United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Defense, Committee on

Appropriations, U.S. Senate

February 1997 FINANCIAL

MANAGEMENT

An Overview of

Finance and

Accounting Activities

in DOD

GAO/NSIAD/AIMD-97-61

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-275755 

February 19, 1997

The Honorable Ted Stevens

Chairman, Subcommittee on Defense

Committee on Appropriations

United States Senate

Dear Mr. Chairman:

As you are aware, the Department of Defense (DOD) continues to

experience significant problems in managing its financial operations. This

report, as you requested, provides information to assist the Subcommittee

in its oversight of these operations. More specifically, it addresses

(1) DOD’s rationale for creating the Defense Finance and Accounting

Service (DFAS), (2) the current size of DOD’s finance and accounting

infrastructure (e.g., locations, personnel, and systems) as compared with

its size when DFAS was created, and (3) the various finance and accounting

activities performed by DOD personnel.

For the most part, the report presents data as of September 30, 1996,

which was provided by DOD. We did not attempt to independently verify

the accuracy or reliability of the data. In addition, as agreed with your

office, this report does not discuss the specific problems DOD is

encountering when performing finance and accounting activities or the

actions it is pursuing to correct them. Included, however, is a list of

reports we have issued over the past several years detailing DOD’s financial

management problems (see “Related GAO Products” at the end of this

report). In addition, we recently issued a “High-Risk Series,” report

entitled Defense Financial Management (GAO/HR-97-3, Feb. 1997). That

report summarizes DOD’s problems in this area and provides our general

assessment of DOD’s approach for correcting them. We also have a number

of assignments underway looking at DOD’s actions to correct weaknesses

in the following six areas: (1) lack of integrated systems, (2) lack of

reliable cost information, (3) problem disbursements, (4) workforce

competencies, (5) poor internal controls, and (6) antiquated business

practices. We will report separately on these assignments.

Results in Brief As with any major corporation in the private sector, DOD must carry out

financial management functions such as recording, tracking, and reporting

the value of its assets, liabilities, changes in equity or capital, and

expenses. This type of accounting information not only helps disclose

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DOD’s financial position and results of operations but also provides DOD and

the Congress with information to effectively allocate resources and assess

DOD’s performance. In addition, DOD must monitor, control, and report on

the obligation and expenditure of appropriations. This is to ensure that

DOD does not violate spending limitations established in legislation.

Before fiscal year 1991, the military services and defense agencies

independently managed their finance and accounting operations.

According to DOD, these decentralized operations were highly inefficient

and failed to produce reliable information for decisionmakers. On

November 26, 1990, DOD created DFAS as its accounting agency to

consolidate, standardize, and integrate finance and accounting

requirements, functions, procedures, operations, and systems. Between

1991 and 1994, DFAS assumed control of 6 large finance and accounting

centers, many of the people at 332 installation-level finance and

accounting offices, and over 300 systems used to perform specific finance

and accounting operations. The military services and defense agencies

began paying for finance and accounting services provided by DFAS using

their operations and maintenance appropriations. The military services

and defense agencies also kept some people at most of the 332

installation-level offices and maintained responsibility for hundreds of

feeder systems that are the source of most finance and accounting

information. Table 1 shows the changes that DOD has reported in its total

finance and accounting network since 1991 and targets DFAS and the

military services hope to meet by the year 2000.

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Table 1: Reported Changes in DOD’s Finance and Accounting Network Since 1991

1991(pre-DFAS) 1996 (current) 2000 (vision)

Military services

6 centers

332 installation-level offices

46,000 employees

331 finance and accounting systems

Budget - not precisely known because many

finance and accounting operations were

financed through major command and

installation budgets.

DFAS

5 centers

17 operating locations

102 installation-level offices

23,500 employees

217 finance and accounting systems

Budget: $1.64 billion

Military services

No centers

332 installation-level offices

17,300 employees

Budget - not precisely known because

finance and accounting activities are

financed through command and

installation budgets (estimated personnel

budget: $598 million).

DFAS

5 centers

Not more than 21 operating locations

No installation-level offices

20,000 employeesa

110 finance and accounting systems

Budget: $1.47 billion (in constant 1996

dollars)

Military services

According to military service financial

management officials, there are no plans

to centrally assess or reduce the size of

the military service finance and accounting

network. These decisions are the

responsibility of local base or installation

commanders.

aAccording to DFAS officials, reducing personnel levels to 20,000 is their current goal. They said,

however, that the number of employees could be reduced by an additional 30 percent if ongoing

economy and efficiency initiatives are successful.

As this table shows, DOD is working toward streamlining its finance and

accounting infrastructure (locations, personnel, and systems). Most of the

reductions, however, are anticipated to occur in DFAS operations as it

moves toward consolidating its activities. For example, DFAS initially

inherited 28,000 of the 46,000 employees that were working in finance and

accounting in 1991. As of September 30, 1996, it had reported a reduction

in this workforce to 23,500 and had plans to eliminate another 3,500

positions by the year 2000. Likewise, DFAS operations were initially spread

over 332 installation-level offices and 6 centers. By the year 2000, DFAS

expects that the 332 installation-level offices will be closed and all its

finance and accounting activities will be performed at 5 centers and no

more than 21 operating locations.

The military services (which were left with 18,000 of the 46,000

employees) continue to perform certain finance and accounting activities

at each military installation. These activities vary by military service

depending on what the services wanted to maintain in-house and the

number of personnel they were willing to transfer to DFAS. In making travel

payments, for example, DFAS disburses funds to Army and Air Force

travelers while the Navy retained this function for most of its travelers.

Because the number of personnel and the activities they perform are

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controlled and budgeted for at the installation level, the military services

have no specific plans to centrally assess or reduce the size of their

networks.

Significantly improving financial management operations in DOD is an

enormous task, involving the replacement of many antiquated systems and

processes. The enormity of this task is made even more difficult by the

need to continue paying millions of military and civilian employees and

thousands of defense contractors as improvements are being made. In this

respect, table 2 illustrates the scope of DFAS’ fiscal year financial operation,

which, by any standard, is unparalleled in either the private or public

sector.

Table 2: Magnitude of DFAS’ Financial

Operation for Fiscal Year 1996

* Disbursed a reported $266 billion on

17 million invoices,

6 million payroll accounts, and

2 million travel vouchers.

* Collected a reported $238 million from

116,000 debtors.

As DOD’s accounting agency, DFAS records these transactions in the

accounting records, prepares thousands of reports used by managers

throughout DOD and by the Congress, and prepares DOD-wide and

service-specific financial statements required by the Chief Financial

Officers Act. The military services play a vital role in that they authorize

the expenditure of funds and are the source of most of the financial

information that allows DFAS to make payroll and contractor payments.

The military services also maintain stewardship over all DOD assets and

provide asset, liability, and equity information needed by DFAS to prepare

annual financial statements.

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Rationale for Creating

DFAS Before 1991, the military services maintained separate finance 

and accounting operations that were duplicative and inefficient.

DFAS was created to standardize DOD finance and accounting 

policies, procedures, and systems.

Military services and defense agencies generally use operations 

and maintenance appropriations to pay for DFAS services.

Before fiscal year 1991, the military services and defense agencies each

had their own financial management structure, consisting of a

headquarters comptroller organization; finance and accounting centers;

and accounting, finance, and disbursing offices at military bases. Each

service and agency developed its own processes and systems that were

geared to its particular mission. In many instances, the military services

and defense agencies interpreted governmentwide and DOD-level finance

and accounting policies differently. According to DOD, these variances

sometimes resulted in managers being provided conflicting information.

