GAO

United States General Accounting Office

Report to Agency Officials

July 2001 FINANCIAL 

MANAGEMENT

Improvements in 

Air Force Fund 

Balance With Treasury 

Reconciliation 

Process

GAO-01-847

Page 1 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

July 18, 2001

Mr. Thomas R. Bloom

Director

Defense Finance and Accounting Service

Mr. Zack E. Gaddy

Director

Defense Finance and Accounting Service—Denver Center

The Department of Defense (DOD) and its components have had longstanding problems in reconciling the transaction activity in their Fund

Balance with Treasury accounts. These reconciliations continue to be a

significant challenge facing DOD and contribute to DOD’s inability to

prepare auditable financial statements and to DOD financial management

being a high-risk area.1

 We recently testified2 that DOD could not reconcile

billions of dollars of differences between its available fund balances and

the amounts reported by the Department of the Treasury for those

accounts. Until DOD and its components can reconcile the receipt and

disbursement activity and demonstrate the validity of their Fund Balance

with Treasury accounts, the amount of DOD funds available to them for

expenditure in each appropriation account will remain questionable.

Federal agencies record their budget spending authorization in Fund

Balance with Treasury accounts, and increase or decrease these accounts

as they collect or disburse funds. Routinely reconciling the receipt and

disbursement activity, as Treasury guidance requires, helps to ensure that

all transactions are included in the agencies’ Fund Balance with Treasury

accounts. Agencies reconcile differences between their records and

Treasury’s by either recording the transactions that make up the

differences or by correcting errors. In general, the reconciliation process

can be described as consisting of two distinct parts. First, Treasury

compares the payments and collections processed by the Federal Reserve

and commercial banks to the amounts federal agencies reported to

Treasury themselves or amounts reported for them by other agencies.

 1

Major Management Challenges and Program Risks: Department of Defense (GAO-01-244,

January 2001).

2

DOD Financial Management: Integrated Approach, Accountability, and Incentives Are

Keys to Effective Reform (GAO-01-681T, May 8, 2001).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Second, agencies must ensure that the disbursements and receipts

reported to Treasury agree with their own data. For DOD components, this

second part of the process is complicated by the fact that DOD

components process disbursements for each other and because DOD

components allow certain other federal agencies to make disbursements

on their behalf. As a result, timing differences often occur between the

reporting of DOD transactions to Treasury and the recording of

transactions in DOD components’ books.

In August 1998, DOD developed a strategic plan to improve the

reconciliation process for the activity in its Fund Balance with Treasury

accounts. DOD told us that the Defense Finance and Accounting Service’s

(DFAS) Denver Center, which provides support for the Air Force, has

made the most progress in implementing this plan, and that its process for

reconciling the activity in the Air Force General Funds3

 is more

comprehensive than that of the other DOD components. Consequently, we

chose to review DFAS Denver’s reconciliation processes. Our objectives

were to determine (1) the progress DFAS Denver has made in improving

its processes for reconciling the transaction activity in the Air Force

General Funds and (2) whether the DFAS Denver reconciliation concepts,

policies, and practices could be used in reconciling the Fund Balance with

Treasury activity of other DOD components. The scope of our review

focused solely on evaluating the processes used by DFAS Denver to

reconcile Air Force’s General Funds activity. However, we did not perform

detailed testing of the transaction data used in the reconciliation process.

DFAS Denver has made progress in developing a comprehensive

reconciliation process for the Air Force General Funds’ transaction

activity in the Fund Balance with Treasury accounts, primarily by

increasing management attention. However, the process needs some

refinements.

DFAS Denver’s two-part process includes reconciling (1) Treasuryidentified cash differences and (2) DFAS Denver-identified differences

between its and Treasury’s records. To improve the first part, DFAS

 3

General funds are used to record financial transactions arising under congressional

appropriations, including personnel, operation and maintenance, research and

development, procurement, and construction accounts. The Air Force manages 16 general

fund accounts, consisting of 7 funded by annual 1-year appropriations and 9 funded by

multiyear appropriations.

Results in Brief
Page 3 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Denver has developed additional guidance, provided training to its staff,

and improved oversight to address an Air Force Audit Agency finding that

DFAS Denver was not promptly researching and correcting differences.

DFAS Denver’s records show that this increased management attention

has reduced the reported unreconciled net cash transaction differences

that are from 2 months to 1 year old from $26 million as of September 30,

1998, to less than $400,000 as of September 30, 2000.

Prior to 1998, DFAS Denver was not performing part two of the

reconciliation. Since then, DFAS Denver management has made a

concerted effort to develop a comprehensive reconciliation process. DFAS

Denver now (1) compares Treasury reports to Air Force accounting

records to identify the total difference between the two sets of data,

(2) attempts to identify the transactions that make up the unreconciled

difference and categorizes them by type, and (3) tracks the identified

transactions until they are recorded or corrected by field-level Air Force

accounting stations. With these new procedures and increased

management attention, DFAS Denver reports that it has been able to

significantly reduce the amounts for which it has not been able to identify

transactions that make up the unreconciled differences. DFAS Denver

also reported improved ability to reconcile transactions within DFAS time

frame performance metrics.

