforts, there is no assurance that successive commanders will  emphasize cost control and that each command’s efforts will be equally  comprehensive.

	Conclusions

We found numerous problems with DOD’s processes for recording and  reporting costs for the Global War on Terrorism, raising significant  concerns about the overall reliability of DOD’s reported cost data.  Because  of these problems, neither DOD nor Congress can reliably know how much  the war is costing and details on how appropriated funds are being spent,  or have historical data useful in considering future funding needs.  In  response to our work, DOD has identified a number of steps it said it is  taking to improve the accuracy and reliability of its cost reporting.  Until  DOD fully implements those steps, gives improving its GWOT cost  reporting high priority, and undertakes an exhaustive effort to ensure that  the data in its GWOT cost reports are reliable, there can be no assurance  that the cost of the war is accurate and whether funding is adequate.
DOD is generally using its existing contingency operations financial  management regulation to guide GWOT budgeting, cost reporting, and  spending, although this regulation was developed and structured to  manage the costs of small-scale contingency operations.  Specific  provisions of the regulation conflict with the needs of GWOT.  One such  conflict concerns administrative limitations on the use of supplemental  funds for base support activities at home stations.  In addition, the  regulation includes conflicting policies and procedures to guide the  budgeting or reporting of investment costs of the war.  Without an updated  policy, the military services and other DOD agencies cannot make informed  judgments on the appropriate use of GWOT funding authorities.  In  response to our work, DOD revised its Financial Management Regulation.
While certain individual commands have taken steps to control costs and  DOD policy generally advises its officials of their financial management  responsibilities with regard to the prudent use of contingency funding, the  Office of the Under Secretary of Defense (Comptroller) has not  systematically called for all commands involved in GWOT to take steps to  control costs and to keep the office informed of those steps and their  success.  With the growth in GWOT costs, there is a need to ensure that all  commands seek to control costs.  Until the department establishes  guidelines on cost controls and is routinely informed about the types of  controls and their impact on costs, it cannot be sure that all that can be  done to control costs is being done.

	Recommendations for Executive Action

To ensure that Congress and the Department of Defense can reliably know  how much the war is costing, we recommend that the Secretary of Defense  take the following three steps: 1. Direct the Secretaries of the military services to undertake a series of  steps to ensure that reported GWOT costs are accurate and reliable, to  include:   developing a systematic process to review reported obligations;  developing and monitoring procedures to ensure that obligations are   using actual data whenever possible and, when not possible, to take  steps to allow the development of actual data; and   ensuring that actions previously agreed to in response to audits have  been implemented effectively. 2. Direct the Office of the Under Secretary of Defense (Comptroller) to  oversee the above service efforts as well as to develop a systematic  process to review and test the reliability of the overall GWOT cost  reports.  3. Direct the Secretary of the Army to take the following steps:  develop and implement formal procedures to guide the monthly  reporting of GWOT military personnel costs;  formalize the Army’s management review of military personnel cost  information submitted for the GWOT cost report;   use information from the DOD payroll system, where applicable, to  identify and report GWOT military personnel cost information; and   review and simplify the numbers of elements of resource currently used  to identify, categorize, and record contingency costs.
To ensure that the military services and other DOD agencies make  informed judgments on the appropriate use of GWOT funding authorities  that are consistent with DOD guidance and meet the needs of GWOT, we  recommend that the Secretary of Defense expand DOD’s financial  management regulation for contingency operations to include  contingencies as large as the current GWOT.  At a minimum, the updated  policy should address the budgeting, cost reporting, and spending  associated with investment and base operation and support costs at the  home stations of units that support GWOT.
To ensure that GWOT mission needs are being met while applying  appropriate cost controls we recommend that the Secretary of Defense  direct the Office of the Under Secretary of Defense (Comptroller) to take  the following two steps: 1. establish guidelines on cost controls, including identifying what types  of cost controls are available to the services, and  2. require that the services routinely keep the Comptroller’s office  informed about the types of controls and their impact on costs, and  share information on cost control efforts.

