GAO

United States General Accounting Office

Testimony

Before the Subcommittee on National Security,Veterans’ 

Affairs, and International Relations, Committee on 

Government Reform, House of Representatives

For Release on Delivery Expected at

10:00 a.m., 

Wednesday, 

June 16, 1999

DEPARTMENT OF 

DEFENSE

Improving the DOD 

Payment Process, Using 

Recovery Auditing and 

Changing the Prompt 

Payment Act

Statement of David Cooper, Associate Director, Defense

Acquisition Issues, National Security and International 

Affairs Division

GAO/T-NSIAD-99-193

Page 1 GAO/T-NSIAD-99-193

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to discuss the Department of Defense’s (DOD) 

payment problems and how recovery auditing is being used to identify and 

recover overpayments. I will also make some comments on changes to the 

Prompt Payment Act. To put these issues in perspective, in fiscal year 1998, 

DOD spent about $115 billion contracting for goods and services. DOD 

contract dollars account for about two-thirds of total federal government 

contract spending for goods and services. Thus, it is vital that DOD have 

sound controls to ensure that contract payments are proper, accurate, and 

timely.

Results in Brief The need for DOD to achieve effective control over its payment process 

remains an imperative. If DOD does not, it will continue to risk 

erroneously paying contractors hundreds of millions of dollars and 

perpetuating other financial management and accounting control 

problems. Further, improving the efficiency of the payment process could 

save millions of dollars annually in reduced processing costs. 

While DOD is taking steps to improve its payment process and controls, it 

will likely take many years before DOD gets its payment problems under 

control. The focus of DOD’s actions needs to be on making better use of 

technology to improve and integrate its payment systems and to streamline 

and simplify its payment requirements. These actions will, however, 

require sustained top-management efforts.

DOD needs to also concentrate on reducing overpayments and, recognizing 

that some overpayments are inevitable, adopt best practices to quickly 

identify and recover them. We believe that recovery auditing offers a 

low-risk opportunity to achieve both these goals, and we are supportive of 

the recently introduced legislation to require federal agencies to use 

recovery auditing. 

Currently, contractors are not required to inform the government when 

they have been overpaid. Contractors should be required to notify the 

government of overpayments when they become aware of them. This 

requirement should not impose a significant burden on the contractor. 

Once notified, government contracting personnel should immediately ask 

contractors to refund the overpayment.

Letr
Page 2 GAO/T-NSIAD-99-193

It may be time to raise the minimum dollar threshold required by the 

Prompt Payment Act. Currently, the Defense Finance and Accounting 

Service (DFAS) pays interest amounts that are less than it costs them to 

process the checks. However, raising the threshold should be part of an 

overall assessment of the efficiency of the payment process.

Erroneous DOD 

Payments Are a 

Long-standing Issue

In recent years, our reports have identified hundreds of millions of dollars 

in erroneous government payments, and interest expense on late payments, 

and other financial management problems. For example, in March 1994, 

we reported that during a 6-month period in fiscal year 1993, DFAS in 

Columbus, Ohio—a principal DOD contract paying activity—processed 

$751 million in payments returned by defense contractors.1

 Our 

examination of about one-half of these checks disclosed that about 78 

percent represented overpayments by the government. We also found that 

while some contractors returned overpayments, others did not. In one 

case, an overpayment of $7.5 million was outstanding for 8 years. We 

estimate that the government lost interest on the overpayment amounting 

to nearly $5 million. We concluded that neither DOD nor some contractors 

appeared to be aggressively pursuing resolution of payment discrepancies.

DOD continues to make substantial erroneous payments to its contractors. 

For example, in the 5 years between fiscal year 1994 and 1998, defense 

contractors returned about $4.6 billion to DFAS Columbus—in fiscal year 

1998, they returned $746 million. However, some contractors were still 

retaining overpayments. For example, 4 of the 13 contractors we visited 

during a recent review were retaining overpayments totaling about

$1.1 million. At each location contractor personnel told us that they had a 

practice of retaining overpayments until the government issued a demand 

letter requesting the overpayments be returned.2

 There is no requirement 

for contractors who have been overpaid to notify the government of 

overpayments or to return overpayments prior to the government issuing a 

demand letter for a refund. The magnitude of overpayments defense 

contractors are retaining is not known.

1

DOD Procurement: Millions in Overpayments Returned by DOD Contractors (GAO/NSIAD-94-106, 

Mar. 14, 1994).

2

A demand letter is a formal notification to the contractor that it owes the government money.

