United States General Accounting Office

GAO Report to the Chairman, Committee on

the Budget, House of Representatives

March 1998 CFO ACT FINANCIAL

AUDITS

Programmatic and

Budgetary Implications

of Navy Financial Data

Deficiencies

GAO/AIMD-98-56

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-279143 

March 16, 1998

The Honorable John R. Kasich

Chairman, Committee on the Budget

House of Representatives

Dear Mr. Chairman:

One basic objective of the Chief Financial Officers (CFO) Act is to improve

the financial information available to agency managers and to the

Congress. The act called for the integration of the federal government’s

accounting and budgeting systems and the preparation and independent

audit of financial statements. This link between accounting and budgeting

systems and the rigors of a financial audit is intended to improve the

accuracy of data used in budgeting and help ensure that oversight officials

have accurate and complete information to assess whether agencies are

spending their funds as intended by the Congress.

This report responds to your request that we analyze the programmatic

and budgetary implications of the financial data deficiencies enumerated

by the auditors’ examination of the Department of the Navy’s fiscal year

1996 financial statements.1

 In its first attempt to audit the Navy’s financial

statements, the Naval Audit Service reported in March 1997 that it was

unable to render an opinion on the fiscal year 1996 financial statements.

This means that, despite extensive audit efforts, the Navy’s financial

records were in such poor condition that the auditors could not tell

whether or not the statements were accurate. The Naval Audit Service

concluded that the Navy did not have reliable information on “the value of

assets and liabilities, including the status of funds appropriated.” In

essence, the Navy did not have adequate records to document what it had,

what it owed, or how much money it had spent. This is of particular

concern since the Navy is responsible for about one-third of the

Department of Defense’s (DOD) gross budget authority, controls an

estimated one-half of the reported value of DOD assets, and employs about

1 million military and civilian personnel.

It is vitally important that the Navy obtain accurate financial information if

it is to effectively manage the vast resources for which it is accountable.

1

Your request also asked that we analyze the financial reporting and associated auditors’ reports

detailing the implications of financial deficiencies at the Forest Service and the Federal Aviation

Administration. As agreed with your office, we have reported to you separately on these agencies. (See

Financial Management: Federal Aviation Administration Lacked Accountability for Major Assets

(GAO/AIMD-98-62, February 18, 1998) and Forest Service: Status of Progress Toward Financial

Accountability (GAO/AIMD-98-84, February 27, 1998).)

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Credible financial data are critical not only for preparing auditable

financial statements but also to provide a reliable basis for Navy and DOD

managers and congressional officials to make difficult resource allocation

and program management decisions.

Results in Brief The extent and nature of the Navy’s financial deficiencies identified by the

auditors, including those that relate to supporting management systems,

increase the risk of waste, fraud, and misappropriation of Navy funds and

can drain resources needed for defense mission priorities. Critical

weaknesses identified by the auditors and their implications include the

following.

• Information on $7.8 billion in inventories on board ships was not included

in Navy’s year-end financial statements. This information was omitted

from the inventory data used for inventory management, budgeting, and

financial reporting. The lack of Navy-wide visibility over inventories

substantially increases the risk that the Navy may request funds to obtain

additional inventories that are not needed because responsible managers

may not receive information that some of these inventories may already be

on hand in excess.

• Failure to follow prescribed procedures for controlling Navy’s cash

account with Treasury contributes to continuing disbursement accounting

problems that not only prevent reliable financial statement reporting, but

increase the risk of overspending or overobligating Navy’s appropriations.

For example, the auditors reported that the lack of controls over the

Navy’s Fund Balance With Treasury may result in Antideficiency Act

violations.

• Until duplicate and erroneous vendor payments were identified and

collected as a result of the financial audit, the Navy not only paid too much

for goods and services but, more importantly, was unable to use these

funds to meet other critical programmatic needs. We recently reported2

that for fiscal years 1994 through 1996, contractors returned to DOD checks

totaling about $1 billion per year that related to payments from the Navy,

the other military services, and other DOD agencies.

• Breakdowns in the controls relied on to prevent or detect material

financial errors mean that the Navy cannot tell if its business-type support

operations are operating on a break-even basis as intended. For example,

the auditors reported that inventory records differed from quantities

actually in storage about 22 percent of the time. Inaccurate records could

2

DOD Procurement: Funds Returned by Defense Contractors (GAO/NSIAD-98-46R, October 28, 1997).

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result in decisions to buy the wrong quantity of an item, which could result

in either excess inventory or shortages.

Although the Navy’s 1996 financial statements—its first effort to prepare

comprehensive financial statements3

—did not include all required

information and were not verifiable, they still provided data that could be

used to identify several financial issues that may be of interest to budget

and program managers. For example, footnote disclosures on the Navy’s

accounts receivable and unexpended appropriations raise questions about

whether future budget resources may be needed or whether there may be

opportunities to reduce resource requirements. To illustrate, if accounts

receivable are overstated, the Navy may not receive amounts that it

intended to use to support its operations and may therefore need to obtain

additional funding. If the amount is understated, the Navy may lack the

visibility necessary to ensure that it is taking appropriate action to collect

all amounts due it. When the findings presented in the auditors’ reports are

corrected, the financial statements themselves and related notes can

become an excellent source of information on the financial condition and

operations of the Navy.

Also, if properly implemented, new accounting standards that require

information such as data on asset disposal costs and deferred maintenance

will provide the Navy and the Defense Finance and Accounting Service

(DFAS)4

 with an opportunity to improve the extent and usefulness of

information that is currently available to support program decision-making

and accountability in these areas.

Background The CFO Act of 1990 requires DOD and other agencies covered by the act to

improve their financial management and reporting operations. One of its

specific requirements is that each agency CFO develop an integrated agency

accounting and financial management system, including financial

reporting and internal controls. Such systems are required to comply with

applicable principles and standards and provide for complete, reliable,

consistent, and timely information needed to manage agency operations.

Beginning with fiscal year 1991, the CFO Act required agencies, including

3

The Navy, like all other federal entities, has been required to prepare and submit a prescribed set of

financial information to the Treasury since 1950. However, fiscal year 1996 was the first year the

Navy’s required financial reporting for its activities financed using general funds included the more

detailed descriptive information called for under the CFO Act, as amended.

4

DFAS, which provides accounting services for the military services, was established in January 1991

to improve, standardize, and consolidate DOD’s finance and accounting policy, systems, and

operations.

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the Navy, to prepare financial statements for their trust and revolving

funds, and for their commercial activities. The CFO Act also established a

pilot program under which the Army and Air Force, along with eight other

federal agencies or components, were to test whether agencywide audited

financial statements would yield additional benefits.