Although DFAS Denver has reduced the outstanding unreconciled

differences from both parts of its reconciliation process, it has not yet

documented the entire process to ensure that all necessary activities will

continue to be performed if the personnel who currently know the

processes leave. Further, the second part of the process needs additional

refinement. For example, DFAS Denver has not yet developed the

capability to identify all the transactions making up the unreconciled

difference between its and Treasury’s records. In addition, DFAS Denver

has not prepared specific desk procedures for some of the individual

activities within the second part of the process. Without such

documentation, the process depends on the creativity and knowledge of a

few individuals and is vulnerable to loss of momentum should one or more

of these individuals no longer work in the area.

The concepts and policies developed thus far by DFAS Denver to identify

and resolve transaction differences could improve the reconciliation

processes of the other DFAS centers that have not made as much

progress. The increased management attention devoted to identifying

transactions making up the differences and reconciling those transactions

that has been instrumental in DFAS Denver’s reported success would
Page 4 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

likely prove successful at the other DFAS centers. With increased

management attention, each DFAS center could tailor the concepts and

processes used at DFAS Denver to its individual environment even though

each center has its own legacy system, which causes them to operate

differently.

Once all of the DOD components are able to establish a comprehensive

and routine reconciliation of the transaction activity in each of their

appropriation accounts, DOD will be closer to establishing accountability

over its unexpended balances. Reconciling and auditing the current

activity can, over time, result in having a verifiable beginning balance in

the Fund Balance with Treasury accounts.

We are making recommendations that address the need for DFAS Denver

to continue its efforts to refine the reconciliation process. We are also

recommending that DFAS headquarters direct and facilitate the other

DFAS centers’ adaptation of DFAS Denver’s reconciliation concepts and

policies to improve their Fund Balance with Treasury account

reconciliations. DOD agreed with our recommendations, described

completed and ongoing actions to address these issues, and provided

estimated completion dates.

Federal agencies record their budget spending authority in fund accounts

called Fund Balance with Treasury (FBWT), and increase or decrease

these accounts as they collect or disburse funds. In the federal

government, an agency’s FBWT account is the closest thing an agency has

to a corporate bank account. The difference is that instead of a cash

balance, FBWT represents unexpended spending authority in

appropriations.4

 In enacting appropriations, Congress authorizes agencies

to spend from the various FBWT accounts to meet their missions. These

fund accounts serve as a control mechanism to help ensure that agencies’

disbursements do not exceed the appropriated amounts.

Reconciling FBWT activity is an important internal control in ensuring that

all receipt and disbursement transactions have been recorded in the

accounting records of government agencies. Reconciling agency FBWT

 4

An appropriation provides an agency with two authorities—the authority to incur

obligations and the authority to disburse funds from the Treasury to liquidate those

obligations.

Background
Page 5 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

activity records with Treasury activity records is important to establish the

completeness of transactions reported and can be used to determine

unexpended fund balances. Reconciliation is a necessary step in achieving

funds control. A reconciliation consists of comparing two or more sets of

records, researching and resolving any differences, and recording

adjustments if necessary. Reconciliations are to be performed routinely so

that any problems are detected and corrected promptly and differences

are not allowed to age, thereby becoming increasingly difficult to research.

DFAS, a component of DOD, has responsibility for providing finance and

accounting services to all other DOD components, including the Air Force,

Army, Navy, and Marine Corps. DFAS’ headquarters unit and five DFAS

centers are responsible for accounting, disbursing, collecting, and

financial reporting for DOD components. DFAS Denver, with support from

its field locations, is specifically responsible for Air Force accounting

functions. Air Force and other components’ personnel are responsible for

funds control and purchasing the goods and services necessary to meet

their missions. The Office of the Under Secretary of Defense (Comptroller)

issues the DOD Financial Management Regulation containing DOD’s

policies and procedures in the area of financial management.

The DFAS centers and their field locations process cash, interagency, and

intra-DOD transactions based on requests from military service personnel.

Cash transactions primarily consist of paper checks issued, electronic

funds transfers, and deposits. Interagency and intra-DOD transactions are

primarily transfers of funds between federal entities and do not involve

cash; however, they affect the FBWT accounts the same way cash

transactions do. DFAS increases or decreases DOD’s individual FBWT

account balances during the year as funds are collected or disbursed.

DFAS is responsible for maintaining transaction-level details and a record

of the unexpended balance for each of DOD’s appropriation accounts.

Treasury also maintains accounting information on the Air Force’s and

other federal agencies’ FBWT activity to prepare governmentwide

financial reports. In an effort to ensure the integrity of these reports,

Treasury directs agencies to reconcile their reported FBWT activity on a

regular and recurring basis.5

 5

Department of the Treasury Financial Manual, Vol. 1, part 2, chap. 5100 on Reconciling

Fund Balance with Treasury Accounts, http://fms.treas.gov/fundbalance.
Page 6 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Many disbursements from Air Force General Funds are made and reported

to Treasury by other DOD services and federal agencies in accordance

with pre-arranged agreements. These other DOD components and

agencies process disbursements from Air Force General Funds for

obligations that were established by Air Force personnel responsible for

buying goods and services and then transmit information on their

disbursements for Air Force to Treasury and separately to DFAS Denver.