Letr
Page 3 GAO/T-NSIAD-99-193

We have also found problems that contribute to improper and fraudulent 

payments. For example, in September 1998, we reported on internal 

control and system weaknesses that contributed to two cases of Air Force 

vendor payment fraud—one resulting in the embezzlement of over $500,000 

and the other resulting in embezzlement of $435,000 and attempted theft of 

over $500,000.3

 We found that the lack of segregation of duties and other 

control weaknesses created an environment where employees were given 

broad authority and the capability, without compensating controls, to 

perform functions that should have been performed by separate individuals 

under proper supervision. We also found that over 1,800 DFAS and Air 

Force employees had access to the vendor payment system that allowed 

them to submit all the information necessary to create fraudulent and 

improper payments.

In testimony before the Congress earlier this year, the DOD Inspector 

General commented on the vulnerability of DOD finance operations, 

particularly to fraud in the vendor pay area. According to the Inspector 

General, the Defense Criminal Investigative Service (DCIS), an arm of the 

DOD Inspector General, is working with the DFAS to decrease that 

vulnerability through such measures as increased fraud awareness training. 

She said at the time that DCIS has about 80 open criminal investigations 

related to finance operations. 

Factors Contributing to 

Erroneous Payments

In an April 1997 report,4 we concluded that DOD’s erroneous payments are 

due, in part, to (1) nonintegrated computer systems that often require data 

to be entered manually, and with data that are often erroneous or 

incomplete and (2) payments that are required to be allocated among 

numerous accounting classifications. In addition, these factors increase 

the cost of paying contract invoices.

The need for DOD to effectively control its payment process remains 

imperative. If DOD does not, it will continue to risk erroneously paying 

contractors hundreds of millions of dollars and perpetuating other financial 

management and accounting control problems. Further, improving the 

efficiency of the payment process would save additional millions of dollars 

3

Financial Management: Improvements Needed in Air Force Vendor Payment Systems and Controls

(GAO/AIMD-98-274, Sept. 28, 1998).

4

Contract Management: Fixing DOD’s Payment Problems Is Imperative (GAO/NSIAD-97-37, 

Apr. 10, 1997).
Page 4 GAO/T-NSIAD-99-193

annually in reduced processing costs. Two key areas where DOD needs to 

focus its efforts are (1) better using available technology by developing 

seamless, fully integrated payment systems and (2) streamlining and 

simplifying, to the extent practical, its payment processes.

Detailed Accounting 

Requirements Are a Burden on 

Payment Process

Let me give a few examples of the detailed accounting requirements that 

DFAS payment personnel are faced with when paying a bill. These 

examples clearly suggest the need for simplification.

DOD uses what is called a “long line of accounting” to accumulate 

appropriation, budget, and management information for contract 

payments. For all contracts, the buying activity assigns a two-character 

code called an accounting classification reference number (ACRN) to each 

accounting line containing unique information. Figure 1 is an example of 

an accounting line—the type and quantity of information varies among the 

services.

Figure 1: Example of DOD’s Long Line of Accounting

Source: DOD.
Page 5 GAO/T-NSIAD-99-193

Contracts can be assigned anywhere from 1 to over 1,000 ACRNs. A 

contract with numerous ACRNs may involve extensive data entry, 

increasing the chance for errors and manual payment processing. Manual 

payment processing costs an average of $15 per ACRN, according to a 

consulting firm’s study. 

Payment allocations to numerous ACRNs can be time consuming and may 

not provide useful or reliable management information. For example, in 

one case we reviewed, a single payment on a contract with many ACRNs 

took 6 to 8 hours to process. The contractor, required to bill by ACRN, took 

487 pages to assign $2.1 million in costs and fees to 267 ACRNs. Ten of the 

ACRNs cited by the contractor had insufficient obligation balances to cover 

the payment, according to DFAS records. The remaining 257 ACRNs 

corresponded to 8 annual appropriations covering from 1 to 5 fiscal years 

and included Army, Air Force, and general defense funds. Of the

257 transactions processed, 38 were for less than $10, and some involved 

debits or credits for pennies. Unresolved discrepancies, such as 

insufficient funds on some ACRNs, have persisted for about 3 years.

Even for a simple purchase, assigning numerous ACRNs can cause 

extensive and costly rework and provide information of questionable 

management value. For example, a $1,209-Navy contract for children’s 

toys, candy, and holiday decorations for a child care center was written 

with most line items (e.g., bubble gum, tootsie rolls, and balloons) assigned 

a separate ACRN. A separate requisition number was generated for each 

item ordered, and a separate ACRN was assigned for each number. In total, 

the contract was assigned 46 ACRNs to account for contract obligations 

against the same appropriation. To record this payment against the

1 appropriation, DFAS had to manually allocate the payment to all 46 

ACRNs. Figure 2 is an actual portion of this contract showing the ACRNs 

assigned to each item.
Page 6 GAO/T-NSIAD-99-193

Figure 2: Contract Excerpt

Source: DOD.