The Congress concluded that agencywide financial statements contribute

to cost-effective improvements in government operations. Accordingly, the

Government Management Reform Act of 1994 made the CFO Act’s

requirements for annual audited financial statements permanent and

expanded it to include virtually the entire executive branch. Under this

legislative mandate, DOD is to annually prepare and have audited DOD-wide

and component financial statements beginning with fiscal year 1996. The

Office of Management and Budget (OMB) has designated Navy and the

other military services as “components” that will be required to prepare

financial statements and have them audited. Because the Navy was not

one of the pilot agencies, fiscal year 1996 was the first year for which it

was required to prepare agencywide financial statements for its general

funds.

In October 1990, the Federal Accounting Standards Advisory Board

(FASAB) was established by the Secretary of the Treasury, the Director of

OMB, and the Comptroller General to consider and recommend accounting

standards to address the financial and budgetary information needs of the

Congress, executive agencies, and other users of federal financial

information. Using a due process and consensus-building approach, the

nine-member Board, which, since its formation has included a member

from DOD, recommends accounting standards for the federal government.

Once FASAB recommends accounting standards, the Secretary of the

Treasury, the Director of OMB, and the Comptroller General decide

whether to adopt the recommended standards. If they are adopted, the

standards are published as Statements of Federal Financial Accounting

Standards (SFFAS) by OMB and by GAO. In addition, the Federal Financial

Management Improvement Act of 1996, as well as the Federal Managers’

Financial Integrity Act, requires federal agencies to implement and

maintain financial management systems that will permit the preparation of

financial statements that substantially comply with applicable federal

accounting standards.

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Navy Financial Statement

Preparation and Audit

Responsibilities

For fiscal year 1996, the Navy prepared two separate sets of statements:

one for its operations financed with general funds and another for

operations financed using funds provided through the Defense Business

Operations Fund (DBOF).5

 The Defense Finance and Accounting

Service-Cleveland Center supported the Navy in preparing the fiscal year

1996 financial statements for activities financed by general funds and DBOF.

The Navy’s general fund financial statements encompassed those

operations financed through 24 general fund accounts.6

 These general

funds included moneys the Congress appropriated to the Navy to pay for

related authorized transactions for periods of 1 year, multi-years, or on a

“no-year” basis.7

 The Navy’s DBOF business activities are financed primarily

through transfers from the Navy’s Operations and Maintenance

appropriations, based on the costs of goods and services to be provided.

The Navy has historically operated many supply and industrial facilities

using a working capital fund concept. In fiscal year 1996, the Navy’s

business activities comprised the largest segment of DOD’s support

operations financed through DBOF.

The DOD Inspector General delegated responsibility for auditing Navy’s

fiscal year 1996 financial statements to the Naval Audit Service. By

agreement with the DOD Inspector General, the Naval Audit Service’s fiscal

year 1996 audit encompassed two separate efforts, both limited to the

Navy’s Statement of Financial Position and related footnotes.8

 The audit

resulted in one set of reports focused on the Navy’s financial statement

reporting for its operations financed using general funds and one overall

report summarizing the results of its review of the Navy’s DBOF-financed

5

The Navy was responsible for directly managing the goods and services provided through the Navy’s

business areas, although they were financed through DBOF. Consistent with this management

practice, on December 11, 1996, the Under Secretary of Defense (Comptroller) reorganized DBOF and

created four working capital funds: Army, Navy, Air Force, and Defense-wide.

6

General Fund accounts are composed of federal money not allocated to any other fund account.

7

“No-year” appropriations remain available for obligation for their original purposes until expended.

8

The Statement of Financial Position is intended to show the value of the Navy’s assets and liabilities.

The Navy’s other fiscal year 1996 financial statements, which were not audited by the Naval Audit

Service, were the Statement of Operations and Changes in Net Position and the Statement of Cash

Flows.

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operations.9 The set of general fund reports included an overall auditor’s

opinion report, an overall report on internal controls and compliance with

laws and regulations, and eight other more detailed supporting reports.

Appendix I shows the status of Navy entities’ financial statement audits in

fiscal year 1996. Appendix II provides a complete listing of the Naval Audit

Service reports issued as a result of its fiscal year 1996 financial statement

audit efforts.

Objectives, Scope,

and Methodology

The objectives of this report were to (1) analyze the extent to which

financial deficiencies detailed in the auditors’ reports may adversely

impact the ability of Navy and DOD managers and congressional officials to

make informed programmatic and budgetary decisions, (2) provide

examples of other issues of interest to budget and program

decisionmakers that can be identified by reviewing the financial

statements, and (3) describe the additional financial data that, if complete

and accurate, could be used to support future decision-making when the

Navy implements accounting standards that are effective beginning with

fiscal years 1997 and 1998.

To accomplish these objectives, we obtained and analyzed the Naval Audit

Service’s opinion report and other supporting reports resulting from its

examination of the Navy’s fiscal year 1996 financial statements to identify

data deficiencies and determine their actual or potential impact on Navy

programmatic or budgetary decision-making. To do this, we compared the

Naval Audit Service’s audit results with the findings and related open

recommendations in our previous reports that discuss the implications of

Navy’s financial deficiencies. We also obtained additional details on the

Naval Audit Service’s findings through discussions with cognizant Naval

Audit personnel, and we discussed the status of our previous findings and

recommendations with cognizant Navy and DFAS personnel. Further, we

independently reviewed Navy’s financial statements to identify other

issues of interest to budget and program decisionmakers, particularly

those areas that may indicate the need for future budget resources or that

may provide the opportunity to reduce resource requirements. Finally, we

analyzed recently adopted federal accounting standards to identify areas

9

The Naval Audit Service was not responsible for offering a separate opinion on the Navy’s DBOF

operations. Instead, the results of the Naval Audit Service’s review of Navy’s DBOF operations were

provided to the Department of Defense Inspector General for inclusion in its auditors’ report on DOD

for the Defense Business Operations Fund Consolidating Financial Statements. That report disclaimed

an opinion because of significant accounting system deficiencies and unsound control procedures. The

auditors concluded that DOD’s financial statements for its DBOF-funded operations could not be relied

on for making decisions or assessing performance.

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where Navy program and budget managers will have additional useful

information available to support decision-making, if the standards are

effectively implemented as required.

Our work was conducted from December 1997 through February 1998 in

accordance with generally accepted government auditing standards. We

requested comments on a draft of this report from the Secretary of

Defense or his designee. On March 9, 1998, the Principal Deputy Under

Secretary of Defense (Comptroller) provided us with written comments,

which are discussed in the “Agency Comments and Our Evaluation”

section and are reprinted in appendix III.