Federal agencies and the other DOD components disburse the funds first,

and DFAS Denver field locations receive the detailed accounting

transaction data from them later. This process is different from both

normal bookkeeping operations in the private sector and keeping one’s

personal checkbook. This DOD system is similar to having more than one

person writing checks on the same bank account, which would create

uncertainty in knowing the balance in the account. Increasing the

difficulty in knowing the balance is DOD’s long-standing problem of not

having integrated accounting systems, which routinely causes accounting

data to be processed at different times.

The following example illustrates the interagency disbursement system.

Assume the Air Force authorizes the State Department to disburse Air

Force funds. The State Department pays a bill for the Air Force and sends

the information to Treasury. Treasury then subtracts the funds from the

Air Force’s FBWT. Treasury reports the disbursement to DFAS Denver.

However, DFAS Denver cannot record the related expense transaction or

subtract the already disbursed funds from the FBWT account balance on

its books until it receives sufficient details from the State Department.

These details can come after the month-end Treasury report. When DFAS

Denver receives the transaction data from the State Department, DFAS

Denver sends the information to the Air Force field activity that authorized

the disbursement. The Air Force field activity matches the disbursement to

the original obligation and records the transaction. Each month, DFAS

Denver compares the activity recorded in the Air Force FBWT account to

the activity reported in the account by Treasury. Because multiple federal

agencies and other DOD components can affect the Air Force’s fund

balance accounts at Treasury, DFAS Denver’s recorded transaction

activity routinely differs from Treasury’s, creating reconciling items at any

point in time. These multiple participants in the disbursing and collecting

process make the reconciliation process more complex than reconciling

one’s personal checkbook.

The reconciliation process consists of two parts. First, Treasury compares

agency-reported receipts and disbursements to amounts reported by the

Federal Reserve or commercial banking system. Treasury then provides
Page 7 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

agencies the details of any identified discrepancies in monthly comparison

reports. Each agency is responsible for researching the differences

between its and Treasury’s records. Once differences are resolved,

agencies record any necessary adjustments to their FBWT accounts and

report these adjustments to Treasury. To correct bank errors, agencies

contact the bank or Treasury for assistance. Figure 1 summarizes this first

part of the FBWT reconciliation process.

Figure 1: Treasury Comparison of Agency and Bank Reported Activity

For the second part of the reconciliation process, DFAS Denver compares

the disbursement and collection transaction activity for each

appropriation account in its records for the Air Force General Funds to

another monthly report from Treasury that shows the activity reported by

all agencies for each fund account. Since, as previously explained,

Treasury receives some of the disbursement and collection activity

directly from other entities before DFAS Denver, timing differences often

occur. DFAS Denver then identifies and reconciles any timing differences

or errors. Timing differences are resolved through the normal course of

DFAS Denver’s staff recording transactions in Air Force records. To

correct errors, including those made by other agencies in reporting Air

Force fund account transactions to Treasury, DFAS Denver’s staff records

adjustments to Air Force records and reports them to Treasury and the

other agencies as appropriate. Figure 2 summarizes the second part of the

FBWT reconciliation process.
Page 8 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Figure 2: Comparison of Air Force Records and Treasury Activity Reports

The reconciliation process at DFAS Denver and the other DOD

components is complicated by the long-standing problem of a lack of

integrated systems within and among the components. DFAS Denver

currently depends on file extracts from multiple systems for its

reconciliations. DFAS Denver’s staff analyzes the numerous extracts and

determines the causes of the differences in the multiple systems. To be

effective, this reconciliation process must be comprehensive to overcome

and compensate for the lack of integration among its systems.

Our objectives were to determine (1) the progress DFAS Denver has made

in improving its processes for reconciling the transaction activity in the Air

Force General Funds and (2) whether any of DFAS Denver’s reconciliation

concepts or policies could be used in reconciling the Fund Balance with

Treasury activity of the other DOD components. Our review focused on

the General Funds reconciliations and did not include Air Force Working

Capital Funds6

 reconciliations.

To determine the extent of progress DFAS Denver has made in improving

the reconciliation of the transaction activity in the Air Force General

Funds, we met with DFAS Denver officials and observed DFAS Denver

procedures for monitoring the field reconciliation efforts. We obtained

reports of outstanding differences for the Air Force General Funds from

DFAS Denver and Treasury. We determined whether existing DFAS

 6

Working capital funds are revolving funds that receive their initial working capital through

an appropriation or a transfer of resources. Financial resources to replenish the initial

working capital and to permit continuing operations are generated by the acceptance of

customer orders.

Objectives, Scope,

and Methodology
Page 9 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Denver policies, procedures, and practices reflected the need for

improvements outlined in prior year audit reports issued by GAO, DOD’s

Inspector General, and the Air Force Audit Agency.