Over the years as greater emphasis was placed on joint operations,

financial management system incompatibility and lack of standardization

(even within a military service) became more apparent. For example, there

was only one pay schedule for military personnel, yet DOD maintained and

operated dozens of different pay systems. These types of conditions

produced business practices that were complex, slow, and error prone.

According to DOD officials, no matter how skilled the people operating

them, DOD’s financial management systems and processes were inherently

handicapped in their efficiency and effectiveness. Furthermore, DOD

officials stated that there was an inherent inefficiency in having multiple

organizations perform virtually identical functions.

Given these problems; changes in the economic, political, and

management environments; and advances in technology, DOD officials

became convinced they needed to improve the economy and efficiency of

their finance and accounting operations. After assessing how finance and

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accounting activities were performed, DOD determined that consolidating

these activities offered a number of potential advantages, including

• increasing DOD-wide oversight;

• improving consistency in the application of accounting principles, policies,

procedures, systems, and standards throughout DOD;

• eliminating the costs of maintaining and operating multiple financial

operations and systems;

• improving decision making by providing DOD managers with more timely,

meaningful, and accurate financial information; and

• accelerating the implementation of standard DOD-wide financial systems.

The establishment of DFAS in January 1991 was the first step taken by DOD

directed at fundamentally reforming finance and accounting operations.

DFAS was formed by consolidating into a single agency under DOD’s

Comptroller, the large finance and accounting centers that belonged to the

military services and the Defense Logistics Agency. Recognizing that

additional economies and efficiencies could be achieved, the Deputy

Secretary of Defense, in December 1991, directed DFAS to assume control

of existing finance and accounting operations and personnel at the

command and installation levels within the military services.1

 By 1994,

DFAS had assumed responsibility for many of the finance and accounting

activities at 332 offices (in the continental United States, Alaska, Hawaii,

Guam, Puerto Rico, and Panama) and had announced plans to consolidate

these activities at a limited number of DFAS locations.

To focus DOD management’s attention on managing the cost of finance and

accounting activities, DFAS was designated a Defense Business Operations

Fund (DBOF)2

 business area in fiscal year 1992. The concept of DBOF is to

promote total cost visibility by charging customers (primarily the military

services and defense agencies) for the full cost of providing goods and

services. By doing this, DOD hoped that all levels of management would

focus their attention on the total costs of carrying out certain critical DOD

business operations. DOD anticipated that this would encourage managers

to become more conscious of operating costs and make fundamental

1

DOD refers to this as “capitalization.” In this instance, it means the transfer of ownership and

command and control of the people, resources, and assets (supplies, equipment, personal computers,

etc.) involved in performing DOD finance and accounting functions or directly supporting these

functions.

2

DBOF is a revolving fund that was created by DOD in October 1991 by consolidating DFAS and

several other defense business activities with the nine industrial and stock funds operated by the

military services and defense agencies. DBOF centralized the cash management operations of these

business activities, but the military services and defense agencies continued to manage the day-to-day

operations of the activities much as they had before DBOF was created.

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improvements in how DOD conducts business. In fulfilling DBOF’s concept,

DFAS sets the prices it charges the military services and defense agencies

and bills them to cover the full cost of its operations. The military services

and defense agencies pay for these services primarily with funds from

their operations and maintenance appropriations.

The 1997 Defense Authorization Act required DOD to conduct a

comprehensive study of DBOF and present an improvement plan to the

Congress for approval. Pending the results of this study, DOD’s

Comptroller, on December 11, 1996, dissolved DBOF and created four

working capital funds: (1) Army Working Capital Fund, (2) Navy Working

Capital Fund, (3) Air Force Working Capital Fund, and (4) Defense-wide

Working Capital Fund. DFAS is part of the Defense-wide Working Capital

Fund. The four working capital funds will continue to operate under the

revolving fund concept—using the same policies, procedures, and systems

as they did under DBOF—and charge customers the full costs of providing

goods and services to them.

Changes in DOD’s

Finance and

Accounting

Infrastructure

Over the past few years, DOD’s finance and accounting organization and

management structure has undergone major changes. For example, DFAS

and the military services now share the finance and accounting

responsibilities that previously belonged to the military services. Most

significantly, however, DFAS has developed a new concept of operations

that involves performing most of its finance and accounting operations at

consolidated sites rather than at local bases and installations. This has

allowed it to reduce the number of locations and personnel needed to

perform these operations and to begin standardizing its accounting

systems and processes. This section describes the current organizational

structure of DOD’s finance and accounting activities and the status of

various changes with respect to finance and accounting locations,

personnel, budgets, and systems.

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DFAS and the Military

Services Share Finance

and Accounting

Responsibilities

DFAS and the military services are jointly responsible for 

carrying out DOD finance and accounting activities.

DFAS negotiated a division of responsibility with each military 

service. 

Finance and accounting operations are performed by two chains of

command within DOD. On one side is DFAS, which reports to the Under

Secretary of Defense Comptroller/Chief Financial Officer within the Office

of the Secretary of Defense. On the other side are the military services,

which are headed by their respective secretary. Each service secretary has

an assistant secretary for financial management who directs and manages

financial management activities consistent with policies prescribed by the

Chief Financial Officer and the service’s implementing directives.

As shown in figure 1, the Under Secretary has no direct line of authority to

any of the financial management staff within the military services, defense

agencies, and DOD field activities. Those staff report through their own

organizational structure to their respective unit heads. The Under

Secretary and the unit heads report to the Secretary of Defense. The Under

Secretary, however, does issue policies, instructions, regulations, and

procedures relating to financial management matters and the production

of financial statements, which are binding on all DOD activities.

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Figure 1: Organizational Structure of DOD’s Finance and Accounting Activities

 

 

 

Office of the

Secretary of Defense

Secretary of the

Army

Assistant Secretary 

for

Financial 

Management

Secretary of the

Navy

Assistant Secretary 

for

Financial 

Management

Secretary of the

Air Force

Assistant Secretary 

for

Financial 

Management

Under Secretary of

Defense

Comptroller/Chief 

Financial Officer

Defense Finance and

Accounting Service

Note: There are a number of additional offices at the Under Secretary of Defense level. This chart

shows only the high-level relationship between the Secretary of Defense and DFAS and the

military services.

Source: Our analysis of DOD data.

The National Defense Authorization Act for Fiscal Year 1994 designated

the Comptroller as DOD’s Chief Financial Officer. Specific duties of the

Comptroller/Chief Financial Officer as specified in the Chief Financial

Officers Act include

• directing, managing, and providing policy guidance and oversight of

agency financial management personnel, activities, and operations;

• developing and maintaining integrated accounting and financial

management systems;

• monitoring the financial execution of the agency budgets in relation to

actual expenditures and preparing and submitting timely performance

reports; and

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• overseeing the recruitment, selection, and training of personnel to carry

out agency financial management functions.

As mentioned, each service secretary has an assistant secretary for

financial management who reports to the service secretary and directs and

manages financial management activities consistent with policies

prescribed by the Chief Financial Officer and the service’s implementing

directives. The assistant secretary for financial management position in

each service was established in the National Defense Authorization Act for

Fiscal Year 1989. The act delineated many of the responsibilities of the

office, including

• managing financial management activities and operations;

• directing the preparation of budget estimates;

• approving any asset management systems, including cash and credit

management;

• collecting debts; and

• accounting for property and inventory systems.

Because of potentially overlapping responsibilities, DFAS met several times

with the military services’ financial managers and their staffs during 1994

to reach agreement on their respective finance and accounting roles.

These meetings resulted in “responsibility matrices” that identify the

specific activities that will be performed by DFAS and each military service.

