United States General Accounting Office

GAO Report to Congressional Requesters

May 1996 CONTINGENCY

OPERATIONS

DOD’s Reported Costs

Contain Significant

Inaccuracies

G O A

years

1921 - 1996

GAO/NSIAD-96-115

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-271279 

May 17, 1996

The Honorable Benjamin A. Gilman

Chairman, Committee on

 International Relations

House of Representatives

The Honorable Floyd Spence

Chairman, Committee on

 National Security

House of Representatives

As requested, this report discusses the reliability of the Department of Defense’s (DOD) reported

costs for contingency operations. We make recommendations that are designed to improve the

reliability of reported costs. The information in this report should be useful to your committees

in their deliberations on DOD’s participation in contingency operations.

We are sending copies of this report to other interested congressional committees; the

Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant, U.S. Marine

Corps; and the Director, Office of Management and Budget. Copies will also be made available

to others on request.

If you have any questions on this report, please call me on (202) 512-3504. Major contributors to

this report are listed in appendix II.

Richard Davis

Director, National Security

 Analysis
Executive Summary

Purpose Since fiscal year 1992, the Department of Defense (DOD) has reported over

$7 billion in incremental costs for its participation in contingency

operations.1

 Accurate reporting of contingency operations costs is

important for effective congressional oversight of appropriated funds.

Over the past several years, the Congress has provided supplemental

funding or reprogramming of previously appropriated funds to cover

contingency operations costs. When costs are inaccurately reported, the

Congress cannot assess with confidence the sufficiency of funds it has

provided DOD.

In response to a request from the Chairmen of the House Committees on

International Relations and National Security, GAO reviewed (1) the

accuracy of DOD-reported incremental costs for contingency operations

and (2) the adequacy of DOD guidance and accounting systems to ensure

accurate cost reporting.

Background The Secretary of Defense’s 1995 Annual Report to the President and the

Congress describes “contingency operations” as military operations that

go beyond the routine deployment or stationing of U.S. forces abroad but

fall short of large-scale theater warfare. During fiscal year 1995, U.S.

military forces participated in a number of contingency operations. These

operations included (1) support of U.N. peace operations in the former

Yugoslavia, Haiti, and Southwest Asia; (2) increased deployment to South

Korea in response to heightened tensions; (3) increased deployment to

Kuwait and Saudi Arabia in response to the threat of renewed Iraqi

aggression against Kuwait; and (4) the enforcement of a revised U.S. policy

to prevent Cuban migrants from reaching the United States. DOD continues

to be involved in contingency operations, including the operation in

Bosnia involving implementation of the Dayton Peace Accords, which is

estimated to cost $2.5 billion.

Contingency operations such as these begin when the President decides to

commit U.S. military forces to respond to developing world conditions

that he judges affect U.S. interests. For new operations, DOD develops cost

estimates before the actual deployment of military forces or early in the

deployment. These estimates are commonly used as the basis for

requested additional funds to cover operation costs. As the operation

progresses, the incremental costs that are incurred are reported.

Contingency cost reports consequently are important for monitoring the

1

As used in this report, “incremental costs” means those costs that would not have been incurred if it

were not for the operation. This is the same definition contained in the Omnibus Budget and

Reconciliation Act of 1990 (P.L. 101-508) and the fiscal year 1996 DOD Authorization Act.

Page 2 GAO/NSIAD-96-115 Contingency Operations
Executive Summary

adequacy of funding for such operations as well as for a variety of other

purposes.

GAO has reported that when considering the cost of operations it should be

recognized that DOD’s financial systems cannot reliably determine costs.2

Systems are classified as high risk, are not integrated, and cannot easily

capture actual incremental costs. Only the total obligations are captured

by the accounting systems. The services use various management

information systems to identify incremental obligations and to estimate

costs.

Results in Brief GAO found inaccuracies in DOD’s reported costs for contingency operations,

representing about 7 percent of the $4.1 billion in costs reported in fiscal

years 1994 and 1995. In GAO’s judgment, this variance in reported costs is

indicative of a material weakness in the accounting systems. GAO identified

about $104 million in overstated costs and about $171 million in

understated costs. GAO also found that the accuracy of some reported

costs could not be determined. It was not feasible to examine all reported

costs and their supporting data, and GAO’s results are not statistically

projectable. Consequently, GAO is not able to conclude whether on balance

the sum of reported incremental costs are overstated or understated.

DOD guidance for reporting incremental costs is vague and incomplete, and

there are weaknesses in DOD’s accounting systems. In February 1995, DOD

added a chapter on contingency operations to its financial management

regulations to include guidance for developing and reporting incremental

costs. Neither DOD nor the resulting service guidance provides instructions

on which costs to include, how to calculate them, or how to apply

generally accepted internal control standards to test the accuracy and

reliability of the reported costs. Finally, the incremental cost data is

developed using financial management systems that DOD has reported as a

high-risk area within its Federal Managers’ Financial Integrity Act

Statement of Assurance. The Office of Management and Budget (OMB) and

GAO have also reported DOD’s financial management as a high-risk area. DOD

is taking steps to improve its incremental cost reporting, but problems in

reporting accurate costs remain.

2

Peace Operations: Information on U.S. and U.N. Activities (GAO/NSIAD-95-102BR, Feb. 13, 1995).

Page 3 GAO/NSIAD-96-115 Contingency Operations
Executive Summary

Principal Findings

DOD’s Reported

Incremental Costs Are Not

Accurate

Some Costs Were Overstated GAO identified about $104 million in incremental costs that were overstated

primarily because the services failed to adjust reported costs for normal

operating and training costs that were not incurred. For example, GAO

identified about $11 million in reported normal operating costs at one

Army command that were not actually incurred because the units were

deployed to contingency operations.

The largest overstatement of reported costs GAO found, about $70 million,

occurred in the services’ reported flying hour costs. The Air Force

overstated its fiscal years 1994-95 incremental flying hour costs by

$67 million. For the most part, this was because the Air Force failed to

adjust its reported fiscal year 1994 flying hour costs by the value of free

fuel provided by other nations. The Navy overstated its incremental flying

hour costs by $3 million for the same reason.

Some Costs Were Understated GAO also identified about $171 million in incremental costs that were either

not fully reported or not reported at all. The largest instance GAO found of

underreporting involved military personnel costs. Although the Air Force

reported some incremental personnel costs in fiscal year 1994, it did not

report about $81 million for such incremental costs as imminent danger

pay and family separation pay. Air Force officials said they were unaware

that they were required to account for and report all incremental military

personnel costs. The Air Force accounted for and reported its incremental

military personnel costs for contingency operations beginning in fiscal

year 1995.

Other unreported costs for fiscal year 1995 include $48 million for

munitions the Navy used in the former Yugoslavia and about $28 million in

incremental costs related to Air Force mobility equipment and munitions.

Accuracy of Some Costs Could

Not Be Determined

The services cannot readily extract from their pay system the incremental

costs related to special pays and allowances for contingency operations.

With the exception of the U.S. Marine Corps, the payroll and personnel

systems are not linked to provide these incremental personnel costs.

Page 4 GAO/NSIAD-96-115 Contingency Operations
Executive Summary

Consequently, the services generally estimate them. For example, the

Army applies estimated cost factors to the estimated number of personnel

deployed to determine incremental personnel costs. DOD has plans

underway to link the payroll and personnel systems, which will provide

more accurate incremental personnel contingency costs.