	Agency Comments and Our Evaluation

DOD provided written comments on a draft of this report.  Its comments  are discussed below and are reprinted in appendix III.
DOD agreed with all but one of our recommendations, stating that it  generally agreed with the intent of the recommendations and has carefully  reviewed its guidance and procedures for reporting cost data.  DOD further  commented that on the basis of its review and consistent with our  recommendations it has taken several immediate actions to improve  procedures and strengthen the cost reports.  These include issuing  additional direction and guidance to strengthen, clarify, standardize, and  simplify procedures for collecting, reporting, and auditing cost of war  information and issuing supplemental guidance to its Financial  Management Regulation to address large-scale contingency operations.
Regarding our recommendations on improving the accuracy and reliability  of reported costs of the Global War on Terrorism and to have the Office of  the Under Secretary of Defense (Comptroller) play a role in overseeing the  efforts as well as to develop a systematic process to review and test the  reliability of the overall GWOT cost reports, DOD stated that it has  completed implementation of this recommendation through the execution  of new guidance and procedures for collecting and reporting cost of war  information and is actively overseeing the preparation of GWOT cost  reports.  DOD further stated that the Army has changed its data collection  and reporting process and among other things is now using a Standard  Operating Procedure which prescribes a clear methodology for capturing  contingency operations cost data from the accounting systems and a  formal management review process to prepare military cost information  associated with GWOT. “Additionally, because of the scale of operations, including intense combat or long term  stability or anti-insurgency operations, expenses beyond only direct incremental costs may  be appropriate on a case by case basis in written coordination with the Office of the Under  Secretary of Defense (Comptroller).”
Although the revised guidance states that such costs require coordination  with the Office of the Under Secretary of Defense (Comptroller), we  believe that this expanded definition of incremental costs suggests that the  costs of large-scale contingency operations can be beyond those defined  elsewhere in DOD’s guidance as incremental costs--i.e., those additional  costs to the DOD Component appropriations that would not have been  incurred had the contingency operations not been supported.  We further  believe that costs incurred beyond what was reasonably necessary to  support a contingency operation cannot be deemed incremental expenses,  since such costs are not directly attributable to support of the operation.  In  addition, we believe that expanding allowable costs of contingency  operations beyond those directly attributable to support of the operation is  problematic because it provides no guidance on what costs beyond those  that are attributable to the operation are now allowed to be reported.  We  therefore do not believe that this provision meets the intent of our  recommendation.  The Under Secretary of Defense (Comptroller) should  reconsider this provision in light of our evaluation of its potential  consequences.
DOD did not agree with our recommendation to have the Office of the  Under Secretary of Defense (Comptroller) establish guidelines on cost  controls.  In commenting on our recommendation, DOD stated that field  commanders are the correct echelon to adopt and emphasize cost controls  during a contingency; that it relies on the judgment of the combatant  commander in the theater of operations to manage resources at their  disposal to effectively safeguard personnel and perform the mission; and  that implementing administrative funding controls could have a  detrimental effect on the commanders’ ability to make critical decisions in  the theater.  DOD further stated that the Office of the Under Secretary of  Defense (Comptroller) has included a section in the Financial Management  Regulation that emphasizes that the DOD components are responsible to  employ a fiduciary approach to ensure that the funds are used in a prudent  manner and that as operations mature, steps should be taken to evaluate  and establish spending constraints.  We recognize that certain individual  commands have done much to control costs and describe some of those  efforts, but we further note in our discussion of cost controls that efforts  vary by command and that there is limited knowledge of such efforts  outside each command.  We do not believe, as DOD suggests, that our  recommendation would have a detrimental effect on the commanders’  ability to make critical decisions in the theater.  We are simply  recommending that DOD provide guidance that increases awareness of the  need for reasonable cost controls and requires that the Office of the Under  Secretary of Defense (Comptroller) be kept informed of the types of  controls and their impact on costs and share information within DOD on  cost control efforts.  We continue to believe that more can be done and that  absent DOD-wide guidelines on cost control efforts, there is no assurance  that successive commanders will emphasize cost control and that each  command’s efforts will be equally comprehensive.  Therefore, we have  retained the recommendation.
In commenting on the report’s content, DOD disagreed with GAO’s position  on the overstatement of the reported costs for mobilized Army reservists in  fiscal year 2004.  DOD commented that our report was incomplete because  we did not consider military retirement pay and other costs, which DOD  stated accounted for almost $1.3 billion of the $2.1 billion difference cited  in our report.  We disagree.  As discussed in our draft report, initially, the  Army could not support its reported costs for mobilized Army reservists or  explain the $2.1 billion difference that we noted between its payroll system  and its reported cost for mobilized Army reservists.  During our audit, the  Army and the Office of the Under Secretary of Defense (Comptroller)  provided us with several possible, although sometimes inaccurate,  explanations for the $2.1 billion difference.  After several months, DOD  provided information showing that it could account for about $1.6 billion of  the $2.1 billion difference.  While making it clear that the information was  received too late for us to assess its accuracy and completeness as part of  our audit, we did include the information in our draft report.  We stated that  some of the explanations appeared valid, while others did not and, taken  together, they failed to fully account for the difference.  The fact that DOD’s  comment letter reduces the $1.6 billion to $1.3 billion further confirms the  concerns we have expressed throughout this report over the accuracy of  DOD’s past reported costs.  Finally, we believe that DOD’s reference in its  comment letter to the $2.1 billion difference as an anomaly is a  mischaracterization--particularly when viewed in the context of its  explanation that “the Department’s use of estimates led to a difference.”    As clearly stated in this report, we found that the reported cost data are not  reliable, in part because of long-standing deficiencies in DOD’s financial  and accounting systems, a lack of systematic processes to ensure that data  are properly entered into those accounting systems, and the use of  estimates rather than actual information.  We understand that DOD is  planning corrective action to address issues related to cost reporting for  military personnel supporting GWOT operations.
We are sending copies of this report to other interested congressional  committees; the Secretary of Defense; the Under Secretary of Defense  (Comptroller); the Secretaries of the military services; and the Director,  Office of Management and Budget.  Copies of this report will also be made  available to others upon request.  In addition, this report will be available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions regarding this report, please contact  Sharon Pickup at 202-512-9619 or by e-mail at pickups@gao.gov or Greg  Kutz at 202-512-9095 or kutzg@gao.gov.  Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report.  GAO staff that made major contributions to this report are  included in appendix IV.