Implications of

Pervasive Financial

Problems Identified

by Auditors

To an even greater extent than the other military services, the Navy has

been plagued for years by troublesome financial management problems

involving billions of dollars. For example, our 1989 report10 on the results

of our examination of Navy’s fiscal year 1986 financial reporting detailed

numerous problems, such as understating the value of Navy’s assets by

$58 billion, that we attributed to carelessness and the failure to perform

required rudimentary supervisory reviews and reconciliations.

Seven years later, we found that such problems persisted. In our report11

on the Navy’s fiscal year 1994 financial reporting, we reported that the

Navy had not taken advantage of the 5 years that had passed since the

enactment of the CFO Act or the experiences of its counterparts, the Army

and the Air Force, in preparing financial statements. Our report identified

a minimum of $225 billion of errors in the $506 billion in assets, $7 billion

in liabilities, and $87 billion in operating expenses reported to the

Department of the Treasury in the Navy’s fiscal year 1994 consolidated

financial reports. Consequently, we concluded that the Navy and DFAS had

to play “catch up” if they were to successfully prepare reliable financial

statements on the Navy’s operations.

Most recently, the Naval Audit Service’s April 1997 report on the results of

its audit of the Navy’s fiscal year 1996 financial reporting disclosed that

errors, misstatements, and internal control weaknesses continued. A

number of the financial data and control deficiencies disclosed in the

Naval Audit Service’s reports not only adversely affect the reliability and

10Financial Reporting: Navy’s 1986 Consolidated Report on Financial Position Is Unreliable

(GAO/AFMD-89-18, April 6, 1989).

11CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy’s Financial Reports

(GAO/AIMD-96-7, March 27, 1996).

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usefulness of the Navy’s financial reporting but also have significant

programmatic or budgetary implications. Our analysis of the auditors’

reports, along with additional examples from our own audit work, is

provided in the following sections.

Budget Development Is

Undermined by Lack of

Accurate Inventory Data

The Naval Audit Service report on the results of its financial audit of the

Navy’s fiscal year 1996 financial statements disclosed numerous problems

with inventory data reported by the Navy, including the following.

“The Department of the Navy did not report an estimated $7.8 billion in Operating Materials

and Supplies items aboard ships or with Marine Corps activities on the FY 1996 Statement

of Financial Position.”

We previously reported that DOD has spent billions of dollars on inventory

that is not needed to support war reserve or current operating

requirements and burdened itself with managing and storing the unneeded

inventory.12 The financial reporting error disclosed by the Naval Audit

Service has implications for the budget process because the inventory data

used both for the financial statements and as the starting point for the

Navy’s process to develop budget requests for additional inventory are

incomplete. A Stratification Report is used to prepare data on the quantity

and value of the Navy’s inventories, such as operating materials and

supplies, included in the Navy’s financial statements. It is also used as the

starting point to forecast budget requirements for inventories that will be

needed in supply warehouses. To determine Navy-wide inventory

requirements, responsible managers must also have accurate, reliable

information on the quantities of inventories on ships, including any

quantities in excess of needs.

However, the auditors found that information on $7.8 billion in

inventories, including those on board ships was not included in the Navy’s

year-end financial statements. This lack of Navy-wide visibility over

inventories substantially increased the risk that Navy may have requested

funds to obtain additional unnecessary inventories because responsible

managers did not receive information that excess inventories were already

on hand in other locations. This happened in the past, as discussed in our

report13 on financial audit work we performed to help the Navy prepare for

the fiscal year 1996 audit. We found that for fiscal year 1994, the Navy’s

12High-Risk Series: Defense Inventory Management (GAO/HR-97-5, February 1997).

13Navy Financial Management: Improved Management of Operating Materials and Supplies Could Yield

Significant Savings (GAO/AIMD-96-94, August 16, 1996).

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inventory item managers did not have adequate visibility over $5.7 billion

in operating materials and supplies on board ships and at 17 redistribution

sites. Approximately $883 million of these inventories were excess to

current operating allowances or needs. For the first half of fiscal year

1995, inventory item managers had ordered or purchased items for some

locations that had been identified as excess at other locations and thus

were already available. As a result, we identified unnecessary spending of

at least $27 million. Further, a review of inventory item managers’

forecasted spending plans for the second half of fiscal year 1995 and fiscal

years 1996 and 1997 found planned purchases of items already available in

excess at other locations could result in the Navy incurring approximately

$38 million of unnecessary costs.

Our recent discussions with Navy officials confirmed that as of

December 1997, the process used to accumulate inventory status

information still did not provide inventory managers complete information

on operating material and supplies inventories, particularly information on

the quantities of Navy operating and supply inventories on ships. As a

result, the Navy’s budget requests for inventory may continue to not

accurately reflect its needs.

Navy Could Not Account

for Its Cash Balance With

Treasury

The Naval Audit Service’s fiscal year 1996 audit report stated the

following.

“The Department of the Navy could not effectively account for the balance in the Fund

Balance with Treasury because Defense Finance and Accounting Service - Cleveland

Center had not developed an adequate accounting system to do so. Consequently, the

Department of the Navy cannot provide reasonable assurance that: (1) the $64.8 billion

account balance reported on the FY 1996 Statement of Financial Position presents fairly its

financial position, or (2) transactions that could cause Antideficiency Act violations would

be detected as required by Department of Defense guidance. Defense Finance and

Accounting Service principally used Department of the Treasury data in reporting the Fund

Balance with Treasury because the data was considered more reliable than the data

provided by the Navy’s accounting systems. Department of Defense guidance requires that

the Fund Balance with Treasury be supported by records of the entity.”

This situation is similar to an individual not being able to reconcile his or

her checkbook register to the monthly statement received from the bank.

Just as with an individual’s checkbook, reconciliations are necessary to

ensure that any differences are identified, the cause researched, and

appropriate corrective action taken. Such reconciliations allow the

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individual to identify not only clerical errors but potential fraudulent

misuse of his or her account. For example, blank checks can be stolen and

forged and the amounts on otherwise legitimate checks can be altered.

The potential consequences of the lack of regular reconciliations is

increased dramatically for the Navy given that the agency reported

$63 billion in fiscal year 1996 general fund expenditures and also has had

continuing problems in properly recording billions of dollars of

transactions.

The lack of complete records for all disbursements and regular

reconciliations can also result in the Navy spending more funds than it has

available. Federal agencies are required to record obligations as legal

liabilities are incurred and make payments from the associated

appropriations within the limitations established by the Congress. To the

extent that the Navy does not properly record all its disbursements, its

ability to ensure that it will have enough funding available to pay for its

expenses will continue to be adversely affected. This is similar to an

individual not properly maintaining his or her checkbook register by

neglecting to record checks written and, at the end of the month, finding

that the account is now overdrawn.