The contract was modified three times—twice to correct funding data and 

once to delete funding for out-of-stock items. The modification deleting 

funding did not list all of the affected ACRNs. DFAS personnel made errors 

in both entering and allocating payment data, compounding errors made in 

the modification. Consequently, DFAS allocated payment for the toy 

jewelry line item to fruit chew, jump rope, and jack set ACRNs—all of 

which should have been deleted by the modification. Contract delivery 

was completed in March 1995, but payment was delayed until October 

1995. DFAS officials acknowledged that this payment consumed an 

excessive amount of time and effort when compared to the time to process 

a payment charged to only one ACRN. The contract could have been 

assigned a single ACRN, according to a Navy official, thus making it easier 

to pay without losing useful information. A single ACRN would also have 

significantly reduced the amount of data entered into the system and the 

opportunities for errors.

User requirements for detailed accounting place unreasonable or 

unachievable demands on the payment system. Moreover, DOD’s current 

pricing structure does not reflect the time it takes DFAS to meet user 
Page 7 GAO/T-NSIAD-99-193

requirements. Thus, the user has little incentive to critically evaluate the 

level of detail being required and its associated costs.

DOD Is Taking Actions to 

Address Payment Problems

DOD is taking steps to address its payment problems. Its initiatives include 

testing and adopting some best practices. In the long term, it is developing 

procurement and payment systems that will be linked by sharing common 

data. This linkage is expected to allow one-time entry of contract data 

critical to making correct payments. In the meantime, DOD is enhancing 

its current technologies to further automate the payment process. It is also 

testing streamlined payment practices and making efforts to reduce the 

number of contract fund citations. But, as we point out in our January 1999 

recent high-risk report,5

 it will be many years before DOD gets its payment 

problems under control.

Additional Steps Could Be 

Taken

Recognizing DOD’s actions and the fact that DOD continues to overpay its 

contractors, one question is: are there additional steps that DOD might take 

to improve the process for both identifying and collecting overpayments? 

The answer is yes.

First, we believe that defense contractors should be required to promptly 

notify the government of overpayments when they become aware of them. 

This seems simple enough, but currently a contractor is not required to 

return an overpayment until the government becomes aware of the 

overpayment and issues a demand letter for repayment. And, as pointed 

out earlier, the true magnitude of contractor retention of overpayments is 

not known. In this regard, we will shortly begin a review to assess the 

extent to which defense contractors are retaining and not promptly 

returning overpayments to the government.

Second, we believe that DOD should take advantage of best practices that 

commercial companies use to identify and recover overpayments. One 

such practice is the use of recovery auditing procedures. For both private 

industry and government agencies, some payments are processed 

incorrectly for a variety of reasons. For instance, vendors make pricing 

errors on their invoices, forget to include discounts that have been 

publicized to the general public, neglect to offer allowances and rebates, or 

miscalculate freight charges. Government payment activities may also 

5

Major Management Challenges and Program Risks, Department of Defense (GAO/OCG-99-4, Jan. 1999).
Page 8 GAO/T-NSIAD-99-193

neglect to take discounts to which they are entitled. These mistakes, when 

not caught, result in overpayments. Identifying and recovering 

overpayments is referred to as recovery auditing.

Recovery Auditing 

Offers Potential to 

Identify Overpayments

Recovery auditing started about 30 years ago, and it is used in several 

industries, including the automobile, retail store, and food service 

industries. Within DOD, the Army and the Air Force Exchange Service, and 

the Navy Exchange Service use recovery auditing. An external audit 

recovery group may be the only group used by an organization or it may be 

used in combination with an internal group that examines invoices for 

overpayments prior to an external group’s review.

Recognizing its potential value to the government, the Fiscal Year 1996 

National Defense Authorization Act required the Secretary of Defense to 

conduct a demonstration program to evaluate the feasibility of using 

recovery auditing to identify overpayments made to vendors by DOD. 

Authority to expand the program was provided in the Fiscal Year 1998 

National Defense Authorization Act.