According to DFAS, the responsibility matrix agreements were driven, to a

large extent, by the number of finance and accounting personnel each

service had transferred to DFAS. Prior to the negotiations in 1994, for

example, the Army had transferred about 75 percent of its finance and

accounting people to DFAS. According to Army officials, it kept only a small

contingent of managerial accountants at each installation and major

command location to interpret accounting reports provided by DFAS to the

installation or major command and provide advice to the commander on

proper stewardship of public funds. As a result, DFAS and the Army agreed

that DFAS would perform just about all of the Army’s financial activities. On

the other hand, Air Force and Navy officials stated that they transferred

smaller percentages of their staffs (50 and 29 percent, respectively). They

took this approach to maintain control of activities they felt were essential

to providing service to their military personnel and families, such as

computing travel pay or helping uniformed personnel solve pay-related

problems.

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Travel payment, a finance function, is an example where DFAS provides

different levels of service to its military customers. In this case,

authorization, computation, disbursement, and accounting are performed

by either the military services or DFAS. Table 3 identifies the responsible

party for each of these steps.

Table 3: Division of Responsibility for Travel Payments

Military service Authorization of travel

Computation of travel

entitlement

Disbursement of travel

payment

Accounting for travel

funds disbursed

Air Force Air Force Air Force DFAS DFAS

Army Army DFAS and Armya DFAS DFAS

Navy Navy Navy DFAS and Navyb DFAS

Marine Corps Marine Corps DFAS and Marine Corpsc DFAS and Marine Corpsd DFAS

aThe Army computes travel entitlement for all tactical and overseas units.

bThe Navy disburses the majority of travel pay today; however, with the implementation of

standard travel system and the subsequent conversion of Navy accounts to this system, DFAS

will assume this responsibility for all Navy travelers. This conversion is expected to be completed

in fiscal year 1997.

cDFAS computes travel entitlement for 22,000 of 174,000 (about 13 percent) Marines who are

stationed at installations that are too small to have their own finance office.

dDFAS disburses the funds for about 109,000 (about 63 percent) Marines out of all Marine Corps

personnel.

DFAS Is Consolidating Its

Activities

DFAS assumed control over the military services' finance centers 

and some of the activities at 332 military installations.

DFAS is currently consolidating all its activities into 5 centers and 

not more than 21 operating locations.

The military services continue to perform their remaining 

activities at most of the 332 installations.

When DFAS was established, it opened a headquarters office in Arlington,

Virginia, and assumed management control over the six large finance

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centers that belonged to the military services and defense agencies. One of

these centers was subsequently closed,3

 but the others continue to support

the military service or defense agency they supported prior to the

formation of DFAS. According to the Director of DFAS, this was done

primarily to ensure that support levels to the military services and defense

agencies remained at an acceptable level.

DFAS also assumed control over many of the people and functions at 332

small finance and accounting offices around the world. To improve

operational efficiencies and reduce costs, DFAS has focused a great deal of

attention on consolidating the personnel and workload at a small number

of locations. In May 1994, for example, the Deputy Secretary of Defense

announced plans to move the DFAS workload and many of the people at

these 332 locations to either the existing 5 centers or 20 new operating

locations.4

 As of September 1996, DFAS had closed 230 (or about

70 percent) of the small accounting offices and opened 17 operating

locations.5

 Figure 2 shows the number of finance and accounting offices

that DFAS plans to close through fiscal year 1998, when the consolidation is

now expected to be completed.

3

The Navy Center in Arlington, Virginia, was closed in September 1992 and its functions distributed to

other centers.

4

On July 1, 1994, a 21st site was added at Ford Island, Hawaii, to support DOD’s finance and

accounting operations in the Pacific theater.

5

See our reports on the DFAS consolidation issue: DOD Infrastructure: DOD Is Opening Unneeded

Finance and Accounting Offices (GAO/NSIAD-96-113, Apr. 24, 1996) and DOD Infrastructure: DOD’s

Planned Finance and Accounting Structure Is Not Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995).

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Figure 2: Status of Closing DFAS’ 332

Finance and Accounting Offices

230

77

25

Closed/consolidated

through fiscal year 1996

Announced for 

fiscal year 1997

To be completed by

end of fiscal year 1998

Source: DFAS Plans and Management Deputate.

Three of the planned operating locations—Lexington, Kentucky; Newark,

Ohio; and Rantoul, Illinois—have not been formally scheduled for opening

at this time. The fourth planned operating location, at Memphis,

Tennessee, will be under the cognizance of the U.S. Army Corps of

Engineers until the Corps completes its consolidation of finance and

accounting operations around fiscal year 1999. At that time, the Corps will

transfer the activity to DFAS.

Except for Honolulu, Hawaii; Norfolk, Virginia; Orlando, Florida; and San

Antonio, Texas, each operating location provides services to a single

military service. Honolulu serves all of the military services; Norfolk

serves Navy and Army customers; and both Orlando and San Antonio

serve Army and Air Force customers. In addition, Charleston, South

Carolina; Pensacola, Florida; and Omaha, Nebraska, provide civilian pay

service to all military services and defense agencies. Figure 3 shows the

locations of the 5 centers and 21 existing or planned operating locations as

of September 30, 1996. The primary customer (military service or defense

agency) of each center is shown in parentheses in the figure.

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Figure 3: Locations of DFAS Centers and Operating Locations as of September 30, 1996

DFAS 

Headquarters

Cleveland Center

(Navy)

Charleston, SC

Honolulu, HI 

Norfolk, VA 

Oakland, CA

Pensacola, FL

San Diego, CA

Columbus Center

(Defense Logistics 

Agency)

Newark, OH

Denver Center

(Air Force)

Dayton, OH

Lexington, KY

Limestone, ME

Omaha, NE

San Antonio, TX

San Bernardino,

 CA

Indianapolis

 Center

(Army)

Lawton, OK

Orlando, FL 

Rock Island, IL

Rome, NY

Seaside, CA

St. Louis, MO

Kansas City Center

(Marine Corps)

Memphis, TN

Rantoul, IL

 

a

a

a

a

aNot opened as of September 30, 1996.

Source: DFAS Plans and Management Deputate.

As discussed in the previous section, each of the military services retained

certain functions (e.g., managerial accounting, travel claim computation,

and customer service) in order to support local commanders and

customers. To do this, the services have maintained some staff at most of

the 332 installation-level finance offices. Although there are interfaces and

exchanges of information between the staff at these offices and DFAS,

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organizationally they are not part of DOD’s Comptroller or DFAS’

communities. Rather, they report to and receive budgetary support from

the base or installation commander. Civilian and military personnel at

these activities are paid from operations and maintenance and military

personnel appropriations, respectively.

Number of People

Performing Finance and

Accounting Activities Is

Not Tracked

DOD estimated it had 46,000 people performing finance and 

accounting activities in 1994 and has 40,800 performing these 

today.

28,000 people were transferred into DFAS, leaving the military 

services with 18,000 people.

DFAS currently has 23,500 employees.

The military services do not track the number of finance and 

accounting personnel they employ, but estimate there are about 

17,300.

In May 1994, when the Deputy Secretary of Defense announced plans to

consolidate finance and accounting operations, he said that the number of

people performing these activities should drop from about 46,000 to 23,000

by 1999. As of September 1996, DOD estimates show that there were about

40,800 people performing finance and accounting activities—about 5,200

less than estimated in 1994. However, there is some uncertainty about

these numbers primarily because the military services do not centrally

budget for or manage finance and accounting operations.

