Page 1 GAO-12-662R DOD Financial Management

United States Government Accountability Office

Washington, DC 20548

June 26, 2012

The Honorable Carl Levin

Chairman

The Honorable John McCain

Ranking Member

Committee on Armed Services

United States Senate

Subject: DOD Financial Management: Improvements Needed in Prompt Payment Monitoring 

and Reporting

The Prompt Payment Act, as amended, requires executive-branch agencies, including the 

Department of Defense (DOD), to pay late-payment penalties when they do not pay their 

invoices for commercial payments on time. DOD’s Prompt Payment Act implementing 

regulations provide that DOD components should take advantage of discounts offered when 

a contract or invoice allows an economically justified discount for early payment.1 Given 

concern that DOD sometimes incurred late-payment penalties and had not taken full 

advantage of prompt-payment discounts, the committee report accompanying the 2012 

national defense authorization legislation directed that GAO review and report on the issue.2

To address this requirement, and as agreed upon with your offices, our objectives were to 

(1) determine whether DOD’s process for monitoring and reporting on its late-payment 

penalties and discounts lost accurately reflected the extent of such penalties paid and 

discounts lost and (2) report on any causes DOD identified for incurring late-payment 

penalties and forgoing prompt-payment discounts.

To address our first objective, we analyzed applicable laws, regulations, and DOD 

documents to identify requirements related to prompt payments, reviewed documentation, 

and interviewed officials to obtain explanations and clarifications on DOD’s process and 

controls for tracking and reporting on late-payment penalties and discounts lost across 

DOD. To address our second objective, we interviewed DOD officials and reviewed 

documentation, including the problems and corrective actions DOD reported on its financial 

operations metrics briefings, to determine DOD’s identified causes of late-payment penalties 

incurred and discounts lost. 

We conducted this performance audit from October 2011 to June 2012 in accordance with 

generally accepted government auditing standards. Those standards require that we plan 

 

1

Generally, the Prompt Payment Act requires agencies to make payment no later than 30 days after 

the date they receive an invoice or by a contractually established payment date. The Department of 

the Treasury establishes the rate used to calculate late-payment penalties. A discount is considered 

to be economically justified if the discount terms effectively equal or exceed the interest the federal 

government charges on overdue debt that it is owed.

2

S. Rep. No.112-26, at 151 (June 22, 2011). 
Page 2 GAO-12-662R DOD Financial Management

and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and conclusions based on 

our audit objectives.

Results in Brief

We found that while DOD has a process in place for monitoring and reporting on latepayment penalties, this process has significant flaws and omissions that result in incomplete 

and inaccurate data, thereby limiting the effectiveness of the process. Specifically, DOD’s 

performance measure, or metric, for late-payment penalties did not include about $54 billion 

of commercial payments subject to the Prompt Payment Act, and DOD did not assess the 

data for accuracy or completeness. In addition, at the time of our review, DOD was not 

monitoring or reporting on discounts lost across the department because, DOD officials 

stated, the metric had consistently met its goal. The deficiencies we found in DOD’s process 

for monitoring and reporting on late-payment penalties and discounts lost significantly 

increase the risk to the accuracy and completeness of reported data, thus preventing DOD 

officials and congressional oversight committees from obtaining the reliable and 

comprehensive data they need for assessing the extent of any issues concerning latepayment penalties and discounts lost across DOD. According to DOD officials and reports, a 

major contributor to late-payment penalties incurred and discounts lost was the late receipt 

of documents necessary to validate receipt and acceptance of goods or services and make 

payments. We are recommending that DOD establish procedures for identifying all DOD 

systems that process commercial payments, validating completeness and accuracy of latepayment penalty metric data, and monitoring discounts lost. In commenting on a draft of our 

report, DOD concurred with our recommendations and cited planned corrective actions to 

address the issues that gave rise to our recommendations.

Background

DOD makes most of its commercial payments to vendors and contractors through systems 

operated by the Defense Finance and Accounting Service (DFAS), the finance and 

accounting organization for DOD.3 In general, such payments are made after matching an 

invoice with (1) a signed contract, purchase order, or other contractual document, to ensure 

that the purchase of goods or services was authorized; (2) a receiving/acceptance report, to 

ensure that the goods or services ordered have been received or accepted, or both; and 

(3) the official accounting records, to ensure that funds have been obligated and are 

available for use. 