To determine whether the DFAS Denver reconciliation concepts, policies,

and practices could be used across DOD, we met with DFAS headquarters,

Denver, Cleveland, and Indianapolis officials to identify the similarities

and differences among DFAS centers and the FBWT reconciliation

initiatives in place at each center. To determine the progress other centers

had reported in reconciling their FBWT accounts, we obtained reports of

outstanding differences from DFAS headquarters and Treasury.

The scope of our review at DFAS Denver focused solely on evaluating the

processes used to reconcile the Air Force General Funds activity and did

not include detailed testing of its reconciliations or of data provided by

Treasury or the Air Force Audit Agency. Also, we did not determine

whether DFAS Denver’s policies and processes are uniformly in place

throughout all of its field locations. We did not audit the Air Force’s FBWT

reconciliation and thus provide no conclusions as to whether the

processes discussed in this report are being effectively performed.

We performed our work from August 2000 through April 2001 in

accordance with generally accepted government auditing standards.

Written comments on a draft of this report were received from the

Director of Accounting, DFAS, and have been reprinted in appendix I.

DFAS Denver has developed a two-part process for reconciling its FBWT

receipt and disbursement activity that reconciles differences in (1) cash

transactions identified by Treasury and (2) Air Force transaction records

compared to transaction activity reported to Treasury. Over the past few

years, by increasing management attention on the reconciliation process,

DFAS Denver has made improvements in both parts of the process and has

reported a corresponding reduction in its unreconciled differences.

However, its reconciliation processes are not yet fully refined.

In prior years, auditors identified and reported weaknesses in DFAS

Denver’s ability to effectively reconcile the cash activity part of its FBWT

reconciliation. For example, in reporting on the results of its audit of the

Air Force’s fiscal year 1997 financial statements, the Air Force Audit

Agency noted that DFAS Denver field personnel did not promptly research

Reconciliation

Process Improved but

Further Refinement Is

Necessary

Improvements in Tracking

and Resolving Cash

Differences Identified by

Treasury
Page 10 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

and correct deposit and disbursement differences identified by Treasury.7

In addition, the Air Force Audit Agency identified internal control

weaknesses for fiscal year 1998 related to the (1) monitoring and

reconciliation of check totals, (2) timely reporting of checks, and

(3) prompt resolution of check amount discrepancies.8

In recent years, DFAS Denver has increased the management attention

given to resolving cash differences identified by Treasury, which is part

one of the FBWT reconciliation process. At the heart of its efforts are

several initiatives to improve its processes for identifying, researching, and

resolving the differences. For example, DFAS Denver has implemented

new procedures for reconciling deposit and electronic funds transfer

transactions. Each month, DFAS Denver produces exception reports

containing specific transactions that have been reported to Treasury (1) by

the Federal Reserve but not by DFAS field personnel, (2) by DFAS field

personnel but not the Federal Reserve, and (3) in different months, for

different amounts, or otherwise reported differently by DFAS field

personnel and the Federal Reserve. DFAS Denver provides these lists each

month to field accounting personnel to aid them in resolving differences.

DFAS Denver personnel monitor the timeliness of field resolution of these

differences and contact field personnel regarding aged unresolved

amounts.

In addition to improving its reconciliation processes for deposits and

electronic funds transfers, DFAS Denver also has improved its methods of

monitoring differences related to paper checks. DFAS Denver receives a

Treasury notification of individual paper check errors throughout the

month as Treasury identifies discrepancies between the check amount

reported by DFAS Denver and the amount paid by the bank. In addition,

Treasury also reports these check discrepancies in a summary comparison

report sent to DFAS Denver after month-end. DFAS Denver has added a

procedure to monitor and correct the individual check errors prior to

receiving the monthly summary comparison reports from Treasury.

Other initiatives DFAS Denver has undertaken include

 7

Air Force Audit Agency Report of Audit: Accounting for Selected Assets and Liabilities,

Fiscal Year 1997 Air Force Consolidated Financial Statements (September 1998, Project

97053001).

8

Air Force Audit Agency Report of Audit: Accounting for Selected Assets and Liabilities -

Fund Balance with Treasury, Fiscal Year 1998 (January 2000, Project 98053001).
Page 11 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

• adding a new section to the mandatory training class for new disbursing

officers describing procedures for clearing differences reported by

Treasury;

• adding a section to the DFAS Web page providing detailed instructions for

DFAS Denver and field accounting personnel for resolving cash

transaction differences;

• increasing the use of electronic funds transfers rather than paper checks

(issuing electronic funds transfers is a more automated process than

issuing paper checks, and, since the transaction occurs immediately,

timing differences are virtually eliminated); and

• issuing memorandums requiring field personnel to increase the priority

given to resolving FBWT differences identified by Treasury.

These proactive initiatives have been a major factor in DFAS Denver’s

reported reduction in cash transaction discrepancies. For example,

according to Treasury reports as of September 30, 2000, the current net

unresolved cash differences from 2 months to 1 year totaled less than

$400,000 compared to $26 million as of September 30, 1998.