As a DBOF entity that is now part of the new Defense-wide Working Capital

Fund, DFAS tracks the number of personnel it employs so that it can

accurately charge its customers for the full cost of operations. Therefore,

it generally knows how many people it inherited from the military services

and its current on-board strength. DFAS officials told us, for example, that

by 1994 DFAS had assumed control of 28,000 personnel—about 10,000 at

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the 5 large finance centers and about 18,000 at the 332 small,

installation-level finance and accounting offices.6

 As of September 1996,

this workforce had been reduced to 23,500 and DFAS has plans to eliminate

another 3,500 positions by the year 2000. According to DOD, most of these

reductions are (or will be) made possible by economies of scale achieved

by closing the 332 small finance and accounting offices and consolidating

activities at the 5 centers and 21 operating locations.

Finance and accounting personnel and activities in the military services,

however, are budgeted for and controlled at the installation level.

Consequently, service representatives said there were no specific plans to

centrally assess or reduce the size of their finance and accounting

network. For this reason, they were also uncertain of the number of

people that remained after DFAS assumed control of resources in 1994 or

that are currently onboard. According to DOD, however, there should have

been about 18,000 finance and accounting personnel left with the military

services in 1994. In 1992, DFAS and the military services issued a data call

to all installation-level finance offices, and in 1994, estimated that the total

number of people in DOD’s network was about 46,000.7

 On the basis of this

estimate, DFAS assumed control of 28,000 people, leaving about 18,000

people in the military services.

To determine the number of people in the current military service

network, the services (at our request) either issued another data call to

their installations or prepared an estimate based on other available

information. They reported to us that, as of September 30, 1996,

approximately 17,300 people were performing finance and accounting

activities in the military services.8

 On the basis of a comparison of the

original data call and the current estimate, about 700 fewer people are

performing finance and accounting activities now than DOD officials

believe were doing so when DFAS completed its transfer process in 1994.

Figure 4 shows the number of finance and accounting personnel reported

to us by DFAS and the military services as of September 30, 1996.

6

According to DFAS officials, the actual number of people it inherited by 1994 was 30,700. About 2,700

of these people, however, were computer operators and software developers who were quickly

transferred to the Defense Information Technology Services Office, which is now part of the Defense

Information Systems Agency.

7

DFAS originally determined that the total number of people that had a finance and accounting

position description was approximately 62,000. However, about 16,000 were excluded from possible

transfer to DFAS for a variety of reasons. For example, audit personnel and personnel stationed

overseas or belonging to a tactical unit that would deploy with troops in time of war were not

considered part of DOD’s finance and accounting network.

8

In an attempt to get information that would be comparable with the 1992 data call, we asked the

services to exclude the same type of personnel excluded from consideration in 1992.

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Figure 4: Reported Number of

Personnel Performing DOD Finance

and Accounting Activities as of

September 30, 1996

Military services -- 17,295

0

5,000

10,000

15,000

20,000

25,000

Army

4,547

Air Force

4,723

DFAS

23,464

Navy

8,025

a

aThis includes 589 personnel in the Marine Corps.

Source: Our analysis of data provided by the DFAS Resource Management Deputate and the

military services’ financial management offices.

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Budget to Perform Finance

and Accounting Activities

Exceeds $2 Billion The total budget for DOD finance and accounting activities is 

unknown but exceeds $2 billion.

DFAS' 1996 budget was $1.64 billion.

The military services estimate their personnel costs for fiscal 

year 1996 at $598 million.

The vast majority of the funds come from operations and 

maintenance appropriations.

Information that was provided by DFAS and the military services indicates

that DOD budgeted at least $2 billion in fiscal year 1996 to support finance

and accounting activities. This estimate includes all DFAS costs plus

estimated personnel costs in the military services. Because military service

finance and accounting activities are budgeted at local installations and

bases in various appropriation accounts, the military services were unable

to estimate other finance and accounting-related costs such as training,

equipment, supplies, and overhead.

As part of the new Defense-wide Working Capital Fund, DFAS does not

receive an appropriation. Instead, it bills customers, primarily the military

services, for the cost of operations. These bills include charges for direct

labor costs related to the performance of finance and accounting

functions; indirect costs, such as systems support and depreciation

expenses; and overhead costs, such as management support and

electricity bills. The bills may also include additional charges or reductions

to make up for prior year losses or gains. The military services use their

operations and maintenance appropriations to pay the bills. Figure 5

shows DFAS’ financial operations budget from fiscal years 1991 through

1996 and the projected budget for fiscal years 1997 through 2000—the

numbers are in constant 1996 dollars.

Page 18 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

Figure 5: DFAS’ Budget From Fiscal

Years 1991 Through 2000 in Constant

1996 Dollars

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Fiscal year

Dollars in millions

Dollars Projected dollars

Source: DFAS Resource Management Deputate.

As shown in figure 5, DFAS’ budget for finance and accounting increased

from $339 million (in 1996 dollars) in fiscal year 1991 to about $1.64 billion

in fiscal year 1996, primarily as a result of an increase in its scope of

operations. In fiscal year 1991, for example, DFAS was in operation for only

9 months and was only supporting the finance centers. In fiscal year 1992,

DFAS became a DBOF entity and began to identify and charge the military

services for the full cost of its operations. For example, system support

(e.g., computer hardware and software) costs that had been part of the

Defense Information Systems Agency budget in the past were included in

the DFAS budget. In fiscal year 1993, DFAS began to assume control of the

332 installation-level finance and accounting offices, and in 1994, DFAS

began renovating buildings at the new operating locations.

Page 19 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

Between fiscal years 1996 and 2000, DFAS estimates its budget will

decrease by about 10 percent—from $1.64 billion in fiscal year 1996 to

$1.47 billion in 2000 in constant 1996 dollars. According to DFAS officials,

the decrease reflects a leveling off of depreciation expenses associated

with capital expenditures (such as new computer systems), a drop in

workload as DOD continues to downsize its military force structure, and

the completion of personnel and workload consolidations from the small

finance and accounting offices to DFAS centers and operating locations.

The military services’ finance and accounting activities are funded through

annual operation and maintenance appropriations. Because these

appropriations are allocated to many different budget categories at the

installation level, military service officials were not able to estimate the

total amount budgeted to support their finance and accounting activities.

On the basis of the estimated number of personnel that are currently

performing finance and accounting activities, the services estimated that

for fiscal year 1996 they budgeted about $598 million in personnel costs.

Figure 6 shows the personnel costs each of the military services estimated

it incurred during fiscal year 1996.

Page 20 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

Figure 6: Estimated Military Services’

Finance and Accounting Personnel

Costs During Fiscal Year 1996

Total personnel costs -- $598 million

Marine Corps Air Force

Army

Navy

$22 $191

$128

$257

Dollars in millions

Sources: Military services’ financial management offices.

DFAS Is Reducing the

Number of Finance and

Accounting Systems DFAS is responsible for reducing the number of finance and 

accounting systems used throughout DOD.

Since 1991, the number of DOD's reported finance and 

accounting systems has been reduced from 324 to 217.

The military services continue to operate hundreds of feeder 

systems for which DFAS has no responsibility.

Page 21 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

As part of its mission, DFAS is responsible for standardizing the finance and

accounting systems used throughout DOD. When it was established, for

example, DFAS reported that it inherited 127 finance and 197 accounting

systems that were in use throughout DOD. In general, DOD defines finance

systems as those used to process payments to DOD personnel, retirees,

annuitants, and contractors, and accounting systems as those relied on to

track appropriations and record operating and capital expenses. In

accordance with DOD Financial Management Regulations (DOD 7000.14-R,

Volume 1), DFAS, however, does not recognize or include in its inventory

several hundred “feeder systems”—systems used to initially record

financial data, such as logistics, inventory, and personnel systems—as

finance and accounting systems. Yet these feeder systems, which are

under the control and operations of the military services and defense

agencies, are the source of much of the information that is needed to

adequately account for DOD’s assets and operations.9

DFAS embarked on what it calls a migration system strategy to reduce the

number of DFAS finance and accounting systems. Under this strategy,

which is depicted in figure 7, DFAS plans to gradually reduce the number of

systems used in each functional area (e.g., civilian payroll, military payroll,

and accounting) until it eventually arrives at systems that would be used

DOD-wide for each finance and accounting area. While the completion of

this strategy varies by system and functional area, DFAS estimates that

about 49 percent of its current systems (107 of 217) will be eliminated by

2000.