As noted by the auditors, the lack of controls over the Fund Balance with

Treasury may result in Antideficiency Act violations.14 In addition, in our

March 1996 report,15 we disclosed that problems in keeping records on

Navy’s disbursements resulted in understating by at least $4 billion the

federal government’s overall budget deficit reported as of June 30, 1995. In

the current environment, such errors could make the difference between

the federal government reporting a budget deficit or surplus.

Erroneous and Duplicate

Payments Identified by

Auditors Affect Amount of

Funds Available

The extensive problems identified in the Navy’s disbursement process also

resulted in erroneous and duplicate payments to vendors, as stated in the

auditors’ report.

“Defense Finance and Accounting Service Operating Locations processed 110 duplicate or

erroneous vendor payments for the Department of the Navy. Of these, 62, valued at

$2.5 million, had not been previously identified for collection....The improper payments

were the result of input errors, failure to conduct reviews, ambiguous reports, and

14Under the Antideficiency Act, federal agency officials may not “make or authorize an expenditure or

obligation exceeding an amount available in an appropriation or fund” (31 U.S.C. 1341).

15CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy’s Financial Reports

(GAO/AIMD-96-7, March 27, 1996).

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improper processing of invoices....The $2.5 million in duplicate or erroneous payments we

identified and the Operating Locations collected represent funds that can be put to better

use.”

The auditors’ findings were based on a limited judgmental sample of about

400 payments out of a universe of about 1.2 million payments Navy made

during fiscal year 1996. DOD officials informed us that subsequent

investigation showed that not all of the $2.5 million were actually

duplicate or erroneous payments that could be put to better use. However,

the Naval Audit Service has not yet validated these results.

Nonetheless, the control weaknesses identified, along with our previous

work on DOD’s long-standing problems with overpayments to contractors

and vendors, suggest that significant additional, undetected erroneous

payments likely exist. Most recently, we reported16 that for fiscal years

1994 through 1996, contractors returned checks to DFAS totaling about $1

billion a year. These related to payments from the Navy, the other military

services, and other Defense agencies. For the first 7 months of fiscal year

1997, DFAS’s Columbus Center received checks returned by contractors

totaling about $559 million. DOD’s reliance on contractors to identify these

overpayments substantially increases the risk that it is incurring

unnecessary and erroneous costs. Because of our continuing concerns

with control breakdowns in the contract payment area across the

department, we have continued to monitor this area as one of the high-risk

federal areas most vulnerable to waste, fraud, abuse, and

mismanagement.17

Lack of Reliable Financial

Information Impairs

Management of Navy’s

Businesslike Operations

By establishing DBOF in 1991, the Department of Defense intended to focus

management attention on the total costs of its businesslike support

organizations to help manage these costs more effectively. DBOF was

modeled after businesslike operations in that it was to maintain a

buyer-seller relationship with its military customers, primarily the Navy

and the other military services. DBOF-funded operations were to operate on

a break-even basis by recovering the current costs incurred in conducting

its operations, primarily from operations and maintenance funding

provided by its customers.

The Naval Audit Service reported a number of serious financial

deficiencies in its fiscal year 1996 review of Navy’s DBOF activities.

16DOD Procurement: Funds Returned by Defense Contractors (GAO/NSIAD-98-46R, October 28, 1997).

17High-Risk Series: Defense Contract Management (GAO/HR-97-4, February 1997).

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“[I]nternal controls were not adequate to detect or prevent errors. For example, inventory

records were inaccurate; fixed assets were not capitalized or depreciated properly;

depreciation on fixed assets at closing activities was not included on financial statements;

payables were not always processed accurately or timely; accruals were inaccurate

because of lack of reconciliations; liabilities were inaccurate because of untimely

processing and bookkeeping errors; and Military Sealift Command financial accounting

information was inaccurate due to inadequate general ledger and subsidiary ledger controls

and accounting records.”

The following examples of data deficiencies, when considered along with

the Naval Audit Service’s overall assessment of material weaknesses in the

Navy’s DBOF operations, have an adverse effect on the Navy’s ability to

reliably determine DBOF’s net operating results. These financial

deficiencies adversely affect not only the Navy’s DBOF financial reporting

but also its ability to achieve the goal of operating on a break-even basis.

Reliable information on the DBOF’s net operating results is a key factor in

setting the prices DBOF charges its customers. As a result of the problems

pointed out by the Naval auditors, neither DOD nor congressional officials

can be certain (1) of actual DBOF operating results and (2) if the prices

DBOF charges its customers are reasonable for the goods and services

provided.

Our recent reporting demonstrates the Navy’s continuing problems in

achieving the goal of operating its businesslike activities on a break-even

basis. For example, in March 1997, we reported18 that DBOF management’s

inability to stem continuing losses occurred as a result of, among other

factors, inaccurate accounting information concerning the Fund’s

overhead costs. More recently, in an October 1997 report,19 we determined

that because one of the Navy’s DBOF business areas did not require its

customers to pay for all storage services provided its customers—as is the

common practice in most businesslike operations—customers had no

incentive to either relocate or dispose of unneeded ammunition and

thereby reduce their costs. To the extent that the Navy’s DBOF operations

incur losses, future appropriations may be required to cover those losses.

DOD officials informed us that they used these financial statements and

related audit report findings in their efforts to reduce costs and streamline

the Navy’s ordnance business area.

18Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses

(GAO/AIMD/NSIAD-97-74, March 14, 1997).

19Navy Ordnance: Analysis of Business Area Efforts to Streamline Operations and Reduce Costs

(GAO/AIMD/NSIAD-98-24, October 15, 1997).

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Specific examples of problems identified by Naval Audit Service auditors

in its fiscal year 1996 financial review of the Navy DBOF included the

following.

• A sample comparison of inventory records and on-hand stock revealed

that quantities actually in storage differed from inventory records about

22 percent of the time. The auditors reported that management took action

to correct the data deficiencies it reported and that action was underway

to correct the systemic causes for the discrepancies indentified. In

discussing the possible implications of its findings, the Navy auditors

reported that “Inaccurate inventory records distort financial records and

financial reports used by senior managers. This, in turn, can result in

decisions to buy wrong quantities, which could cause excesses or critical

shortages of material.”

• Depreciation expenses associated with fixed assets at one location were

understated by a net amount of about $5 million. This occurred primarily

because of a misinterpretation of guidance on reporting depreciation

expenses incurred during the year on assets that were to be transferred

from that location before the end of the fiscal year. While it did not

quantify the extent of depreciation expense understatements, the Naval

Audit Service also reported that additional reviews revealed that at least

eight other locations also misinterpreted the guidance. In reporting on the

implications of this deficiency, the Naval Audit Service stated, “Failure to

report depreciation at closing activities understates current year costs and

prior year losses that could be eligible for recoupment from Operation and

Maintenance, Navy funds . . . . Ultimately, costs that are not recouped will

have a direct effect on the cash position of the Department of the Navy

Defense Business Operations Fund.” This means that to the extent that the

Navy was undercharged as a result of the depreciation understatement,

the Navy would have more Operation and Maintenance funds available

than it should.