DFAS Denver’s experience also provides evidence that not performing

routine reconciliation can result in differences getting so old that they

become difficult to reconcile. Treasury records as of September 30, 2000,

show $56 million still outstanding in net unreconciled cash differences

that occurred over 5 years ago before the new reconciliation procedures

were in place. DFAS Denver has found it difficult to locate supporting

documentation to determine the causes of these old differences. The

records also show that DFAS Denver has only $260,000 net unreconciled

differences that are from 1 to 5 years old.

Every month, timing differences occur between when Treasury and Air

Force receive and record transactions. These differences are caused by

the lack of integrated accounting systems and routine business processing.

Consequently, DFAS Denver must routinely reconcile its transaction

records to those at Treasury. Prior to fiscal year 1998, DFAS Denver was

not reconciling these monthly differences in the two sets of records. Over

the past 3 years, DFAS Denver developed the second part of the overall

reconciliation process to reconcile the difference between its records and

those at Treasury as shown in figure 3. DFAS Denver’s goal for this

process is to identify the transactions that make up the difference,

categorize them to facilitate reconciliation, and track them until they are

reconciled.

Improvements in

Reconciliation of Air Force

Records to Transaction

Activity Reported to

Treasury
Page 12 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Figure 3: Reconciliation of Difference Between Air Force Records and Treasury

Records

The first step is to determine the difference between Treasury and Air

Force records each month. DFAS Denver does this by comparing the total

Air Force disbursement and receipt transactions in Treasury’s records to

the comparable transactions in Air Force accounting records and

calculating the difference. This is the amount that has to be reconciled,

which was $1.6 billion at September 30, 2000.

Step two is a monthly data analysis process to identify the specific

transactions making up the difference calculated in step one. DFAS

Denver refers to the calculated difference in the two sets of records as the

undistributed difference. The term “undistributed” applies to those

transactions that have not yet been reconciled—recorded or corrected in

the accounting records.

To identify the transactions, DFAS Denver uses data retrieval and analysis

tools to extract the transactions in DFAS Denver’s Merged Accounting and

Fund Reporting system. The function of this system is to track

transactions from the time DFAS Denver receives them from either

Treasury or the originators of the transactions until Air Force personnel

reconcile them. Once DFAS Denver identifies the transactions that make

up the unreconciled difference, it sorts them by appropriation into various

categories to help speed and simplify the reconciliation process. Sorting

the transactions into categories with common elements facilitates tracking

the transactions until the field-level accounting staff fully reconciles them

by either recording them in Air Force accounting records, making
Page 13 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

corrections to the records, or submitting adjustments or corrections to the

originators of the transactions. DFAS Denver has developed 11 categories

that reflect the nature of transactions. For example, the categories into

which the unreconciled transactions are sorted include the following.

• Army-Navy Current Month. The Army and the Navy, which make

payments on behalf of the Air Force, cite Air Force appropriations when

they submit the payment information to Treasury. Since Air Force field

locations often have not yet received the detailed accounting transactions

for these payments, these transactions are placed in this category awaiting

reconciliation.

• Rejects. This category is used when Air Force field locations cannot

verify payments made by someone else on their behalf. This can happen

when they determine that they have not been provided sufficient

supporting documentation to post the transaction or the payment belongs

to another accounting station. The field locations “reject” the individual

payment back to DFAS Denver for transmission either back to the

originator of the payment or to another field location.

• Interfund.9 DOD components sometimes use the interfund system to sell

materials to each other. If the seller and buyer do not record the

transactions in the same month, which often occurs, it automatically

appears as a reconciling difference between DFAS Denver’s records and

Treasury’s records and would be placed in this category for reconciliation

purposes.

Reducing the total undistributed amount is important because fewer

transactions will have to be tracked until reconciled. However, the use of

nonintegrated systems and routine business processes does not permit the

simultaneous processing of transactions and affects when transactions are

recorded. Therefore, eliminating the undistributed amount entirely is not

possible because timing differences will continue to cause a difference

between DFAS Denver’s and Treasury’s records that will need to be

identified and reconciled.

DFAS Denver’s analysis cannot yet identify all the transactions that make

up the total undistributed difference. The amount that is not identified is

referred to as the “variance.” Eliminating the variance is important

 9

Interfund is a system of billing and collecting for sales of material between activities of

different DOD components, or between DOD components and the General Services

Administration.
Page 14 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

because the variance constitutes the amount of receipt and disbursement

activity for which DFAS Denver cannot identify transactions. Without first

identifying the transactions, DFAS Denver cannot reconcile the activity.