9

See our reports on DOD systems: DOD Accounting Systems: Efforts to Improve System for Navy Need

Overall Structure (GAO/AIMD-96-99, Sept. 30, 1996) and Financial Management: DOD Inventory of

Financial Management Systems Is Incomplete (GAO/AIMD-97-29, Jan. 31, 1997).

Page 22 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

Figure 7: DOD Migration System Strategy for Each Finance and Accounting Area

.

Legacy 

Systems

Interim

Migratory

Systems

Migratory

System

Target

System

Air Force

Army

Navy

Marine Corps

.

.

.

.

.

Source: DFAS Financial Systems Plan.

This migration strategy typically involves (1) selecting one of the legacy

systems from each service, (2) implementing the system servicewide,

(3) selecting the best interim migratory system to be DOD’s standard

migratory system, and (4) enhancing the migratory system until it meets all

DOD requirements.

As shown in table 4, DFAS has reduced the reported number of finance

systems from 127 to 67 (a 47-percent reduction) and accounting systems

from 197 to 150 (a 24-percent reduction). By the year 2000, DFAS estimates

that the number of systems will be further reduced to 110—43 finance and

67 accounting systems. Table 4 also shows the number of finance and

accounting locations where these systems were used as of September 30,

1996.

Page 23 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

Table 4: Change in Number of Reported Finance and Accounting Systems Since Fiscal Year 1991

Number of systems

Activity

Locations as of

Sept. 30, 1996

Fiscal year

1991

Fiscal year

1996

Fiscal year

2000 (est.)

Finance systems

Civilian payroll

Domestic

Foreign nationala

5

28

27

37

10

21

1

21

Military payroll 4 32 13 6

Retiree and annuitant payroll 2 5 1 1

Travel payments 124 5 3 1

Contract payments 1 2 1 1

Vendor payments 124 8 6 5

Transportation payments 3 3 4 3

Debt management 5 2 1 1

Disbursing 536b 6 7 3

Total finance systems 127 67 43

Accounting systems 124 197 150 67

Total systems 324 217 110

aForeign national systems are unique to specific countries and will continue to be used to pay

foreign nationals as long as DOD maintains a presence in the respective country.

bThe 536 locations consist of 256 ships and 280 disbursing stations where a disbursing officer

has both the authority to disburse payments and access to one of the seven disbursing systems.

Source: DFAS Plans and Management Deputate.

On the basis of the information presented in table 4, DFAS has been

successful in reducing the number of systems in several areas, particularly

those where the military services had already consolidated activities at a

small number of locations. When DFAS was formed, for example, each of

the military services was already operating standard retiree and annuitant

pay systems at its respective finance centers. After evaluating the relative

capabilities of these systems, DFAS selected the Navy’s retiree pay system

and the Air Force’s annuitant pay system as DOD-wide migratory systems.

DFAS subsequently integrated these two systems into one system and pays

all retirees from the Cleveland center and all annuitants from the Denver

center.

Page 24 GAO/NSIAD/AIMD-97-61 Financial Management
B-275755 

DOD Finance and

Accounting Activities DFAS and the military services account for monies from four 

primary sources.

Finance and accounting operations are divided into nine

functional areas.

DOD’s $240-billion appropriation for fiscal year 1996 was used to pay about

6 million people and about 17 million invoices charged to nearly 12 million

contracts. The appropriation also supported the operation of 13 DBOF (now

working capital fund) business areas such as depot maintenance,

commissaries, distribution depots, and DFAS. In addition, in fiscal year

1996, DOD received about $10 billion through its foreign military sales

programs and about $12 billion through the operation of base activities

such as child care facilities, golf courses, and the Armed Forces

Exchanges.

To process financial transactions and account for the receipt and

expenditure of funds, DFAS and military services’ finance and accounting

operations are generally divided into nine functional activities. Table 5

lists these activities, the reported number of DFAS personnel involved in the

activity, and the reported total cost for DFAS to process the transactions in

fiscal year 1996. The military services were unable to provide us with

comparable information.

Page 25 GAO/NSIAD/AIMD-97-61 Financial Management
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Table 5: Reported Number of DFAS

Personnel Performing Finance and

Accounting Functions and the

Associated Costs for Fiscal Year 1996

Dollars in thousands

Activity Number of personnel

Fiscal year 1996 cost to

perform function

Accounting 8,006 $673,498

Finance activities

Civilian payroll 1,184 98,906

Military payroll 3,079 253,240

Retiree and annuitant

payroll

899 64,125

Travel payments 1,423 83,246

Contractor payments 1,625 108,231

Vendor payments 4,823 268,230

Transportation payments 438 29,749

Debt management 327 24,678

Information technology

support

1,469 a

Other 191b 36,886

Total 23,464 $1,640,789

aThe 1,469 people maintain DFAS’ technological infrastructure and provide systems maintenance,

systems development, and software training to the DFAS activities listed above. For the most part,

the costs of their services are charged to the DFAS activities on a reimbursable basis and are

already included in the costs listed above.

bThe 191 people are not involved in the finance and accounting activities listed. Rather they

provide reimbursable support (e.g., base operations and human resource support), primarily to

other DOD units, which are collocated at DFAS facilities.

Source: Our analysis of DFAS data.

A more detailed description of the sources and uses of DOD funds and the

finance and accounting responsibilities of DFAS and the military services is

presented in appendix I.

Agency Comments We requested comments on a draft of this report from the Secretary of

Defense. On January 15, 1997, officials from the Office of the Under

Secretary of Defense Comptroller/Chief Financial Officer and

representatives of DFAS, the Air Force, the Army, and the Navy met with us

to discuss the report. In general, DOD officials agreed with our description

of DOD’s finance and accounting structure and organization. They provided

us with some suggested changes, which we have incorporated in our final

report where appropriate.

Page 26 GAO/NSIAD/AIMD-97-61 Financial Management
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We performed our review from July 1996 through January 1997 in

accordance with generally accepted government auditing standards.

Appendix II contains a description of our scope and methodology.

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

Minority Members of the Senate and House Committees on

Appropriations; Senate Committee on Armed Services; House Committee

on National Security; Senate Committee on Governmental Affairs; House

Committee on Government Reform and Oversight; the Director, Office of

Management and Budget; the Secretary of Defense; and other interested

parties. We will make copies available to others on request.

If you or your staff have any questions concerning this report, please

contact either James E. Hatcher on (513) 258-7959 or Geoffrey B. Frank on

(202) 512-9518. Major contributors to this report are listed in appendix III.