The office of the Deputy Chief Financial Officer (DCFO) monitors DOD performance 

measures and various aspects of DOD’s financial operations through its monthly financial 

operations metrics, including the ratio of late-payment penalties paid per million dollars in 

payments.4

 

3

Systems that make DOD commercial payments and that are not operated by DFAS include those 

currently being implemented by the Army, Navy, and Air Force. 

As part of its metrics process, each year the DCFO works with DFAS to 

establish goals—including Prompt Payment Act goals—towards improved efficiencies, 

financial stewardship, and productivity in its financial operations. DFAS compiles the results 

of its financial operations metrics (metric data), and each month the DCFO tracks the metric 

data—including data on late-payment penalties—and compares them against DOD’s goals. 

The metric data are scored and receive a “green” rating when they meet the goal, and a 

“yellow” or “red” rating—depending on severity—when they do not. Each month, DFAS 

4

The process for monitoring DOD financial operations using metrics is documented by the DCFO’s 

Performance Measurement Team in its Performance Measurement Team Handbook. 
Page 3 GAO-12-662R DOD Financial Management

officials, the DCFO, and other DOD officials meet to discuss DOD-wide metric data that 

received a “red” or “yellow” rating, determine the causes for metric data that do not meet the 

goals, and agree on any corrective actions to address them. Metric data that meet or exceed 

the goals and receive a “green” rating are generally not discussed at these monthly 

meetings. 

Incomplete and Inaccurate Data Undermine DOD’s Prompt Payment Act Monitoring 

In our review of DOD’s monitoring of payments related to the Prompt Payment Act, we found 

deficiencies in the completeness and accuracy of the data used to monitor and report on 

late-payment penalties. The late-payment penalty metric data did not include nine systems 

that process commercial payments, and the metric data had not been validated. Regarding 

discounts lost, we found that monitoring had not been conducted DOD-wide since fiscal year 

2007 and that there were deficiencies in the completeness of the data DOD provided us 

from systems within DOD’s components.

Deficiencies in the Monitoring Process for Late-Payment Penalties

We found deficiencies in both the completeness and accuracy of the data the DCFO uses to 

monitor and report on late-payment penalties. These deficiencies limit the effectiveness of 

DOD’s monitoring and reporting process. According to DCFO reports, the ratio of latepayment penalties paid to million dollars of invoices paid has decreased 81 percent since 

2001, from an average of $343 in penalties in fiscal year 2001 to $65 in fiscal year 2011 

(see fig. 1). 

Figure 1: Late-Payment Penalties Paid per Million Dollars of Invoices Paid (DFAS 

Systems Only), Fiscal Years 2001–2011

Note: Data are from September 2011 financial operations metric briefing. a

Total dollar amount for fiscal year 2011 based on DFAS-provided data does not include late-payment penalties for non-DFAS 

systems.

While these data show a significant drop in late-payment penalties as a proportion of invoice 

amounts paid, in our analysis of DOD data used to support this reporting, we found that the 

trend may be misleading because in compiling the late-payment penalty metric data, DFAS 

did not consider late-payment penalties on about $54 billion in payments subject to the 

Prompt Payment Act from nine systems (see table 1). These systems were all systems that 

process commercial payments. According to DOD officials, the nine systems we identified 
Page 4 GAO-12-662R DOD Financial Management

whose data were not considered in the late-payment penalty metric are systems run and 

operated by DOD components and not DFAS.

Table 1: DOD Systems and Payment Amounts Considered and Not Considered in the 

Late-Payment Penalty Metric, Fiscal Year 2011

Dollars in millions

System name

Payments 

considered in 

late-payment 

penalty metric 

(from DFAS 

systems)

