United States Government Accountability Office

GAO Report to the Subcommittee on 

Defense, Committee on Appropriations, 

House of Representatives 

NAVY WORKING 

CAPITAL FUND 

Management Action 

Needed to Improve 

Reliability of the 

Naval Air Warfare 

Center’s Reported 

Carryover Amounts 

June 2007 

 

GAO-07-643 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

NAVY WORKING CAPITAL FUND

Management Action Needed to Improve 

Reliability of the Naval Air Warfare 

Center’s Reported Carryover Amounts 

Highlights of GAO-07-643, a report to the 

Subcommittee on Defense, Committee on 

Appropriations, House of Representatives

According to the Department of 

Defense’s (DOD) fiscal year 2007

budget estimates, working capital 

fund activity groups (depot

maintenance, ordnance, and 

research and development) will 

have about $6 billion of funded

work that will be carried over from 

fiscal year 2007 into fiscal year

2008. The congressional defense 

committees recognize that these

groups need some carryover to

ensure a smooth work flow from 

one fiscal year to the next. 

However, the committees have

previously raised concern that the 

amount of carryover may be more

than is needed. GAO was asked to

determine if (1) the Naval Air 

Warfare Center’s (NAWC) reported

actual carryover was reliable for 

fiscal years 2003 through 2006 and 

(2) NAWC was utilizing the

required triannual review process 

to improve the reliability of its 

carryover information and 

underlying financial data. 

What GAO Recommends

GAO makes six recommendations 

to DOD that are aimed at improving 

the reliability of carryover

information and the effectiveness

of the triannual review process.

DOD concurred with all of GAO’s

recommendations. 

GAO’s analysis of NAWC reports determined that NAWC’s reported 

carryover information was not reliable. Since DOD changed its carryover 

policy in December 2002, NAWC reports showed that while under the ceiling 

for fiscal year 2006, it exceeded its carryover ceiling by tens of millions of 

dollars from fiscal year 2003 through fiscal year 2005, as shown in the

following table. To the extent that carryover is too high, Congress can 

redirect the customers’ funds for other priorities.

NAWC’s Reported Carryover Amounts Over/Under Ceiling 

Dollars in millions

Fiscal year 

2003

Fiscal year 

2004 

Fiscal year 

2005

Fiscal year 

2006

Carryover amount $1,146 $1,109 $1,046 $1,007

Carryover ceiling 1,129 1,052 994 1,034

Amount over or under 

ceiling Over $16 Over $57 Over $51 Under $28

Source: Navy reports. 

Note: Figures may not add due to rounding. 

GAO’s analysis of accounting information on customer orders and 

discussions with NAWC officials determined that its fiscal year 2003 and 

2004 carryover information was unreliable due to (1) NAWC converting to a 

new accounting system in fiscal year 2003 and (2) NAWC not performing 

reviews of obligations, including the required DOD triannual reviews. To 

better manage carryover and improve the reliability of carryover 

information, starting in fiscal year 2005, NAWC (1) issued guidance on the 

acceptance of orders at year end and (2) began reviewing orders to correct 

its old financial records. While the reliability of carryover information 

improved in fiscal years 2005 and 2006, GAO determined that problems still

exist. For example, GAO found that funds on some customer orders totaling 

$19.5 million were deobligated at fiscal year end and then reobligated at the 

beginning of the next fiscal year on these same orders. This artificially

lowered reported NAWC carryover at fiscal year end.

Further, even though DOD’s 1996 guidance required NAWC as well as other 

activities to conduct triannual reviews of its financial information, NAWC 

did not perform these reviews until fiscal year 2006. If implemented 

properly, these reviews would improve the reliability of reported carryover

information and the underlying financial data. In addition, as of September 

2006, the two NAWC divisions were still not fully complying with several of 

the 16 specific DOD tasks required as part of the triannual reviews. For 

example, because the two divisions were not always effectively reviewing 

some obligations, especially dormant obligations (obligations over 120 days

old), their reported actual carryover was overstated. Also, effective triannual 

reviews would help NAWC validate its financial records before it implements

a new system that is scheduled to be installed in October 2007. 

www.gao.gov/cgi-bin/getrpt?GAO-07-643.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact McCoy 

Williams at (202) 512-9095 or 

williamsm1@gao.gov. 
Contents 

Letter 1

Results in Brief 3 

Background 5

NAWC’s Reported Actual Carryover Information Was Unreliable 10 

NAWC Did Not Perform the Required Triannual Reviews Until 

Fiscal Year 2006 17 

Conclusions 24

Recommendations for Executive Action 25 

Agency Comments and Our Evaluation 26 

Appendix I Scope and Methodology 29 

Appendix II Analysis of Dormant Obligations and Accrued 

Expenditures 32 

Appendix III Comments from the Department of Defense 40 

Appendix IV GAO Contacts and Staff Acknowledgments 44 

Table 

Table 1: Dollar Amount of Reported Actual Carryover, Carryover 

Ceiling, and the Amount of Carryover that is Over or 

Under the Ceiling 11 

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Page i GAO-07-643 Navy Working Capital Fund
United States Government Accountability Office

Washington, DC 20548 

June 26, 2007 

The Honorable John P. Murtha 

Chairman 

The Honorable C.W. Bill Young 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 

According to the Department of Defense’s (DOD) fiscal year 2007 budget

estimates, working capital fund activity groups (depot maintenance, 

ordnance, and research and development) will have about $6 billion of 

funded work that will be carried over from fiscal year 2007 into fiscal year 

2008.

1

 The congressional defense committees recognize that these activity 

groups need some carryover to ensure a smooth flow of work during the 

transition from one fiscal year to the next. However, past congressional 

defense committee reports raised concerns that the level of carryover may 

be more than is needed. Excessive amounts of carryover financed with 

customer appropriations are subject to reductions by DOD and the 

congressional defense committees during the budget review process. To 

the extent that carryover is too high, Congress may redirect the funds 

gained from such reductions to pay for other priority initiatives. 

In May 2001, we reported2

 that DOD did not have a sound analytical basis 

for its 3-month carryover standard, which it established in 1996. In 

December 2002, DOD revised its carryover policy to eliminate the 3-month 

across-the-board standard for allowable carryover. Under the new policy, 

the allowable amount of carryover (known as the carryover ceiling) is to 

 1

 The carryover amount includes both work for which obligations have been made by

requesting organizations but that has not yet started and the cost to complete work that has

been started. 

2

 GAO, Defense Working Capital Fund: Improvements Needed for Managing the Backlog

of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 2001). 

Page 1 GAO-07-643 Navy Working Capital Fund
be based on the outlay rate3

 of the customers’ appropriations financing the 

work. This means that in determining allowable carryover, the first year 

outlay rate of the customers’ appropriations financing the work is used for 

new orders received in the current year (first year of the work order). 

However, we reported4

 in June 2006 that the military services have not 

consistently implemented DOD’s revised policy in calculating carryover. 

Instead, the military services used different methodologies for calculating 

reported actual and allowable amounts of carryover since DOD changed

its carryover policy in December 2002. We also reported that the Naval Air

Warfare Center (NAWC) exceeded the carryover ceiling for fiscal years 

2003, 2004, and 2005 by millions of dollars each year. 

As requested by and agreed to with your office, this report assesses 

carryover related to NAWC. The objectives of this assignment were to 

determine if (1) NAWC’s reported actual carryover was reliable for fiscal 

years 2003 through 2006 and (2) NAWC was utilizing the required triannual 

review process to improve the reliability of its carryover information and 

underlying financial data. Our review was performed from July 2006 

through April 2007 in accordance with U.S. generally accepted government 

auditing standards. The carryover data used in this report were obtained 

from official Navy budget and accounting documents. To assess the 

reliability of the data, we (1) reviewed and analyzed the information used 

to calculate reported actual carryover, (2) analyzed the NAWC aircraft and 

weapons divisions’ fiscal years 2003 through 2006 financial statements, (3) 

interviewed officials knowledgeable about the carryover data, (4) 

reviewed NAWC’s implementation of the required DOD triannual review 

process, and (5) reviewed selected orders to determine if the orders were 

adequately supported by documentation. Further details on our scope and 

methodology can be found in appendix I. We requested comments on a 

draft of this report from the Secretary of Defense or his designee. Written

comments from the Under Secretary of Defense (Comptroller) are 

reprinted in appendix III. 

 3

 The amount of allowable carryover using the outlay rate follows. For example, customers

order $100 of work, which is financed with a specific appropriation. If the outlay rate for 

this appropriation at the appropriation level is 60 percent, then this would result in the

working capital fund activity group being allowed to carry over $40 ($100 - $60 [$100 x 60 

percent] = $40). 

4

 GAO, Defense Working Capital Fund: Military Services Did Not Calculate and Report 

Carryover Amounts Correctly, GAO-06-530 (Washington, D.C.: June 27, 2006). 

Page 2 GAO-07-643 Navy Working Capital Fund
Our analysis of accounting data that provide information on customer 

orders and discussions with NAWC officials determined that the reported 

carryover information was not reliable for fiscal years 2003 and 2004 as a 

result of (1) NAWC’s conversion to a new accounting system in fiscal year 

2003 and (2) the divisions not performing reviews of obligations, including 

the required DOD triannual reviews. Reliable carryover information is 

essential for DOD and congressional defense committees during the 

budget review process since they may redirect excessive carryover 

amounts to pay for other priority initiatives. For fiscal years 2003, 2004, 

and 2005, NAWC reports showed that it exceeded its carryover ceiling by 

$16.3 million, $57.2 million, and $51.7 million, respectively. During this 3-

year period, our analysis of Navy reports showed that NAWC had 

carryover amounts of $1.1 billion, $1.1 billion, and $1.0 billion, 

respectively, which represented over one-third of NAWC’s annual 

workload. However, both the NAWC aircraft and weapons divisions’ 

comptrollers did not certify to the accuracy of financial information 

reported in their fiscal year 2003 financial statements. To better manage 

carryover, improve the reliability of reported carryover information, and 

avoid exceeding the carryover ceiling, beginning in fiscal year 2005 and 

continuing into fiscal year 2006, NAWC (1) issued guidance on the 

acceptance of orders at fiscal year end and (2) began reviewing orders to 

correct old financial records and reduce carryover. For fiscal year 2006, 

NAWC reported that its actual carryover was below the carryover ceiling. 

While the reliability of carryover information improved in fiscal years 2005 

and 2006, we determined that some data reliability problems still exist. For 

example, we found that funds on some customer orders totaling $19.5 

million were deobligated at the end of the fiscal year end and then 

reobligated at the beginning of the next fiscal year on these same orders. 

This artificially lowered carryover at the end of the fiscal year.

Results in Brief 

Furthermore, NAWC did not perform the triannual reviews of its financial 

information until fiscal year 2006, even though DOD guidance has been in

place for about 10 years requiring NAWC and all other fund holders5

 to 

conduct these reviews of their financial data (outstanding commitments, 

obligations, and accrued expenditures). If implemented properly, these 

reviews would likely have improved the reliability of reported carryover 

information and related underlying financial data. DOD established its 

triannual review requirement in 1996 in order to improve the timeliness 

 5

 The fund holder is the organization on whose accounting records a commitment, 

obligation, and/or accrued expenditure is recorded. 