Sincerely yours,

David R. Warren

Director, Defense Management Issues

National Security and International

 Affairs Division

Lisa G. Jacobson

Director, Defense Financial Audits

Accounting and Information

 Management Division

Page 27 GAO/NSIAD/AIMD-97-61 Financial Management
Contents

Letter 1

Appendix I 

Finance and

Accounting in the

Department of

Defense

30

Accounting in the Department of Defense 30

Finance Activities in DOD 34

Appendix II 

Objective, Scope, and

Methodology

48

Appendix III 

Major Contributors to

This Report

50

Related GAO Products 53

Tables Table 1: Reported Changes in DOD’s Finance and Accounting

Network Since 1991

3

Table 2: Magnitude of DFAS’ Financial Operation for Fiscal Year

1996

4

Table 3: Division of Responsibility for Travel Payments 11

Table 4: Change in Number of Reported Finance and Accounting

Systems Since Fiscal Year 1991

24

Table 5: Reported Number of DFAS Personnel Performing

Finance and Accounting Functions and the Associated Costs for

Fiscal Year 1996

26

Figures Figure 1: Organizational Structure of DOD’s Finance and

Accounting Activities

9

Figure 2: Status of Closing DFAS’ 332 Finance and Accounting

Offices

13

Figure 3: Locations of DFAS Centers and Operating Locations as

of September 30, 1996

14

Page 28 GAO/NSIAD/AIMD-97-61 Financial Management
Contents

Figure 4: Reported Number of Personnel Performing DOD

Finance and Accounting Activities as of September 30, 1996

17

Figure 5: DFAS’ Budget From Fiscal Years 1991 Through 2000 in

Constant 1996 Dollars

19

Figure 6: Estimated Military Services’ Finance and Accounting

Personnel Costs During Fiscal Year 1996

21

Figure 7: DOD Migration System Strategy for Each Finance and

Accounting Area

23

Figure I.1: Types of DOD Funds 32

Figure I.2: Overview of Civilian and Military Payroll Process 36

Figure I.3: Overview of Retiree and Annuitant Payroll Process 38

Figure I.4: Overview of Travel Payment Process 40

Figure I.5: Overview of Contractor, Vendor, and Transportation

Payment Process

43

Figure I.6: Overview of Debt Management Process 46

Abbreviations

CFO Chief Financial Officer

DBOF Defense Business Operations Fund

DFAS Defense Finance and Accounting Service

DOD Department of Defense

GAO General Accounting Office

Page 29 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

This appendix provides an overview of the Department of Defense’s (DOD)

finance and accounting operations.

Accounting in the

Department of

Defense

DOD has focused its accounting operations primarily on monitoring and

controlling the obligation and expenditure of budgetary resources. As

discussed in the following sections, DOD carries out these accounting

operations for four types of funds —general, working capital,

nonappropriated, and security assistance.

With the enactment of the Chief Financial Officers Act (CFO) of 1990, the

Congress called for audited agency financial statements that would more

fully disclose a federal entity’s financial position and results of operations

beginning with fiscal year 1996. Such statements are intended to provide

for (1) better information for more informed decisions on allocation of

budgetary resources and (2) an annual assessment of an agency’s financial

performance, including the effectiveness of its execution of its

stewardship responsibilities.

DOD officials have forthrightly acknowledged that serious financial

management problems severely hamper their ability to effectively carry

out the full range of accounting and financial reporting responsibilities

called for in the CFO Act.1 DOD has struggled to put in place the financial

management operations and controls required to produce the information

it needs to ensure adequate accountability and to support decision making.

For example, few of DOD’s accounting systems are now integrated with its

finance systems or with other systems or databases relied on to carry out

its accounting and financial reporting responsibilities. Consequently, DOD

prepares required financial reports to account for an estimated 80 percent

of its physical assets based on management systems that were not

intended for such accounting and financial reporting. The absence of a

fully integrated general ledger-controlled system necessitates DOD’s

reliance on labor-intensive, error-prone processes to ascertain whether all

required items are accounted for and reported.

Largely as a result of the CFO Act and other recent legislative initiatives

directed at increasing financial management discipline throughout the

federal government, DOD has recently begun efforts to broaden the focus of

and to bring greater discipline to its accounting operations. DOD’s Chief

Financial Officer stated that the CFO Act “has contributed to the

1

See our related report on DOD and the CFO Act: Financial Management: Challenges Facing DOD in

Meeting the Goals of the Chief Financial Officers Act (GAO/T-AIMD-96-1, Nov. 14, 1995).

Page 30 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

recognition and understanding of the scope and depth of the financial

management problems that DOD faces and has defined a standard by which

the Department can measure its progress.” DOD has characterized its

blueprint for financial management reform as the most comprehensive

reform of financial management systems and practices in its history.

In its efforts to improve its accounting activities, DOD is guided by a set of

comprehensive standards that were developed by the Federal Accounting

Standards Advisory Board. This Board, which was established in

October 1990 by the Comptroller General of the United States, the Director

of the Office of Management and Budget, and the Secretary of the

Treasury Department, recommends accounting standards after

considering the financial and budgetary information needs of the

Congress, executive agencies, and other users and comments from the

public. The Office of Management and Budget, Treasury, and GAO then

decide whether to adopt the recommended standards; if they do, the

standards are published by the Office of Management and Budget and GAO

and become effective. Recently, a set of comprehensive accounting

standards was approved by the three agencies. The new accounting

standards and accompanying reporting concepts are central to effectively

meeting the financial management improvement goals of the CFO Act of

1990, as amended. Also, improved financial information is necessary to

support the strategic planning and performance measurement

requirements of the Government Performance and Results Act of 1993.

DOD Accounting Focuses

on Four Types of Funds

DOD accounting personnel are responsible for accounting for funds

received through congressional appropriations, the sale of goods and

services by working capital fund businesses, revenue generated through

nonappropriated fund activities, and the sales of military systems and

equipment to foreign governments or international organizations.

Figure I.1 shows the types of funds and the sources and uses of the funds.

Page 31 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Figure I.1: Types of DOD Funds

Nonappropriated Funds

Source:

Self-sustaining program

 dollars

Use:

Golf courses

Officers' messes

Child care

Libraries

General Funds

Source:

Appropriated dollars

Use:

Civilian and military pay

Retiree and annuitant pay

Travel payments

Contractor, vendor, and

transportation payments

Debt management

Working Capital Funds

Source:

Dollars from goods and 

 services provided to DOD

 customers

Use:

To procure goods needed

 to satisfy customers' needs

Security Assistance Funds

Source:

Sales dollars 

Use:

To procure specified items

 (through the U.S. military

 services) to fill orders from

 foreign governments or 

 international organizations

Source: Our analysis of DOD data.

General Funds General funds, the largest category of funds the Defense Finance and

Accounting Service (DFAS) must account for, involve monies provided to

DOD through congressional appropriations for military personnel;

operation and maintenance; military construction; procurement; and

research, development, test and evaluation. The Congress appropriated

over $240 billion to DOD for fiscal year 1996. Because some of these

appropriations involve multiyear funds, DFAS accounted for $338.5 billion

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Appendix I 

Finance and Accounting in the Department

of Defense

in obligated and unobligated balances in general funds monies during

fiscal year 1996.

Working Capital Funds As of September 30, 1996, DFAS was required to account for $74.6 billion in

obligated and unobligated balances generated by 13 working capital fund

(formally DBOF) business areas. These business areas include such

activities as depot maintenance, commissaries, distribution depots, and

DFAS. In general, these business activities are intended to operate by selling

goods and services to the military services and defense agencies at the

cost incurred in providing the good or service. Many of the services

provided through these business areas, such as the overhaul of ships,

tanks, and aircraft, are essential to maintaining the military readiness of

our country’s weapon systems. Working capital fund customers pay for the

goods and services, primarily, with operations and maintenance funds

appropriated by the Congress.2

Nonappropriated Funds DOD’s nonappropriated funds result primarily from the sale of goods and

services to DOD military personnel, their dependents, and other qualified

persons. Nonappropriated fund activities are divided into two major

types—morale, welfare, and recreation activities and the Armed Forces

Exchanges. In fiscal year 1995, DOD reported morale, welfare, and

recreation activities and Armed Forces Exchanges revenues of $2.5 billion

and $9.4 billion, respectively (according to a DOD official, 1996 revenues

are expected to be about the same). DFAS, however, has accounting

responsibility for only a limited portion of the nonappropriated activities.