• The Navy’s DBOF maintained over 2,300 flatracks (containers used to

transport Army cargo on Navy ships) solely for the benefit of the Army but

did not recover the related estimated costs. The auditors reported that the

costs to maintain these flatracks “should have been funded by Operation

and Maintenance, Army funds. As a result of the failure to collect

reimbursement, the Department of Navy used Operation and Maintenance,

Navy funds to support the Army requirements. The funds used were

estimated to be $640,000 for Fiscal Year 1997, and taking corrective action

could result in the Department of the Navy putting $4.1 million to better

use over a 6-year period.” Although this situation did not affect the federal

government’s overall financial position, this means that the Navy

Page 13 GAO/AIMD-98-56 Navy Financial Data
B-279143 

augmented Army budgetary resources by paying for a service that should

have been paid with Army funds.

• The Navy’s DBOF accounting records included at least $5.8 million in

invalid “Other Non-Federal (Governmental) Liabilities.” The auditors

reported that “Invalid liabilities cause funds to be unnecessarily set aside

either to pay invoices already paid or to plan for costs not yet incurred.

Therefore, this $5,793,496 represents potential funds that can be put to

better use.” This means that the Navy’s operation and maintenance

appropriation requirements are less than previously recognized because

the Navy will not be required to pay these “invalid liabilities.”

Implications of

Financial Statement

Disclosures

Despite the shortcomings in the Navy’s financial statements, we were able

to identify several financial issues that may be of interest to budget and

program managers. Specifically, even with the acknowledged deficiencies

in the Navy’s financial data, some areas raise questions about whether

future budget resources may be needed or whether there may be

opportunities to reduce resource requirements.

The following are examples of footnote disclosures and the kind of

information that can be gleaned from them.

Page 14 GAO/AIMD-98-56 Navy Financial Data
B-279143 

Figure 1: Excerpts From “Note 5. Accounts Receivable, Net”

Figure 1 provides excerpts from the note intended to explain how the

accounts receivable balance presented on the Statement of Financial

Position was calculated. Accounts receivable, which represents amounts

owed the Navy, is significant to program managers and budget officials. If

the amount is overstated, the Navy may not receive amounts that it

intended to use to support its operations and may therefore need to obtain

Page 15 GAO/AIMD-98-56 Navy Financial Data
B-279143 

additional funding. If the amount is understated, the Navy may lack the

visibility necessary to ensure that it is taking appropriate action to collect

all amounts due it.

For example, the table shows a 14.5 percent allowance for appropriation

1453 (military personnel). This means that nearly 15 percent of the funds

Navy personnel owed the Navy were not likely to be collected. In some

cases, better and more timely collection of these types of receivables may

result in the recovery of amounts that could be used to reduce the Navy’s

request for funds to support its military personnel or provide funds to

meet other critical resource needs.

The note also refers to negative governmental non-entity receivables of

$26.7 million. A negative receivable is an unusual disclosure, indicating

that the Navy does not know the source of almost $27 million it collected.

These funds cannot be used until the source of the collection is

determined. If these collections are owed the Navy, recording them

improperly and not taking timely action to collect these amounts may have

resulted in requests for budgetary resources when these collections could

have been used to meet those requirements.

Page 16 GAO/AIMD-98-56 Navy Financial Data
B-279143 

Figure 2: Excerpts From “Note 31. Other Disclosures”

Figure 2 shows excerpts from the note that provides information on over

$4 billion of cancelled appropriations that the Navy reopened in fiscal year

1996. The note does not clearly indicate how much or for what purpose

the cancelled accounts were used.

The Congress has long-standing concerns with agencies’ use of funds after

their expiration. In 1990, the Congress determined DOD was expending

funds from expired accounts without sufficient assurance that authority

for such expenditures existed or in ways that the Congress did not intend.

To end these abuses, the Congress enacted account closing provisions in

the fiscal year 1991 National Defense Authorization Act. The act closes

appropriations 5 years after the expiration of their availability for

obligation. Once closed, the appropriations are not available for obligation

or expenditure for any purpose. In a series of decisions,20 the Comptroller

20See Comptroller General Decisions 72 Comp. Gen. 343 (1993), 72 Comp. Gen. 347 (1994), and 73

Comp. Gen. 338 (1994) and B-251287.3, November 1, 1995.

Page 17 GAO/AIMD-98-56 Navy Financial Data
B-279143 

General has stated, however, that agencies may adjust their accounting

records for closed appropriations to record transactions that occurred but

were not recorded before closure and to correct obvious clerical mistakes

within a reasonable period of time after closure. For example, if an agency

discovers, after an appropriation closes, that it had failed to record a

disbursement that it had properly made from an appropriation before

closure, the agency is expected to adjust its accounting records to reflect

that disbursement.

Further details would be necessary to assess the implications of the Navy’s

note regarding the “reopening” of $4 billion in cancelled appropriations.

This information may be related to the Navy’s continuing problems in

accounting for its disbursements and may indicate a weakening in the

mechanism put in place by the Congress to ensure control over cancelled

appropriations.

Figure 3: Note 20. Net Position

Page 18 GAO/AIMD-98-56 Navy Financial Data
B-279143 

Navy’s fiscal year 1996 Statement of Financial Position includes about

$61 billion in “Unexpended Appropriations.” Note 1R of the financial

statements defines unexpended appropriations as “amounts of authority

which are unobligated and have not been rescinded or withdrawn and

amounts obligated but for which neither legal liabilities for payments have

been incurred nor actual payments made.” Note 20, as shown in figure 3,

disclosed that at the end of fiscal year 1996, Navy had an unobligated

balance available of about $13 billion and about $45 billion in undelivered

orders, which represent amounts obligated but not expensed. These

amounts, along with the $3 billion in unavailable unobligated

appropriations included in the note, tie back to the $61 billion reported in

the financial statements.

This type of information, along with other required disclosures, could

serve as a key indicator of how well the Navy is managing the funds

provided by the Congress. A portion of the amounts identified as

unexpended appropriations relate to funding provided through

procurement or other appropriations that are available for obligation for

more than 1 year to fund Navy activities. However, this information, along

with other required disclosures, can be used to monitor the Navy’s

long-standing problems in fully utilizing its resources. For example, OMB

requires that agencies disclose the amount of unexpended cancelled

appropriations in the note on contingent liabilities. Although the Navy’s

fiscal year 1996 financial statement reporting did not include this

information, the Navy’s year-end reports to the Treasury state that the

Navy cancelled $1.8 billion and $1.5 billion in unexpended appropriations

for fiscal years 1996 and 1997, respectively. Also, the Naval Audit Service

has issued several reports that highlighted the Navy’s ongoing problems in

promptly deobligating unneeded funds that could be better utilized for

critical Navy mission needs. In addition, beginning in fiscal year 1998, the

Navy will be required to prepare a Statement of Budgetary Resources,

which will provide decisionmakers with added information on the status

of the Navy’s use of its resources.