Scope and Methodology

To accomplish this review, we obtained and analyzed copies of all 12  months of the Department of Defense’s (DOD) fiscal year 2004 monthly  Consolidated DOD Terrorist Response Cost Report from the Office of the  Under Secretary of Defense (Comptroller), which was renamed the  Supplemental and Cost of War Execution Report in January 2005, to  identify reported obligations by operation and by appropriation account for  the military services.  We did not review the obligations reported by the  intelligence community or the other defense agencies, but we do mention  the amount appropriated and obligated because the amount appropriated  was part of the total DOD appropriation.  We focused our analysis  primarily, but not exclusively, on reported costs for fiscal year 2004—the  latest full year of data available at the time of our review—and specifically  the military personnel and operation and maintenance accounts as they  represent the largest amount of spending.  We also did not conduct site  visits to Air Force units because their audit agency was conducting a  similar review.
To determine the reliability of DOD’s data, we reviewed previous GAO  reports and reports from other audit agencies that identified long-standing  material weaknesses in DOD’s accounting systems.  We conducted limited  testing on operation and maintenance obligations using Global War on  Terrorism (GWOT) funding because DOD’s financial management systems  and business processes have been reported to contain significant  deficiencies.  At the Army- and Marine Corps-unit levels, we judgmentally  selected obligation data entries and traced them back to a computerized  database or paper documents to determine whether the data were properly  entered into the accounting system.  At the Army’s Central Command  Headquarters, we judgmentally selected document numbers and item  descriptions for obligations made in Iraq and Afghanistan. We traced the  document register numbers against paper documentation controlled by the  Defense Finance and Accounting Service (DFAS), Rome, New York.  We  also provided a written data reliability assessment checklist for Navy  officials to report how they ensured that their data were accurate and  reliable.  Finally, we discussed the processes used to ensure that GWOT  obligation data provided were accurate and reliable with service financial  managers.  We found that the reported cost data were not reliable because  of long-standing deficiencies in DOD’s financial and accounting systems,  the lack of a systematic process to ensure that data were properly entered  into those accounting systems, the use of estimates rather than actual data  for some of DOD’s reported costs, and the incorrect categorization of some  reported costs due to the large number of cost categories and limited  training on how to apply them.  However, because it was not feasible to  examine all reported costs and significant data reliability problems existed,  we were not able to determine the extent that total costs were misstated.
To identify unusual fluctuations in the reported Army military personnel  GWOT obligations, we analyzed the fiscal year 2004 GWOT cost reports  and discussed our work with the Army Budget Office and DFAS.  We also  obtained and reviewed cost-reporting for military personnel information,  budget estimates, supplemental appropriation information, budget  reprogramming documents, and other supporting documentation from the  Army Budget Office.  To determine if reported obligations were based  primarily on estimates, we compared reported GWOT amounts for Army  military personnel with Army obligation plans.  We obtained monthly  extracts of fiscal year 2004 military pay records for Army Reserve and  National Guard soldiers supporting GWOT operations from the DOD  payroll system at DFAS, Indianapolis.  To identify GWOT obligations for  Army military personnel based on actual DOD payroll information, we  summarized payroll record extracts by pay component and aligned these  amounts with the cost category structure of the GWOT cost report.  For  cost category “Reserve Components Called to Active Duty,” we compared  actual DOD payroll information with the estimated Army military  personnel amounts in the GWOT cost report, calculated the difference, and  discussed our work with the Army Budget Office.  In July 2005, we obtained  information from the Army and DOD on this difference.