The Army and the Air Force have reported the amounts they paid for

transporting personnel and equipment for contingency operations. Both

services, however, questioned the validity of the bills received from DOD

agencies that were the basis for these payments. The Army identified

$11 million in fiscal year 1995 transportation charges it believed to be

invalid for airlift, sealift, and port handling. It identified problems such as

duplicate charges, unidentified customers, and missing data, which

prevented identifying the appropriate charges. Air Force officials also have

similar concerns about the accuracy of their transportation bills.

Factors Contributing to

Inaccuracies in Cost

Reporting

Vague and Incomplete

Guidance

While DOD’s revised February 1995 guidance provides some instruction to

DOD components to identify incremental costs and determine offsets, the

guidance is general and incomplete. For example, it excludes discussion of

offsetting certain costs that are not incurred as a result of contingency

operations and other savings that occur during participation in such

operations, such as supply turn-ins. Ultimately, the guidance directs the

DOD components to determine incremental costs. However, the services

have not developed comprehensive implementing instructions that

address how to identify, calculate, and adjust the incremental costs and

how to apply internal control standards to the reported incremental costs.

As stated in the February 1995 guidance, DOD policy requires that controls

and procedures provide proper identification and recording of costs

incurred in supporting contingency operations in financial records. In

addition, the guidance delegates the responsibility to the services to report

costs accurately. DOD guidance is vague on applying internal control

standards to test the accuracy and completeness of reported incremental

costs.

Page 5 GAO/NSIAD-96-115 Contingency Operations
Executive Summary

Weaknesses in DOD

Accounting Systems

The problems GAO has identified in the reporting of contingency operations

costs reflect, in part, the broader problems with DOD’s accounting systems.

DOD’s 1994 and 1995 Federal Managers’ Financial Integrity Act Statement

of Assurance admit long-standing weaknesses in DOD’s accounting systems

and state that none of DOD’s operating accounting systems comply with

appropriate accounting standards and related requirements. Accordingly,

DOD financial management systems are classified as high risk by OMB. In a

November 1995 testimony, GAO stated that no military service or major DOD

component has been able to withstand the scrutiny of an independent

financial statement audit, a requirement established by the Chief Financial

Officers Act. GAO’s review of the Navy’s financial reports, the Army Audit

Agency’s review of the Army’s financial statements, and the Air Force

Audit Agency’s review of the Air Force’s financial statements identified

significant accounting and reporting problems resulting in unauditable

financial statements and reports for fiscal year 1994. DOD also has no cost

accounting system and has directed that contingency cost reporting use

existing systems, so it must develop its contingency cost reports within the

limitations of its existing systems.

Recommendations GAO is making two recommendations to the Secretary of Defense to

improve the accuracy of contingency operation cost reporting.

Agency Comments

and GAO’s Evaluation

DOD generally concurred with a draft of this report. It agreed with GAO’s

recommendations and said that it will attempt to clarify existing guidance.

DOD’s comments appear in appendix I.

Page 6 GAO/NSIAD-96-115 Contingency Operations
Page 7 GAO/NSIAD-96-115 Contingency Operations
Contents

Executive Summary 2

Chapter 1 

Background

10

DOD Reports Incremental Costs of Contingency Operations 10

DOD Often Seeks Supplemental Funding for Contingency

Operations

11

DOD’s Cost Reports Are Important 13

Methodology for Developing Cost Reports 14

Objectives, Scope, and Methodology 15

Chapter 2 

Reported Contingency

Costs Contain

Significant

Inaccuracies

17

Costs Are Overstated Because They Are Not Adjusted to Reflect

Offsets

17

Some Contingency Operation Costs Were Incurred but Not

Reported

22

Accuracy of Some Other Costs Could Not Be Determined 24

Conclusions 26

Chapter 3 

Guidance for

Reporting Incremental

Costs Is Vague and

Accounting Systems

Are Unreliable

27

DOD and Service Guidance for Reporting Incremental Costs Is

Vague

27

Weaknesses Exist in DOD Accounting Systems Used to Provide

Data

30

Recommendations 32

Agency Comments and Our Evaluation 32

Appendixes Appendix I: Comments From the Department of Defense 34

Appendix II: Major Contributors to This Report 36

Tables Table 1.1: Incremental Cost of Contingency Operations 11

Table 2.1: Overstated and Understated Contingency Costs by

Appropriation Account

17

Table 2.2: Air Force’s Reported and Estimated Fiscal Year 1994

Incremental Personnel Costs

23

Page 8 GAO/NSIAD-96-115 Contingency Operations
Contents

Abbreviations

DOD Department of Defense

FMFIA Federal Managers’ Financial Integrity Act

IG Inspector General

OMB Office of Management and Budget

OSD Office of the Secretary of Defense

Page 9 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

The United States has participated in a number of contingency operations

since the end of the Persian Gulf War. The Department of Defense (DOD)

describes contingency operations as military operations that go beyond

the routine deployment or stationing of U.S. forces abroad but fall short of

large-scale theater warfare. They include smaller-scale combat operations,

peace operations, and other missions, such as humanitarian assistance.

Contingency operations involving U.S. military forces have included

(1) operations in support of U.N. peace operations in the former

Yugoslavia, Haiti, Somalia, and Southwest Asia; (2) increased deployment

of military capability to Southwest Asia and South Korea in response to

heightened tensions; and (3) other key missions, including humanitarian

and refugee assistance, such as support for Rwandan refugees.

DOD Reports

Incremental Costs of

Contingency

Operations

Two broad cost categories are associated with contingency

operations—incremental and total. DOD reports the incremental costs of its

participation in contingency operations. As used in this report,

“incremental costs” means those costs that would not have been incurred

except for the operation. This is the same definition contained in the

Omnibus Budget and Reconciliation Act of 1990 (P.L. 101-508) as well as in

the fiscal year 1996 DOD Authorization Act. Examples of incremental costs

are (1) special payments to participating military personnel, such as

imminent danger pay; (2) transportation costs to deploy personnel to the

area of operations; (3) contractor support for deployed forces; and

(4) reconstitution of equipment used in the operation.

In addition to incremental costs, DOD incurs costs to maintain a standing

military force. These costs include (1) basic military pay; (2) fuel, spare

parts, and maintenance to train and sustain military forces; and

(3) procurement of military equipment, such as aircraft, ships, and tanks.

These costs would be incurred regardless of whether military forces

deployed to a contingency operation or remained at their home station,

and they are not to be included in contingency cost reporting.

The costs to participate in contingency operations have been substantial.

Since fiscal year 1992, DOD has reported more than $7 billion in

incremental costs. Table 1.1 provides detail on the reported incremental

costs.

Page 10 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

Table 1.1: Incremental Cost of

Contingency Operations (Fiscal Years

1992-95) 

Dollars in millions

Country/region Reported costs

Former Yugoslavia $784

Haiti 953

Cuba 372

Rwanda 144

Somalia 1,522

Southwest Asia 2,234

All others 1,138

Total $7,147

Source: DOD Comptroller.

DOD Often Seeks

Supplemental Funding

for Contingency

Operations

Through fiscal year 1996, DOD has not budgeted for the cost of military

operations or contingencies.1

 It has budgeted to be ready to conduct such

operations. When the services have had to conduct contingency

operations, they initially have had to shift funds within existing

appropriations. This is done primarily by using funds appropriated for the

same purpose but scheduled for obligation later in the fiscal year.