Improved Financial

Statements Will Enhance

Their Usefulness as a

Management Tool

Although Navy officials represented their fiscal year 1996 financial

statements—the first-ever attempt to prepare comprehensive financial

statements for the Navy—to be based on the best information available,

the usefulness of Navy’s financial statement disclosures is limited at best

due to the previously discussed problems with accuracy, reliability, and

completeness.

Page 19 GAO/AIMD-98-56 Navy Financial Data
B-279143 

The footnotes to the Navy’s financial statements, which should serve as an

excellent source of relevant, detailed information on its operations, are

lacking in detail and present abnormal information. For example, the

statements included a number of footnotes that provided only summary

charts or tables or grossly abnormal balances, such as large negative

balances in what would normally be expected to be accounts with positive

balances, without any accompanying detail or explanation. In addition,

because fiscal year 1996 was a first-year effort, the Navy’s general fund

financial statements do not offer the benefit of comparative data on the

prior year, which can provide useful analysis on trends and changes from

year to year. As the Navy and DFAS improve on their first-year efforts to

develop reliable financial statements for the Navy, and when the problems

identified in the auditors’ reports are corrected, knowledgeable users of

the Navy’s financial statements will be better able to identify key issues

that may be of interest to budget and program managers.

Effective

Implementation of

New Accounting

Standards Would

Provide Useful

Financial Data

Recently adopted federal accounting standards are intended to enhance

federal financial statements by requiring that government agencies show

the complete financial results of their operations and provide relevant

information on agencies’ true financial status. In addition to the new

requirement for the Statement of Budgetary Resources previously

mentioned, two other recently adopted accounting standards are

particularly significant in terms of the additional information that could be

made available to Navy budget and program managers in the future, if the

standards are implemented effectively. Specifically, the standards call for

reporting on the Navy’s costs associated with (1) the disposal of various

types of assets, including environmental clean-up costs, and (2) deferred

maintenance.

Issued in December 1995 and effective beginning with fiscal year 1997,

Statement of Federal Financial Accounting Standard (SFFAS) No. 5,

Accounting for Liabilities of the Federal Government, requires the

recognition of a liability for any probable and measurable future outflow

of resources arising from past transactions. The statement defines

probable as that which is likely to occur based on current facts and

circumstances. It also states that a future outflow is measurable if it can be

reasonably estimated. Because disposal costs are both probable and

measurable, they are to be reported under SFFAS No. 5. The Congress has

recognized the importance of accumulating and considering disposal cost

information. In the National Defense Authorization Act for Fiscal Year

1995, the Congress required DOD to develop life-cycle environmental costs,

Page 20 GAO/AIMD-98-56 Navy Financial Data
B-279143 

including demilitarization and disposal costs, for major defense acquisition

programs. This means that the Navy is required to estimate and report, as

part of the information presented in its financial statements, the estimated

cost to dispose of its major weapon systems and the cost to clean up the

environmental hazards found on its land and facilities.

In our recent report21 on DOD’s efforts to implement the new reporting

requirements as they relate to the disposal of nuclear submarines and

ships, we stated that this reported liability could be made more meaningful

to decisionmakers if it was presented by approximate time periods when

the disposals are expected to occur. Such information could provide

important context for congressional and other budget decisionmakers on

the total liability by showing the annual impact of disposals that have

already occurred or are expected to occur during the budget period.

Furthermore, if the time periods used to present these data were

consistent with the timing of when funding was being requested for

disposal costs as reflected in budget justification documents, such as DOD’s

Future Years Defense Program, this type of disclosure would provide a

link between budgetary and accounting information, one of the key

objectives of the CFO Act.

In addition, SFFAS No. 6, Accounting for Property, Plant, and Equipment,

issued November 30, 1995, and effective beginning with fiscal year 1998,

requires recognition of deferred maintenance amounts by major class of

asset along with disclosure of the method used to measure the extent of

deferred maintenance needed for each asset class. In our recent report22

on DOD’s efforts to implement this standard as it relates to Navy ships, we

stated that accurate reporting of deferred maintenance is important for

key decisionmakers such as the Congress, DOD, and Navy managers and

can be an important performance indicator of mission asset condition,

which is a key readiness factor. While the existence of deferred

maintenance may indicate a need for additional resources for

maintenance, such resources may already be available within the current

funding of the military services.

As Navy and DFAS move to put in place the systems and procedures

required to comply with these new accounting standards, they will not

only be better able to prepare a more useful set of Navy financial

21Financial Management: Factors to Consider in Estimating Environmental Liabilities for Removing

Hazardous Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997).

22Financial Management: Issues to Be Considered by DOD in Developing Guidance for Disclosing

Deferred Maintenance on Ships (GAO/AIMD-98-46, February 6, 1998).

Page 21 GAO/AIMD-98-56 Navy Financial Data
B-279143 

statements but also to better support more informed programmatic and

budgetary decision-making in these areas.

Conclusions Currently, the Navy is unable to produce accurate financial information

needed to support either its financial statements or operations and

budgetary decision-making. However, through the impetus provided by the

CFO Act, it has an opportunity to better integrate financial information into

budget and operational management decisions. To seize this opportunity,

the Navy and DFAS must establish a greater linkage between financial

statement preparation and reporting processes, and resource allocation

and oversight decisions. However, such a linkage will yield the benefits

envisioned by the CFO Act only if the Navy’s financial information is

dramatically improved to the point where it is generated by a systematic

process and its accuracy can be verified. Auditable financial statements

produced by this type of disciplined process provide the Congress and

managers with assurance that the information being used to support the

statements is accurate and can therefore be used with confidence for

day-to-day decision-making.

In this context, efforts to produce auditable financial statements on an

annual basis should be viewed not as an end in itself but as the capstone of

a vigorous financial management program supported by effective

information systems that produce accurate, complete, and timely

information for decisionmakers throughout the year. Achieving the

far-reaching financial management goals established by the CFO Act,

particularly in light of the serious and widespread nature of the Navy’s

long-standing financial problems, will only be possible with the sustained,

demonstrated commitment of top leaders in DOD, the Navy, and DFAS.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD stated that it is firmly

committed to providing taxpayers and the Congress with accurate

financial statements that can pass rigorous audit tests. DOD also said that

for some time it has acknowledged that significant improvements are

required in its financial management systems and reporting, and that many

of the problems found during the audits of the Navy’s fiscal year 1996

financial statements remain. It also stated that financial management is a

high priority in DOD and that it is working to improve the basic financial

procedures and systems used to collect, categorize, and report financial

transactions.