Page 3 GAO-07-643 Navy Working Capital Fund
and accuracy of its financial data. According to NAWC officials at the 

aircraft and weapons divisions, these reviews were not done prior to 2006 

because they received guidance from the Naval Air Systems Command 

that stated NAWC was not required to conduct the triannual reviews. 

Further, as of September 2006, the two divisions were still not fully 

complying with several of the 16 specific DOD tasks that they were 

required to accomplish as part of the triannual reviews. Because the two 

divisions did not always effectively review some obligations, particularly 

dormant obligations (obligations over 120 days old), (1) their reported 

actual carryover was overstated and (2) they sometimes returned 

unneeded funds to customers after the funds had expired. Furthermore, if 

effectively implemented, the triannual reviews could help NAWC validate 

or correct any errors in its financial records before it implements a new 

system that is scheduled to be installed in October 2007. 

We are making six recommendations to DOD to (1) reiterate guidance to 

NAWC that would prohibit it from deobligating reimbursable customer 

orders at fiscal year end and reobligating them in the next fiscal year, an 

action that artificially reduces carryover balances that are ultimately 

reported to Congress; and (2) improve the effectiveness of the triannual 

review process. DOD concurred with the six recommendations and 

identified corrective actions it is taking to address them. While we 

appreciate DOD’s efforts, we are concerned with (1) the timing of the 

corrective action for one of the recommendations and (2) the 

completeness of DOD’s planned actions related to the one 

recommendation with which it “concurred with comment.” First, with 

regard to DOD’s plans to complete its reviews and validations of dormant 

obligations and accrued expenditures by September 2008, we continue to 

believe that these reviews and validations should be completed prior to 

the planned implementation of a new accounting system, currently 

scheduled for October 2007. Second, in concurring with our 

recommendation for a clarification of the DOD Financial Management 

Regulation (FMR) guidance on the triannual reviews, DOD commented the 

FMR is clear as currently written but it would issue a letter directing the 

Navy to comply with the FMR. As noted in our draft report, we identified

varying interpretations of the FMR guidance among the Navy officials we 

interviewed. Thus, while we continue to believe that a revision to the FMR 

would be the most efficient means to resolve this issue, a letter such as 

that proposed in DOD’s response could suffice as long as it includes 

clarification of the FMR guidance, particularly with regard to the dollar 

thresholds for required reviews. 

Page 4 GAO-07-643 Navy Working Capital Fund
A working capital fund relies on sales revenue rather than direct 

appropriations to finance its continuing operations. A working capital fund

is intended to (1) generate sufficient resources to cover the full costs of its 

operations and (2) operate on a break-even basis over time—that is, 

neither make a gain nor incur a loss. Customers use appropriated funds to 

finance orders placed with the working capital fund. According to the 

Navy’s fiscal year 2007 budget, the Navy Working Capital Fund will earn 

about $23.4 billion in revenue during fiscal year 2007. The Navy Working 

Capital Fund consists of the following five major activity groups: supply 

management, depot maintenance, transportation, base support, and 

research and development. The Navy’s research and development working 

capital fund activity group is Navy’s largest activity group in terms of 

expected revenue with $10.1 billion in fiscal year 2007. The activity group 

includes the following subactivity groups: (1) the Naval Surface Warfare 

Center, (2) the Space and Naval Warfare Systems Centers, (3) the Naval

Undersea Warfare Center, (4) the Naval Research Laboratory, and (5) the 

Naval Air Warfare Center. 

The Naval Air Warfare Center consists of two divisions: (1) the aircraft 

division, which is located at Lakehurst, New Jersey, and Patuxent River, 

Maryland; and (2) the weapons division, which is located at China Lake, 

California, and Point Mugu, California. NAWC employs about 10,300 

civilian and military personnel and is expected to have revenues of almost 

$3 billion in fiscal year 2007. The mission of NAWC’s aircraft division is to 

operate the Navy’s principal research, development, test, and evaluation; 

engineering; and fleet support activity for naval aircraft engines, avionics, 

and aircraft support systems, and ships, shore, air operations. The mission

of NAWC’s weapons division is to operate as the Navy’s full-spectrum 

research, development, test, and evaluation in-service engineering center 

for air warfare weapons systems (except antisubmarine warfare systems), 

missiles and missile subsystems, aircraft weapons integration, and 

assigned airborne electronic warfare systems. The weapons division also 

operates one of the Navy’s major range and test facility bases comprising a 

complex of air, land, and sea test ranges. 

Carryover is the dollar value of work that has been ordered and funded 

(obligated) by customers but not completed by working capital fund 

activities at the end of the fiscal year. Carryover consists of both the 

unfinished portion of work started but not completed, as well as requested 

work that has not yet begun. Some carryover is necessary at fiscal year 

end if working capital funds are to operate efficiently and effectively. For

example, if customers do not receive new appropriations at the beginning 

Background 

What Is Carryover and 

Why Is It Important? 

Page 5 GAO-07-643 Navy Working Capital Fund
of the fiscal year, carryover is necessary to ensure that the working capital 

fund activities have enough work to ensure a smooth transition between 

fiscal years. Too little carryover could result in some personnel not having 

work to perform at the beginning of the fiscal year. On the other hand, too 

much carryover could result in an activity group receiving funds from 

customers in one fiscal year but not performing the work until well into 

the next fiscal year or subsequent years. By optimizing the amount of 

carryover, DOD can use its resources in the most effective manner and 

minimize the “banking” of funds for work and programs to be performed 

in subsequent years. 

Decision makers, including the Office of the Under Secretary of Defense 

(Comptroller) and congressional defense committees, use reported 

carryover information to make decisions concerning whether working 

capital fund activities, such as NAWC, have too much carryover. If NAWC 

has too much carryover, the decision makers may reduce the customers’ 

budgets and use these resources for other purposes. For example, during 

its review of the fiscal year 2003 budget, the Office of the Under Secretary 

of Defense (Comptroller) determined that the Navy research and 

development activities’ carryover had been steadily increasing from about 

$2.2 billion in fiscal year 1997 to about $3.4 billion in fiscal year 2003. Since 

a significant portion of the carryover was related to work that was to be 

contracted out, the Office of the Under Secretary of Defense (Comptroller) 

reduced the customer funding by $161.1 million, because these efforts 

could be funded in fiscal year 2004 with no impact on performance. 

DOD Revised Its Carryover 

Policy 

In 1996, DOD established a 3-month carryover standard for working 

capital fund activities. In May 2001, we reported6

 that DOD did not have a 

basis for its carryover standard and recommended that DOD determine the 

appropriate carryover standard for depot maintenance, ordnance, and 

research and development activity groups. According to Office of the 

Under Secretary of Defense (Comptroller) officials, DOD provided verbal 

guidance concerning its new carryover policy for working capital fund 

activities in December 2002. Subsequently, DOD included its revised 

carryover policy in its DOD Financial Management Regulation 7000.14-R,

Volume 2B, Chapter 9, dated June 2004, which eliminated the 3-month 

standard for allowable carryover. Under the new policy, the allowable 

 6

 GAO, Defense Working Capital Fund: Improvements Needed for Managing the Backlog

of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 2001). 

Page 6 GAO-07-643 Navy Working Capital Fund
amount of carryover is to be based on the outlay rate7

 of the customers’ 

appropriations financing the work. This meant that in determining 

allowable carryover, the first year outlay rate of the customers’ 

appropriations financing the work would be used for new orders received 

in the current year (first year of the work order). According to the DOD 

regulation, this new metric allows for an analytical-based approach that 

holds working capital fund activities to the same standard as general fund

execution and allows for more meaningful budget execution analysis. 

To calculate the reported actual carryover for the Navy research and 

development activity group that includes NAWC, the Navy uses the 

summary-level formula shown below. 

Balance of customer orders beginning of year 

Plus: New orders received 

Equals: Total available orders 

Less: Revenue 

Less: Work-in-process 

Equals: Carryover 

In accordance with DOD policy, the following orders and related work are 

excluded from this calculation: (1) nonfederal orders, (2) non-DOD orders,

(3) foreign military sales, (4) work related to base realignment and 

closure, and (5) major range and test facility base work. The reported 

actual carryover is then compared to the amount of allowable carryover 

using the above-mentioned outlay rate method to determine if the reported

actual amount was over or under the allowable amount. 

DOD Established 

Triannual Review 

Requirement in 1996 

The May 1996 memorandum from the Under Secretary of Defense 

(Comptroller) that established DOD’s triannual review requirement noted 

that the timely review of commitments and obligations to ensure the 

accuracy and timeliness of financial transactions is a vital phase of 

financial management. To illustrate the point, the Under Secretary stated 

that the accurate recording of commitments and obligations (1) forms the 

basis for formal financial reports issued by the department and (2) 

 7

 The amount of allowable carryover using the outlay rate follows. For example, customers

order $100 of work, which is financed with a specific appropriation. If the outlay rate for 

this appropriation at the appropriation level is 60 percent, then this would result in the

working capital fund activity group being allowed to carry over $40 ($100 - $60 [$100 x 60 

percent] = $40). 

Page 7 GAO-07-643 Navy Working Capital Fund
provides information for management to make informed decisions 

regarding resource allocation. 

Carryover-related budget decisions are examples of resource allocation 

decisions that require reliable obligation data. This is because there is a 

direct link between the (1) carryover data that working capital fund 

activities report to Congress and DOD decision makers and (2) obligation 

data contained in the accounting records of working capital fund activities 

and their customers. Specifically, 

• when working capital fund activities, such as NAWC, accept customer 

orders, obligations are created in the customers’ accounting records, and 

the activities become the “fund holders”; and 

• as work is performed and customers are billed, both the unliquidated 

obligation balances in the customers’ accounting records and the working 

capital fund activities’ reported carryover balances are reduced. 

DOD included the triannual review requirements in its Financial 

Management Regulation. DOD Financial Management Regulation 7000.14-

R, Volume 3, Chapter 8, requires fund holders, such as NAWC, to provide 

written confirmation that they have completed 16 specific tasks8 during 

their reviews. For example, the regulation requires fund holders to 

confirm, among other things, that they have (1) traced the obligations and 

commitments that are recorded in their accounting systems back to source 

documentation and (2) conducted adequate follow-up on all dormant 

obligations and commitments over 120 days old to determine if they are 

still valid.9 Additionally, the regulation requires fund holders to (1) identify

the problems that were noted during their reviews; (2) advise management 

of whether, and to what extent, adjustments or corrections were taken to

remedy noted problems; (3) summarize, by type, the actions or corrections 

remaining to be taken; (4) indicate when such actions/corrections are 

expected to be completed; and (5) identify the actions that have been 

 8

 In June 2006, the Navy added 2 additional tasks, resulting in Navy activities being required 

to perform 18 specific tasks in their triannual reviews and to certify that they have 

completed them. 