Subsequently, DOD has often sought supplemental funding or

reprogramming of appropriated funds to cover its costs.

In fiscal year 1993, to pay for the cost of operations in Somalia, DOD asked

for and received a supplemental appropriation that also rescinded

$750 million from other areas within its budget. Congress provided no new

funds. In fiscal year 1994, DOD received two supplementals to fund ongoing

contingency operations: one for $1.2 billion in February 1994 and one for

$299 million in September 1994. The February 1994 supplemental was

funded with a mix of new budget authority and rescission of existing

authority. The September 1994 supplemental provided funding through the

Defense Emergency Relief Fund, which was designed to reimburse other

appropriation accounts for costs incurred in responding to emergencies.

In fiscal year 1995, DOD received a supplemental appropriation that

included $2.2 billion intended for contingency operations. This

supplemental also contained a mix of new budget authority and

rescissions. For fiscal year 1996, the administration is seeking $620 million

in supplemental funding and the reprogramming of $991 million in

previously appropriated funds for DOD’s incremental costs associated with

1

The Air Force has included funds in its budget request for the military personnel appropriation

account for the payroll cost of reserve volunteers participating in contingency operations.

Page 11 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

the deployment of U.S. forces to implement the Bosnia peace agreement.

The administration proposes to fully offset the supplemental with a

corresponding rescission.

Cost Estimates Tend to

Increase

DOD’s estimate of supplemental funding needs is based on cost estimates

developed before or during the operation. Developing the estimate

involves (1) making assumptions about a number of factors, including the

number of military personnel needed to conduct the operation, its

expected duration, and the logistical requirements to support operations

and (2) costing out the assumed force, using standard cost factors that are

in turn based on historical costs and, where there are no cost factors,

military judgment. For existing operations, DOD projects costs based on

costs incurred in the previous year unless it expects an operation to

change in size, scope, or duration. The estimate of required supplemental

funding is prepared and reviewed within DOD and then reviewed by the

Office of Management and Budget (OMB). The reviews can result in some

parts of the request being deleted and other costs being added to the

request. Overall, the cost estimates tend to increase as the estimates move

through the review process.

Within DOD, the Office of the Secretary of Defense (OSD) Comptroller

reviews service submissions and prepares a program budget decision that

serves as the basis for senior level DOD review. In the last 2 years, the

estimates we have reviewed have tended to increase during final review

within DOD and OMB. For example, in developing the cost estimate for fiscal

year 1995 contingency operations, the overall estimate increased by

$104 million. Within this amount, the OSD Comptroller reduced proposed

funding for part of one operation, Cuba migrant operations, by $3 million

and increased funding by $107 million for several other operations,

including operations in Haiti. DOD’s estimated costs as expressed in the

approved program budget decision are also reviewed within OMB when the

administration seeks supplemental funding. OMB, for example, increased

the estimate of required fiscal year 1995 funding by $126 million over the

amount proposed by DOD. OMB increased many of the estimates for

required funding to support contingency operations. The biggest single

increase was for operations in Cuba—an increase of $16 million to cover

additional operating and maintenance costs and personnel costs.

In developing the cost estimate for operations in and around Bosnia for

fiscal years 1996 and 1997, the estimated cost increased by $164 million

between the preliminary program budget decision and the final one

Page 12 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

submitted to the Deputy Secretary of Defense. Within the total increase,

some estimated costs increased while others decreased. For example, the

estimate for support costs for personnel in Bosnia decreased by

$20 million, and the estimate for contractor support increased by

$32 million. In approving the final decision document, the Deputy

Secretary added $96 million to the amount proposed in the final program

budget decision to reflect December 1995 special pay for military

personnel deployed in and around Bosnia and command and control

augmentation initiatives, which had not been included in the estimate

submitted to him. In developing the plan for financing the operation, DOD

further increased the estimated cost by almost $82 million.

Reported Costs Vary From

Estimates

Actual costs can vary from the estimate as changes occur to the operation.

For example, DOD originally estimated that Vigilant Warrior, the

deployment of military forces to Southwest Asia in response to Iraqi troop

movements, would cost $462 million in fiscal year 1995. However, the

operation ended in December 1994 and cost only $258 million. This was

about $204 million below the estimate because the operation concluded

sooner than expected as the Iraqis pulled their troops back. On the other

hand, DOD estimated that the operation in Haiti would cost $465 million in

fiscal year 1995, but through the end of fiscal year 1995, DOD had reported

costs of $569 million. This was in part due to unforeseen requirements

associated with Operation Uphold Democracy and U.N. effort.

DOD’s Cost Reports

Are Important

As previously mentioned, DOD has reported more than $7 billion in

incremental costs for its participation in contingency operations since the

end of the Gulf War. The number, size, and scope of these operations have

increased over the past several years as the United States has responded

to events in a number of locations, including Somalia, Haiti, Bosnia,

Rwanda, and Iraq. The U.S. participation in implementing the Dayton

Peace Accords, including deploying over 18,000 troops to

Bosnia-Herzegovina, which began in December 1995, and the April 1996

evacuation of American civilians from Liberia are the latest examples of

the kinds of operations in which the United States has become engaged.

Contingency operations such as these begin when the President decides to

commit U.S. military forces to respond to developing world conditions

that he judges affect U.S. interests. For new operations, DOD develops cost

estimates before the actual deployment of military forces or early in the

deployment. These estimates are commonly used as the basis for

Page 13 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

requested additional funds to cover operation costs. As the operation

progresses, the incremental costs that are incurred are reported.

Contingency cost reports consequently are important for monitoring the

adequacy of funding for such operations as well as for a variety of other

purposes. They help DOD monitor the resources necessary to support

contingency operations, which enables DOD to determine the implications

for readiness when drawing from previously appropriated operation and

maintenance funds to cover contingency costs. They also aid DOD in

developing requests for supplemental appropriations and reprogrammings.

DOD uses them to respond to congressional and public interest about the

incremental cost of specific operations as well as all contingency

operations. Also, they facilitate congressional oversight of the expenditure

of appropriated funds and the assessment of the financial impact of

contingency operations on DOD’s spending plans.

Cost reporting is also important for reimbursement. DOD’s financial

management regulation for contingency operations discusses proper

identification and reporting of costs to support billings. This is important

in instances where the United States is due reimbursement from the

United Nations and for the distribution of reimbursements to applicable

organizations.

Methodology for

Developing Cost

Reports

DOD financial guidance requires that the services use existing systems to

record their costs of contingency operations. The services record costs as

they are incurred during the course of the mission. Therefore, unlike the

estimates of costs developed before and during the mission, cost reporting

is historical in nature.

Some costs are initially recorded by the military unit that incurs the cost.

For example, personnel in an Army unit that purchases spare parts to

prepare equipment for deployment record the purchase against the

financial management code assigned for the operation. Individual costs

are consolidated at Army headquarters from the Army’s financial

management system. Other costs are determined centrally. For example,

Air Force units report their flying hours, but Air Force headquarters

translates those flying hours into costs. DOD consolidates the services

reports and publishes a monthly contingency cost report.

Page 14 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

Objectives, Scope,

and Methodology

In response to a request from the Chairmen of the House Committees on

International Relations and National Security, we reviewed (1) the

accuracy of DOD’s reported incremental costs for contingency operations

and (2) the adequacy of DOD guidance and accounting systems to ensure

accurate cost reporting.