To assess the extent to which DOD’s existing financial management policy  is applicable to war spending, we focused our efforts on analyzing guidance  provided by the fiscal year 2004 Defense Appropriation Act and DOD’s and  the military services’ specific policy and procedures.  We reviewed  previous GAO reports regarding guidance and oversight of contingency  operations costs.  We also reviewed DOD Financial Management  Regulation volume 12 chapter 23, which establishes DOD policy and  procedures for developing contingency budget estimates and cost  reporting.  We analyzed DOD’s emergency supplemental budget requests  for fiscal year 2003 and fiscal year 2004, and service contingency operation  financial management policies and procedures.  Lastly, we spoke with  Office of the Under Secretary of Defense (Comptroller) and service  financial management officials about GWOT budget estimations, cost  reporting activities, and whether the current policy is sufficient or needs to  be modified to reflect GWOT conditions.
To determine controls over costs, we reviewed reports on GWOT spending  and contract management from other audit agencies as well as command  guidance and held discussions with resource management officials from  major commands and units that had returned from Iraq and Afghanistan  regarding their experiences.  We also discussed what steps DOD has  directed or implemented to strengthen cost controls and what actions it  has implemented.  Furthermore, we discussed cost controls implemented  by Army divisions while deployed or upon the units’ return to their home  station.
We visited the following locations during our review:  Office of the Under Secretary of Defense (Comptroller), Washington,  D.C.
Headquarters, Defense Finance and Accounting Service, Arlington,  Virginia.
Headquarters, Department of the Army, Washington, D.C.
U.S. Army Installation Management Agency, Washington, D.C.
U.S. Army Installation Management Agency, Southeast Region, Fort  McPherson, Georgia.
Headquarters, U.S. Army Forces Command and Headquarters, Third  Army (Army Central Command), Fort McPherson, Georgia.
Headquarters, U.S. Army Pacific, Fort Shafter, Hawaii.
Headquarters, 25th Infantry Division, Schofield Barracks, Hawaii.
Headquarters, U.S. Army Europe, Heidelberg, Germany.
Headquarters, 1st Armored Division, Wiesbaden, Germany.
Headquarters, III Corps and 1st Cavalry Division, Fort Hood, Texas.
Headquarters, 3rd Armored Cavalry Regiment, Fort Carson, Colorado.
Headquarters, U.S. Marine Corps Forces Pacific, Camp H.M. Smith,  Hawaii.
Headquarters, 1st Marine Expeditionary Force, Camp Pendleton,  California.
Defense Finance and Accounting Service Center, Denver, Colorado.
Defense Finance and Accounting Service Center, Indianapolis, Indiana.
Defense Finance and Accounting Service-Rome, Rome, New York.
Assistant Secretary of the Navy, Financial Management and Comptroller,  Washington, D.C.
Commander, Naval Installations Command, Washington, D.C.
U.S. Fleet Forces Command, U.S. Atlantic Fleet, Norfolk, Virginia.
Commander, U.S. Pacific Fleet, Pearl Harbor, Hawaii.
Commander, Naval Air Force, San Diego, California.
Commander, Naval Surface Force, San Diego, California.
Commander, Submarine Force, Pearl Harbor, Hawaii.
U.S. Air Force Audit Agency, March Air Reserve Base, California.
U.S. Air Forces Pacific, Hickam Air Force Base, Hawaii.
We performed our work from August 2004 through August 2005 in  accordance with generally accepted government auditing standards.