Page 22 GAO/AIMD-98-56 Navy Financial Data
B-279143 

DOD expressed concern with what it termed the report’s implication that

the Navy’s budget is overstated or could be reduced because its financial

statements omitted a line, excluded a footnote, or were otherwise

deficient. DOD stated that such an implication is grossly misleading and

undermines the rigorous planning, programming, and budgeting process

within both DOD and the Navy. In addition, DOD maintained that the report

leaves the erroneous impression that there have been no significant

improvements in the Navy’s financial operations since our review of the

Navy’s fiscal year 1986 financial reports. Furthermore, DOD stated that the

report makes broad assertions that deficiencies in the Navy’s financial

statements adversely impact the ability to make informed programmatic

and budgetary decisions. In this regard, DOD contended that the report did

not acknowledge that many of the deficiencies cited, including those from

audit reports, are reviewed as part of the Navy’s day-to-day management

and internal budget review processes, and again by the Office of the

Secretary of Defense.

We disagree that our report implies that the Navy’s budget is overstated or

could be reduced merely because data were omitted from the Navy’s

financial statements or because the statements were deficient in some

other way. Our report focuses on deficiencies in the management systems

and processes that are used to support not only the Navy’s financial

statement preparation, but its budgetary and program decision-making. As

a result, the deficiencies discussed in our report focus on those errors or

omissions in the Navy’s financial reporting that also raise serious

questions about whether decisionmakers had sufficiently reliable

information available to make informed budgetary resource allocation

decisions.

With respect to DOD’s assertion that our report provides a misleading

impression that there have been no significant improvements in Navy’s

financial operations, our finding that the Navy has been plagued with

troublesome financial management problems for many years is warranted.

We have not seen the level of expected improvement in the years that have

passed since our report on the Navy’s fiscal year 1986 financial reporting.

While we are encouraged with DOD’s stated high priority commitment to

reforming its financial operations, significant errors, omissions, and

misstatements remain uncorrected, as evidenced by the extent and nature

of the deficiencies pointed out in auditors’ reports on their examination of

the Navy’s fiscal year 1996 financial statements. Efforts to reform DOD’s

financial operations, however well-intentioned, have not as yet resulted in

the level of improvements needed to put in place a disciplined financial

Page 23 GAO/AIMD-98-56 Navy Financial Data
B-279143 

operation that will not only yield accurate, reliable information for the

Navy’s financial statements, but also support its program and budget

decision-making. It is for this reason that DOD financial management is on

our list of high-risk government programs.23

Lastly, we are encouraged that the Navy auditors’ findings have been used

and that the Navy has found them helpful in developing budget estimates.

In addition, while the Navy’s planning, programming, and budgeting

process was not the focus of the review requested for this report, we

recognize that it has been in place for many years and is intended to

provide a thorough review of all pertinent information, including the

implications of auditors’ findings, in determining Navy budget estimates.

However, the Navy should not be forced to rely on such alternative data

development and validation procedures as a proxy for a systematic,

disciplined financial management and reporting process. Such a process

would provide accurate and reliable financial data to support the

development of the Navy’s financial statements, as well as day-to-day

program and budget decision-making.

We are sending copies of this report to the Ranking Minority Member of

the House Committee on the Budget, the Director of the Office of

Management and Budget, the Secretary of Defense, the Secretary of the

Navy, and the Director of the Defense Finance and Accounting Service. We

will also send copies to other interested parties upon request.

Please contact me at (202) 512-9095 if you or your staff have any questions

concerning this report. Major contributors are listed in appendix IV.

Sincerely yours,

Lisa G. Jacobson

Director, Defense Audits

23High-Risk Series: Defense Financial Management (GAO/HR-97-3, February 1997).

Page 24 GAO/AIMD-98-56 Navy Financial Data
Page 25 GAO/AIMD-98-56 Navy Financial Data
Contents

Letter 1

Appendix I 

Audit Status of Navy

Entities for Fiscal

Year 1996

28

Appendix II 

Naval Audit Service

Reports Resulting

From Fiscal Year 1996

Audit

29

Appendix III 

Comments From the

Department of

Defense

30

Appendix IV 

Major Contributors to

This Report

40

Figures Figure 1: Excerpts From “Note 5. Accounts Receivable, Net” 15

Figure 2: Excerpts From “Note 31. Other Disclosures” 17

Figure 3: Note 20. Net Position 18

Abbreviations

CFO Chief Financial Officer

DBOF Defense Business Operations Fund

DFAS Defense Finance and Accounting Service

DOD Department of Defense

FASAB Financial Accounting Standards Advisory Board

OMB Office of Management and Budget

SFFAS Statements of Federal Financial Accounting Standards

Page 26 GAO/AIMD-98-56 Navy Financial Data
Page 27 GAO/AIMD-98-56 Navy Financial Data
Appendix I 

Audit Status of Navy Entities for Fiscal Year

1996

Supply Management

Depot Maintenance - 

Naval Shipyards and

 Naval Aviation Depots

Research and

 Development

Activities

Logistics Support

Navy Public Works

 Centers

Information Services

Transportation

Defense Printing

Service

Financial statements prepared and opinion report issued.

Financial statements prepared and reviewed, but no opinion report issued.

Financial statements prepared but not reviewed.

Navy-Component

Department of Defense

Department of Defense

Defense Business Operations

 Fund

Department of the Navy

General Fund

Department of the Navy

Defense Business Operations

 Fund

Department of Defense

Defense Business Operations

Fund

Page 28 GAO/AIMD-98-56 Navy Financial Data
Appendix II 

Naval Audit Service Reports Resulting From

Fiscal Year 1996 Audit

General Fund Reports Department of the Navy Fiscal Year 1996 Annual Financial Report: Report

on Auditor’s Opinion (Report No. 022-97, March 1, 1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report: Report

on Internal Controls and Compliance with Laws and Regulations (Report

No. 029-97, April 15, 1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report: Fund

Balance with Treasury and Cash and Other Monetary Assets (Report No.

004-98, October 31, 1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Property, Plant, and Equipment, Net (Report No. 051-97, September 25,

1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Government Property Held by Contractors (Report No. 046-97, August 14,

1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Ammunition and Ashore Inventory (Report No. 048-97, September 25,

1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Advances and Prepayments, Non-Federal (Report No. 049-97,

September 19, 1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Accounts Receivable, Net (Report No. 045-97, August 12, 1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Accounts Payable and Accrued Payroll and Benefits (Report No. 006-98,

November 14, 1997).

Department of the Navy Fiscal Year 1996 Annual Financial Report:

Department of Defense Issues (Report No. 015-98, December 19, 1997).