9

 All obligations and commitment balances are required to be reviewed at least annually in

order to substantiate year-end certification requirements. However, for those balances that

are greater than a certain amount, these transactions are required to be reviewed during 

each of the 4-month periods ending January 31, May 31, and September 30 of each fiscal 

year (e.g., for customer-order-related obligations and commitments, the amount is $50,000). 

Page 8 GAO-07-643 Navy Working Capital Fund
taken to preclude identified problems from recurring in the future. Thus, if 

properly implemented by the department, triannual reviews can provide a 

systematic process that can help fund holders not only improve the 

reliability of their financial data but also identify and correct the 

underlying causes of data problems. 

In 1998, the Navy established four separate Enterprise Resource Planning

(ERP) pilot programs to address the need for business operations reform 

within the Navy. We reported10 in September 2005 that (1) the Navy 

invested approximately $1 billion in its four pilot ERP efforts, without 

marked improvements in its day-to-day operations; (2) the lack of a 

coordinated effort among the pilots led to a duplication of efforts in 

implementing many business functions and resulted in ERP solutions that 

carry out similar functions in different ways from one another; and (3) the 

pilots resulted in four more stovepiped systems that did not enhance 

DOD’s overall efficiency and resulted in $1 billion being largely wasted. 

One of these pilots was managed by the Naval Air Systems Command and 

called SIGMA. SIGMA was to improve program management including 

linkage among contract management, financial management, and 

workforce management. Prior to fiscal year 2003, NAWC used the Defense 

Industrial Financial Management System to account for its funds. In 

January 2003, NAWC began to implement SIGMA and completed 

implementation of this new system in March 2003. As discussed later in 

this report, NAWC encountered significant difficulties implementing 

SIGMA, which affected the reliability of the financial information for fiscal 

years 2003 and 2004. The Navy now plans to implement one overall ERP 

system, referred to as Navy ERP, and discontinue using the four ERP 

systems. This overall ERP system is planned to be implemented at NAWC 

in October 2007. 

NAWC Implemented a New 

System in Fiscal Year 2003 

and Plans to Implement a 

Different System in 

October 2007 

 10 GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best Business

Practices Critical to Avoid Past Failures, GAO-05-858 (Washington, D.C.: Sept. 29, 2005). 

Page 9 GAO-07-643 Navy Working Capital Fund
Our analysis of accounting data that provide information on customer 

orders and discussions with NAWC officials determined that the reported 

carryover information was not reliable for fiscal years 2003 and 2004 as a 

result of (1) NAWC’s conversion to a new accounting system in fiscal year 

2003 and (2) the divisions not performing reviews of obligations including

the required DOD triannual reviews—as discussed later in this report. 

Reliable carryover information is essential for DOD and congressional 

defense committees during the budget review process since they may 

redirect excessive carryover amounts to pay for other priority initiatives. 

Both the NAWC aircraft and weapons divisions’ comptrollers did not 

certify to the accuracy of financial information reported in their respective 

fiscal year 2003 financial statements. To try to better manage carryover, 

improve the reliability of the carryover information, and avoid exceeding 

the ceiling, beginning in fiscal year 2005 and continuing into fiscal year 

2006, NAWC (1) issued guidance on the acceptance of orders at year end 

and (2) started to review orders to correct its old financial records and 

reduce carryover. While the reliability of carryover information improved 

in fiscal years 2005 and 2006, we determined that data reliability problems 

still exist. For example, we found that funds on some customer orders 

totaling $19.5 million were deobligated at the end of the fiscal year and 

then reobligated at the beginning of the next fiscal year on these same 

orders. This artificially lowered carryover at the end of the fiscal year. 

Since DOD changed its carryover policy in December 2002, NAWC 

exceeded its carryover ceiling by tens of millions of dollars from fiscal 

year 2003 through fiscal year 2005. During this 3-year period, Navy reports

showed that NAWC had carryover amounts of $1.1 billion, $1.1 billion, and 

$1.0 billion, respectively, which represented over one-third of NAWC’s 

annual workload. Table 1 shows the dollar amount of the carryover 

ceiling, the dollar amount of the Navy-reported actual carryover for 

NAWC, and the dollar amount of carryover that was over or under the 

ceiling for fiscal years 2003 through 2006. 

NAWC’s Reported 

Actual Carryover 

Information Was 

Unreliable 

NAWC Reports Showed 

that It Exceeded Its 

Carryover Ceiling from 

Fiscal Year 2003 through 

Fiscal Year 2005 

Page 10 GAO-07-643 Navy Working Capital Fund
Table 1: Dollar Amount of Reported Actual Carryover, Carryover Ceiling, and the 

Amount of Carryover that is Over or Under the Ceiling 

Dollars in millions 

Fiscal year 

2003

Fiscal year 

2004 

Fiscal year 

2005

Fiscal year 

2006

Carryover amount $1,146 $1,109 $1,046 $1,007

Carryover ceiling 1,129 1,052 994 1,034

Amount over or

under ceiling Over $16 Over $57 Over $51 Under $28

Source: Navy reports. 

Note: Figures may not add due to rounding. 

NAWC reports showed that it exceeded the carryover ceiling in fiscal year 

2003 by $16.3 million. NAWC reports showed that the weapons division 

exceeded the ceiling by $31 million, while the aircraft division was $14.7 

million under the ceiling. NAWC aircraft and weapons division officials 

stated that their fiscal year 2003 carryover information was unreliable as a 

result of NAWC’s conversion to SIGMA in fiscal year 2003. According to 

NAWC aircraft and weapons division officials, immediately after the 

conversion to SIGMA between January and March 2003, NAWC personnel 

began experiencing problems with the reliability of the data. This resulted 

from the lack of subject matter expertise and user training on the new 

system, and system configuration problems between the previous system, 

called the Defense Industrial Financial Management System, and SIGMA. 

Further, due to the system not operating for approximately 3 months and 

system-related problems, NAWC experienced significant backlogs in 

processing financial documents during fiscal year 2003. For example, 

NAWC weapons division officials noted that their personnel spent the first 

2 months of fiscal year 2004 processing fiscal year 2003 customer bills. 

Due to the delays in processing billing transactions, NAWC’s work-inprocess balances at the end of fiscal year 2003 (a key component in the 

carryover calculation) were about 10 times (aircraft) and 8 times 

(weapons) higher than its fiscal year 2002 reported amount. As a result of 

these system problems, both the NAWC aircraft and weapons divisions’ 

comptrollers would not certify to the accuracy of financial information 

reported in their fiscal year 2003 financial statements. 

For fiscal year 2004, the aircraft and weapons divisions reported that their

carryover exceeded the ceiling by $35.7 million and $21.5 million, 

respectively, for a total of $57.2 million. According to NAWC aircraft and

Implementation of New 

System Affected Reliability 

of Carryover Information 

Page 11 GAO-07-643 Navy Working Capital Fund
weapons division officials, several data fixes were made to SIGMA in fiscal 

year 2004 that improved its processing times and data integrity issues. 

However, some data reliability problems continued to exist. The NAWC 

aircraft and weapons divisions’ comptrollers noted problems with the 

reliability of some of their financial information presented in the fiscal 

year 2004 financial statements. In fiscal year 2004, NAWC aircraft and 

weapons division officials stated that, at the request of the Naval Air 

Systems Command Comptroller, a team of consultants and analysts 

conducted a review of SIGMA’s processes to address its multitude of data

integrity issues and its inability to provide accurate financial statements. 

The team developed a detailed plan of action and milestones to fix these 

problems with timelines that extended into fiscal year 2006. Further, for 

most of fiscal year 2003 and 2004, NAWC aircraft and weapons division 

officials stated that SIGMA lacked carryover management reports that 

would allow NAWC program managers to monitor the status of each order 

(funding document) and make informed decisions to control its carryover. 

In the executive summary to the NAWC aircraft division’s fiscal year 2004

financial statements, the division reported that the implementation of 

SIGMA resulted in the nonavailability of specific carryover reports 

necessary for managing carryover at the program level. NAWC aircraft and 

weapons division officials stated that while the reports became available 

late in fiscal year 2004, they were of limited utility because of continuing 

data integrity issues and NAWC’s inability to review and validate both aged 

and current financial records. 

Beginning in fiscal year 2005 and continuing into fiscal year 2006, NAWC 

issued guidance on the acceptance of orders at fiscal year end in an 

attempt to better manage carryover and avoid exceeding its carryover 

ceiling for the third straight year. Specifically, in an August 2005 

memorandum that contained fiscal year 2005 NAWC carryover guidance,

NAWC estimated that its year-end carryover balance would be $95 million 

over its authorized level. The memorandum placed strict controls over 

acceptance of year-end orders including (1) the rejection of noncritical 

new orders, (2) the acceptance of requests for reversion of funds back to 

customers, and (3) before the NAWC accepts any critical workload that 

would result in additional unexpended carryover, the division must obtain 

approval from the NAWC aircraft division or weapons division commander 

and offset the outstanding carryover amounts by reversions of funds to the 

customer of an equal or greater amount. Further, the NAWC comptrollers 

were directed to provide program managers with a list of projects or tasks 

that had 25 percent or less of authorized funding executed as a potential

source for reversion or offsets. Finally, the NAWC weapons division 

NAWC Took Steps to 

Better Manage Carryover 

and Improve the Reliability 

of Carryover Information 

Page 12 GAO-07-643 Navy Working Capital Fund
provided its business financial management community with tools to give 

them the capability to better manage carryover. For example, one tool 

provided the business financial managers (BFM)11 with the capability to 

compare planned carryover data to actual carryover data for individual 

orders and at the summary level on a weekly basis to determine if actual 

carryover may exceed the carryover ceiling at year end. If actual carryover 

may exceed the ceiling at year end, the weapons division can use the tool 

to identify problems—such as a significant delay in a major program’s 

start date—and begin working on solutions to mitigate them. Even with 

these stronger management controls over new orders and the increased 

efforts to validate old accounts, NAWC’s reports showed that it still 

exceeded the carryover ceiling in fiscal year 2005 by $51.7 million. The 

aircraft division exceeded the ceiling by $52.4 million while the weapons 

division was under the ceiling by $0.7 million. 

For fiscal year 2006, NAWC’s reported actual carryover amount was below 

the carryover ceiling for the first time since DOD revised its carryover 

policy in December 2002. The aircraft and weapons divisions were under 

the ceiling by about $10 million and $18 million, respectively. NAWC 

officials informed us that they continued to emphasize the management of

carryover during fiscal year 2006 by reviewing orders and issuing 

additional guidance. Key elements of this guidance include the following. 

• The aircraft division issued additional carryover guidance in September 

2006 to reiterate several requirements cited in fiscal year 2005. 

Furthermore, an aircraft division official noted that the increased focus 

resulting from the prior GAO report recommending that the research and

development subactivity groups report their carryover balances separately

in the Navy’s annual budget encouraged NAWC management to more 

closely monitor and manage its carryover. 