The DOD demonstration program began in September 1996, when the 

Defense Supply Center, Philadelphia (DSCP), competitively contracted 

with Profit Recovery Group International (PRGI). The contract covers 

purchases made during fiscal years 1993-95 and requires PRGI to identify 

and document overpayments and to make recommendations to reduce 

future overpayments. PRGI receives a fee of 20 percent of net collected 

funds. 

In our review of the demonstration program, we concluded that recovery 

auditing offers potential to identify overpayments but implementation 

problems hindered DOD from fully realizing the benefits of the program.6

 

As of August 1998, PRGI had identified $19.1 million in overpayments. 

However, recoveries of overpayments amounted to only $1.9 million, in 

large part, because vendors took issue with some of the overpayments. 

This caused the recovery process to virtually stop for 8 months while DSCP 

reviewed the merits of the vendors’ issues. DSCP has concluded that the 

claims of overpayment are valid. However, according to the contracting 

officer, his letter of final decision regarding vendors’ indebtedness has not 

6

Contract Management: Recovery Auditing Offers Potential to Identify Overpayments

(GAO/NSIAD-99-12, Dec. 3, 1998).
Page 9 GAO/T-NSIAD-99-193

been issued. PRGI continues to identify overpayments. As of June 1999, 

according to PRGI, it had identified $29.3 million in overpayments, and 

collections by DOD amount to $2.6 million.

PRGI has also made recommendations to DFAS and DSCP to reduce future 

overpayments, but, at the time of our review, DOD had not implemented 

them. In addition, PRGI identified about $1.8 million in overpayments that 

were outside the scope of its contract, either because they were not within 

the contractual review period or because they involved other government 

agencies. Neither DFAS nor DSCP chose to pursue payment recovery or 

inform the other government agencies of the overpayments so that they 

could pursue recovery and take steps to avoid future overpayments.

DOD Is Slow to Use 

Recovery Auditing 

Techniques

DOD has been slow to embrace recovery auditing. For example, in House 

Report 105-532, which related to a bill providing for fiscal year 1999 DOD 

authorizations, DOD was directed to use recovery auditing by selecting at 

least two commercial functions within its working capital fund and issuing 

a competitive request for proposal by December 31, 1998. We found, 

however, that DOD had not done either.7

 While DOD issued an August 1998 

memorandum encouraging the use of recovery auditing, and some 

activities have expressed interest, no contracts had been awarded at the 

time we completed our work in March 1999. In June 1999, we checked with 

the recipients of the August 1998 memorandum and, with the exception of 

the U.S. Transportation Command, which told us it just entered into a 

contract for recovery auditing services, no other contracts have been let. 

The Defense Commissary Agency said it has completed a statement of 

work, and plans to have a contract by July 30, 1999. The Defense Logistics 

Agency told us it issued a solicitation on May 28, 1999, to expand the use of 

recovery auditing from the demonstration program in place at DSCP to its 

other four supply centers. The Defense Logistics Agency said it plans to 

have a contract by August 31, 1999. Each of the services and the Defense 

Information Services Agency also expressed an interest in recovery 

auditing and they are evaluating whether to use it.

7

Contract Management: DOD Is Examining Opportunities to Further Use Recovery Auditing

(GAO/NSIAD-99-78, Mar. 17, 1999).
Page 10 GAO/T-NSIAD-99-193

Issues Related to Using 

Recovery Auditing

While we believe that recovery auditing could be beneficial to DOD and 

other federal agencies, there are some important implementation issues 

that need to be considered as federal agencies evaluate using recovery 

auditing to identify and recover overpayments. First, it is not clear how 

DOD agencies should organize to perform recovery auditing. Should it be 

contracted out? Should it be performed with in-house personnel? Should 

some combination of the two be used? We believe that agencies need to 

carefully consider the extent to which recovery auditing is applicable to 

their operations and, if applicable, if it would be cost-effective to undertake 

moderate internal recovery auditing efforts to pick the “low hanging fruit” 

before turning audit recovery efforts over to an external group.

Second, it is important that there be (1) periodic reporting by those 

performing recovery auditing on the factors causing overpayments and on 

recommendations to reduce overpayments and (2) a process to evaluate 

these recommendations and implement those that make sense. One of the 

criticisms we made of the demonstration program was that DOD did not 

implement the contractor’s recommendations to reduce overpayments. 

These issues have been addressed in the “Government Waste Corrections 

Act of 1999” (H.R. 1827), introduced on May 17, 1999, by Congressmen 

Burton, Armey, and Ose. We believe the bill is a positive step in the 

government’s effort to reduce overpayments and to obtain timely 

identification and recovery of overpayments when they occur.