To review the accuracy of reported costs, we examined the methodology

for reporting incremental costs and contingency operation cost reports for

fiscal years 1994 and 1995 throughout DOD. We used auditor’s judgment as

prescribed by the American Institute of Certified Public Accountants to

determine the materiality of reporting inaccuracies. We conducted our

work at the OSD (Comptroller); all service headquarters; and major

commands within each service that were heavily involved in determining

incremental costs, including the U.S. Army Forces Command and U.S.

Army, Europe, the Air Force’s Air Combat Command, Air Mobility

Command, and U.S. Air Forces in Europe, the Navy’s Commanders in

Chief, Atlantic and Pacific Fleet, the Commander, Marine Forces Atlantic,

and the U.S. Transportation Command. We also conducted work at

individual military units that participated in contingency operations in

fiscal years 1994 and 1995. Individual units visited included the XVIII

Airborne Corps in Fort Bragg, North Carolina; 101st Air Assault Division in

Fort Campbell, Kentucky; 25th Infantry Division in Schofield Barracks,

Hawaii; 48th Fighter Wing in Lakenheath, England; 1st Fighter Wing in

Langley, Virginia; and the II Marine Expeditionary Force in Camp LeJeune,

North Carolina. At the locations we visited we discussed how the

incremental costs of contingency operations are captured and reviewed

costs reported at that location. We also examined the guidance that the

locations had received from higher command levels regarding contingency

cost reporting and the views of cognizant officials at those locations

regarding the adequacy of the available guidance.

To assess the adequacy of DOD’s accounting systems and internal controls,

we drew from our past work and the work of the DOD Inspector General

(IG) and the military audit agencies on the financial audits required under

the Chief Financial Officers Act. We also examined DOD’s annual Federal

Managers’ Financial Integrity Act (FMFIA) Statement of Assurance, which

detail the significant internal control problems of DOD and the military

services. We consulted with DOD’s IG and the military audit agencies

regarding planned work to assess the extent of audits of contingency cost

reporting. We discussed the extent to which cost reports are reviewed for

accuracy at locations visited.

Page 15 GAO/NSIAD-96-115 Contingency Operations
Chapter 1 

Background

We conducted our review between May and December 1995 in accordance

with generally accepted government auditing standards.

Page 16 GAO/NSIAD-96-115 Contingency Operations
Chapter 2 

Reported Contingency Costs Contain

Significant Inaccuracies

In fiscal years 1994 and 1995, we found inaccuracies in DOD’s reported

contingency operation costs that represented about 7 percent of reported

incremental costs. The American Institute of Certified Public Accountants

states that a financial auditor must consider materiality in the scope of

work to be performed and leaves the threshold of what constitutes a

material weakness to the auditor’s judgment. In our judgment, a 7 percent

known error as well as potential errors in the unauditable amounts

discussed below, constitutes a material weakness in the accounting

systems. A material weakness raises questions about the reliability of

reported costs. DOD reported incremental costs of about $4.1 billion for

contingency operations that occurred in fiscal years 1994 and 1995. We

identified about $104 million in overstated costs and about $171 million in

understated costs between fiscal years 1994 and 1995. Table 2.1

summarizes these over- and understatements by appropriation. We also

found instances where the accuracy of some reported costs could not be

determined. It was not feasible to examine all reported cost data, and our

results are not statistically projectable. Consequently, we are not able to

conclude whether on balance the sum of reported incremental costs are

overstated or understated.

Table 2.1: Overstated and Understated

Contingency Costs by Appropriation

Account (Fiscal Years 1994-95) 

Dollars in millions

Appropriation account Overstated costs Understated costs

Operation and Maintenance $104 $14

Military Personnel 0 81

Procurement 0 76

Total $104 $171

Costs Are Overstated

Because They Are Not

Adjusted to Reflect

Offsets

The services do not have financial management systems that capture

actual incremental costs. Therefore, the services use various financial

management systems to identify obligations and modify them to arrive at

their incremental costs. In addition, with the exception of the Army, the

services receive input from their subordinate commands. As required by

DOD guidance, the services are then to offset their incremental costs by

those costs for which funds were appropriated, but not spent because of

participation in the contingency operation. For example, reported costs

should be adjusted for such functions as training not conducted and base

operations not provided. However, we found that this was not always

being done.

Page 17 GAO/NSIAD-96-115 Contingency Operations
Chapter 2 

Reported Contingency Costs Contain

Significant Inaccuracies

Reported Cost Not

Adjusted for Normal

Operating Costs Saved

We found instances where reported incremental costs were not offset by

normal operating costs, such as base operations, that were saved due to

participation in contingency operations. For example, Army Headquarters

did not apply these offsets when calculating its incremental costs. In fiscal

year 1995, the U.S. Army Forces Command, which was responsible for

supporting most of the Army forces involved in contingency operations in

that year, estimated that military units did not incur about $11 million in

funded normal operating costs as a result of deploying to contingency

operations. Therefore, these funds were recoverable. For example, U.S.

Army Forces Command estimated that Fort Drum, home of the 

10th Mountain Division (Light), had not incurred almost $3 million in base

operations cost because a large part of the division was deployed to Haiti

and so was not incurring some normal day-to-day costs. Although Forces

Command officials made this information available to senior command

officials, no action was taken to offset reported costs.

In another instance, the 25th Infantry Division (Light), part of the U.S.

Army, Pacific saved $1 million from normal operating costs while part of

the division was deployed to Haiti because its operating costs during

deployment were paid by another Army command. Thus, the division was

able to use the $1 million it saved from normal operating costs not

incurred to acquire equipment it could not otherwise afford within its

annual budget. Neither the division nor higher command levels in the

Army adjusted these reported contingency costs to reflect these savings.

The Army chose to allow units that had savings to retain and use them for

otherwise unfunded needs.

In fiscal year 1996, at least one major command, U.S. Army, Europe, has

identified offsets and adjusted its funding estimate accordingly. U.S. Army,

Europe, which has the lead responsibility for tracking U.S. Army costs

resulting from participation in implementing the Dayton Peace Accords in

Bosnia, anticipates that it will not incur about $113 million in fiscal 

year 1996 normal operating costs as a result of its participation in Bosnia.

In reporting fiscal year 1996 costs, the Army should offset its incremental

costs by this amount.

Reported Costs Not

Adjusted for Training Not

Conducted

We identified two cases where the services did not adjust reported costs to

offset training not conducted due to participation in contingency

operations. In fiscal year 1995, the Army’s 25th Infantry Division (Light)

reported about $2 million in costs associated with deploying to Haiti. The

division was scheduled to participate in a training exercise at the Joint

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Readiness Training Center. U.S. Army, Pacific, the command that funds

the division, had budgeted more than $6 million for the cost of this

exercise. Because elements of the division’s brigades were deployed to

Haiti, the division did not participate in this exercise. The 25th Infantry

Division’s (Light) cost to participate in the Haiti operation was not

adjusted to reflect the savings from the missed training exercise. The

Department of the Army directed the U.S. Army, Pacific to use $2 million

of the $6 million to fund other Army requirements and allowed the

command to retain the remaining $4 million, which it used to cover all of

the 25th Infantry Division’s (Light) $2 million cost associated with Haiti

and to meet otherwise unfunded needs. Consequently, we believe that the

division’s $2 million in incremental costs were fully offset by the training

costs that were not incurred and there were no incremental costs.