In fiscal year 1996, DFAS accounted for about $500 million in

nonappropriated funds.

Morale, welfare, and recreation activities are essentially small businesses

such as libraries, gyms, golf courses, child care centers, and officers’ clubs

that operate at numerous military installations worldwide. Armed Forces

Exchanges are located on military installations worldwide and operate

similarly to commercial retail outlets. The exchanges offer a variety of

goods and services from military uniforms to fast food. DFAS has

accounting responsibility only for a portion of the Army morale, welfare,

and recreation workload. The Air Force, the Navy, and the Marine Corps

account for these activities through their own nonappropriated fund

2

See our reports on DBOF, including Defense Business Operations Fund: DOD Is Experiencing

Difficulty in Managing the Fund’s Cash (GAO/AIMD-96-54, Apr. 10, 1996) and Defense Business

Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, Mar. 1,

1995).

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Appendix I 

Finance and Accounting in the Department

of Defense

organizations that are not part of the military service finance and

accounting offices. The Armed Forces Exchanges are not included in DFAS’

or the military services’ finance and accounting office workload.

Security Assistance Funds DOD also has responsibility for security assistance funds used for

congressionally approved sales of military weapon systems and equipment

to foreign governments. In some cases, funds accounted for in the security

assistance program are received from foreign governments. In addition,

the Congress appropriates funds that countries can use as loans or grants

to make these purchases. In fiscal year 1996, DOD reported that the security

assistance program generated almost $10 billion in new sales. Because

many foreign military sales involve procurements over a number of years,

in total, DFAS accounted for about $28 billion in obligated and unobligated

balances in security assistance funds in fiscal year 1996.

Finance Activities in

DOD

DOD’s finance activities generally involve paying the salaries of its

employees, paying retirees and annuitants, reimbursing its employees for

travel-related expenses, paying contractors and vendors for goods and

services, and collecting debts owed to DOD.

3

 This section describes DFAS’

and the military services’ involvement in each of these activities.

3

See our related reports on DOD payroll: Financial Management: Control Weaknesses Increase Risk of

Improper Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995) and Financial Management:

Defense’s System for Army Military Payroll Is Unreliable (GAO/AIMD-93-32, Sept. 30, 1993).

Page 34 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Civilian and Military

Payroll

Civilian payroll Military payroll

Number of accounts 826,000 3 million

DFAS locations 33 4

DFAS personnel 1,184 3,079

Unique systems 31 13

Dollars disbursed $30.2 billion $46.3 billion

a

a

aIncludes 28 locations and 21 Foreign National Civilian pay systems.

Currently, DFAS pays the salaries of 826,000 civilians and about 3 million

military personnel. In order for DFAS to pay DOD personnel, it receives

information from three sources—military and civilian personnel offices,

customer service representatives, and field finance offices or timekeepers

within the employee’s unit. Figure I.2 shows an overview of the process by

which DFAS obtains information to disburse and account for salary

payments made to all DOD employees.

Page 35 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Figure I.2: Overview of Civilian and Military Payroll Process

DFAS 

accounting 

unit

DFAS 

payroll 

office

Military service DFAS

Military/civilian 

personnel

 offices

Military service 

field finance 

offices or 

timekeepers

Customer service

 representatives

Source: Our analysis of DFAS and military service data.

The civilian and military pay processes begin with the military service’s

personnel office establishing a record in its personnel system for a new

hire or recruit by entering personal data such as name, address, and salary.

Since the majority of the military services’ personnel systems are not

integrated with the payroll systems DFAS uses, entitlement data are sent to

DFAS payroll systems through an electronic interface. This interface allows

DFAS to establish a pay account for the civilian or military employee.

Throughout a person’s employment with DOD, timekeepers, who are

usually administrative support personnel or supervisors in a military unit

or office, or field finance office staff, submit time and attendance

information directly to DFAS. This information is used by DFAS to compute

the amount each employee should be paid. After payments are made, the

payroll system transmits disbursement information to DFAS accounting

Page 36 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

units where accounting records are updated and management and

budgetary reports are distributed to DOD and external agencies.

DFAS also receives information that affects civilian and military pay from

customer service representatives. DFAS and the military services’ finance

personnel share the responsibility of providing customer service to civilian

employees and military members. Customer service duties include input of

employee initiated transactions such as bonds, tax withholdings, and

address changes; resolving pay-related problems; and responding to

inquiries on all aspects of the payment process, such as pay computation

and the recording and balancing of annual and sick leave.

Retiree/Annuitant Payroll

Number of accounts 2 million

DFAS locations 2

DFAS personnel 899

Unique systems 1

Dollars disbursed $26.2 billion

DFAS assumed retiree and annuitant pay responsibilities from the military

services upon its establishment in 1991. In fiscal year 1996, DFAS processed

payments to about 2 million retirees and annuitants. Figure I.3 provides an

overview of the retiree and annuitant payroll process, identifying duties

specific to DFAS and the military services.

Page 37 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Figure I.3: Overview of Retiree and Annuitant Payroll Process

Military service

personnel office

Transfers retiree personnel 

data electronically to DFAS

DFAS - Cleveland

Receives data electronically

from military service

Issues payment to retiree

Sends pay data to accounting unit

DFAS - Denver

Receives records electronically

from DFAS - Cleveland

Issues payment to annuitant

Updates accounting records

Upon death

records transferred

Notification

of retiree death

DFAS accounting unit

Updates accounting records

Distributes management and 

budgetary reports to a variety 

of users

Military service DFAS

Source: Our analysis of DFAS and military service data.

The military services’ personnel offices process the paperwork required

for establishing a retiree pay account. This information is sent

electronically to the DFAS Cleveland center where personnel in retired pay

operations verify that the retiree’s account has been deleted from the

military pay systems (to avoid dual payments to the retiree); compute the

retiree’s pay; disburse payment to the retiree; and forward pay information

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Appendix I 

Finance and Accounting in the Department

of Defense

to a DFAS accounting unit that updates accounting records and distributes

management and budgetary reports.

Upon receipt of a death notice, retired pay operations personnel in

Cleveland will suspend or terminate the retirement pay account and

electronically transfer the case to the Denver center. Denver personnel in

the annuity pay office maintain the annuitant’s pay account, issue

surviving annuity payment, provide customer service support, and update

accounting records. These personnel also annually verify the annuitant’s

eligibility status. Factors that affect entitlement eligibility include, but are

not limited to, changes in Social Security benefits, remarriage, and age of

children.

Travel Payments

Number of travel settlements 2.1 million

DFAS locations 124

DFAS personnel 1,423

Unique systems 3

Dollars disbursed $1.1 billion

The travel payment process for both DOD civilian and military employees

can be broken down into three stages—travel authorization, actual travel,

and travel settlement.4

 Military service finance personnel are involved in

the travel authorization process and, in some cases, the travel settlement

process. DFAS performs the majority of the responsibilities in the travel

settlement step in which the traveler is reimbursed. Annually, DFAS

processes about 2.1 million travel settlements. Figure I.4 provides an

overview of the travel payment process, distinguishing between activities

performed by DFAS and the military services.

4

Travel settlement includes computing the traveler’s entitlement, disbursing funds, and accounting for

travel expenses as shown in table 3.

