GAO

United States General Accounting Office

Report to the Secretary of Defense

May 2000 FOREIGN MILITARY

SALES

Air Force Controls

Over the FMS Program

Need Improvement

GAO/AIMD-00-101

Page 1 GAO/AIMD-00-101 FMS Expenditures

United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-284676 Letr

May 3, 2000

The Honorable William S. Cohen

The Secretary of Defense

Dear Mr. Secretary:

Since October 1998, we have issued four reports on the results of our

reviews of the Department of Defense’s (DOD) accounting and reporting on

the costs of the foreign military sales (FMS) program.1 These reports

identified internal control weaknesses that resulted in DOD’s failure to

properly charge foreign military sales customers for goods and services

already received. In response to these reports, DOD has taken positive

steps, including the collection of over $400 million from FMS trust fund

accounts, to address our recommendations. This report presents the

results of our review of the Air Force’s accounting for the FMS program.

Results in Brief The Air Force did not have adequate management controls over its foreign

military sales program to ensure that foreign customer accounts were

properly charged for goods and services. Specifically, the Air Force was not

generating reports that would identify instances where customer accounts

were not charged for goods and services received or where there were

discrepancies between the recorded value of delivered goods and services

and the corresponding value of charges to customer accounts. Without

such reports, the Air Force could not readily ensure that FMS accounting

records were accurate and that customer accounts were properly charged.

1

The four reports are Foreign Military Sales: Millions of Dollars of Nonrecurring Research

and Development Costs Have Not Been Recovered (GAO/AIMD-99-11, October 20, 1998),

Foreign Military Sales: Recovery of Nonrecurring Research, Development, and Production

Costs (GAO/AIMD-99-148R, May 19, 1999), Foreign Military Sales: Navy’s Accounting for

Sales to Foreign Customers Needs Improvement (GAO/AIMD-99-213, August 24, 1999), and

Foreign Military Sales: Efforts to Improve Administration Hampered by Insufficient

Information (GAO/NSIAD-00-37, November 22, 1999).
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Our analysis of data contained in the Defense Finance and Accounting

Service’s Defense Integrated Financial System (DIFS)2 as of July 1999,

indicated that the Air Force might not have charged FMS customer trust

fund accounts for $540 million of delivered goods and services. In

performing a detailed review of $96.5 million of these transactions, we

found that the Air Force was able to reconcile about $20.9 million.

However, of the remaining $75.6 million, the Air Force had either

• failed to charge customer accounts ($5.1 million, 22 transactions);

• made errors, such as incorrectly estimating delivery prices ($44 million,

11 transactions); or

• could not explain differences between the recorded value of delivered

goods and services and corresponding value of charges to customer

accounts. ($26.5 million or 19 transactions).

The Air Force has since recognized that it must improve its controls over

the FMS program and developed the capability to generate data necessary

to help identify those instances where foreign customers’ accounts have

not been charged for goods and services received. However, according to

responsible Air Force officials, the data are going to be made available only

on an ad hoc basis, meaning that they will not be routinely available to the

appropriate personnel for review, including managers, with the

requirement that they use the information to ensure that customer

accounts are being properly charged. Such steps are integral to ensuring

the accuracy of FMS accounting and the prompt collection of funds owed.

Our recommendations, therefore, focus on implementing these

requirements as well as calling on the Air Force to review the transactions

that were not included in our detailed review to make certain that customer

accounts are properly charged.

In commenting on a draft of this report, DOD’s Deputy Chief Financial

Officer (CFO) generally agreed with our recommendations and stated that

the Under Secretary of Defense (Comptroller) will request that the Air

Force and Defense Finance and Accounting Service implement our

recommendations.

2

DIFS is the primary Defense Finance and Accounting Service’s system used to consolidate

delivery and disbursement data. It is used to account for and report on the status of DOD’s

foreign military sales programs to foreign customers.
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Background The Arms Export Control Act gives the President authority to sell defense

articles and services to eligible foreign countries, generally at no cost to the

U.S. government. While the Defense Security Cooperation Agency (DSCA)

has overall responsibility for administering the FMS program, the Army,

Navy, and Air Force generally execute the sales agreements—commonly

referred to as sales cases.