Prompt Payment Act 

Issues

Mr. Chairman, you also asked us for our views on how the Prompt Payment 

Act could be improved to support DOD’s efforts to reduce the risk of 

overpayments. 

The Prompt Payment Act of 1982, as amended, provides governmentwide 

guidelines for establishing due dates on commercial invoices and paying 

interest on invoices paid late. Except where otherwise specified within 

contracts, the act provides that agencies should pay within 30 days after 

the designated office receives the vendor invoice or the government 

accepts the items ordered as satisfactory, whichever is later. The act also 

states that if a payment is late, a business concern shall be entitled to any 

interest penalty of $1 or more from the government (interest penalties of 

less than $1 are not required to be paid).
Page 11 GAO/T-NSIAD-99-193

In a report we issued in May 1997,8 we stated that small interest payments 

made by the DFAS Columbus Contract Entitlement Directorate comprised 

a large portion of the number of payments made but accounted for a very 

small portion of the total interest dollars paid. For example, of the 47,773 

interest payments in fiscal year 1996, 10,789, about one quarter of all 

interest payments, were for $5 or less, and totaled $28,701—less than one 

quarter of 1 percent of total interest payment dollars. Interest payments up 

to $25 comprised over 50 percent of all interest payments but less than 

2 percent of total interest dollars paid.

DOD officials said that the current minimum payment of $1 might need to 

be increased because the benefits from such small interest payments may 

not justify the costs of making the payments. According to DOD, it takes an 

average of 45 minutes to process each interest payment at DFAS, 

Columbus, and that the time spent processing such payments could be 

better spent on other high priority tasks.

We recently obtained updated information on the interest payments made 

by the DFAS Columbus Contract Entitlement Directorate under the act. 

This information shows that in fiscal year 1998, the directorate issued 

23,355 checks totaling $15 million in interest payments to defense 

contractors. Thirty-eight percent were for payments of $25 or less. 

According to the Contract Entitlement Directorate, its cost to process an 

interest payment check in fiscal year 1998 was at least $24. DFAS issues a 

separate check for interest payments.

Through the first half of fiscal year 1999, the DFAS Columbus Contract 

Entitlement Directorate issued 30,781 checks totaling $16.6 million in 

interest for late payments. About 41 percent of these checks representing 

less than 1 percent of the dollars were for $25 or less. According to 

directorate personnel, the increase in interest payments is due to a priority 

initiative to reduce the backlog of late payments.

Given the cost of processing an interest payment check, it might be 

cost-effective to increase the minimum dollar requirement for paying 

interest under the act. Alternatively, the late payment interest could be 

included in the same check with the principal payment, which would 

significantly reduce the costs of processing interest payments. We believe 

8

Financial Management: The Prompt Payment Act and DOD Problem Disbursements (GAO/AIMD-97-71, 

May 23, 1997).

Letr
Page 12 GAO/T-NSIAD-99-193

that any initiative to change the minimum interest payment should consider 

the efficiency of agency payment processes.

Conclusions In closing, Mr. Chairman, DOD needs to achieve more effective control 

over its payment process. If DOD does not, it will continue to risk 

erroneously paying contractors hundreds of millions of dollars and 

perpetuating other financial management and accounting control 

problems.

Recovery auditing, which has a long-standing track record in the private 

sector, offers a low-risk opportunity to identify overpayments and to 

recover them and we are supportive of the recently introduced legislation 

to require federal agencies to use recovery auditing. 

Currently, contractors are not required to inform the government when 

they have been overpaid. Contractors should be required to notify the 

government of overpayments when they become aware of them. Once 

notified, government contracting personnel should immediately ask 

contractors to refund the overpayment.

Finally, it may be time to raise the minimum dollar threshold required by 

the Prompt Payment Act. However, raising the threshold should be part of 

an overall assessment of the efficiency of the payment process. 

Mr. Chairman, this concludes my statement. I will be glad to answer any 

questions you or the other Members of the Subcommittee may have at this 

time. Major contributors to this testimony were Daniel J. Hauser and 

Charles W. Thompson.

(707429) Letr
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the 

following address, accompanied by a check or money order made 

out to the Superintendent of Documents, when necessary, VISA and 

MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are 

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and 

testimony. To receive facsimile copies of the daily list or any list 

from the past 30 days, please call (202) 512-6000 using a touchtone 

phone. A recorded menu will provide information on how to obtain 

these lists.

For information on how to access GAO reports on the INTERNET, 

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at: 

http://www.gao.gov
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Mail

Postage & Fees Paid

GAO

Permit No. GI00