Defense Business

Operations Fund

Report

Fiscal Year 1996 Consolidating Financial Statements of the Department of

the Navy Defense Business Operations Fund (Report No. 040-97, June 16,

1997).

Page 29 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 30 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

See comment 1.

Page 31 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

See comment 2.

See comment 1.

See comment 3.

Now on p. 2.

See comment 4.

See comment 5.

Page 32 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

Now on p. 8.

See comment 6.

See comment 1.

Now on p. 9.

See comment 7.

Page 33 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

Now on p. 10.

See comment 8.

See comment 9.

Now on p. 10.

See comment 10.

Now on p. 10.

See comment 11.

Page 34 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

Now on p. 10.

See comment 12.

Now on p. 18.

See comment 13.

Now on p. 19.

See comment 14.

Now on p. 20.

See comment 15.

Page 35 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

See comment 16.

Page 36 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

The following are GAO’s comments on the Department of Defense’s letter

dated March 9, 1998.

GAO Comments 1. See the “Agency Comments and Our Evaluation” section of this report.

2. Our analysis of the Naval Audit Service reports considered the Under

Secretary of Defense (Comptroller) and Defense Finance and Accounting

Service comments that were included in the reports.

3. As stated in the report, the Navy, like all other federal entities, has been

required to prepare and submit a prescribed set of financial information to

the Treasury since 1950. In addition, the federal financial accounting

standards to which DOD refers were, for the most part, not required or

implemented in the fiscal year 1996 statements. We refer to these

standards only in the report’s discussion of financial data that will be

available when DOD fully implements these provisions.

4. The report was revised to indicate that the checks returned to DFAS

applied not only to the Navy, but also to the other military services and

Defense agencies.

5. To ensure proper payment, financial management personnel are

dependent upon obtaining accurate and complete contract information. To

the extent that the financial systems do not contain accurate and complete

information from feeder systems or the feeder systems provide erroneous

information on, for example, contract modifications, overpayments can

occur.

6. As discussed in our August 1996 report, we disagree that operating

materials and supplies held on board ships are considered to be in the

hands of end users. These items should be reported on the Navy’s financial

statements as operating materials and supplies. In addition, we agree that

decisions on inventory purchases are not based on amounts reported in

the Navy’s financial statements (or, as in the case of the $7.8 billion in

operating materials and supplies, amounts excluded from the statements).

However, as discussed in our report, the Navy auditors and we have found

deficiencies in the management systems and processes which are used not

only to support the inventory values included in the Navy’s financial

statements, but also to support the Navy’s budgetary and program

decision-making concerning needed inventories. As a result, the

deficiencies discussed in our report concern not just errors or omissions

Page 37 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

in the Navy’s financial reporting, but also raise questions about whether

decisionmakers had sufficiently reliable information available on which to

make informed budgetary resource allocation decisions.

7. Undistributed collections and disbursements represent amounts

reflected in Treasury’s records but not recorded by the Navy. The Navy

then recorded these amounts in its department-level accounting records

without having corroborating support in the form of transaction detail

needed to verify that these amounts accurately represent Navy activities.

As a result, the Navy does not know whether its records are accurate.

8. While DOD has efforts underway that are intended to match

disbursements against valid obligations before payment, this is not

currently required for all payments. Consequently, until DOD can establish

controls to ensure that all disbursements can be related to a valid

obligation at the time of payment, DOD cannot rely on its obligation records

for funds control purposes and will continue to lack assurance that it will

have sufficient funding available to pay its expenses.

9. DOD’s comment concerning an adequate accounting system at the DFAS

Cleveland Center relates to a quote from a Naval Audit Service report and

has no impact on the point being made in our report.

10. We disagree that simply recording obligations ensures that fund

balances are not exceeded. DOD, under law, must maintain accurate and

reliable obligation and disbursement records. The Antideficiency Act

prohibits not only overobligations but overexpenditures as well. Obligated

balances forecast expenditures and, in that regard, offer some measure of

funds control by, in effect, “setting aside” funds for these projected

amounts. However, even if all obligations have been recorded, actual

expenditures can be more (or less), making it necessary to adjust

obligated amounts when payment occurs. By not matching payments to

obligations at the time of disbursement, the Navy has undermined this

control feature.

11. The report was revised to omit reference to the specific Antideficiency

Act violations previously reported by the Navy.

12. The report was revised to indicate that DOD officials stated that the

entire $2.5 million discussed in the Naval Audit Service report may not

represent erroneous or duplicate payments.

Page 38 GAO/AIMD-98-56 Navy Financial Data
Appendix III 

Comments From the Department of Defense

13. After an appropriation cancels, Public Law 101-510 permits agencies to

liquidate obligations that had been properly charged to the appropriation

during its period of availability. However, the liquidation must be from

current funds available for the same purpose, and the agency may not

charge expenditures against such accounts in excess of the lesser of

1 percent of that appropriation or the unexpended balance of the

cancelled appropriation. To track compliance with these limitations,

agencies need to maintain in their records for the cancelled appropriation

memorandum account entries to track transaction amounts.

We do not agree that maintaining memorandum account balances requires

the reopening of cancelled accounts, as implied by DOD’s comments. Public

Law 101-510 prohibits agencies from using cancelled appropriations for

any purpose whatsoever. As indicated in our report, reopening cancelled

accounts provides an opportunity for an agency to inappropriately charge

current disbursements against reopened cancelled appropriations, thereby

weakening the controls the Congress established in Public Law 101-510.

14. While information on the status of the Navy’s use of its resources is

currently available, it has not been audited. Only when this information is

compiled through a disciplined process that can withstand the rigors of a

financial audit test will congressional and Navy decisionmakers have

assurance that this information is accurate and reliable.

15. We agree that OMB is responsible for providing minimum guidance for

all agencies to follow in preparing their financial statements. However, it

remains the responsibility of each agency to expand on these minimum

requirements, as appropriate, so that its financial statements (1) provide

sufficiently detailed information on the unique circumstances and

operations of that agency and (2) are most relevant and informative for

oversight officials and other users.

16. While the Navy was required to record a liability for certain

environmental cleanup costs based on existing accounting standards at

the date of the financial statements, this report addresses audited

information that will be available upon full implementation of the federal

financial accounting standards. As a result, the report was revised to

delete reference to a Naval Audit Service finding concerning reporting a

projected environmental cleanup cost liability.

Page 39 GAO/AIMD-98-56 Navy Financial Data
Appendix IV 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Geoffrey Frank, Assistant Director

George Botic, Senior Auditor

Matthew Femia, Auditor

Francine DelVecchio, Communications Analyst

Atlanta Field Office William Cordrey, Senior Auditor

(918928) Page 40 GAO/AIMD-98-56 Navy Financial Data
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