Another example of reported incremental costs not offset by training not

conducted was found in the Air Force. In fiscal year 1994, the 48th Fighter

Wing had to cancel its participation in several training exercises because

of contingency operations. U.S. Air Forces, Europe budgeted $1 million for

this training. Although the training was canceled, the command made no

adjustment to its reported incremental costs.

In these examples, neither the Army nor the Air Force adjusted its

reported costs to reflect the savings from canceled training. For the Army,

this was because Army headquarters did not apply any offsets, including

those related to canceled training, to its reported costs for fiscal year 1995.

The Air Force example was due to U.S. Air Forces, Europe not offsetting

its reported costs that were forwarded to Air Force headquarters, who

prepared the final cost report.

Flying Hour Costs Not

Adjusted for Actual Costs

and Value of Free Fuel

We found instances where the services overstated flying hour costs. For

example, the Air Force overstated fiscal years 1994 and 1995 incremental

flying hour costs by $67 million. The reasons for the overstatement were

that it (1) did not use actual cost factors to report costs in fiscal years 1994

and 1995 and (2) did not offset its flying hour costs by the value of free fuel

received from the Kingdom of Saudi Arabia in fiscal year 1994.

According to Air Force officials, the Air Force calculated its incremental

flying hour costs by applying budgeted cost factors for supplies, repair

parts, maintenance, and fuel to the additional hours flown per aircraft

above budgeted flying hours. These cost factors reflect the average

historical costs, by aircraft type, to operate, not their actual costs. In fiscal

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year 1994, we determined that U.S. Air Forces, Europe actual costs of

contingency flying hours were about $19 million below that funded by the

Air Force.

According to command officials, when actual costs are lower than the

budgeted factors for an aircraft, the command is allowed to retain the

excess. Conversely, when costs are above these factors, the command

must absorb the increased cost within its budget. For example, we

calculated that Air Combat Command had to absorb $4 million for fiscal

year 1994 because its actual costs were higher than the budgeted factors.

In the same year, Saudi Arabia provided the Air Force free fuel valued at

$45 million to support contingency operations in Southwest Asia. The Air

Force failed to deduct the value of this free fuel when computing its

incremental flying hour costs for Operation Southern Watch, thereby

overstating its costs.

In fiscal year 1995, the Air Force headquarters revised its methodology for

calculating incremental flying hour costs to reflect the receipt of free fuel.

However, it continued to compute the flying hour costs by using the

budgeted versus actual cost factors. Consequently, Air Force headquarters

computed almost $74 million for Air Combat Command’s incremental

flying hour costs, while the command’s actual costs were about $7 million

lower because actual costs were less than the budgeted cost factors. We

did not have comparable data to calculate U.S. Air Forces, Europe’s costs.

We also found that the Navy used either budgeted or actual cost factors

when determining its incremental flying hour cost. The Navy Atlantic Fleet

used budgeted rates reflecting average historical cost applied to its

additional flying hours, while the Pacific Fleet applied actual rates for the

most part when determining its costs. The Navy Pacific Fleet provided an

example where the actual rates were higher than the budgeted costs

allowed for fiscal year 1995. For its F/A-18A, F/A-18C, and P-3C aircraft

involved in contingencies, the actual costs per hour for these aircraft were

higher than the budgeted costs by $2,632, $126, and $41, respectively.

Furthermore, Navy officials also stated that the Navy’s fiscal year 1994 and

1995 flying costs were not adjusted for free aviation fuel. In fiscal year

1994, the Navy reported almost $6 million for aviation fuel used in

Operation Southern Watch but did not adjust this amount by the $2 million

of free fuel received. Therefore, the Navy overstated its reported costs by

33 percent. Similarly, in fiscal year 1995, the Navy did not adjust its

reported costs to reflect $1 million of free fuel received for operations in

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Southwest Asia. Navy headquarter officials stated that the value of free

fuel received for operations was accounted for in its flying hour costs

factors, which were used to determine flying hour costs. However, the

Navy did not provide documentation to support its position.

Reported Costs Not

Adjusted to Reflect Unused

Items or Credits From

Items Returned to the

Supply System

The value of items that have been purchased for contingency operations

but not used and either retained by the unit or returned to the DOD supply

system for credit is not deducted from reported incremental costs. For

example, the U.S. Army, Europe purchased parachutes and rigging

supplies to support the airdrop mission over Bosnia during 1994. The cost

of this material, over $23 million, was reported as an incremental cost of

that contingency operation. In July of 1994, the Army Audit Agency found

that $12 million of this equipment was excess to the command’s needs and

recommended that the command turn in the supplies to receive a credit.

However, U.S. Army, Europe officials did not concur with this

recommendation and retained the material. They believed that the

equipment was necessary for immediate future contingency airdrop

operations. Also, they did not want to turn in the inventory because they

believed that it made little sense to turn in equipment, receive a limited

credit for it, and then buy it back at full price for anticipated operations.

Regardless of whether the material was returned, the reported incremental

cost should have been adjusted by the $12 million of material not used in

the contingency operation. However, neither the command nor Army

headquarters adjusted the reported cost.

In fiscal year 1995, the Army’s 101st Airborne Division was told that it

would deploy to a contingency operation in Southwest Asia. Although the

Division incurred some costs to prepare to deploy, it ultimately did not

deploy. However, it reported incremental predeployment costs of

$14 million. The reported costs were not adjusted by Army headquarters to

offset the value of items not used. Division officials estimated that about

$7 million or more of the reported costs were incremental, the balance

was eventually used for normal operating costs.

When items that are purchased for use in a contingency are ultimately not

used and are returned to the supply system, they are credited to a general

operation and maintenance fund, but the reported incremental costs of the

contingency are not reduced. According to Army officials, there is no

system in place to ascertain which of the supplies turned in were originally

purchased for a contingency operation. In addition, the DOD guidance on

reporting contingency costs does not specifically require the services to

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turn in these items as a means to credit the reported costs of the

contingency operation or adjust reported costs to reflect the value of items

purchased for contingency operations but not used in them.

Military Pay Costs for

Reservists Not Adjusted to

Reflect Base Pay

The reported incremental military personnel costs for reservists

volunteering for or called to active duty are not adjusted to reflect regular

monthly reserve pay that is not being incurred. When federalized,

reservists receive active duty base pay plus allowances, and special pays,

some of which are based on where they are deployed. According to Army

and Air Force officials, they do not adjust reported incremental military

pay for reservists on active duty in contingencies by the monthly reserve

pay they would have received had they not been activated. We believe that

because these are costs that are not incurred as a result of contingency

operations, the incremental personnel costs should be offset by these

amounts. We did not determine the amount of this overstatement.

Some Contingency

Operation Costs Were

Incurred but Not

Reported

We found instances where services did not report certain incremental

contingency costs. The unreported costs included military personnel pay,

aviation parts, and procurement.

Military Personnel Costs

Not Reported by Air Force

Military personnel who deploy to contingency operations become eligible

for special pay and allowances such as imminent danger pay, certain

places pay (formerly known as foreign duty pay), and family separation

pay. We found that the Air Force did not report about $81 million of the

almost $100 million it estimated as incremental personnel costs for fiscal

year 1994. According to Air Force officials, they were not aware that they

were required to track and report these costs. Table 2.2 compares the Air

Force’s reported incremental personnel costs for fiscal year 1994 with the

estimated costs that should have been reported.