As figure 4 shows, DFAS Denver has reported progress in reducing both

the variance and the total undistributed amount. As of September 30, 2000,

the reported variance for all appropriations totaled $35 million, or about 2

percent, of the $1.6 billion in total difference in Treasury’s and DFAS

Denver’s records. As of September 30, 1998, the reported variance was

$386 million, or almost 10 percent, of the $3.7 billion in total difference. At

the time of our review, DFAS Denver had additional efforts under way to

refine its methodology for identifying transactions for the remaining

variance. DFAS Denver officials told us that by April 2001 they had

identified causes and potential explanations for all but $2 million of the

$35 million variance as of September 30, 2000. However, they will not be

able to prevent the variance from continuing until they have learned how

to consistently identify the types of transactions that were causing the

variance.
Page 15 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Figure 4: Reported Reduction in Undistributed Transactions and Variance

Source: Based on DFAS Denver data.

DFAS Denver’s analysis of undistributed transactions is crucial to part two

of the overall reconciliation process, and the progress DFAS Denver has

made in reducing the reported variance is commendable. However, the

undistributed analysis is incomplete because two types of transactions are

not subject to the analysis. As discussed in the following section, adding

these transactions to the analysis is one of the needed refinements to the

reconciliation process.

Step three is the tracking process. DFAS Denver tracks all undistributed

transactions until its field-level accounting staff fully reconciles them by

either recording them in Air Force accounting records or making

corrections to Air Force or Treasury records. In this step, DFAS Denver

transmits lists of undistributed transactions in aging categories to the fieldlevel accounting stations each month and requires them to return the lists

annotated with a proposed resolution for each transaction. To complete

the loop, DFAS Denver personnel are to monitor that the annotated

Dollars in millions

0

1,000

2,000

3,000

4,000

1998

10%

Undistributed

Variance

Fiscal Year

2000

2%
Page 16 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

resolution does, in fact, take place by examining subsequent accounting

cycles for evidence of the action.

DFAS Denver measures the success of its tracking efforts against

performance metrics for reconciling transactions established by DFAS

headquarters. These time frame performance metrics range from 60 to 180

days, depending on the type of transaction. DFAS Denver data indicate

that about 85 percent of the total undistributed transactions are reconciled

within 60 days, so DFAS Denver’s primary focus is on the other 15 percent,

although it tracks all undistributed transactions until they are reconciled.

DFAS Denver has reported progress in reducing the volume of

transactions that fall outside the established time frame performance

metrics for reconciling identified transactions. As figure 5 shows,

according to DFAS Denver reports, it reduced the portion of the

undistributed transactions shown in figure 4 that were not reconciled

within the performance time frame metrics from $234 million at the end of

fiscal year 1998 to $37 million at the end of 2000.

Figure 5: Reported Reduction in Transactions Identified but Not Reconciled Within

Established DFAS Time Frame Performance Metrics

Source: Based on DFAS Denver data.

Dollars in millions

0

50

100

150

200

250

1998

Fiscal Year

2000
Page 17 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Although DFAS Denver has made progress in developing its reconciliation

process to fully reconcile the differences between Treasury’s and its own

FBWT records for the Air Force General Funds, it has not yet achieved

that goal. First, DFAS Denver has not documented the overall

reconciliation process with explanations of the individual steps, their

objectives, and their associated comparisons and reconciliations. Such a

description could provide both a road map for the entire process and a

means for ensuring that the FBWT activity reconciliation is complete and

thorough. In addition to potentially omitting important activities without a

complete description of the process, a loss of one or more of the few key

people who understand the entire process, especially part two, would

jeopardize DFAS Denver’s ability to maintain its reconciliation progress

and to continue needed refinements.

Second, in addition to the need to document the overall reconciliation

process, we identified three refinements to part two of the process that are

necessary.

• Identification of Transactions for Remaining Variance. As discussed

above, DFAS Denver has not yet determined the causes of the remaining

difference between its and Treasury’s receipt and disbursement activity or

the transactions that make it up. Because all transactions have not been

identified and because the variance fluctuates somewhat from month to

month, further analysis is necessary. Until DFAS Denver can identify all of

the transactions that make up the variance, it will not be able to fully

reconcile the difference.

• Undistributed Analysis Incomplete. DFAS Denver has not included

two types of unreconciled transactions in its analysis of the undistributed

transactions because they are not in the Merged Accounting and Fund

Reporting system. The first type consists of the transactions that field-level

personnel have accepted, processed, and entered into the Air Force

accounting records but not yet matched to obligations. Field-level

accounting staffs recorded these transactions even though DFAS does not

consider transactions ready to be recorded in Air Force’s official

accounting records until they have been matched with their obligations.

The second type consists of the transactions recorded temporarily in

Treasury suspense accounts. DFAS Denver and Treasury use these

suspense accounts to record receipt or disbursement transactions pending

identification of the fund holders.10 DFAS Denver includes these

 10A fund holder is a unit or individual responsible for incurring obligations against an

appropriation and for managing the use of the appropriation’s funds.

Refinements to

Reconciliation Process Are

Necessary
Page 18 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

transactions in the undistributed analysis at fiscal year-end but not

routinely every month. Until both types of transactions are routinely

identified by appropriate data extracts and included in the monthly

analysis of undistributed transactions, DFAS Denver will not have

assurance that it has identified the complete universe of transactions that

must be reconciled. During our review, DFAS Denver agreed to begin

including both types of transactions in the monthly undistributed analysis.