Payments 

not 

considered 

in latepayment 

penalty 

metric (from 

nine nonDFAS 

systems) a

Mechanization of Contract Administration Services (MOCAS)

a

$161,298.6

Computerized Accounts Payable System–Windows (CAPS-W) 39,525.4

U.S. Army Corps of Engineers Financial Management System 

(CEFMS) 28,047.9

Enterprise Business System (EBS) 23,721.9

Automated Voucher Examining and Disbursing System 

(AVEDS) 18,396.7

Integrated Accounts Payable (IAPS) 18,388.0

OnePay (OP) 18,104.1

TRICARE Oracle Federal Financials (OFF) 16,869.8

Standard Automated Voucher Examination System (SAVES) 6,056.8

Defense Enterprise Accounting and Management System 

(DEAMS) 4,374.3

General Fund Enterprise Business System (GFEBS) 2,528.7

Transportation Financial Management System (TFMS) 2,333.1

Military Sealift Command Financial Management System (MSCFMS) 1,625.8

Financial Accounting and Budget System (FABS) 1,119.7

Defense Agencies Initiative (DAI) 474.3

Nonappropriated Fund Information Standard System (NAFISS) 370.8

Transportation Management System (TMS) 119.1

Computerized Accounts Payable System–Clipper (CAPS-C) 7.3

Navy Enterprise Resource Planning (ERP) System –

Total

b

$288,951.5 c $54,410.6

Source: GAO analysis of DOD data.

a

Commercial payments reported by DOD as subject to the Prompt Payment Act. b

Navy ERP could not provide the amount of commercial payments subject to the Prompt Payment Act because it does not 

systemically identify whether commercial payments are subject to the Prompt Payment Act. c

Due to rounding, the total amounts do not equal the sum of the individual system amounts in the table. 

While DFAS reported a total of about $19 million in late-payment penalties for fiscal year 

2011 (see fig. 1), these data are incomplete because the DCFO did not consider the 

complete population of commercial payments when reporting late-payment penalties in 

fiscal year 2011. For example, DOD provided us information that indicates that the nine nonDFAS systems we identified incurred almost $2 million in late-payment penalties in 2011, 

bringing fiscal year 2011 late-payment penalties to almost $21 million. Although DOD took 

steps to include some of these commercial payments in the data for its late-payment penalty 
Page 5 GAO-12-662R DOD Financial Management

metric during the course of our work,5 additional payments and late-payment penalties that 

are associated with non-DFAS systems may still be unidentified. 

We also found—and DOD officials confirmed—that the DCFO does not assess its latepayment penalty metric data for accuracy or completeness. Standards for Internal Control in 

the Federal Government states that for organizational performance measures, controls 

should be in place to validate the propriety and integrity of the measures.6 Further, the 

DCFO handbook states that successful measures need to be reliable, and should be verified 

to ensure that they represent the desired data. Although the late-payment penalty amounts 

provided to us are relatively small compared to DOD’s total commercial payment amounts, 

we are unable to conclude as to the completeness and accuracy of the $21 million in latepayment penalties due to questions about the completeness of the population of systems 

that process commercial payments and the lack of validation and verification control. In 

addition, these issues prevent DOD officials and congressional oversight from obtaining 

reliable and comprehensive data on the extent of any issues concerning late-payment 

penalties across DOD.

DCFO Is Not Monitoring Discounts Lost DOD-Wide 

The DCFO has not monitored discounts lost at the DOD-wide level since fiscal year 2007 

and does not have procedures to evaluate the risk and magnitude of discounts lost to 

determine whether it should resume monitoring discounts lost in DOD-wide metrics if the risk 

increases beyond an acceptable level. Standards for Internal Control in the Federal 

Government states that separate evaluation of controls is useful, and that the scope and 

frequency of such evaluations should depend primarily on risk assessments and the 

effectiveness of ongoing monitoring procedures. Officials stated the DCFO ceased 

monitoring discounts lost because the metrics consistently delivered results that ranked 

“green” (i.e., met their goal) and no longer warranted DOD-wide monitoring. However, as 

reflected in figure 2, we found that the reported discounts-lost metric only met its goal of 4 

percent for 2 months in fiscal year 2007. 

 

5

For example, DOD started including commercial payments from the U.S. Army Corps of Engineers 

Financial Management System in the December 2011 metric.

6

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, 

D.C.: November 1999). These standards provide the overall framework for establishing and 

maintaining internal control and for identifying and addressing areas at greatest risk of fraud, waste, 

abuse, and mismanagement.
Page 6 GAO-12-662R DOD Financial Management

Figure 2: Percentage of the Number of Offered Discounts Lost in Fiscal Year 2007

Note: Data are from fiscal year 2007 financial operations metric briefings.