Ineffective Reporting of Fiscal Year 2004 Army Military Personnel Global War on Terrorism Obligations

As part of our work on cost reporting for the Global War on Terrorism  (GWOT), we undertook a detailed review of obligations for Army military  personnel supporting GWOT operations.  The results of that review follow.

	Background

In fiscal year 2004, the Department of Defense (DOD) asked for funds in a  supplemental budget request to provide pay, allowances, subsistence, and  other personnel costs for active- and reserve-component military personnel  activated for duty in support of GWOT.  This request included certain  special pays that active-duty military personnel received for deployment, as  well as the base pay, special pays, and allowances for reserve personnel  mobilized to participate in or directly support GWOT operations.  In  addition, the estimate also included the costs to pay active-component  personnel affected by military stop-loss programs and additional military  personnel maintained on active duty above the normal end-strength levels  to sustain the readiness of deploying units.  As shown in figure 3, Congress  provided about $17.8 billion in funding for DOD military personnel in the  fiscal year 2004 supplemental appropriation, including almost $12.9 billion  provided for the Army.  This was an increase from the about $13.4 billion in  funding for DOD military personnel, including about $7.8 billion for Army  military personnel in the fiscal year 2003 supplemental appropriation.
In the September 2004 GWOT cost report, DOD military personnel  obligations totaled over $17 billion of the reported $71.2 billion in total  GWOT obligations for fiscal year 2004.  Of this $17 billion, Army military  personnel obligations reported by DOD totaled almost $12 billion, or about  71 percent, of military personnel obligations for GWOT operations.  As  shown in table 2, Army military personnel obligations for GWOT operations  increased from fiscal year 2003 through fiscal year 2004, while obligations  reported by other DOD organizations decreased.
The Army Budget Office controls the Military Personnel, Army,  appropriation account and is also responsible for identifying and reporting  the incremental costs of Army military personnel in support of GWOT  operations.  Incremental military personnel costs are to include pay, special  pay, and entitlements above normal monthly payroll costs for active- and  reserve-component personnel.
In fiscal year 2004, the monthly GWOT cost report included the following  six primary cost categories for military personnel as designated in the DOD  Financial Management Regulation: “Reserve Components Called to Active Duty” includes basic military pay  for Reserve and National Guard personnel either as part of the operation  or as backfill.  “Imminent Danger or Hostile Fire Pay,” when authorized, provides a  monthly special pay for active- and reserve-component personnel.    “Family Separation Allowance” is a monthly special allowance paid to  active- and reserve-component personnel who are separated from their  families for 30 days or more.    “Foreign Duty Pay” is a monthly special pay for active- and reserve- component personnel who are at a designated location outside of the  continental United States.  “Subsistence” includes the costs of food, water, ice, and other  subsistence items that are purchased expressly to support personnel  engaged in or supporting the operation.  “Other Military Personnel” includes other allowances or special pay for  active- and reserve-component personnel that are not included in  another cost category.  In fiscal year 2004, this category included the  costs to pay active-component soldiers affected by military stop-loss  programs and additional soldiers maintained on active duty above the  normal end-strength levels.
Table 3 shows the Army military personnel obligations for GWOT  operations reported in fiscal years 2003 and 2004.

	Army Lacked a Reasonable and Reliable Process to Report GWOT Military Personnel Obligations

The Army did not have a reasonable and reliable process to identify and  report almost $12 billion of GWOT military personnel obligations in fiscal  year 2004.  Instead of using actual information, the Army based the GWOT  military personnel obligations used in the GWOT cost report primarily on  estimates in its fiscal year 2004 obligation plan and, in the end, forced, or  “plugged,” obligations to match available supplemental budget authority.   Army officials were unable to readily explain the process for identifying  and reporting GWOT military personnel obligations owing to the lack of  both formalized reporting procedures and management review of reported  obligations, problems which were exacerbated by staff losses in the  September 11 terrorist attack on the Pentagon, personnel turnover, and  hiring difficulties.
Our analysis showed that obligations associated with Army military  personnel in the monthly GWOT cost report were not consistent with  related DOD payroll information, and the use of planned obligations  instead of related DOD payroll information might have resulted in reported  GWOT military personnel obligations being materially overstated.  For  fiscal year 2004, our analysis of the more than $7.1 billion in incremental  military personnel costs listed in the cost category “Reserve Components  Called to Active Duty” identified as much as $2.1 billion of reported  obligations in excess of related DOD payroll information.  Army Budget  Office officials were unable to explain the entire difference.