• The weapons division issued carryover guidance in August 2006, which 

continued to stress the reviews of customers’ orders that are financed with

appropriations that are canceling or expiring. The guidance states that 

such reviews would (1) improve the quality of the year-end carryover and 

(2) validate the records, which is an essential task for accomplishing a 

smooth financial conversion to the new Navy ERP system planned for 

October 2007. The guidance further provided that funds accepted during 

the remainder of the fourth quarter should not negatively impact the 

 11 BFMs are responsible for pre- and postcontract functions and contract management, 

including resource management, manpower management, and material management. 

Page 13 GAO-07-643 Navy Working Capital Fund
division’s carryover position. Otherwise, the division should notify the 

customer that the order cannot be accepted and renegotiate, if possible, 

the amount of the order that can be accomplished using the DOD 

carryover guidance on outlay rates. 

Furthermore, starting primarily in fiscal year 2005, the aircraft and 

weapons divisions began reviewing certain types of orders to validate old 

financial records and reduce carryover. According to NAWC aircraft and 

weapons division officials, most of these reviews were not done in fiscal 

years 2003 and 2004 because of NAWC’s conversion to SIGMA and the 

problems, mentioned earlier, it encountered with implementing the system 

and the reliability of the data in the system. Some of the reviews 

performed by the aircraft or weapons divisions include (1) reviews of 

funding documents (orders) citing appropriations that are canceling12 at 

the end of each fiscal year (such reviews have been done since the 1990s),

(2) reviews of funding documents citing accounts that were to expire at 

the end of the fiscal year (these reviews started in fiscal year 2005), and 

(3) a fiscal year 2006 review of unused funds with work completion dates 

of September 30, 2005, and before. According to NAWC officials, these 

reviews resulted in correcting millions of dollars in unsupported or 

unneeded funds on orders, and greatly improved the reliability of the 

financial data. For example, according to a NAWC aircraft division official, 

as of August 2005, this division had 14,353 orders that were still open on its 

books when it converted to SIGMA in fiscal year 2003. As a result of the 

aircraft division’s review of these orders from August 2005 through 

November 2006, this number was reduced to 7,053 open orders—a 

reduction of about 50 percent—and $10 million of unneeded funds were 

removed from its books. 

 12An appropriation enacted for a fixed period of time is available for incurring and 

recording new obligations during such fixed period of time after which the appropriation 

account expires. The expired appropriation account remains available for the period of 5

years to record adjustments to obligations properly incurred prior to its expiration and to

liquidate such obligations. At the end of the 5-year expired account period, the 

appropriation balance is canceled and the account is closed. Once closed, the expired 

appropriation account ceases to be available to adjust or liquidate obligations. 

31 U.S.C. §§ 1552(a), 1553(a), 1553(b) (1). For further discussion see GAO, Principles of 

Federal Appropriations Law, vol. 1, 3rd ed., GAO-04-261SP, pp. 5-71 through 5-75 

(Washington, D.C.: January 2004) and Principles of Federal Appropriations Law: Annual

Update of Third Edition, GAO-06-534SP, pp. 5-3 and 5-4 (Washington, D.C.: April 2006).

Page 14 GAO-07-643 Navy Working Capital Fund
While we are encouraged by NAWC’s actions to review and validate its 

financial records and better manage its carryover, we identified some 

cases where NAWC deobligated millions of dollars of funds at fiscal year 

end on orders for work it still planned to perform. NAWC then reobligated 

funds at the beginning of the next fiscal year to perform the work. This 

action artificially lowered NAWC’s actual year-end carryover balances in

fiscal years 2004 and 2005 that were reported to DOD and congressional 

decision makers. We analyzed fiscal years 2004 and 2005 year-end orders

where amendments or adjustments were made to deobligate funds on 

these orders at the end of the fiscal year. We found a total of $19.5 million 

was deobligated at the end of fiscal year 2004 or 2005 and reobligated at 

the beginning of the next fiscal year. These actions had the effect of 

reducing carryover even though the requirement for the funds still 

remained at the time the funds were returned to their customers. We 

reported13 on a similar problem in fiscal year 2003 on our review of the 

Space and Naval Warfare Systems Command. The following examples 

illustrate the orders that were deobligated at the end of fiscal year 2004 or

2005, which had the effect of reducing reported carryover even though the 

requirement for the funds still remained but the work could not be 

completed by the end of the fiscal year. 

Some Customer Orders 

Were Reduced at Year End, 

which Artificially Lowered 

Carryover 

• Aircraft division officials stated that they did not know why adjustments 

totaling $10.5 million on 14 orders were made to deobligate customer 

funds at the end of fiscal year 2004 or 2005 and why the funds were 

reobligated at the beginning of the next fiscal year on these same orders. 

They said that lack of documentation, turnover of personnel, and 

difficulties implementing SIGMA hindered their ability to determine why 

these year-end adjustments were made. For example, from December 1,

2003, to September 23, 2004, the NAWC aircraft division accepted a work

order and related amendments from the Naval Air Systems Command 

totaling approximately $2.1 million for engineering support for the CH-53E 

helicopter program. Accounting records showed that $404,435 was 

deobligated in September 2004—at the end of the fiscal year—and that this 

same amount was reobligated 1 month later in October 2004—at the 

beginning of the next fiscal year. According to an aircraft division official, 

“no documentation for reason of the deobligation has been located.” 

 13 GAO, Navy Working Capital Fund: Backlog of Funded Work at the Space and Naval 

Warfare Systems Command Was Consistently Understated, GAO-03-668 (Washington,

D.C.: July 1, 2003). 

Page 15 GAO-07-643 Navy Working Capital Fund
• In April 2005, the NAWC weapons division accepted two orders from the 

U.S. Army Space and Missile Defense Command totaling $5.5 million for 

range instrumentation services and missile flight safety support for two 

separate tests of the Missile Defense Agency Target Intercontinental 

Ballistic Missiles. The tests were originally scheduled to be completed in

fiscal year 2005, but were delayed into fiscal year 2006 due to weather and

instrumentation problems. Due to program delays and expenditure rates 

that were 25 percent or less of authorized funding on the orders, NAWC 

identified these orders as potential funds that could be returned to the 

customer. According to a BFM, the NAWC weapons division needed to

have these funds “off the books” to relieve the carryover problem. The 

NAWC weapons division’s comptroller officials stated that the return of 

funds to customers is appropriate when mission support requirements slip 

from one fiscal year to the next and the tasking to be accomplished is 

severable, as in this case. On September 23, 2005, the U.S. Army Space and 

Missile Defense Command issued an amendment to each order 

deobligating a total of $4.85 million. Approximately 1 month later, the 

command issued amendments on the orders returning the $4.85 million—

the exact amount that was deobligated in September 2005. The two tests 

were performed in fiscal year 2006. 

• In January 2005, the NAWC aircraft division accepted an order from the 

Naval Air Systems Command totaling $100,000 for the research and 

development of a low-cost, automated fiber optic cable. In September 

2005—8 months later—the Naval Air Systems Command issued an 

amendment to the order deobligating the entire amount. In October 2005—

approximately 1 month later—the command issued another amendment to 

the order returning funds to the program totaling $110,000. Work on the 

order began in November 2005 and was completed in September 2006. 

According to a BFM, delays in completing work in fiscal years 2003 and 

2004 on other jobs delayed the start of fiscal year 2005 work. NAWC 

aircraft division accounting officials said, and we agree, that work should 

have been started within a reasonable amount of time after accepting the 

order in January 2005—within 90 days. Otherwise, the funds should have 

been deobligated when the delays caused the work to commence beyond a 

reasonable amount of time as specified in the DOD financial management 

regulation. 

Page 16 GAO-07-643 Navy Working Capital Fund
NAWC did not perform the triannual reviews of its financial information 

until fiscal year 2006, even though DOD guidance had long required NAWC 

and all other fund holders14 to conduct these reviews of their financial data 

(outstanding commitments, obligations, and accrued expenditures). These 

reviews would likely have improved the reliability of carryover 

information and the underlying financial data. DOD established its 

triannual review requirement in 1996 in order to improve the timeliness 

and accuracy of its financial data. However, the aircraft and weapons 

divisions did not conduct their first reviews until January 2006—about 10 

years later. Further, as of September 2006, the two divisions were still not 

fully complying with several of the 16 specific DOD tasks that they were

required to accomplish during their reviews. Because the two divisions did 

not always effectively review some obligations, particularly dormant 

obligations (i.e., those over 120 days old), (1) their reported actual 

carryover was overstated and (2) they sometimes returned unneeded 

funds to customers after the funds had expired. Further details on 

dormant obligations and accrued expenditures are included in appendix II. 

Furthermore, if effectively implemented, the triannual reviews could help 

NAWC validate its financial records before it implements a new system 

that is scheduled to be installed in October 2007. 

NAWC did not properly implement DOD’s triannual review guidance cited 

in DOD Financial Management Regulation 7000.14-R, Volume 3, Chapter 8. 

Specifically, (1) NAWC did not perform the required triannual reviews 

prior to fiscal year 2006 although these reviews were required in a May 

1996 memorandum from the Under Secretary of Defense (Comptroller) 

and in the November 2000 DOD Financial Management Regulation and (2) 

NAWC did not review all obligations at least once during fiscal year 2006

as required by the November 2000 DOD regulation. In addition, the 

November 2000 DOD regulation (triannual guidance) on the dollar 

threshold for reviewing obligations was unclear.

Prior to fiscal year 2006, NAWC did not perform triannual reviews, even 

though these reviews were required by the DOD Financial Management 

Regulation. According to NAWC officials at the aircraft and weapons 

divisions, these reviews were not done because they received e-mail 

guidance from the Naval Air Systems Command that stated the NAWC 

NAWC Did Not 

Perform the Required 

Triannual Reviews 

Until Fiscal Year 2006 

NAWC Did Not Properly 

Implement DOD’s 

Triannual Review 

Guidance 

NAWC Did Not Perform 

Required Triannual Reviews 

Prior to Fiscal Year 2006 

 14 The fund holder is the organization on whose accounting records a commitment, 

obligation, and/or accrued expenditure is recorded. 

Page 17 GAO-07-643 Navy Working Capital Fund
divisions were not required to submit the triannual review confirmation 

report because this requirement was only for general funds. In October 

2005, the Naval Air Systems Command provided guidance to the NAWC 

aircraft and weapons divisions that they were now required to perform the 

triannual reviews and complete the confirmation statements. Officials 

from the NAWC aircraft and weapons divisions stated that the first time 

they completed a triannual review and confirmation statement was for the 

period ending January 31, 2006. 