Foreign military sales are made on an individual case basis. A foreign

country representative initiates a case by sending a letter of request to DOD

asking for information, such as the price and availability of goods, training,

technical assistance, follow-on support, or other services. Once the

customer decides to proceed with the purchase, DOD prepares a Letter of

Offer and Acceptance (LOA) stating the terms of the sale for the items and

services being provided. After the LOA is accepted, the FMS customer is

generally required to pay, in advance, amounts necessary to cover costs

associated with the services or items purchased from DOD. The

Department of the Treasury holds these advance payments in an FMS trust

fund.

DOD policy requires that FMS customer accounts be charged as goods and

services are delivered to the FMS customer. If, for some reason, DOD fails

to process the appropriate charges against the FMS trust fund accounts,

amounts paid in advance to cover the costs of goods and services FMS

customers receive could eventually be erroneously returned to the FMS

customers.

Objective, Scope, and

Methodology

Our objective was to determine whether the Air Force was properly

charging FMS customer trust fund accounts for goods and services already

provided. To determine the requirements and procedures for charging the

FMS trust fund for goods and services, we reviewed applicable laws,

regulations, policies, and procedures. To assess whether the Air Force was

effectively following these requirements, we analyzed financial information

from pertinent Air Force and Defense Finance and Accounting Service

(DFAS) accounting records and reports.

Because Air Force systems did not produce reports to identify transactions

for which FMS customers had not been charged for goods and services

already received, we met with Office of the Secretary of Defense and Air

Force accounting officials to identify alternative sources of information.

The officials agreed that DFAS’ foreign military sales accounting system,
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DIFS, contained the data necessary to identify transactions in which FMS

customers have received goods and services but may not have been

properly charged for them.

In analyzing the DIFS’ database as of July 1999, we identified 2,001 Air

Force FMS delivery transactions for which there were no charges

comparable to the value of the deliveries to indicate that the FMS

customers’ trust fund accounts had been charged the full amount for goods

and services already received. In total, the value of 2,001 delivery

transactions exceeded the value of corresponding charges to the trust fund

accounts by $540 million.3 We judgmentally selected 150 of these

transactions—totaling $96.5 million—for further review. The following

describes how we judgmentally selected the 150 transactions.

• DOD and Air Force officials agreed that an FMS customer’s account

should show a charge for the value of goods and services received.

Therefore, we selected all those transactions for which the DIFS report

showed that the FMS customer had received goods and services but no

charges had been recorded against the trust fund accounts for the value

of goods and services received. In total, there were 146 of these

transactions with an overall difference totaling $28.3 million.

• We selected four additional transactions with a total difference between

reported deliveries and charges of $68.2 million primarily based on

(1) large dollar differences between the value of reported deliveries and

charges or (2) previous audit findings which showed that the Air Force

had not charged the FMS customers promptly.

• In further reviewing these transactions, we met with Air Force officials

knowledgeable about the FMS cases to identify the (1) value of goods

and services the FMS customer received and (2) amount that the FMS

customer’s trust fund account had been charged for the goods and

services. For those transactions where it was determined that

customers had not been charged or errors were identified, we met with

3

The actual difference for the 2,001 transactions totaled $750.6 million. However, we

excluded $210.6 million from this total because the Air Force had already begun collecting

this amount. In fact, as of December 1999, the Air Force had completed this collection. We

first identified these outstanding charges, which related to nonrecurring research and

development costs for F-15 aircraft already delivered to Saudi Arabia, in a May 1999 report

(GAO/AIMD-99-148R). At the time, the Air Force had failed to recoup $152.1 million of

nonrecurring costs; however, as of July 1999, this unrecouped balance had increased to

$210.6 million.
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or contacted responsible Air Force and DFAS officials to try to identify

the underlying contributing causes.

We performed our work at DOD headquarters, Office of the Under

Secretary of Defense (Comptroller); Air Force Aeronautical Systems

Center and Air Force Security Assistance Center at Wright-Patterson Air

Force Base, Dayton, Ohio; and the Defense Finance and Accounting

Service, Denver, Colorado. We conducted our review from June 1999

through February 2000 in accordance with generally accepted government

auditing standards. The Office of the Under Secretary of Defense provided

written comments on a draft of this report. These comments are discussed

in more detail in the “Agency Comments and Our Evaluation” section and

are reprinted in full in appendix I.