		Army GWOT Reporting Process Used Estimated Obligations

In 2003, the Army developed a monthly obligation plan for estimated  GWOT military personnel obligations in fiscal year 2004 on the basis of  anticipated funding of $12.5 billion from the fiscal year 2004 DOD  supplemental appropriation request.  In October 2003, the Army began  incurring military personnel obligations for fiscal year 2004 GWOT  operations before passage of a supplemental appropriation.  However,  instead of using actual information, the Army based the military personnel  obligations used in the monthly GWOT cost report primarily on estimates  in its fiscal year 2004 obligation plan, and “plugged” to available  supplemental budget authority.  Effectively, the Army was reporting back  to Congress exactly what it had appropriated.
Through much of fiscal year 2004, the Army Budget Office based military  personnel obligations for GWOT operations primarily on its monthly  obligation plan.  As illustrated in table 4, this resulted in the cumulative  GWOT military personnel obligations tracking closely to and, in two cases  equaling, the estimated amounts from the fiscal year 2004 obligation plan.
One example of military personnel obligations reported directly from the  Army obligation plan is evident with the cost category for “Subsistence”  described earlier.  The Army obligation plan for “Subsistence” showed an  estimated obligation amount of about $130 million monthly in most of fiscal  year 2004 and, except for a large increase in September 2004, was largely  identical to the monthly GWOT cost report amounts as shown in table 5.   Subsistence costs at the end of fiscal year 2004 were a major factor in the  need to “plug” reported military personnel obligations in the GWOT report’s  cost category “Reserve Components Called to Active Duty” as discussed  later.
Budget authority for Army military personnel supporting GWOT operations  provided in the fiscal year 2004 emergency supplemental appropriation was  reduced late in the fiscal year.  As detailed in table 6, reprogrammings and  additional reductions lowered the supplemental budget authority available  from the supplemental appropriation to about $12 billion for Army GWOT  military personnel in fiscal year 2004.
The Army Budget Office reported negative obligations of more than $439  million in the cost category “Reserve Components Called to Active Duty”  for September 2004 so that GWOT military personnel obligations would  equal available supplemental budget authority of about $12 billion.  This  was necessary (1) because the fiscal year 2004 Army obligation plan was  originally developed for about $12.5 billion in GWOT military personnel  spending and the available supplemental budget authority was reduced late  in the fiscal year and (2) because of the unexpected need to obligate a large  amount for the “Subsistence” cost category in September 2004.  As shown  in figure 4, the reporting of a negative amount effectively resulted in the  Army’s use of “plugging,” or reporting back to Congress exactly the amount  of available budget authority, as adjusted, remaining from the fiscal year  2004 emergency supplemental appropriation.

		Army’s Reporting Process Hampered by Lack of Formal Procedures and Management Review