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Table 2.2: Air Force’s Reported and

Estimated Fiscal Year 1994

Incremental Personnel Costs

Dollars in millions

Operation

Reported

costs

Estimated

costs Difference

Bosnia $7.6 $66.5 $(58.9)

Cuba/Haiti 0.0 1.1 (1.1)

Rwanda 0.4 0.0 0.4

Somalia 0.4 4.3 (3.9)

Southwest Asia 10.4 27.8 (17.4)

Total $18.8 $99.7 $(80.9)

Source: Developed by GAO using Air Force data.

Air Force headquarters officials said that, in fiscal year 1994, they reported

the amount of supplemental funding received for military personnel as

their military personnel incremental costs. However, beginning in fiscal

year 1995, the Air Force tracked and reported these costs.

Cost of Aviation Parts Not

Reported

We found one instance where an Air Force command did not report the

value of aviation spare parts used in contingency operations at one of its

bases. The cost was instead recorded in the base’s account for normal

operations. According to a 1st Fighter Wing official, if parts are not

available to support deployed aircraft during contingency operations they

are removed or cannibalized from base aircraft and replaced when needed

parts are received. Between May 1994 and October 1995, the command’s

1st Fighter Wing estimated that it had used approximately $10 million in

spare parts to support operations in Southwest Asia. However, the Wing

official stated that this cost was charged to the base maintenance account

when replacement parts were cannibalized for contingency operations

rather than reported as contingency cost because in their view the base

accounting system only allows one account for maintenance. Thus, the

contingency-related maintenance costs were commingled with normal

base maintenance costs.

Replacement Costs for

Equipment Not Reported

We found that the Air Force did not report $12 million to replace mobility

equipment (tents, field kitchens, water systems, and warehouse and

maintenance facilities) that were reported as lost during contingency

operations in fiscal year 1995. An Air Force official stated that replacement

costs for these items were not considered incremental costs because

funding for these items was requested through the budget process and

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additional expenses were not incurred. However, we believe that these

replacement costs should have been reported as incremental costs

because the equipment was used in support of contingency operations and

in all likelihood would not have been rendered unusable or destroyed were

it not for the operation.

Munitions Cost Not

Reported

The Navy and the Air Force are not tracking and reporting the cost of

munitions used in contingency operations. During the 1995 bombing

campaign in Bosnia, the two services consumed almost $64 million worth

of munitions—$48 million for the Navy and $16 million for the Air Force.

According to an Air Force official, Air Force munitions were not drawn

from excess stock levels. A Navy official said that Navy munitions will

have to be replaced.

DOD officials told us that services are not reporting the costs of munitions

consumed in contingency operations because they absorbed munitions

procurement costs in normal budgets and do not consider the value of

munitions consumed in contingencies to be incremental costs. However,

since these are costs that would not have been incurred were it not for the

operation, we believe that they should be included in reported costs.

Accuracy of Some

Other Costs Could

Not Be Determined

The accuracy of reported costs could not be determined for some cost

categories relating to active and reserve military personnel and

transporting personnel and equipment.

Services Report Estimated

Incremental Personnel

Costs

Military personnel deployed to contingency operations become eligible for

several types of special pays and allowances. These can include imminent

danger pay, certain places pay, and family separation pay. These types of

special pays and allowances would not be paid were it not for the

contingency operation, so they are considered incremental costs. Because

the military services cannot readily extract the amount of the special pays

and allowances from their military pay system, they estimate the

incremental pay costs. This makes it difficult to ascertain the accuracy of

these costs, which may be over- or understated. In addition, the military

services do not all use the same estimating methodology.

In fiscal year 1995, the Air Force applied estimated cost factors to the

actual number of deployed active military personnel to derive special pays

and allowances. The Army and the Marine Corps also applied estimated

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cost factors but instead used the estimated number of deployed active

personnel. The Navy, on the other hand, reports actual costs from its

military pay center but only included imminent danger pay. This is

because the nature of the Navy’s normal deployment schedules already

include special pays and allowances, such as family separation pay.

Therefore, those pays are not characterized by the Navy as incremental.

Officials from the other services told us that they do not reconcile

reported incremental personnel costs to actual payroll cost reports to

determine the accuracy of their reported estimated contingency figures.

Although the services’ payroll systems calculate how much the personnel

deployed should receive in special pays and allowances and are able to

distinguish between geographic locations, they are not configured to

distinguish between contingency operations and other deployments. On

the other hand, the personnel systems are capable of determining who is

deployed and the location of this deployment. However, the payroll and

personnel systems are not configured or linked to provide the incremental

contingency costs.

DOD has plans underway to link the payroll and personnel systems. On the

basis of discussions with Defense Finance Accounting System officials

(who operate the military payroll system) and OSD officials in the military

personnel arena, we believe that linking the payroll and personnel systems

to allow the extraction of actual special pay and allowance costs may only

involve providing one additional space in computer records to allow for a

code indicating that a service person is deployed to a contingency

operation. Until the two systems are linked it is not possible to test the

accuracy of estimated costs.

The services also use estimates rather than actual data to derive

incremental personnel costs for reservists on active duty in contingency

operations. The Air Force and the Army multiply actual numbers of

reservists participating in contingency operations by estimated base salary

as well as by the special pays and allowances. According to Navy officials,

the Navy did not report any incremental personnel costs for the number of

reservists who supported contingency operations in fiscal years 1994 and

1995.

Reported Costs Include

Disputed Transportation

Bills

Although paid and reported as incremental contingency costs, the Army

and the Air Force question some of their bills to transport personnel and

equipment for contingency operations, which may have resulted in

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overstated costs. Allowable transportation costs include moving

personnel, material, equipment, and supplies to the contingency area. The

services pay the Military Traffic Management Command for port handling,

the Military Sealift Command for sealift, and the Air Mobility Command for

airlift. If billing errors exist, reported incremental transportation costs are

also inaccurate.

The U.S. Army Forces Command identified $11 million in transportation

charges it believed to be invalid for airlift, sealift, and port handling

services in fiscal year 1995. This represented 16 percent of the command’s

total contingency transportation charges for that year. In the review of

bills, command officials found problems such as unidentified customers,

duplicate charges, and missing data that prevented the validation of

charges. For example, officials estimated that over 50 percent of fiscal

year 1995 contingency port handling bills had disputed charges. The

command requested transportation providers to respond to disputed

charges; however, responses have been minimal and few credits applied.

Air Force officials also told us that they have noticed problems with

transportation bills but do not have the resources to research and validate

the bills. In fiscal year 1995, the Air Combat Command incurred

$17 million in airlift contingency charges. Command officials believe that

the airlift bills may include errors and reported incremental costs may be

inaccurate. For example, command officials told us that some of their bills

may include other services’ airlift mission charges.

Conclusions We found a number of inaccuracies in DOD’s fiscal years 1994 and 1995

reported incremental costs, which resulted in costs being overstated,

understated, or unable to be determined. In our opinion the magnitude of

these inaccuracies is material to the reported costs. With regard to

incremental military pay costs, we believe DOD’s plan to link the military

pay and military personnel systems will be helpful in capturing actual

military pay incremental costs.

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The DOD Comptroller and the service secretaries have not developed

sufficiently specific guidance for identifying contingency operation costs

and the methodology for calculating them. DOD and the services also have

not taken steps to ensure that cost development methodologies are

consistent and that key officials involved in accounting for incremental

cost reporting are made aware of guidance. In addition, DOD and the

services have not adequately ensured that cost reports are complete,

accurate, timely, and appropriately reviewed. This would include that

costs are properly recorded and classified and supporting documentation

is maintained. Further, DOD accounting systems are classified as high risk

and cannot reliably determine incremental costs.