Air Force Did Not Have

Adequate Management

Controls for FMS

Accounting

When we began our review, the Air Force did not have adequate

information to readily identify instances where FMS customer accounts

were not being properly charged for goods and services received or where

there were discrepancies between the recorded value of delivered goods

and services and the corresponding value of charges to customer accounts.

According to responsible Air Force officials, Air Force financial systems

were not programmed to produce such data.

Our review of data contained in DFAS’ DIFS as of July 1999, indicated that

the Air Force may not have charged FMS customers’ trust fund accounts

for $540 million of delivered goods and services, i.e., the recorded value of

delivered goods and services for these transactions was $540 million more

than the corresponding value of charges to the foreign customer accounts.

Our detailed review of $96.5 million of this amount—150 transactions—

found that the Air Force was able to reconcile about $20.9 million of the

differences, finding that these variances were due either to timing issues or

special freight forwarding refund accounts.4 However, of the remaining

$75.6 million, the Air Force had either failed to charge customer accounts,

made errors, or could not adequately explain the differences. Table 1

provides additional details.

4

Freight forwarding refund accounts are unique transactions used to track and refund

payments to foreign customers for freight costs that should have been paid from the FMS

trust fund account. DIFS records these refunds as delivery transactions without recording

corresponding charges against the trust fund accounts.
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Table 1: Reasons for Differences for Sampled Transactions

a

Total transactions exceed 150 because two transactions were included in two categories.

The following sections describe our findings with regard to some of these

transactions.

FMS Customers Not

Charged for $5.1 Million

For 22 transactions totaling $5.1 million, the Air Force had not charged

FMS customers’ accounts for goods and services they had already received.

One transaction—the sale of three aircraft drones to the United Kingdom

between mid 1998 and early 1999 valued at $4.8 million—made up most of

this total. Since the drones were from Air Force inventory, the United

Kingdom’s account should have been charged so that the appropriate Air

Force account that was used to initially purchase the drones could be

reimbursed. However, according to the Air Force official responsible for

the United Kingdom program, as of July 30, 1999, no charges had been

processed against the United Kingdom’s account. The official stated that

the United Kingdom’s account had not been charged because personnel

initially responsible for overseeing that this was done were replaced and

the new personnel did not follow up to ensure that the charges were

processed. After we brought this problem to the Air Force’s attention, it

collected $2.1 million of the $4.8 million owed and is planning to collect the

remaining $2.7 million.

Similar mistakes were made for the remaining 21 transactions, which

totaled about $300,000. We found that these were reimbursable payment

transactions which required that funds be collected from the FMS

customers’ trust fund accounts to allow the reimbursement of the DOD

activities that initially paid for the goods and services. However, because of

errors in processing the transactions, no actions had been taken to charge

the FMS customers’ funds. Air Force officials told us that this was due

Dollars in millions

Reason

Number of

transactions Dollar amount

Timing/refunds 100 $20.9

Charges not processed to customer accounts 22 5.1

Could not determine cause of difference 19 26.5

Errors 11 44.0

Totals 152a $96.5
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Page 7 GAO/AIMD-00-101 FMS Expenditures

primarily to inexperienced staff who had since been notified of the

mistake. After we brought the problem to their attention, Air Force officials

began collecting the $300,000 owed.

The Air Force Was Unable

to Reconcile $26.5 Million of

Deliveries With Charges

For 19 of the 150 transactions we reviewed, the Air Force could not

adequately explain $26.5 million in differences between the value of

reported deliveries and corresponding charges to the FMS customers’ trust

fund accounts. For example, for one transaction involving the sale of F-15

aircraft to Saudi Arabia, the reported value of delivered goods and services

exceeded the reported charges against the trust fund account by

$48.1 million. A review of this difference identified errors and other

adjustments totaling $30.5 million that had resulted in the overstatement of

delivery values. Most of this amount—about $22 million—was due to the

Air Force’s failure to revise its per unit delivery cost when it was

determined that charges for sustained engineering services initially

factored into overall costs were not required. However, the Air Force could

not explain the remaining $17.6 million difference. Air Force officials

generally believed that this remaining difference was also due primarily to

incorrect delivery prices, but could not provide documentation to support

their contention. Nor could they rule out the possibility that the Saudi’s

account had not been properly charged for all goods and services received

to date.