The process used in fiscal year 2004 to determine the Army’s military  personnel obligations for the monthly GWOT cost report was not clearly  understood by Army Budget Office management, and we found that Army  management was not familiar with the process used to force, or “plug,” the  reported fiscal year 2004 GWOT military personnel obligations to match  available supplemental budget authority.
According to Army Budget Office officials, they did not have formal  procedures for developing and reporting GWOT military personnel  obligations.  These officials explained that, in the absence of written  procedures, the process used to develop the monthly obligation  information reported to the Defense Finance and Accounting Service  (DFAS) was entirely dependent on the staff person assigned to this task.  A  DOD Financial Management Regulation includes general guidance on  developing and reporting incremental costs related to contingency  operations.  For example, the guidance requires that controls, accounting  systems, and procedures provide, in financial records, a proper  identification and recording of the costs incurred for DOD contingency  operations.  However, this general guidance is not a substitute for detailed,  written implementing procedures at the service level.
Furthermore, the Army Budget Office did not establish a formal  management review process for the GWOT military personnel obligations  reported monthly to DFAS.  The Army could not provide documentation to  show that management-level officials reviewed its GWOT military  personnel obligations in fiscal year 2004 that were sent to DFAS for  inclusion in the monthly GWOT report.  Army Budget Office officials also  told us that these problems were exacerbated by staff lost in the September  11 terrorist attack on the Pentagon, personnel turnover, and hiring  difficulties.  Specifically, the Army Budget Office-Military Personnel  Division is authorized 10 civilian positions and had not been fully staffed in  over 2 years.  The position of Chief for the Military Personnel Division was  held by three different individuals in the last 2 years.  We were told that  only one staff member had been with the division longer than 2 years.  As of  May 2005, Army Budget Office officials told us that 2 of the 10 positions  were staffed by interns and 3 positions were not filled.
High staff turnover and new staff training make it increasingly important  that detailed, documented procedures be developed for identifying and  reporting incremental GWOT military personnel obligations.  Formal  procedures would help ensure that the monthly amounts are reported  consistently and accurately, using the best available information.  Lacking  such procedures, Army Budget Office management provided two different  explanations for the process for identifying and reporting GWOT military  personnel obligations.  When asked, Army management initially explained  that reported GWOT military personnel obligations for fiscal year 2004  were based largely on payroll expenditures.  However, our analysis of  reported obligations revealed a significant, unexpected monthly fluctuation  in two GWOT military personnel cost categories, raising doubts about the  reasonableness of management’s explanation and the reliability of the  Army’s estimation process.  For example, as previously noted, a large  negative obligation amount was reported in the “Reserve Components  Called to Active Duty” cost category in September 2004 even though the  associated Army National Guard and Reserve soldier strength remained  relatively constant during the period.
In December 2004, Army Budget Office management provided a different  explanation and stated that GWOT military personnel obligations were  estimates based principally on a calculation that considered the number of  soldiers (e.g., mobilized, deployed) and a monthly composite pay rate or  special pay/allowance amount.  The Army Budget Office provided a  schedule in January 2005 supporting this description of the estimating  process for its GWOT military personnel obligations in fiscal year 2004.   Using this description, our analysis of these obligations, however, indicated  that the Army’s estimation process was not reliable.  For example, our  analysis showed that the estimated obligations reported were not  reasonable owing to both inconsistencies with the number of soldiers and  the high composite pay rate (i.e., officer-grade equivalent).
After further discussion with us about the reasonableness of their earlier  explanations, an Army Budget Office official agreed with our determination  in February 2005 that the reported amounts were based on planned  obligations and later agreed that the year-end amount was matched, or  “plugged,” to available supplemental budget authority.  Army and DOD  officials stated that efforts were being undertaken to improve GWOT cost  reporting by using, where applicable, DOD payroll information instead of  estimated amounts.

		Reported GWOT Obligations for Mobilized Army Soldiers Were Significantly Higher Than Related DOD Payroll Information

GWOT military personnel obligations reported in fiscal year 2004 were not  consistent with the DOD payroll information we reviewed.  Army  management expressed a belief that pay and allowance information could  not be obtained from the DOD payroll system and used for the monthly  GWOT cost report.  However, we obtained fiscal year 2004 payroll  information from DFAS for reserve-component soldiers mobilized for  GWOT operations and demonstrated that actual DOD payroll information,  where applicable, could be used to identify incremental military personnel  obligations for mobilized Army National Guard and Reserve soldiers.   Although we previously reported that several system issues were  significant factors impeding accurate and timely payroll payments to  mobilized reserve-component soldiers, we believe that payroll information  represents the best information available and should be used, where  applicable, to prepare the GWOT cost report.
For fiscal year 2004, we evaluated the Army obligation plan estimates and  military personnel cost category titled “Reserve Components Called to  Active Duty.”  Army officials explained that this estimate included a  soldier’s basic pay, Federal Insurance Contribution Act contributions (i.e.,  Social Security and Medicare), allowances for housing and subsistence,  and accrual amounts for retirement pay and retirement health care.  From  the DOD payroll system, we identified the payroll information for Army  soldiers mobilized to support GWOT operations in fiscal year 2004 and  analyzed payroll information for the related pay components used to  estimate Army military personnel GWOT obligations.  As shown in table 7,  military personnel costs identified from the DOD payroll system were as  much as $2.1 billion less than the estimated Army obligations reported in  the monthly GWOT cost report.
Initially, the Army could not support this difference or its reported GWOT  military personnel obligations.  Over the next several months, the Army and  the Office of the Under Secretary of Defense (Comptroller) provided us  with several possible, though sometimes inaccurate, explanations for this  difference.  Some explanations appeared valid while others did not and,  taken together, they failed to fully account for the difference.  For example,  when asked to explain the difference in military personnel obligations  between the GWOT cost report and related DOD payroll information, Army  Budget Office officials stated in March 2005 that a portion of the difference  was attributable to retirement pay and retirement health care accruals.  We  found that the retirement health care accrual did not result in incremental  costs and, therefore, was not a valid explanation for the difference.  In July  2005, DOD agreed that mobilized reservists do not receive an increase in  retirement health care benefits over benefits for nonmobilized reservists  and, therefore, DOD does not incur incremental costs related to this  benefit.  However, mobilized reservists receive an increase in retirement  pay benefits over benefits for nonmobilized reservists and, therefore, DOD  incurs incremental costs related to this benefit.  In July 2005, Army and  Office of the Under Secretary of Defense (Comptroller) officials reported  to us that $824 million of the difference was attributable to the inclusion of  the retirement pay accruals and provided other potential reconciling cost  information totaling $732 million as additional explanations for the  difference.  This information was provided too late in our audit to assess its  accuracy and completeness.