Although the DOD regulation requires that all obligations be reviewed at 

least annually in order to substantiate year-end triannual review 

requirements, the NAWC aircraft and weapons divisions only reviewed 

obligations, including dormant obligations, over a certain dollar 

threshold—$50,000 or $200,000. The weapons division did not review all

the obligations because guidance received from the Naval Air Systems 

Command dated June 2, 2006, and September 28, 2006, and guidance 

issued by NAWC weapons divisions dated September 29, 2006, did not 

require a review of all of them. Officials from Naval Air Systems Command 

and the NAWC weapons division informed us that they did not require the 

review of all obligations at least once a year because they did not realize 

that the DOD regulation required such a review. NAWC aircraft division 

officials told us that although the DOD regulation required such reviews, 

they did not have the time or resources to perform the reviews. If 

effectively implemented, the triannual reviews could help NAWC validate 

its financial records before it implements a new system that is scheduled 

to be installed in October 2007. 

We also found that DOD’s triannual review guidance regarding the dollar 

threshold for reviewing outstanding obligations was unclear. The DOD 

Financial Management Regulation 7000.14-R, Volume 3, Chapter 8, 

guidance states that during the January and May reviews, obligations of (1) 

$200,000 or more for investment appropriations (e.g., procurement and the 

capital budget of the working capital funds) should be reviewed and (2) 

$50,000 or more for operating appropriations (e.g., operation and 

maintenance funds and the operating portion of the working capital funds) 

should be reviewed. However, the Naval Air Systems Command and the 

NAWC weapons division interpreted the guidance to mean that customer 

orders—which are the operating portion of the working capital fund—

financed with investment funds fell into the $200,000 threshold category 

for review purposes, rather than the $50,000 category. The NAWC 

weapons division conducted its triannual reviews accordingly. In 

discussing this issue with accounting and budgeting officials from the 

Office of the Under Secretary of Defense (Comptroller), they stated that 

NAWC Did Not Review All 

Obligations in Fiscal Year 2006 

as Required by DOD Regulation 

DOD Triannual Review 

Guidance on Dollar Threshold 

for Reviewing Obligations Is 

Unclear 

Page 18 GAO-07-643 Navy Working Capital Fund
customer orders received by working capital fund activities are part of the 

operating portion of the working capital fund regardless of the 

appropriation financing the order. Thus, the January and May triannual 

reviews should have included all obligations over $50,000. 

Our review of the process that the NAWC aircraft and weapons divisions 

used to conduct their triannual reviews identified several areas that need

improvements. The aircraft and weapons divisions developed their own 

separate processes for performing the triannual reviews. For fiscal year 

2006, the weapons division used a decentralized process that relied on 

both the accounting department and the BFMs to conduct its reviews, 

while the aircraft division used a centralized process that relied on the 

accounting department to conduct its reviews. During our review, we 

identified problems with the two divisions’ triannual reviews of obligation

and accrued expenditure balances. Based on the results of our review and

discussions with NAWC officials, the aircraft and weapons divisions issued 

written guidance on performing the triannual reviews and are now 

including the BFMs in the process. If the process is implemented properly, 

the aircraft and weapons divisions’ decision to include the BFMs in its 

triannual review process should result in better reviews and more reliable 

financial information, including carryover information, in the future. 

The NAWC weapons division accomplished its triannual reviews on a 

decentralized basis. During the first step of the process, the Office of the

Comptroller for the NAWC weapons division, which has overall 

responsibility for the reviews, developed computer lists that contain 

information on the division’s outstanding commitments, obligations, and 

accrued expenditures. The Comptroller’s office then placed these lists on 

the Business Financial Management Community shared server so that the 

BFMs could access the data and conduct their triannual reviews. When the 

BFMs finished their reviews, the competency15 heads certified that their 

reviews had been completed and then forwarded their certifications to the 

Comptroller’s office. On the basis of the technical department’s 

certifications, the Comptroller then certified that the division has 

completed its review. 

NAWC Continues to Refine 

Its Triannual Review 

Process 

NAWC Weapons Division 

Improved Its Decentralized 

Review Process throughout 

2006 

 15 Competencies represent different departments aligned to perform specific functions such

as engineering, contracting, and financial management. Throughout the rest of this report,

we will refer to the competencies as technical departments. 

Page 19 GAO-07-643 Navy Working Capital Fund
We found problems with the weapons division’s implementation of the 

triannual review process. The NAWC weapons division performed its first 

triannual review for the period ending January 31, 2006. The review was 

performed on a limited basis by the Comptroller’s office since no formal 

triannual review procedures had been developed by the weapons division. 

For the second triannual review performed for the period ending May 31, 

2006, the Comptroller’s office modified its process to place primary 

responsibility for reviewing its division’s commitments, obligations, and 

accrued expenditures on the BFMs within the division’s technical 

departments. NAWC weapons division officials stated that the BFMs had 

information that was not immediately available to the Comptroller’s office 

on whether work was performed on its orders. Consequently, they were in

the best position to determine whether outstanding obligations and 

accrued expenditures were valid and whether the funds were still needed 

to perform the work. 

While the May 2006 process was better than the one used for the weapons 

division’s January 2006 review, our analysis and discussions with technical 

department and Comptroller’s office officials found that (1) no written 

procedures had been developed by the weapons division, (2) not all BFMs 

that were responsible for reviewing the transactions participated in the 

training offered by the Comptroller’s office, (3) the Comptroller’s office 

did not specifically identify which transactions the technical departments 

were required to review, (4) the weapons division did not have a standard 

methodology for reporting the results of its technical departments’ reviews 

to the Comptroller’s office in order to ensure that all required transactions

were certified, (5) not all BFMs that reviewed transactions were 

maintaining documentation for 24 months on their reviews as required by

the DOD Financial Management Regulation, and (6) the division did not 

have a procedure in place to ensure the technical departments were 

performing the triannual reviews properly. For example, many of the 

technical departments’ BFMs that we interviewed stated that the lists 

provided by the Comptroller’s office contained hundreds of commitment, 

obligation, and accrued expenditure transactions for review, but the lists 

did not contain enough information to identify the specific transactions 

that the BFMs were responsible for reviewing. As a result, some BFMs did 

not perform the May 2006 triannual review at all because they could not

identify the transactions that they were responsible for reviewing. Further,

several of the BFMs that did perform reviews stated that they did not 

report their results to the Comptroller’s office because a clearly defined

procedure for reporting the results did not exist.

Page 20 GAO-07-643 Navy Working Capital Fund
In August 2006, we met with weapons division officials to discuss the 

division’s triannual review process. Based on those discussions, we 

pointed out internal control weaknesses we identified in the May 2006

process. The officials agreed that the weapons division’s triannual review 

process could be improved and the division needed to document its 

triannual review procedures. Shortly after our meeting, the division 

established a team to develop guidance on its triannual review procedures. 

The team decided to use a phased approach to achieve compliance with 

the DOD triannual review regulation. On September 29, 2006, the weapons 

division issued interim guidance containing the triannual review 

procedures for reporting on the period ending September 30, 2006. The 

weapons division made a number of improvements to the May 2006 

process. The weapons division (1) modified the process to clearly identify 

which technical departments were responsible for the transactions, (2) 

directed the department heads who were responsible for the transactions 

assigned to their departments to certify that these transactions were 

reviewed, and (3) established a procedure for reporting results to the 

Comptroller’s office. 

Our discussions with several weapons division technical departments’ 

BFMs found that these officials thought the September 2006 triannual 

review process was a significant improvement over the May 2006 review 

process because the computer lists provided by the Comptroller’s office 

contained sufficient information to identify the technical department and 

BFM responsible for reviewing the September 2006 transactions. Further, 

the interim guidance contained clear instructions for reporting their 

results to the Comptroller’s office through their technical department 

managers. Our analysis showed that while the guidance for the September

2006 triannual reviews was an improvement, the guidance (1) did not 

comply with all the requirements of the DOD Financial Management 

Regulation to review all outstanding commitments, obligations, and 

accrued expenditures at least once annually; (2) did not require training 

for all the technical departments’ BFMs involved in the review; (3) did not 

require all BFMs that were responsible for performing triannual reviews to 

maintain documentation for 24 months on their reviews; and (4) did not 

establish a procedure for ensuring that the technical departments are 

completing their reviews in compliance with the September 2006 interim 

guidance. 

On December 21, 2006—about 3 months later—the NAWC weapons 

division issued additional guidance containing instructions for performing

all future triannual reviews beginning with the review period ending 

January 31, 2007. The guidance stated that the triannual reviews are a 

Page 21 GAO-07-643 Navy Working Capital Fund
critical factor in the NAWC weapons division efforts to eliminate problem 

disbursements, reduce potential violations of the Anti-Deficiency Act, and 

improve obligation and expenditure rates. The guidance requires all 

commitments and obligations to be reviewed at least annually in 

compliance with the DOD Financial Management Regulation and requires

the technical departments’ BFMs to attend mandatory annual triannual 

review training. While the new guidance addresses many of our concerns,

it still does not establish procedures for ensuring that the technical 

departments are completing their reviews in compliance with the new 

guidance. Without these procedures, the Comptroller’s office does not 

have a sound basis for providing written confirmation that the NAWC 

weapons division’s transactions are complete and accurate. 

Unlike the weapons division, the NAWC aircraft division accomplished its 

triannual reviews on a centralized basis within the accounting department 

and the BFMs were generally not included in the process. During the first 

step of the aircraft division process, the accounting department generated

computer lists that contained information on the division’s outstanding 

commitments, obligations, and accrued expenditures. The accounting 

department then forwarded these lists to the various team leaders within 

the accounting department to conduct the needed research to ensure that 

the outstanding obligations, accruals, or commitments are still valid. For 

example, the accounting department reconciled the disbursements 

recorded in SIGMA to the disbursements recorded in the DOD payment 

system called the Mechanization of Contract Administration Services 

(MOCAS). In performing the triannual reviews, the accounting department 

involved the BFMs on an as-needed basis. When the accounting 

department team leaders finished their reviews, they sent the completed 

lists back to the cost accounting supervisor, who then coordinated with 

the accounting officer to certify that the reviews were completed and

forwarded these certifications to the Comptroller’s office. On the basis of 

these certifications, the Comptroller certified that the division had 

completed its review and the transactions reviewed were accurate. 

NAWC aircraft division did not complete its first triannual review until 

January 2006. Our analysis and discussions with NAWC aircraft division 

officials determined that the aircraft division had not (1) developed and 

implemented written procedures for performing the triannual reviews and 

(2) developed or provided training to the BFMs on how to conduct the 

triannual reviews since they have not been specifically involved in 

performing these reviews. The accounting officer stated that they were 

unable to review all outstanding obligations, as required by the DOD 

regulation at least annually, due to time and resource constraints. 

NAWC Aircraft Division Did 

Not Generally Involve BFMs in 

Its Triannual Reviews 

Page 22 GAO-07-643 Navy Working Capital Fund
In addition to the triannual reviews, the accounting officer stated that the 

aircraft division accounting department reviews commitments, 

obligations, and accrued expenditures as part of its routine operations. 

Specifically, the accounting department is to take the following actions. 

• Identify outstanding orders funded with appropriations that are canceling 

at the end of the fiscal year and perform detailed analyses to resolve these

transactions in order to get them off the books prior to the end of the 

fiscal year. 