According to Air Force officials, these differences will eventually be

cleared up when all the goods and services associated with this case have

been delivered and the financial transactions are reconciled during the case

closure process. However, the reconciliation process is not expected to be

done until sometime in fiscal year 2001.

In another instance involving the sale of F-16 aircraft to South Korea, DFAS

accounting records showed that the value of delivered goods and services

exceeded the value of charges to South Korea’s trust fund account by about

$14 million. Our review found that $12.2 million of the overstatement was

due to a miscalculation in the reported delivery price of 13 “kits” of

government-furnished equipment.5 However, there was still an additional

$1.8 million difference remaining that the Air Force could not explain. As

with the Saudi Arabia transaction, the Air Force believed that the

5

The Air Force mistakenly computed the unit costs of “kits” of government-furnished

equipment resulting in an overstatement of $12.2 million of their actual value.
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Page 8 GAO/AIMD-00-101 FMS Expenditures

remaining difference was due to additional incorrect delivery reporting but

did not rule out the possibility that South Korea’s account may not have

been charged for all the goods and services already received. According to

Air Force officials, reconciliation of this case should be completed by the

end of fiscal year 2000.

Air Force Actions to

Improve FMS

Accounting Need to Be

Strengthened

During the course of our review, the Air Force recognized that it lacked a

tool that provided the information necessary to help identify those

instances in which FMS customers had either not been properly charged

for goods and services or errors had occurred in processing deliveries and

charges against the trust fund accounts. As a result, in August 1999, it

developed the capability to produce computer-generated data that would

identify those instances. However, Air Force officials responsible for

overseeing the development of the data told us that the information would

be made available only on an ad hoc basis. That is, while program officials

responsible for an FMS case would be trained to access and use the data to

assess the status of their FMS programs, the Air Force does not plan to

formally require that officials, including headquarters personnel, routinely

use the data to review FMS customer accounts to identify instances where

customers are not being properly charged or accounting errors may have

occurred—and then take corrective action. Such steps would provide FMS

program managers and decisionmakers with information and management

processes necessary to improve the Air Force’s financial management of

the FMS program.

Conclusion The Air Force has lacked adequate controls over foreign military sales

accounting to ensure that it (1) promptly charges FMS customer accounts

to recover its costs for delivered goods and services and (2) reconciles

accounting errors. It has since produced data that will help to identify

instances where FMS customers are not being properly charged.

Nevertheless, it must ensure that these data are routinely produced and

used properly to confirm that FMS customers’ accounts are being properly

charged. Furthermore, since our review found that the differences for

about 78 percent of the $96.5 million of transactions reviewed were caused

by accounting errors, failure to charge customers, or could not be

determined, it is important that the Air Force complete the review of the

remaining $443.5 million of balances to ensure that any amounts owed are

promptly collected and any errors and their causes are corrected.
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Recommendations We recommend that the Secretary of Defense direct the Secretary of the Air

Force to ensure that the (1) $5.1 million identified in this report as owed by

FMS customers is collected and (2) $26.5 million, for which the cause of the

differences could not be readily determined, is promptly reviewed and

resolved.

We also recommend that the Secretary of Defense direct the Secretary of

the Air Force to ensure that officials responsible for managing the FMS

program, including headquarters personnel, are (1) properly trained to use

the data being produced to identify instances in which FMS customers have

not been properly charged for goods and services received and (2) required

to routinely use the data at least monthly to review customer accounts,

identify instances in which they are not being properly charged, and act

promptly to correct the control problems causing the differences.

Lastly, we recommend that the Secretary of Defense direct the Air Force, in

cooperation with the Under Secretary of Defense (Comptroller) and the

Defense Finance and Accounting Service, to review the remaining

$443.5 million of transactions to (1) identify and collect any amounts FMS

customers owe for goods and services already provided, (2) correct any

erroneous transactions, and (3) determine the causes and act to eliminate

similar errors in the future. Cost-effectiveness should be considered when

selecting the transactions for detailed review.