Comments from the Department of Defense

GAO Contacts and Staff Acknowledgments

	GAO Contacts

	Acknowledgments

In addition to the contacts named above, Steve Sternlieb, Mark Connelly,  Leo Sullivan, Vince Balloon, Kurt Burgeson, Laura Czohara, Dave Mayfield,  Francine Delvecchio, Abe Dymond, K. Eric Essig, Jason Kelly, John  Ledford, and Wayne Turowski made key contributions to this report.

Summary:
Why GAO Did This Study

Since the attacks of September 11, 2001, the Department of Defense (DOD) has reported spending $191 billion through May 2005 to conduct the Global War on Terrorism (GWOT). On an ongoing basis, DOD compiles and reports information on the incremental costs of the war, and uses these data in preparing future funding requests. To assist Congress in its oversight of war spending, GAO assessed (1) whether DOD's reported war costs are based on reliable data, (2) the extent to which DOD's existing financial management policy is applicable to war spending, and (3) whether DOD has implemented cost controls as operations mature. GAO focused primarily, but not exclusively, on fiscal year 2004 reported costs--the latest full year of data available at the time of GAO's review.

What GAO Found

GAO found numerous problems in DOD's processes for recording and reporting costs for GWOT, raising significant concerns about the overall reliability of DOD's reported cost data. As a result, neither DOD nor Congress can reliably know how much the war is costing and details on how appropriated funds are being spent, or have historical data useful in considering future funding needs. On the basis of GAO's work, DOD is taking steps to improve its cost reporting. Factors affecting the reliability of DOD's reported costs include long-standing deficiencies in DOD's financial systems, the lack of a systematic process to ensure that data are correctly entered into those systems, inaccurately reported costs, and difficulties in properly categorizing costs. In at least one case, reported costs may be materially overstated. Specifically, DOD's reported obligations for mobilized Army reservists in fiscal year 2004 were based primarily on estimates rather than actual information and differed from related payroll information by as much as $2.1 billion, or 30 percent of the amount DOD reported in its cost report. In addition, GAO found inadvertent double counting in the Navy's and Marine Corps' portion of DOD's reported costs amounting to almost $1.8 billion from November 2004 through April 2005. Because it was not feasible to examine all reported costs and significant data reliability problems existed, GAO was not able to determine the extent that total costs were misstated. Further complicating the data reliability issue is the fact that DOD has not updated its policy to address GWOT spending. Instead, DOD is using its existing financial management regulation for funding contingency operations, although it was developed and structured to manage the costs of small-scale contingency operations. GAO has noted that specific provisions of the existing policy conflict with the needs of GWOT. One conflict concerns the use of supplemental funds for base support activities at home stations. DOD's financial management regulation administratively precludes such use, but military service officials have spent billions of dollars in supplemental funds on these activities. Some of this spending appears to directly support the war, but some does not. DOD is currently updating its regulation on the basis of GAO's work. While individual commands have taken steps to control costs and DOD policy generally advises its officials of their financial management responsibilities to ensure the prudent use of contingency funding, DOD has not established guidelines that would require all commands involved in GWOT to take steps to control costs and to keep DOD informed of those steps and their success. For example, the commander of coalition forces in Iraq has unilaterally set a 10 percent cost reduction target for fiscal year 2005 but the details are not widely known outside the command. With the growth in GWOT costs, there is a need to ensure that all commands seek to control costs, including the need to review and rationalize related requirements. Until the department establishes guidelines on cost controls and is routinely informed about the types of controls and their impact on costs, it cannot be sure that all that can be done to control costs is being done.