• Forward information to the budget department, which coordinates with 

the BFMs to review outstanding commitments over 90 days old on a 

monthly basis and respond back to the accounting department as to 

whether the commitments on the list are valid or invalid. 

• Perform research on outstanding accrued expenditures. The first accrued 

expenditure data file was produced as of the end of fiscal year 2005.

According to a NAWC aircraft division official, throughout fiscal year 2006, 

the accrued expenditure information improved. The aircraft division now 

compares the information in this file to information received from 

MOCAS. The accounting department had not provided the accrued 

expenditure file to the BFMs for review prior to January 2007. However, 

beginning in January 2007, the Comptroller’s office began generating files 

that identified which accrued expenditure records belonged to which 

BFMs. In addition, one of the data elements identifies the person in the 

accounting department who performed the initial research and what 

research had been performed to date to alleviate the duplication of efforts 

between accounting and BFM personnel. This will enable the accounting 

department to begin using the BFMs in researching the accrued 

expenditures. 

Even though the procedures provide for some BFM involvement, our 

review of 21 dormant obligations involving 17 different BFMs disclosed 

that they had not reviewed the specific transactions in our sample prior to 

our visit. This is an indication that the aircraft division’s routine reviews of

obligations were not always effective. Additionally, our analyses identified 

that the aircraft division’s current process did not provide an adequate 

review of its obligations and accrued expenditures. We found that: 

• As of September 30, 2006, $43 million (or 23 percent) of the NAWC aircraft 

division’s obligations were over 120 days old and $20 million (or 11 

percent) were over 1 year old. The accounting officer stated that they were

unable to review all the obligations as required by the DOD regulation at

least annually, due to time and resource constraints. Accordingly, this item

Page 23 GAO-07-643 Navy Working Capital Fund
was not certified on the September 30, 2006, triannual review confirmation 

checklist. 

• As of June 30, 2006, $70 million (or 62 percent) of the NAWC aircraft 

division’s accrued expenditures were over 120 days old and $35 million (or 

31 percent) were over 1 year old. The accounting officer stated that 

accrued expenditures were only reviewed within the accounting 

department and that they had not developed policies or procedures for 

reviewing the accrued expenditures. 

In February 2007, NAWC aircraft division officials stated that they were 

developing a new draft instruction for conducting their triannual reviews. 

These officials added that they started with the December 2006 NAWC 

weapons division guidance and are revising it to better reflect the aircraft

division’s operations. A month later, on March 20, 2007, the NAWC aircraft 

division issued written procedures that (1) require the division to review 

all outstanding obligations and accrued expenditures at least annually in 

order to substantiate the year-end certification process, (2) clearly 

delineate the responsibilities of the individuals performing the review, (3)

require the BFMs to participate in performing the triannual reviews, (4) 

clearly describe the process for reporting the triannual review results to 

the division’s Comptroller office, and (5) require the division to maintain 

all documentation related to the transactions reviewed for a period of 24 

months following the review to ensure that independent organizations, 

such as the Office of Inspector General, can verify that the reviews were 

accomplished as required. While we agree with the aircraft division’s 

issuance of written triannual review procedures that increase the 

involvement of the BFMs in the triannual review process, we note that the

division had not yet developed and implemented training that provides 

detailed instructions to the BFMs on performing the triannual reviews. 

Although this may require a short-term increase in resources to provide 

this training, the long-term benefit will be a more complete review of 

obligations, commitments, and accrued expenditures. This, in turn, should 

improve the reliability of the aircraft division’s financial information, 

including carryover. 

Reliable carryover information is essential for Congress and DOD to 

perform their oversight responsibilities, including reviewing and making 

well-informed decisions on DOD’s budget. Moreover, by improving the 

reliability of the underlying data used to calculate carryover, NAWC’s 

financial data, such as obligation and accrued expenditure balances, will 

also be more reliable. Management accountability at the divisions for the 

Conclusions 

Page 24 GAO-07-643 Navy Working Capital Fund
accuracy of reported carryover and the timely identification of unneeded

funds will be a key factor in improving these data. This includes increased 

management attention to help assure that the divisions are effectively 

conducting their triannual reviews, including reviewing funded orders. 

Further, in light of NAWC’s planned conversion to a new Navy accounting 

system in October 2007, it is especially important for NAWC to review and 

correct any errors in recorded obligations and accrued expenditures, 

particularly dormant ones. If not corrected prior to conversion, any such

errors could cause additional resource-intensive research to fully resolve 

them and these problem transactions could potentially remain unresolved 

for years. 

In order to improve the reliability of carryover information at NAWC, we 

are making the following six recommendations to the Secretary of 

Defense. 

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

Navy to take the following actions. 

Recommendations for 

Executive Action 

• Reiterate its guidance that clearly prohibits Navy working capital fund 

activities from deobligating reimbursable customer orders at fiscal year 

end and immediately reobligating them in the next fiscal year, a process 

that results in artificially reducing the carryover balances that are 

ultimately reported to Congress. 

• Develop and implement procedures for the Naval Air Warfare Center’s 

aircraft and weapons divisions to provide assurance that triannual reviews 

of obligation and accrued expenditure balances are performed in 

accordance with the DOD Financial Management Regulation.

• Develop and implement a required training course for BFMs that provides

instructions on performing the triannual review requirements for the Naval 

Air Warfare Center’s aircraft division. 

• Require individuals, including BFMs responsible for performing the 

reviews at the Naval Air Warfare Center’s aircraft division, to attend the

training to ensure that they are aware of the triannual review 

requirements. 

• Review and validate the accuracy of NAWC’s aircraft and weapons 

divisions’ reported outstanding obligations and accrued expenditures, 

especially those that have remained outstanding since the conversion to 

Page 25 GAO-07-643 Navy Working Capital Fund
SIGMA, prior to its conversion to a new accounting system in October 

2007. 

We recommend that the Secretary of Defense direct the Under Secretary 

of Defense (Comptroller) to clarify the triannual review guidance for the 

January and May reviews in the DOD Financial Management Regulation as 

it pertains to the dollar threshold for reviewing outstanding commitments 

and obligations for the capital budget and operating portion of the working 

capital fund.

DOD provided written comments on a draft of this report. DOD concurred 

with our six recommendations and plans to complete actions on five of the 

six recommendations by the end of fiscal year 2007. We appreciate DOD’s 

efforts and find them generally responsive to our recommendations. For 

example, DOD stated that it would complete the following actions. 

Agency Comments 

and Our Evaluation 

• Direct the Navy to reiterate its policy on handling reimbursable customer 

orders in its fiscal year end closing guidance. 

• Direct the Navy to develop and implement procedures that provide 

assurance that the required triannual reviews are properly performed. 

• Direct the Navy to develop and implement a training course or courses for 

all Naval Air Warfare Center employees involved with the triannual 

reviews and require these employees, including the business financial 

managers, to attend the training. 

However, we are concerned with the timing of the corrective action for 

one of the recommendations and also with the completeness of DOD’s 

planned actions related to the one recommendation with which it 

“concurred with comment.” Specifically, in its written comments, DOD 

stated that the Navy would emphasize reviewing and validating 

outstanding obligations and accrued expenditures that have remained 

outstanding since the conversion to SIGMA and estimated that this action 

would be completed by September 2008. As noted in our draft report, we 

believe that it is critical that such reviews and validations be completed 

prior to the planned conversion to a new accounting system in October 

2007. While we appreciate that the Navy has already started these reviews, 

validating these transactions prior to the system conversion is a best 

practice that would help avoid some of the problems that were 

encountered when NAWC implemented its current accounting system in 

2003. 

Page 26 GAO-07-643 Navy Working Capital Fund
Further, in response to our recommendation that the triannual review 

guidance in the FMR be clarified, DOD “concurred with comment” and 

stated that a letter would be issued directing the Navy to comply with the 

FMR concerning the dollar thresholds for performing the triannual review. 

DOD commented that the FMR was clear as currently written. As noted in 

our draft report, officials from the Naval Air Systems Command, the 

NAWC weapons division, and the NAWC aircraft division had varying 

interpretations of the FMR requirements. Thus, while we continue to 

believe that a revision to the FMR would be the most efficient means to 

resolve this issue, a letter such as that proposed in DOD’s response could 

suffice as long as it includes clarification of the FMR guidance, particularly 

with regard to the dollar thresholds for reviewing outstanding

commitments and obligations for the capital budget and operating portion 

of the working capital fund. 

We are sending copies of this report to the Chairmen and Ranking 

Minority Members of the Senate Committee on Armed Services; the 

Subcommittee on Readiness and Management Support, Senate Committee 

on Armed Services; the Subcommittee on Defense, Senate Committee on 

Appropriations; the House Committee on Armed Services; and the 

Subcommittee on Readiness, House Committee on Armed Services. We 

are also sending copies to the Secretary of Defense, the Secretary of the 

Navy, and other interested parties. Copies will be made available to others

upon request. 

Page 27 GAO-07-643 Navy Working Capital Fund
Should you or your staff have any questions concerning this report, please 

contact McCoy Williams, Director, at (202) 512-9095 or 

williamsm1@gao.gov, or William M. Solis, Director, at (202) 512-8365 or 

solisw@gao.gov. Contact points for our Offices of Congressional Relations 

and Public Affairs may be found on the last page of this report. Key 

contributors to this report are listed in appendix IV. 

McCoy Williams 

Director, Financial Management and Assurance 

William M. Solis 

Director, Defense Capabilities and Management 

Page 28 GAO-07-643 Navy Working Capital Fund
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To determine if the Naval Air Warfare Center’s (NAWC) reported actual

carryover was reliable for fiscal years 2003 through 2006, we obtained

budget and accounting documents that provided information on reported

actual carryover and the carryover ceiling for fiscal years 2003 through 

2006. We analyzed the carryover information to determine if the NAWC 

aircraft or weapons divisions’ reported actual carryover exceeded the 

ceiling for fiscal years 2003 through 2006. We (1) discussed with NAWC 

officials the reliability of the carryover information, (2) obtained and 

analyzed the NAWC aircraft and weapons divisions’ financial statements 

for fiscal year 2003 through 2006 to determine if NAWC certified to the 

reliability of the information, and (3) discussed with NAWC officials 

actions they were taking to improve the reliability of the carryover 

information. We also reviewed year-end transactions that reduced the

dollar amount of reported actual carryover. For these transactions, we 

obtained data on orders from August through December for 2004 and 2005.

We identified orders that showed deobligated amounts in August or 

September and matched them to the same orders that showed obligated

amounts in October through December. We analyzed the orders and any 

amendments to the orders and met with officials from the NAWC aircraft 

and weapons divisions to determine why these transactions occurred at 

the end of the fiscal year. We also discussed with NAWC aircraft division 

and weapons division officials actions they were taking or have taken to 

help ensure that the reported actual carryover amount stays below the 

ceiling. 