Agency Comments and

Our Evaluation

In commenting on a draft of this report, the Defense Deputy Chief Financial

Officer agreed with our recommendations and stated that the Under

Secretary of Defense (Comptroller) will request that the Air Force and

Defense Finance and Accounting Service act to implement the

recommendations.

However, with regard to the $540 million difference between DOD’s

reported delivery value of goods and services and related disbursements,

the Deputy CFO noted that the Air Force sometimes uses estimated

delivery prices, instead of the actual value of the deliveries, when recording

deliveries of goods and services to FMS customers. He pointed out that the

$540 million GAO identified as reported differences between the value of

deliveries and DOD disbursements associated with those deliveries was

based, in part, on estimated delivery prices. Therefore, according to the

Deputy CFO, because estimates are involved, DOD does not agree that the
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Page 10 GAO/AIMD-00-101 FMS Expenditures

$540 million difference necessarily means that the FMS customers have not

been properly charged for goods and services received.

Our report does not state that the $540 million difference between

deliveries and disbursements was due to FMS customers not being

properly charged for goods and services received. Rather, it points out that

DOD’s own records showed that FMS customers had received $540 million

of goods and services for which there was no corresponding disbursement

recorded in DOD’s system to show that the FMS customers’ accounts had

been charged for the goods and services. The $540 million was not a GAO

estimate as the Deputy CFO’s letter states. We noted that this difference

indicated only that FMS customers may not have been properly charged for

the goods and services and that the differences should be reviewed to

identify and collect any amounts owed and correct any errors. In fact, we

state that our review of $96.5 million of the differences found that

$75.6 million (78 percent) were due to accounting errors, failure to charge

customers, or could not be determined from the information in DOD

accounting records. The Deputy CFO recognized this distinction in his

response when he stated “With respect to the overall findings included in

the draft report, the GAO indicated that the Air Force might not have

charged FMS customer trust fund accounts for $540 million of delivered

goods and services.” Finally, the thrust of our report recommendations,

with which the DOD agreed, is to determine the reasons for the remaining

$443.5 million of differences that we did not review, and to take appropriate

action in those cases where problems are identified.

This report contains recommendations to you. The head of a federal agency

is required by 31 U.S.C. 720 to submit a written statement on actions taken

on these recommendations to the Senate Committee on Governmental

Affairs and the House Committee on Government Reform no later than

60 days after the date of this report. A written statement must also be

submitted to the House and Senate Committees on Appropriations with the

agency’s first request for appropriations made more than 60 days after the

date of this report.

We are sending copies of the report to Senators Ted Stevens, Fred

Thompson, John W. Warner, Robert C. Byrd, Carl Levin, Joseph I.

Lieberman, and Representatives Dan Burton, Stephen Horn, David R. Obey,

Ike Skelton, Floyd D. Spence, Jim Turner, Henry A. Waxman, and C. W. Bill

Young in their capacities as Chair or Ranking Minority Member of Senate

and House Committees and Subcommittees. We are also sending copies of
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Page 11 GAO/AIMD-00-101 FMS Expenditures

this report to the Honorable F. Whitten Peters, the Secretary of the Air

Force, and the Honorable Jacob J. Lew, Director of the Office of

Management and Budget. We will make copies available to others upon

request.

If you have any questions regarding this report, please contact me or

Larry W. Logsdon, Assistant Director, at (202) 512-6240. Other key

contributors to this report were Harold P. Santarelli and John A. Spence.

Sincerely yours,

Linda D. Koontz

Associate Director, Governmentwide and Defense

Information Systems Issues
Page 12 GAO/AIMD-00-101 FMS Expenditures

Appendix I

Comments From the Department of Defense ApApenednxidexiIs
Appendix I

Comments From the Department of Defense

Page 13 GAO/AIMD-00-101 FMS Expenditures
Appendix I

Comments From the Department of Defense

(511664) Letr Page 14 GAO/AIMD-00-101 FMS Expenditures
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