For the systems it operates, DFAS tracks both the number of discounts lost and the dollar 

value of the discounts lost, and reports its findings to the managers of DOD activities. While 

these figures are useful for management, they are not discussed at DFAS’s monthly 

meeting with the DCFO, and thus fall outside of the DCFO’s monitoring process. 

Although the DCFO stopped monitoring discounts lost, DFAS provided us information that 

indicates the ratios of both the number and dollars of discounts lost have generally been 

increasing (see fig. 3). Discounts lost, as a percentage of the number of discounts offered, 

equaled 8 percent in fiscal year 2011, twice the fiscal year 2007 DCFO goal of 4 percent, 

which was the last goal set by the DCFO for discounts lost. DFAS currently has a goal for 

the number of discounts lost of 5 percent. The DFAS data further show that although the 

ratio of the number of discounts lost decreased from fiscal years 2010 to 2011, the ratio of 

the dollars of discounts lost increased to 25 percent. DFAS currently has a goal for the 

percentage of discounts lost in dollars of 4 percent. 
Page 7 GAO-12-662R DOD Financial Management

Figure 3: Percentage of the Value and Number of Offered Discounts Lost, Fiscal Years 

2005–2011

Note: Data are from DFAS metrics data.

a

Total dollar amount and number of discounts lost for fiscal year 2011 based on DFAS-provided data does not include 

discounts lost for non-DFAS systems. In addition, the goal amounts for both the percentage of dollars and numbers of 

discounts lost are not shown because they vary and have not been set or monitored by the DCFO since fiscal year 2007.

Although the ratios for discounts lost have generally been increasing, the amount of 

discounts lost is relatively small compared to DOD’s total commercial payment amounts. 

DFAS provided us information that indicates that there was about $8 million in discounts lost 

for fiscal year 2011. However, as with the late-payment penalty metric, we found that for 

discounts lost, DFAS did not include about $78 billion in commercial payments subject to the 

Prompt Payment Act7 both from systems that it operates and does not operate. DODprovided information, covering some of the systems not included,8 indicates almost 

$700,000 in discounts lost in fiscal year 2011, bringing the fiscal year 2011 discounts lost to 

almost $9 million. However, because DOD has not established procedures to identify and 

include all systems that process commercial payments, we are unable to conclude as to the 

completeness and accuracy of the almost $9 million in DOD-identified discounts lost. In 

addition, these issues prevent DOD officials and congressional oversight committees from 

obtaining reliable and comprehensive data on the extent of any issues concerning discounts 

lost across DOD. Absent DOD-wide monitoring of discount information, potential cost 

savings may be missed.

 

7

The Navy ERP system, accounting for about $1 billion in fiscal year 2011 commercial payments, 

could not provide an amount subject to the Prompt Payment Act.

8

The Navy ERP system, as well as EBS, which accounts for $24 billion in fiscal year 2011 commercial 

payments subject to the Prompt Payment Act, could not provide an amount for discounts lost.
Page 8 GAO-12-662R DOD Financial Management

DOD-Reported Causes for Late-Payment Penalties Incurred and Discounts 

Lost

On the basis of our discussions with DOD officials and our review of reports, we found 

DFAS’s late receipt of necessary documents was a major contributor to late-payment 

penalties and discounts lost. The documents DOD officials most often cited in this regard 

were receiving reports, which are used to confirm DOD’s receipt or acceptance, or both, of 

goods or services ordered and which must be submitted to DFAS before payment can be 

made. DOD officials told us that one of the reasons receiving reports are often late is reports 

are often mailed by DOD components to DFAS rather than submitted electronically. As part 

of its metric reporting process, DFAS tracks the reasons for the payment of late-payment 

penalties on commercial payments that DFAS’s systems process. DFAS reported that for 

the payments it made in fiscal year 2011, 57 percent of the late-payment penalties were due 

to a delay in DFAS’s receiving contract, invoice, and receipt and acceptance information 

from DOD components, contractors, and vendors, and 23 percent were caused by DFAS 

processing delays and a backlog of invoices to process. DOD reported that as it continues 

to deploy the Wide Area Workflow and take other measures, it will see a decline in latepayment penalties because of efficiencies gained with the electronic transmission of 

contract documents.9 Such efficiencies gained may similarly improve DOD’s ability to take 

advantage of discounts offered and thus realize cost savings. 