• Lack of Documentation for Specific Desk Procedures. DFAS Denver

has not fully documented, with how-to desk procedures, some of the steps

and activities within the second part of the reconciliation process. For

example, the various categories of transactions displayed in the

Undistributed Report and the Merged Accounting and Fund Reporting

system files from which they are extracted are defined and documented,

but the techniques and specific procedures for performing the analysis and

developing the report are not. DFAS Denver began a project to document

these techniques and procedures during our review. Recreating these

management tools without documentation would be difficult for someone

who was not familiar with the process. How-to procedures can ensure that

the process can be replicated over time. Furthermore, in some instances,

only one or two key individuals developed these and other procedures and

know how to perform them. Without complete documentation, the loss of

a few key people could put DFAS Denver at risk of losing its momentum in

reconciling its FBWT activity.

The FBWT reconciliation concepts, policies, and procedures developed at

DFAS Denver could be used by other DFAS centers, which have not made

as much progress in reconciling their FBWT activity, according to DFAS

reports and officials. The other centers have not been as successful as

DFAS Denver has in identifying transactions that constitute the

undistributed difference between their DOD components’ accounting

records and Treasury’s. For example, even though their overall General

Funds operating expenditures are comparable to Air Force’s, the Army

and Navy variances—the amounts for which they cannot determine

specific transactions—are substantially larger. As stated previously, DFAS

Denver reported a $35 million variance as of September 30, 2000, for the

Air Force. In comparison, DFAS Cleveland reported a $5.8 billion variance

for the Navy, and DFAS Indianapolis reported $664 million for the Army.

DOD’s legacy accounting systems complicate the FBWT reconciliation

process. These systems are not integrated, which causes timing

differences in processing receipts and transactions since all DOD

DFAS Denver’s

Process

Improvements

Transferable to Other

DFAS Centers
Page 19 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

components pay bills for each other. In addition, the systems were not

designed to facilitate the reconciliation process. Although DOD has had

plans under way for years to create integrated systems, it is likely many

years away from implementing fully integrated financial management

systems.

Nevertheless, the DFAS centers must reconcile their FBWT activity. Each

DFAS center processes billions of dollars of transactions each month that

must be accounted for and reconciled. Consequently, the centers must

create auditable FBWT activity reconciliation processes. To facilitate its

efforts, DFAS Denver has designed interim workaround measures, such as

its data extracts, to identify undistributed transactions to create useful

reconciliation data. DFAS Denver’s efforts have demonstrated that current

DOD systems can be adapted for routine financial reconciliations if used

creatively and with perseverance.

Transferring DFAS Denver’s experiences to the other centers is reasonable

even though each center relies on different legacy systems, which cause

them to operate differently to accomplish the same tasks. Since each

center’s systems are different, it is the concepts and general approach to

developing processes and practices developed at DFAS Denver that can be

adapted and utilized, rather than the specific steps in the processes. An

example is DFAS Denver’s concept of identifying, categorizing, and

tracking undistributed transactions as illustrated in figure 3. After

comparing their records to Treasury’s, the other DFAS centers could first

identify the individual transactions that make up the difference between

their records and Treasury’s. After identifying the individual transactions,

they could categorize them by type to facilitate reconciliation. Finally, they

could track and monitor the transactions until they are reconciled at the

field level.

DFAS Denver has demonstrated that increased management attention can,

indeed, result in positive change. Reconciliation of FBWT—a key step in

DOD’s ability to establish adequate funds control and financial

accountability—will only be achieved if the other centers follow DFAS

Denver’s lead and provide the needed attention to this area.
Page 20 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Increased attention, improved monitoring, and adaptation of the concepts

used by DFAS Denver will help all of the DOD components to reconcile

their FBWT transaction activity. In addition, a comprehensive

reconciliation process can facilitate achieving a successful audit of only

that year’s FBWT transaction activity. However, one year’s successful

audit of the reconciliation of FBWT activity will not result in an auditable

FBWT financial statement balance because the issue of verifying and

auditing the beginning balances will remain. The balances in each FBWT

account roll forward from year to year until the account is closed, which

can be 5 years or more, depending on the type of appropriation.11 For

example, the DOD-wide financial statement reported a FBWT balance of

$178 billion as of September 30, 2000. Some portion of this can be

attributed to the beginning balance of $175 billion in FBWT brought

forward on October 1, 1999. Although one year’s audit of current activity

will not resolve this issue, a series of successful audits can. After a number

of years, if current activity is routinely reconciled and audited, the

balances from prior years when reconciliations were not routinely being

performed will ultimately be immaterial.

One other issue that affects the reliability of the amount of DOD funds

available for expenditure in each appropriated fund is DOD’s practice of

making large amounts of adjustments to closed accounts. For example, as

we discussed in our May 2001 testimony on DOD financial management,12

DOD reported $2.7 billion of adjustments to closed appropriation accounts

in fiscal year 2000. Although closed accounts are not included in FBWT

balances, we reported that DOD made frequent adjustments to move

transactions from current accounts and charge them to closed accounts.