DOD and Service

Guidance for

Reporting Incremental

Costs Is Vague

In February 1995, DOD added a chapter on contingency operations to its

financial management regulations. Prior to the addition of this chapter,

contingency cost guidance consisted of a patchwork of messages and

directives issued during and since the Gulf War. The new chapter directs

the services to provide monthly incremental cost reports in accordance

with DOD policy and makes the services responsible for accurate cost

reporting. The chapter also

• requires that controls, accounting systems, and procedures identify and

record costs incurred in support of contingency operations;

• directs that the services use the project code established for an operation;

• makes service Comptrollers responsible for determining incremental

costs;

• sets out cost reporting requirements;

• provides broad guidelines for determining costs; and

• requires that reported costs be adjusted for offsets.

DOD guidance is vague about what costs to include as contingency costs

and what methodology to use in calculating these costs. Because DOD’s

guidance is vague, the services and some commands within the same

service calculate costs differently. The guidance is also vague on applying

internal controls standards to test the accuracy and completeness of

reported costs. Several service officials at the reporting level stated that

more specific guidance was needed. DOD officials stated that they are

willing to clarify the guidance to the services if this will assist them in their

cost reporting.

To date, Army guidance has consisted of a series of messages regarding

reporting procedures for specific contingency operations, funding

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responsibilities, and reimbursement from the United Nations. The

guidance also notes broad cost categories but does not contain specific

guidance as to what costs to report and how to calculate them. The Army

has since drafted some implementing guidance that discusses how to

calculate offsets and requires major commands to certify costs, but as of

April 1996, this guidance had not been approved. Air Force guidance has

been limited to describing reporting formats and deadlines. Neither the

Navy nor the Marine Corps has developed any formal instructions to guide

their subordinate commands. They have relied, for the most part, on oral

instructions and electronic mail messages, which have also been limited to

reporting procedures.

Guidance Is Not Specific

About What Costs to

Include

Lack of specific guidance has resulted in services’ not offsetting or

reporting certain costs. For example, while the guidance requires reported

costs to be adjusted for offsets, such as training not conducted, it does not

specify that services’ offsets should include the value of items that have

been purchased for contingency operations but not used. U.S. Army,

Europe and the 101st Airborne Division did not adjust their reported costs

to reflect the value of supplies that were unused in the contingency.

DOD’s February 1995 guidance also is not specific about reporting costs for

training conducted to prepare for a contingency. As a result, the Army did

not report these costs. In fiscal year 1994, aviation elements from the XVIII

Airborne Corps incurred almost $1 million in training costs for Haiti that

were not included in the Army’s contingency cost report. Also in fiscal

year 1994, U.S. Army, Europe officials stated that they did not report

predeployment training costs incurred for one division to prepare for

Operation Able Sentry in Macedonia. Nonetheless, the Army is now

tracking and reporting predeployment training costs associated with the

preparation for operations in the former Yugoslavia.

Guidance Is Not Clear on

How to Calculate Certain

Costs

The DOD guidance does not specify how the services should calculate

incremental personnel costs. It only provides examples of allowable

categories of personnel costs such as family separation allowance and

imminent danger pay. Consequently, the services calculate their

incremental personnel cost differently. The Navy does not include all the

special pays and allowances, the Air Force uses actual numbers of

deployed personnel to estimate these costs, and the Army and the Marine

Corps use an estimate of the number of persons deployed.

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In some cases, commands within the services also calculate some costs

differently. For example, the Navy’s Atlantic and Pacific fleets used

different methods to calculate flying hour costs. According to Navy

officials, the Atlantic Fleet computed its incremental flying hour costs by

determining its incremental hours and multiplying them by budgeted cost

factors, while the Pacific Fleet used mostly actual costs. This is because

Pacific Fleet officials believe that the difference between actual and

budgeted cost factors allows them to fund unforeseen maintenance costs

that do not appear until later fiscal years due to increased flying hours in

support of contingency operations. Again, using different methods results

in inconsistent cost reporting.

Guidance Is Not Clear on

How to Apply Internal

Control Standards

According to our Standards for Internal Controls, there are standards that

are essential for providing the greatest assurance that the objective of

accurate reporting will be achieved. These include maintaining supporting

documentation, properly recording and classifying costs, and having

adequate supervision and review of cost reporting.

We found that these generally accepted internal control standards were

not always followed. For example, Navy Pacific Fleet officials were unable

to support about $2 million of their reported $48 million in incremental

costs for Operation Southern Watch because supporting documentation

was unavailable. Further, one U.S. Army, Europe division did not capture

and report its predeployment training costs for Macedonia and Rwanda. It

also recorded some supply costs to the wrong operation.

We also found that adequate rigor was not always applied in the review of

reported incremental costs. For example, in fiscal year 1994, the Navy

inappropriately reported an $8 million reimbursable cost as an incremental

cost. The Navy was reimbursed for this cost by the Army. The Army also

reported this cost resulting in reported costs being duplicated since both

the Army and the Navy reported the same cost.

Reporting Officials Not

Aware of Guidance

For costs to be reported accurately and in accordance with guidance,

service officials involved in the cost reporting need to be aware of this

guidance. However, during our visits we found that some officials involved

in accounting for incremental cost reporting at the service, major

command, and unit levels were unaware of the February 1995 DOD

guidance on contingency cost reporting. This included officials at various

U.S. Army, Europe subordinate units; the Navy Surface Forces, Pacific

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Fleet; and the U.S. Marine Corps Headquarters and Commander in Chief,

Marine Forces Atlantic.

Weaknesses Exist in

DOD Accounting

Systems Used to

Provide Data

DOD’s Financial Management Regulation notes that data from existing

systems shall be used as applicable to determine contingency operation

costs and that cost accounting systems will not be established solely to

determine incremental costs. Consequently, DOD must develop its cost

reports within its existing systems. However, problems exist with DOD’s

accounting systems and the reliability of its data. The systems do not

provide a firm foundation for DOD’s managers to use in determining

incremental costs for contingency operations.

The problems we identified in contingency cost reporting stem, in part,

from the long-standing and pervasive problems that plague DOD’s

accounting systems. DOD’s 1994 and 1995 Federal Managers’ Financial

Integrity Act (FMFIA) Statements of Assurance admit long-standing

weaknesses in DOD’s financial accounting process and systems. Under the

FMFIA and implementing OMB guidance, the Secretary of Defense is required

to provide this annual Statement of Assurance to the President and the

Congress on whether the Department’s system of internal controls, taken

as a whole, complies with the act’s requirements. DOD’s Statements of

Assurance cite its financial accounting process and systems as a high-risk

area. The Statements note that DOD’s operating accounting systems are not

always in compliance with generally accepted government accounting

standards or with internal management control objectives. As a result, the

quality of financial information is not always reliable, and financial

management practices are sometimes inadequate. Additionally,

compilation of accurate financial statements is impeded, in part, by the

lack of reliable information. Some broad categories of systemic problems

reported include inadequate financial property records, unreliable

accounting and payroll information, inaccurate or incomplete cost

accounting information, improper or incomplete accrual accounting,

improper reporting of the results of financial operations, and lack of

financial system integration.