To determine if NAWC was utilizing the required triannual review process 

to improve the reliability of its carryover information and underlying 

financial data, we reviewed the policies and procedures the Naval Air 

Systems Command and NAWC used to implement the Department of 

Defense’s (DOD) triannual review guidance. Specifically, we (1) reviewed 

the DOD, Navy, Naval Air Systems Command, and NAWC triannual review 

guidance and discussed it with cognizant individuals; (2) requested the 

triannual review confirmation statements that NAWC submitted since 

fiscal year 2003, and discussed these statements with cognizant 

individuals; (3) discussed NAWC’s triannual review procedures with 

cognizant individuals, including those who completed the reviews; and (4) 

reviewed documentation on the results of the review. We also reviewed 

obligations and accrued expenditures to identify problems and actions 

that could be taken to fix these problems if NAWC had performed the 

triannual reviews. 

Page 29 GAO-07-643 Navy Working Capital Fund
Appendix I: Scope and Methodology 

• We obtained data on the status of obligations related to carryover 

(contracts between NAWC and contractors) at the end of fiscal year 2006. 

From these data, we selected and analyzed 41 obligations that had 

outstanding carryover balances at the end of fiscal year 2006 to determine 

if the carryover balances accurately reflected the amount of work that 

remained to be performed. We selected obligations that were old (over 120 

days) and did not have any recent financial activity (no activity for at least 

1 year) since these obligations were more likely to have unneeded funds 

and because a review of these obligations was, therefore, more likely to 

identify problems with the triannual review procedures. 

• We obtained data on accrued expenditures related to carryover at the end

of fiscal year 2005 and June 2006. From these data, we selected and 

analyzed 17 accrued expenditures to determine if the accrued expenditure 

balances were correct. Accrued expenditures are critical in the 

computation of carryover since NAWC recognizes revenue and bills 

customers based on the accrued expenditures, which in turn, reduces its 

amount of carryover. We selected accrued expenditures that were over 1 

year old and showed no financial activity for at least 1 year since these 

accrued expenditures were more likely to have unneeded funds and 

because a review of these orders was, therefore, more likely to identify 

problems with the triannual review procedures. 

We performed our work at or obtained information from headquarters 

offices of the Under Secretary of Defense (Comptroller) and the Assistant 

Secretary of the Navy (Financial Management and Comptroller), 

Washington, D.C.; the Naval Air Systems Command, Patuxent River, 

Maryland; the Naval Air Warfare Center, Aircraft Division, Patuxent River,

Maryland and Lakehurst, New Jersey; and the Naval Air Warfare Center, 

Weapons Division, China Lake and Point Mugu, California. To assess the 

reliability of the data used in this report, we (1) reviewed and analyzed the 

factors used in calculating carryover, (2) analyzed the NAWC aircraft and

weapons divisions’ fiscal years 2003 through 2006 financial statements, 

(3) analyzed the NAWC aircraft and weapons divisions’ fiscal year 2006 

triannual review confirmation statements, (4) interviewed NAWC officials 

knowledgeable about the carryover data, and (5) reviewed obligations and 

accrued expenditures to determine if they were adequately supported by 

documentation. 

The carryover information in this report was obtained from official Navy 

budget and accounting documents. We conducted our work from July 2006 

through April 2007 in accordance with U.S. generally accepted government 

auditing standards. We requested comments on a draft of this report from

Page 30 GAO-07-643 Navy Working Capital Fund
Appendix I: Scope and Methodology 

the Secretary of Defense or his designee. The Under Secretary of Defense

(Comptroller) provided written comments, which are presented in the 

Agency Comments and Our Evaluation section of this report and are 

reprinted in appendix III. 

Page 31 GAO-07-643 Navy Working Capital Fund
A

and A

ppendix II: Analysis of Dormant Obligations

ccrued Expenditures 

Page 32 GAO-07-643

Appendix II: Analysis of Dormant Obligations 

and Accrued Expenditures 

Our analysis of the Naval Air Warfare Center (NAWC) aircraft and 

weapons divisions’ fiscal year 2006 dormant obligations and accrued 

expenditures showed the two divisions had tens of millions of dollars of 

obligations and accrued expenditures that went unresolved for more than 

1 year. For the transactions we reviewed, we determined that the two 

divisions did not perform adequate reviews on some of their dormant 

obligation and accrued expenditures. If the aircraft and weapons divisions 

had performed adequate triannual reviews as required, NAWC could have 

significantly improved the reliability of the carryover balances reported to 

the Department of Defense (DOD) and congressional defense committees. 

A key element of the triannual reviews is the requirement to follow up on 

all obligations that have been dormant for more than 120 days to 

determine if unused funds are still needed. The task is one of the 16 DOD 

triannual review requirements and is important because it will facilitate 

the (1) identification and recording of work performed on these orders, 

thereby reducing NAWC’s reported carryover and, in turn, the likelihood 

of customers’ budget cuts; and (2) identification and return of unneeded

funds to customers so that the customers can reuse the funds for other 

purposes if they are returned before they expire. Furthermore, this task is

especially important for NAWC as it is scheduled to convert to a new 

system—Navy Enterprise Resource Planning (ERP)—in October 2007, and 

reviewing and validating its records to help ensure they are accurate

before converting to the new system would help ensure a smooth 

transition. 

The task of validating obligations to determine if they are still needed is 

especially important for NAWC’s aircraft and weapons divisions. NAWC’s 

September 30, 2006, report on obligations related to carryover showed that 

$252 million was associated with orders received from customers. Our 

analysis of the obligation report showed that about $59 million of the $252 

million, or 23 percent, was over 120 days old as of September 30, 2006, and 

$27 million of the $252 million, or about 11 percent, was over 1 year old.

As previously discussed, NAWC’s aircraft and weapons divisions did not 

perform the required triannual reviews of obligations to determine their 

validity prior to fiscal year 2006. Even though the two divisions did not 

begin reviewing dormant obligations until fiscal year 2006, both divisions 

certified that adequate follow-up was conducted on all dormant 

obligations over 120 days old in the January and May 2006 reports. 

However, after we began our review, the two divisions did not provide 

written confirmation that adequate follow-up reviews of dormant 

More Effective Reviews of 

Dormant Obligations 

Could Result in Better Use 

of Customer Funds and 

Reduce Reported 

Carryover 

Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

obligations over 120 days old to determine if they were valid were 

conducted in their respective September 2006 reports. 

To identify problems and actions that could be taken to fix these problems 

if the NAWC had performed the triannual reviews, we selected and 

reviewed 41 outstanding obligations totaling about $4.1 million that were 

more than 120 days old and had not had any recent financial activity

(sometimes no activity for years). For the obligations we reviewed, we 

determined that the aircraft and weapons divisions did not perform 

adequate reviews on some of their obligations. In addition, obligations 

were overstated, which means that the year-end carryover for this work 

was also overstated by varying amounts for several years. In reviewing the

41 obligations, we found that 14 obligations totaling about $3 million were 

valid, and 27 obligations1

 totaling about $1.1 million overstated carryover. 

The following provides a breakout of the obligations that overstated 

carryover. 

• Eight obligations totaling $467,786 were for work that had been performed 

but (1) no payments had been made to liquidate the obligations and (2) no 

accrued expenditures were recorded for the work that was performed. 

• Eleven obligations totaling $273,628 had no work completed on them or 

NAWC was in the process of deobligating the funds. 

• Ten obligations totaling $312,727 were for work that had been performed 

and paid for but (1) the payment had either not been correctly recorded or 

matched to the obligations in order to liquidate the obligations and (2) no 

accrued expenditures were recorded for the work performed. 

The following are some examples of the problems we identified with the 

dormant obligations that we reviewed. 

• In March 2004, the NAWC aircraft division obligated $172,552 for the 

inspection of flight test propellers. Since May 2004, no financial activity 

occurred for this obligation (such as payments made or accrued 

expenditures recorded for work performed). According to NAWC aircraft 

division officials, the accounting department reviewed this obligation prior 

to our visit and confirmed that this appeared to be a valid outstanding 

obligation since they had not received a bill for this work. As part of our 

review, we requested that the business financial manager (BFM) review 

 1

 Portions of two obligation amounts were included in two different categories. 

Page 33 GAO-07-643 Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

the status of the dormant obligation. Further research performed by the 

BFM disclosed that while the work had been completed by July 15, 2004, 

the vendor had not submitted a bill. At the time we performed our work, 

the NAWC aircraft division was in the process of paying the contractor 

and liquidating the obligation. If the triannual review had been effectively 

performed, this problem could have been identified years earlier and 

NAWC could have reduced its year-end obligations and carryover by

$172,552 for fiscal years 2004, 2005, and 2006. 

• In February 2004, the NAWC aircraft division obligated $25,000 for ship 

installation drawings for an aircraft carrier. Since that time, no financial

activity had occurred. Due to a schedule change regarding the availability 

of the aircraft carrier, the shipyard was unable to gain access to the ship in

order to develop the technical drawings. Consequently, the NAWC aircraft 

division was unable to perform the work and use the funds. NAWC 

officials agreed that this obligation should have been closed out several 

years ago and the funds returned to the customer. According to these 

officials, they did not review this obligation as part of the division’s 

triannual review because they lacked the time and resources to review all 

transactions below $50,000. As a result of not deobligating the funds from 

the records, the NAWC aircraft division overstated its reported year-end

obligations and carryover by $25,000 for fiscal years 2004, 2005, and 2006. 

• In fiscal year 2002, the NAWC weapons division obligated $30,000 for 

updating electronic software in EP-3 planes. As of September 2006, the 

weapons division’s accounting records showed that $22,798 of the 

obligation remained on the accounting records. As part of our review of 

NAWC carryover, we requested that the BFM review the status of this 

dormant obligation. The BFM found that (1) the work was completed in 

2002, (2) the contractor processed about $18,986 in invoices but only 

$7,305 in invoices were recorded as being paid, and (3) about $11,014 of

the original $30,000 was not used by the contractor. The BFM agreed that 

the accounting records were in error and, as a result of our inquiry, NAWC 

weapons division officials are researching the invoice difference of 

$11,681 ($18,986 less $7,305) and plan to return the remaining unused 

amount of $11,014 to the customer. As a result of this failure to match 

invoices with the obligation and revert unused funds back to the customer 

in a timely manner, the NAWC weapons division overstated reported yearend obligations and carryover by $22,798 in fiscal years 2003, 2004, 2005, 

and 2006 while also precluding the customer from using some of these 

funds for some other purpose because the funds had expired. 

Page 34 GAO-07-643 Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

At the conclusion of their triannual reviews, fund holders are required to 

provide written confirmation that they have conducted adequate research

on all accrued expenditures2

 that are more than 120 days old to determine 

if they are valid. This task is important because 

• large accrued expenditures balances in general, and large dormant 

accrued expenditure balances in particular, can indicate either serious 

accounting problems or ineffective procedures for developing accrued

expenditure schedules; and 

More Effective Reviews of 

Dormant Accrued 

Expenditures Could 

Improve Reliability of 

Reported Carryover 

• accrued expenditures reduce reported carryover balances, and overly 

optimistic accrued expenditures can, therefore, cause reported carryover 

to be understated. 