Until all of DOD’s transactions are accurately recorded, the reliability of

FBWT amounts will remain questionable.

DFAS Denver has made progress in developing an auditable process

capable of fully reconciling its FBWT activity, but it has more to do to

finish the job. For example, DFAS Denver has not yet identified all of the

transactions that make up the difference between its and Treasury’s

 11Although there can be activity in an expired account until it is closed, only open

appropriation accounts are the subject of FBWT activity reconciliation.

12DOD Financial Management: Integrated Approach, Accountability, and Incentives Are

Keys to Effective Reform (GAO-01-681T, May 8, 2001).

Other Issues Affecting

Fund Balance With

Treasury

Reconciliation

Conclusions
Page 21 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

receipt and disbursement activity. Finally, a significant amount of the

progress has been highly dependent upon the work of a few key people,

but their efforts have not been captured in detailed documented

procedures. Consequently, if these people were lost, DFAS Denver would

risk being unable to institutionalize these processes and losing the

momentum it has gained.

The reconciliation process is convoluted in that it involves extracting and

comparing data from several DOD systems, which are not fully integrated.

However, other DOD components do not have to wait for future system

enhancements to institute good financial management practices. DFAS

Denver’s experience demonstrates that an effective combination of

people, policies, procedures, and controls can serve as a short-term

solution to the larger and longer term problem of overhauling inadequate

systems. The concepts used at DFAS Denver can be adapted by other

DFAS centers. However, each center will have to develop its own

procedures, data extracts, comparisons, and reconciliations based on the

systems it uses.

To further improve the reconciliation of the activity in Air Force Fund

Balance with Treasury General Fund accounts and to ensure that the

process is comprehensive and institutionalized with continuity of effort,

we recommend that the Director, DFAS, direct the Director, DFAS Denver,

to

• further refine the reconciliation process to identify and include all

transactions that make up the differences between Air Force and Treasury

records and resolve these differences within established time frames; and

• document the entire Fund Balance with Treasury General Funds activity

reconciliation process, including specific procedures for the various

reconciliations within the overall process.

To improve and expedite the reconciliation processes at other DOD

components, we recommend that the Director, DFAS, require the other

DFAS centers to adapt DFAS Denver’s reconciliation concepts and

practices to their own environments. To ensure that each center’s

adaptations are consistent and in accordance with DFAS policies, we

further recommend that the Director, DFAS, provide leadership and

assistance in transferring knowledge from DFAS Denver to the other

centers.

Recommendations for

Executive Action
Page 22 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

In written comments on a draft of this report, DOD concurred with our

recommendations. DOD’s response described the actions that DFAS has

underway to address each recommendation and provided estimated

completion dates.

We are sending copies of this report to the Under Secretary of Defense

(Comptroller and Chief Financial Officer); the Commissioner of the

Financial Management Service, Department of the Treasury; and the

directors of the four other DFAS Centers: DFAS Cleveland, DFAS

Columbus, DFAS Indianapolis, and DFAS Kansas City. Copies will be

made available to others upon request.

Please contact Linda Garrison at (404) 679-1902 or by e-mail at

garrisonl@gao.gov if you or your staffs have any questions about this

report. GAO staff making key contributions to this report were Ray Bush,

Francine DelVecchio, David Shoemaker, and Carolyn Voltz.

Gregory D. Kutz

Director

Financial Management and Assurance

Agency Comments
Appendix I: Comments From the Department

of Defense

Page 23 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Appendix I: Comments From the Department

of Defense
Appendix I: Comments From the Department

of Defense

Page 24 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation
Appendix I: Comments From the Department

of Defense

Page 25 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation
Related Products

Page 26 GAO-01-847 Air Force Fund Balance With Treasury Reconciliation

Financial Audit: Issues Regarding Reconciliations of Fund Balances With

Treasury Accounts (GAO/AIMD-99-271, September 17, 1999).

Financial Audit: Issues Regarding Reconciliations of Fund Balances With

Treasury Accounts (GAO/AIMD-99-3, October 14, 1998).

Financial Audit: Reconciliation of Fund Balances With Treasury

(GAO/AIMD-97-104R, June 24, 1997).

Performance Measures for Disbursing Stations (Report No. D-2001-024,

December 22, 2000).

Disclosure of Differences in Deposits, Interagency Transfers, and Checks

Issued in the FY 1999 DOD Agency-Wide Financial Statements (Report No.

D-2000-123, May 18, 2000).

Accounting for Selected Assets and Liabilities – Fund Balance With

Treasury, Fiscal Year 1999 (99053001, August 28, 2000).

Accounting for Selected Assets and Liabilities – Fund Balance With

Treasury, Fiscal Year 1998 (98053001, January 6, 2000).

Accounting for Selected Assets and Liabilities, Fiscal Year 1997 Air Force

Consolidated Financial Statements (97053001, September 3, 1998).

Related Products

General Accounting

Office Reports

Department of

Defense Inspector

General Reports

Air Force Audit

Agency Reports

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