DOD has made numerous efforts to improve its financial management

activities. A significant action was the establishment of a single DOD

finance and accounting organization, the Defense Finance and Accounting

Service, in January 1991. Its mission is to implement standard accounting

policies and procedures throughout DOD. In May 1994, DOD announced the

consolidation of over 300 finance and accounting sites into 26 locations.

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The Defense Finance and Accounting Service also has responsibility for

consolidating service incremental cost reports for contingency operations.

DOD Accounting Systems

Are High Risk and Do Not

Support Auditable

Statements

We stated in a November 1995 testimony that DOD does not yet have

adequate financial management processes in place to produce the

information it needs to support its decision-making process.1

 We further

stated that no military service or major DOD component has been able to

withstand the scrutiny of an independent financial statements audit, a

requirement established by the Chief Financial Officers Act. DOD’s financial

systems are not integrated and do not provide reliable information. Our

review of the Navy’s financial reports, the Army Audit Agency’s review of

the Army’s financial statements, and the Air Force Audit Agency’s review

of the Air Force’s financial statements identified significant accounting

and reporting problems resulting in unauditable financial statements and

reports for fiscal year 1994.2

 As an example, control practices used in the

Navy’s financial operations were fundamentally deficient: accounts and

records were not routinely reconciled; periodic physical inventories were

not always conducted; undocumented adjustments were common; and the

reasonableness of account balances, adjustments, and data presented in

financial reports was not regularly reviewed. DOD has acknowledged that

its financial management systems are antiquated and cannot be relied

upon to provide DOD management and the Congress with accurate and

reliable financial information for use in decision-making.

DOD’s FMFIA Statements of Assurance also noted that financial data in DOD

is inadequately maintained within current accounting systems. In turn, the

financial information and statements do not always adequately assist the

management functions of budget formulation, budget execution, and

proprietary and financial reporting with a high degree of reliability and

confidence. An important deficiency cited included the lack of flexibility

of most finance and accounting systems to rapidly respond to changing

customer bases, legislative changes, contingency operations, management

initiatives, requirements from other government central agencies, and

other changes. Accordingly, DOD systems are classified as high risk by

fiscal year 1994 and 1995 Statements of Assurance and OMB. Our

February 1995 High Risk report also cited DOD’s serious and long-standing

1

Financial Management: Challenges Facing DOD in Meeting the Goals for the Chief Financial Officers

Act (GAO/T-AIMD-96-1, Nov. 14, 1995).

2

CFO Act Financial Audits: Immediate Attention Must Be Given to Preparing Reliable Financial

Information on Navy Operations (GAO/AIMD-96-7, Mar. 27, 1996), Audit of the Army’s Principal

Financial Statements Fiscal Years 1994 and 1993 (HQ 95-451, 23 Mar. 1995), and Opinion on Fiscal Year

1994 Air Force Consolidated Financial Statements (AFAA Project 94053001, 1 Mar. 1995).

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financial management problems as high risk especially vulnerable to

waste, fraud, abuse, and mismanagement.3

DOD’s Systems Report

Total Obligations

Besides the unreliability of its basic accounting data, DOD does not have

cost accounting systems that can reliably state what was actually

expended in support of a contingency operation. Existing systems report

what was obligated to be spent. Previous audits have shown that such

obligations can differ significantly from actual disbursements,4

 resulting in

DOD’s paying billions of dollars in the course of normal business without

being able to validate payments. For example, vendors were paid

$29 billion that cannot be matched to supporting documentation to

determine if payments were proper. Such errors can affect the accuracy of

the reported contingency costs extracted from these systems. DOD IG and

service audits have also cited material weaknesses that exist in accounting

and related systems.5

 For example, billing data was not always available,

reliable, or accurate to determine the authenticity of claims.

Recommendations To improve the accuracy of cost reporting, we recommend that the

Secretary of Defense direct the DOD Comptroller to clarify existing

guidance to specify what costs to include in contingency operations cost

reporting. At a minimum the guidance should specify the methodology to

(1) calculate these costs and (2) adjust costs to reflect offsets. We further

recommend that the Secretary of Defense direct the service secretaries to

develop comprehensive implementing instructions from the DOD

Comptroller’s guidance. This guidance should specify how the services

would like reporting units to apply internal controls standards so that

incremental costs are adequately supported, recorded, and reviewed.

Agency Comments

and Our Evaluation

DOD generally concurred with a draft of this report as being a reasonable

portrayal of the problems inherent in accounting and reporting for

contingency operations. DOD agreed with our recommendations and stated

3

High-Risk Series: An Overview (GAO/HR-95-1, Feb. 1995).

4

Financial Management: Status of Defense Efforts to Correct Disbursement Problems

(GAO/AIMD-95-7, Oct. 5, 1994) and Financial Management: Financial Control and System Weaknesses

Continue to Waste DOD Resources and Undermine Operations (GAO/T-AIMD/NSIAD-94-154, Apr. 12,

1994).

5

Management Data Used to Manage the U.S. Transportation Command and the Military Department

Transportation Organizations (DOD IG Report No. 94-163, June 30, 1994) and Audit of

Reimbursements for Humanitarian Aid Missions, 21st Theater Army Area Command, Kaiserslautern,

Germany (Army Audit Agency Report NR-95-707, April 3, 1995).

Page 32 GAO/NSIAD-96-115 Contingency Operations
Chapter 3 

Guidance for Reporting Incremental Costs Is

Vague and Accounting Systems Are

Unreliable

that it will attempt to clarify existing guidance to specify which costs to

include in the cost reports and to better explain methodologies to be used

and offsets to be incorporated.

Regarding our finding that DOD’s guidance is general and incomplete and

excludes discussion of offsetting certain costs, DOD commented that

chapter 23, volume 12, of the DOD Financial Management Regulation

discusses the intent that reported costs be adjusted for offsets, and while

the regulation does not list every example of when offsets should be taken,

it provides several examples of such offsets. Further, DOD noted that its

regulation is intended to impart general guidance for use by the

components, not detailed instructions. Such instructions in DOD’s view are

best left to the components to formulate to meet their individual

requirements and circumstances. DOD’s Financial Management Regulation

does require that reported costs be adjusted for offsets and it provides

some examples of types of offsets. But, DOD’s guidance is vague about

what costs to include as contingency costs and what methodology to use

in calculating these costs. In addition, the services have not issued

comprehensive implementing instructions. We have clarified our

discussion in the executive summary of this report to reflect our overall

concern with DOD’s existing guidance.

Page 33 GAO/NSIAD-96-115 Contingency Operations
Appendix I 

Comments From the Department of Defense

Page 34 GAO/NSIAD-96-115 Contingency Operations
Appendix I 

Comments From the Department of Defense

Now on p. 5.

Now on p. 32.

Page 35 GAO/NSIAD-96-115 Contingency Operations
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Steven H. Sternlieb, Assistant Director

Lisa M. Quinn, Evaluator

Joanne L. Jurmu, Evaluator

Accounting and

Information

Management Division,

Washington, D.C.

Roger R. Stoltz, Assistant Director

Norfolk Field Office Lindsay B. Harwood, Senior Evaluator

Joseph A. Rutecki, Senior Evaluator

Tracy W. Banks, Evaluator

Carleen C. Bennett, Evaluator

Willie J. Cheely, Jr., Evaluator

J. Larry Peacock, Evaluator

Suzanne K. Wren, Evaluator

(701068) Page 36 GAO/NSIAD-96-115 Contingency Operations
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