The task of validating accrued expenditures is especially important for the 

aircraft and weapons divisions because NAWC’s report on accrued 

expenditures related to carryover showed that it had about $138 million of 

accrued expenditures as of June 30, 2006, that were associated with orders 

received from customers over the years. Accurately accounting for 

accrued expenditures is important from a carryover standpoint since 

NAWC recognizes revenue and bills customers based on accrued 

expenditures. The Office of the Under Secretary of Defense (Comptroller) 

has also recognized the importance of accrued expenditures in its review 

of Navy working capital fund activities. During its review of the Navy’s 

working capital fund research and development fiscal year 2008 budget, 

the Comptroller’s Office questioned the large amount of recorded accrued 

expenditures. As a result, the Office of the Under Secretary of Defense 

(Comptroller) reduced the Navy’s working capital fund research and 

development fiscal year 2008 budget for three research and development 

subactivity groups, including NAWC, by $214.7 million. 

Our analysis of NAWC’s accrued expenditures report showed that about 

$85 million of the $138 million of accrued expenditures, or 62 percent,

were over 120 days old as of June 30, 2006. Further, $45 million of the $138 

million, or about one-third of the reported accrued expenditures, were 

over 1 year old. NAWC officials informed us that when NAWC 

 2

 According to DOD’s Financial Management Regulation 7000.14-R, Volume 1, accrued

expenditures represent the amount of paid and unpaid expenditures for (1) services

performed by employees, contractors, etc.; (2) goods and tangible property received; and 

(3) items such as annuities and insurance claims for which no current service or

performance is required. 

Page 35 GAO-07-643 Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

implemented SIGMA in fiscal year 2003, the system did not produce an 

accrued expenditure report.3

 Since the new system did not produce a 

report, the NAWC aircraft division designed and developed its own 

accrued expenditure report. The first report was issued in September 

2005—over 2 years after the implementation of the new system. As a 

result, comprehensive reviews of accrued expenditures were not 

performed for fiscal years 2003, 2004, and 2005. The two divisions began 

performing reviews of accrued expenditures during fiscal year 2006 but 

they did not have any written procedures for such reviews. The following

summarizes the fiscal year 2006 results. 

• The aircraft division provided written confirmation that adequate followup was conducted on all dormant accrued expenditures over 120 days old 

in its January, May, and September 2006 triannual review reports. Our 

analysis of the aircraft division’s accrued expenditure report as of June 

2006 showed that $70 million of the $113 million of the accrued 

expenditures—or 62 percent—were over 120 days old and about $35 

million of the $113 million, or 31 percent, were over 1 year old. 

• The weapons division provided written confirmation that adequate followup was performed in its January and May 2006 reports but it did not 

provide written confirmation that adequate follow-up reviews were done 

of dormant accrued expenditures over 120 days old in its September 2006 

report. Our analysis of the weapons division’s accrued expenditure report 

as of June 2006 showed that $14.7 million of the $24.5 million of the 

accrued expenditures—or 60 percent—were over 120 days old and $10.6

million of the $24.5 million, or 43 percent, were over 1 year old. 

To identify problems and actions that could be taken to fix these problems 

if the NAWC had performed the triannual reviews, we selected and 

reviewed 17 accrued expenditures totaling about $4.4 million4

 that were 

over 1 year old as of June 30, 2006, and did not have any recent financial

activity (sometimes no activity for years). Since accrued expenditures 

 3

 In our report entitled DOD Business Systems Modernization: Navy ERP Adherence to 

Best Business Practices Critical to Avoid Past Failures, GAO-05-858 (Washington, D.C.: 

Sept. 29, 2005), we reported that because the pilots were stovepiped, limited within the 

scope of their respective commands, and not interoperable, they did not transform the

Navy’s business operations. As a result, under the leadership of a central office, the Navy 

decided to start over and undertake the development and implementation of a single ERP 

system. 

4

 The dollar amount for the four categories may not total due to rounding. Further, portions

of three accrued expenditures are included in two categories. 

Page 36 GAO-07-643 Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

represent the amount of paid and unpaid expenditures for services 

performed by employees or contractors, accrued expenditures that remain 

outstanding for long periods of time are an indication of a potential 

problem with the accuracy of recorded accrued expenditure data because

the work should have already been performed and payment made. In most 

of the cases we reviewed, we determined that the aircraft and weapons 

divisions did not perform adequate reviews of their accrued expenditures. 

Specifically, we found that 

• no work was performed on 10 accrued expenditures totaling about $2.2 

million (about half the dollar amount reviewed);

• work was performed for 4 accrued expenditures totaling about $1 million 

and while the contractor had billed NAWC, the payment was not correctly 

recorded in the accounting system to liquidate the accrued expenditure; 

• for 4 accrued expenditures totaling about $1 million, the accrued 

expenditures were so old that neither we nor NAWC officials could 

determine their status; and 

• documentation for 2 accrued expenditures totaling about $100,000 showed

they were correctly recorded. 

The following are examples of the problems we identified with the 

accrued expenditures that we reviewed including their impact on reported

NAWC carryover balances. 

• On July 7, 2003, the NAWC weapons division obligated $232,318 on a 

contract with Northrop Grumman Field Support Services to provide 

engineering services in support of the F-14 Weapons System Support 

Activity. On September 29, 2003, the weapons division recorded an 

accrued expenditure in its system totaling $201,651—the balance 

remaining unpaid to the contractor that was obligated in fiscal year 2003.

As part of the weapons division’s May 2006 triannual review, the BFM that 

had responsibility for this contract determined that the accrued 

expenditure recorded in fiscal year 2003 was unsupported. NAWC 

weapons division officials stated that the final invoice for this contract 

was processed on September 20, 2006. In October 2006, the administrative

contracting officer issued an amendment to the contract that deobligated

these funds which had expired. One month later, the weapons division 

reversed the accrued expenditure and returned the funds to its customer. 

As a result of the erroneous accrued expenditure, our analysis showed 

that the weapons division understated its carryover in fiscal years 2003, 

Page 37 GAO-07-643 Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

2004, 2005, and 2006 by $201,651 and billed its customer for work that was 

not performed. 

• As of March 2002, the NAWC aircraft division obligated $226,901 on an

order with Northrop Grumman to provide engineering design data 

services. In fiscal year 2003, the contractor billed and received payment of

$5,626, leaving a remaining balance of $221,275. Our analysis of the aircraft

division’s June 2006 accrued expenditure report indicated that the aircraft

division recorded accrued expenditures in its accounting system for 

$221,275—the outstanding balance—over 31⁄2 years ago. Although no 

further work was performed on this order, the accrued expenditure of 

$221,275 remained outstanding until August 2006. In August 2006, NAWC 

reversed the remaining accrued expenditure of $221,275 and deobligated 

the funds because the customer appropriation financing the order was 

canceling at the end of the fiscal year. By not performing the triannual 

reviews prior to fiscal year 2006 which would have identified this problem, 

the aircraft division recognized revenue and billed its customer $221,275

for work that was not performed and understated its carryover by this 

amount in fiscal years 2003, 2004, and 2005. 

• In March 1996, the NAWC weapons division issued an order to the 

Electronic Proving Ground totaling $333,000 to provide funding for Global 

Positioning System test support. On September 18, 1996, the NAWC 

weapons division recorded an accrued expenditure for the full amount of 

the obligation in its financial management system. In February 1997, a 

payment totaling $123,195 was processed against these funds. The 

remaining accrued expenditure amount ($209,805) has been outstanding 

since it was recorded in 1996. These transactions were recorded in a 

financial management system that has been replaced twice. Many details 

associated with these transactions are no longer available. Because of the

limited data available, we could not determine the validity of the accrued 

expenditure amount. However, if the weapons division had performed the 

triannual reviews as required by DOD regulation, the records may have 

been available to either reverse the outstanding accrued expenditure 

amount or liquidate the accrued expenditure amount against vendor 

payments. 

• In July 2003, the NAWC aircraft division increased funding on a task order

by $126,477 to provide software support services for the Navy’s HE-2K 

aircraft tactical systems program. In July 2004, the NAWC aircraft division

recorded an accrued expenditure in its accounting system totaling 

$126,477—the entire balance for the software support services to be 

performed. According to a BFM, the work for the software support 

services was never performed. In January 2006, an amendment to this task 

Page 38 GAO-07-643 Navy Working Capital Fund
Appendix II: Analysis of Dormant Obligations

and Accrued Expenditures 

order decreased excess funds for the entire $126,477 that was previously 

obligated for the additional software support services. However, the 

NAWC aircraft division did not reverse the accrued expenditure until 

August 2006—about 2 years after it had recorded the accrued expenditure.

As a result, we determined that the NAWC aircraft division recognized 

revenue and billed its customers $126,477 for work that was not performed 

and understated its carryover by this amount in fiscal years 2003, 2004, and 

2005. 

• Between March 1997 and April 1998, the NAWC weapons division issued 

an order and three amendments totaling $505,000 to the 46th test group at 

Holloman Air Force Base for work on the radar cross section of the QF-4E 

range targets. Between September 1997 and August 2001, the NAWC 

weapons division recorded accrued expenditure amounts totaling $505,000 

in its financial management system—the full amount obligated on the 

order. In the late 1990s, Holloman Air Force Base and the Defense Finance 

and Accounting Service Denver paid the 46th test group the full amount 

obligated on the order. However, the NAWC weapons division records 

showed that only $151,074 was recorded in the financial management 

system as paid. Thus, an accrued expenditure totaling approximately 

$353,926 remains outstanding. If the NAWC weapons division had 

performed its triannual review as required by DOD regulation, the 

weapons division could have reduced its end of fiscal year outstanding 

accrued expenditures by $353,926 for fiscal years 2001 through 2006. 

NAWC weapons division officials stated that in this case, the carryover 

amount was accurately reported but the accrued expenditure amount was 

distorted by $353,926. 

Page 39 GAO-07-643 Navy Working Capital Fund
Appendix III: Comments from the Department Appendix III: Comments from the of Defense 

Department of Defense 

Page 40 GAO-07-643 Navy Working Capital Fund
Appendix III: Comments from the Department 

of Defense 

Page 41 GAO-07-643 Navy Working Capital Fund
Appendix III: Comments from the Department 

of Defense 

Page 42 GAO-07-643 Navy Working Capital Fund
Appendix III: Comments from the Department 

of Defense 

Page 43 GAO-07-643 Navy Working Capital Fund
Appendix IV: 

A

GAO Contacts and Staff 

cknowledgments 

Page 44 GAO-07-643

Appendix IV: GAO Contacts and Staff 

Acknowledgments 

McCoy Williams, (202) 512-9095 

William M. Solis, (202) 512-8365 

Staff who made key contributions to this report were Richard Cambosos, 

Francine DelVecchio, Steve Donahue, Mary Jo LaCasse, Keith McDaniel, 

Greg Pugnetti, Chris Rice, and Hal Santarelli. 

Navy Working Capital Fund

GAO Contacts 

Acknowledgments 

(195095) 
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