DOD officials stated that contracts containing unclear descriptions of the items being 

purchased and unclear definitions of units of measure are a significant issue for a relatively 

few contracts that account for a relatively large amount in late-payment penalties.10 For 

example, although a contract line-item may describe the unit of measure as “one lot,” the lot 

may consist of a variety of items and quantities delivered over time. DOD officials further 

stated that multiple contract modifications had resulted in contracts having extremely 

complex line-item structures, causing invoice processing delays due to difficulties in 

comparing or associating the contractor invoices to the related contract line-item. The lack of 

clarity can result in ambiguity regarding both the items to accept and the amount to pay for 

each delivery, thereby causing DOD to incur late-payment penalties and miss opportunities 

to obtain discounts. DOD officials told us they were addressing these issues by providing 

training on writing contracts and issuing DOD-wide memorandums requiring contracts to 

clearly define the quantity and unit of measure of the product to be delivered.

Conclusions

Although the amounts DOD provided us for late-payment penalties and discounts lost 

appear to be relatively small compared to the amount of DOD-reported commercial 

payments subject to the Prompt Payment Act, deficiencies in DOD’s monitoring process 

prevent it from comprehensively and reliably reporting the magnitude of late-payment 

penalties and discounts lost DOD-wide. As DOD implements new systems run and operated 

by the components, the percentage of the complete data population processed by DFAS 

systems will decrease, and the potential gap between actual and reported amounts will 

increase if flaws and omissions in DOD’s current process for monitoring these activities are 

not corrected.

 

9

The Wide Area Workflow is an interactive application that allows contractors and vendors to 

electronically submit invoices and receiving reports, and the federal government to inspect, accept, 

receive, and pay electronically.

10DOD analysis was done using late-payment penalties paid in fiscal year 2010.
Page 9 GAO-12-662R DOD Financial Management

Recommendations for Executive Action

To ensure that the Department of Defense accurately reports and effectively monitors latepayment penalties and discounts lost on commercial payments subject to the Prompt 

Payment Act, we recommend that the Secretary of Defense direct the Deputy Chief 

Financial Officer, through the Office of the Under Secretary of Defense (Comptroller), to 

establish procedures for

(1) identifying all DOD systems that process commercial payments and assuring that the 

late-payment penalties metric data are compiled from the complete population of 

commercial payments subject to the Prompt Payment Act,

(2) validating the accuracy and completeness of the data compiled and reported as DOD’s 

late-payment penalties metric, and 

(3) monitoring discounts lost DOD-wide based on periodic risk assessments.

Agency Comments and Our Evaluation 

We provided a draft of this report to DOD for comment. In its written comments, which are 

reprinted in enclosure I, DOD concurred with all three of our recommendations. DOD also 

stated that it is taking actions to address our recommendations, which includes (1) 

identifying and reporting DOD-wide late payment penalty metrics beginning in October 2012; 

(2) assigning responsibility to each reporting entity for the accuracy, completeness, and 

validation of data reported; and (3) identifying and issuing procedures to address monitoring 

and reporting of discounts lost. If fully and effectively implemented, DOD’s proposed actions 

should address the intent of our recommendations.

-----

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

Secretary of Defense, the Deputy Secretary of Defense, the Deputy Chief Management 

Officer, the Under Secretary of Defense (Comptroller), and other interested parties. In 

addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-

9869 or khana@gao.gov. Contact points for our Offices of Congressional Relations and 

Public Affairs may be found on the last page of this report. GAO staff who made key 

contributions to this report are listed in enclosure II. 

Asif A. Khan

Director, Financial Management and Assurance

Enclosures
Page 10 GAO-12-662R DOD Financial Management

Enclosure I: Comments from the Department of Defense
Page 11 GAO-12-662R DOD Financial Management
Page 12 GAO-12-662R DOD Financial Management

Enclosure II: GAO Contact and Staff Acknowledgments

GAO Contact

Asif A. Khan, (202) 512-9869 or khana@gao.gov

Staff Acknowledgments

In addition to the contact named above, Michael LaForge, Assistant Director; Justin Fisher; 

Patrick Frey; Maxine Hattery; Jason Kelly; Jason Kirwan; Laura Pacheco; J. Mark Yoder; 

and Leonard Zapata made key contributions to this report.

(197107)
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