Page 39 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Figure I.4: Overview of Travel Payment Process

Military Unit

-- Employee prepares travel request

 and makes travel arrangements

-- Superior approves request

-- Administrative support staff reviews travel

 request, obligates funds, and issues travel order

-- Employee travels

-- Employee submits travel voucher to

 supervisor

-- Supervisor approves travel voucher

 and submits travel voucher to DFAS

 travel pay office or the military

 service's finance office 

Military Unit

DFAS or Military Unit

-- Personnel compute travel pay and

 conduct pre-payment audit

-- Personnel disburses payment

-- Updates accounting records

DFAS

Military service DFAS

 

 

Note: This chart represents travel pay that supports the military services. It does not reflect DFAS

travel service that is provided to other defense agencies.

Source: Our analysis of DFAS and military service data.

Page 40 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

The travel pay process begins when a DOD employee or supervisor

identifies a need for travel. The employee prepares and submits a travel

request and cost estimate to the appropriate superior for approval. The

administrative support staff within the organization reviews the approved

request, obligates funds, and issues a travel order. The administrative

support staff includes personnel who have authority to input obligations

into the record and may, for example, be personnel in the finance,

resource management, or budget offices. At this time, the employee makes

travel arrangements and may receive a travel advance through the use of

an official government travel card or, when no other means is available,

from the appropriate disbursement office.

Upon completion of travel, the employee submits a travel voucher to

his/her supervisor for reimbursement of expenses, attaching supporting

documentation such as receipts. Once the supervisor approves the claim,

it is sent to either a DFAS travel pay office or the military service’s finance

office where the traveler’s entitlement is computed and an audit is

conducted.5

 After entitlement is computed, DFAS or the appropriate

military disbursement office makes payment, and DFAS updates the

accounting records to reflect the disbursement.6

5

DFAS computes travel pay for most of the Army and a small proportion of the Marine Corps, while the

Air Force and the Navy perform their own computations.

6

Although DFAS disburses travel pay for all of DOD, the Navy and the Marine Corps also disburse

travel pay for some of their members.

Page 41 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Contractor, Vendor, and

Transportation Payments Contractor 

payments

Vendor 

payments

Transportation 

payments

Number of invoices 

paid

1 million 14 million 2 million

DFAS locations 1 124 1

DFAS personnel 1,625 4,823 438

Unique systems 1 5 4

Dollars disbursed $67.1 billion $94 billion $1.5 billion

DOD finance and accounting personnel are also responsible for making

payments to contractors for goods and services such as the production of

weapon systems, the purchase of computer equipment, and the shipment

of freight and personal property. DFAS has the primary responsibility for

processing the transactions, paying the contractor or vendor, and

accounting for the disbursement of funds. Military service finance

personnel are involved to the extent that they verify that funds are

available for use and they enter information into accounting systems to

show that funds have been committed or obligated for various goods and

services. In fiscal year 1996, DFAS employees made payments on

approximately 17 million invoices submitted by contractors and vendors.7

As shown in figure I.5, while variations exist, the process of acquiring

goods and services starts outside of the finance and accounting

community, usually with a program manager issuing a request for a

procurement of an item or the shipment of freight.

7

See our related reports on contractor pay, including Financial Management: DOD Needs to Lower the

Disbursement Prevalidation Threshold (GAO/AIMD-96-82, June 11, 1996) and DOD Procurement:

Millions in Contract Payment Errors Not Detected and Resolved Promptly (GAO/NSIAD-96-8, Oct. 6,

1995).

Page 42 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Figure I.5: Overview of Contractor, Vendor, and Transportation Payment Process

Inputs 

commitment/obligation

information

Military Service

Finance Office

Sends invoice

to DFAS/military

service

Contractor or Vendor 

Accepts

deliveries

Sends

receiving

reports to

DFAS

Matches contract,

invoices, and

receiving reports

Reports payment

information back

to military services

Pays

invoices

Military Service Activity

Identifies a need for a 

good or service

DFAS

Military Service Activity

Delivers item or

provides service

Military service DFAS

Posts

accountin

reco

g

rds

Source: Our analysis of DFAS and military service data.

Page 43 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Once a requirement for a good or service has been identified, personnel

from a military service finance office are contacted to ensure that funds

are available for use. If funds are available, the finance personnel set up a

commitment on their accounting system. If the supply office has the

needed item, it is issued to the requestor. If it is not available through a

supply office, the contracting office awards a contract for high-dollar value

items or the military service finance office establishes a purchase order for

lower value items. For the movement of freight and personal property, DOD

either provides the service using its own resources or generates a

government bill of lading for the service.

Once a supply item is ordered or service has been contracted for, the

vendor delivers or performs the service and sends an invoice to the

appropriate DFAS office for payment. A receiving report is sent by the

requestor to the same office to show that the delivery was received.

Personnel at each DFAS location are responsible for matching contract,

invoice, and receiving report information prior to making a payment to a

contractor/vendor. After a payment is made, accounting personnel at the

operating locations are responsible for activities such as matching

payment information against obligations and providing status of funds

information to the military services.

Debt Management

Individual 

out-of-service

Contractor

Number of debtors 319,000 2,500

Amount owed $464 million $3.5 billion

DFAS locations 4 1

DFAS personnel 317 10

Unique systems 1 1

Dollars collected $55.6 million $183 million

Page 44 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Federal law requires that all government agencies pursue collection action

against individuals or contractors that owe the government money. Within

DOD, these debts can result from a wide variety of transactions such as

defaulted loans (education or small business) or for various overpayments

of pay and benefits. If an individual is employed by DOD or receiving any

compensation payment, the military service finance offices attempt to

collect the money or process an offset against the individual’s pay account.

If the individual is no longer employed by DOD or is not receiving any

compensation payment, it is considered an out-of-service debt and DFAS

personnel are responsible for collecting the debt. DFAS is also responsible

for collecting all debts owed by contractors. As of September 30, 1996,

about 319,000 military and civilian debtors owed DOD $464 million and

approximately 2,500 contractors owed DOD about $3.5 billion.

DFAS personnel closed about 116,000 cases as of the end of fiscal year 1996

during which time they collected approximately $238 million. The military

services perform debt management activities at each of their installations.

However, we were unable to obtain information related to the number of

cases that were processed during fiscal year 1996. Figure I.6 provides an

overview of the process used by DOD to collect debts.

Page 45 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

Figure I.6: Overview of Debt

Management Process

Military service

finance office

Collects debt through a

 demand letter or payroll 

 offset

If debt is not collected and 

individual is currently

employed by DOD, then

Military installation

activity

Identifies debt

Attempts to collect debt

If debt is not collected and 

contractor or individual is not 

currently employed by DOD, then

DFAS center

Collects debt, refers to

 another agency for 

 collection, or writes off

 debt

Adjusts accounting

 records

Individual or

contractor

Incurs debt

Military service DFAS

Source: Our analysis of DFAS and military service data.

Upon the initial identification of a debt, many military installation-level

organizations, such as a hospital, attempt to collect the debt. If the debt is

determined to be uncollectible and is owed by a contractor or someone no

longer working for DOD, it is sent to a DFAS center for collection. DFAS is

Page 46 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix I 

Finance and Accounting in the Department

of Defense

required to send three letters—30 days apart—to debtors in an attempt to

collect the money. Then, if the money has not been collected, it can be

turned over to a private agency for collection or to the Internal Revenue

Service for a potential tax refund offset. The debt may also be sent to the

Department of Justice for legal action if research shows the debtor has the

ability to pay. If DFAS determines that an individual debtor is employed by

another federal agency, it can obtain payment for the outstanding debt

through payroll deductions. At any time during the process, the debt can

be collected in full, compromised to a lesser amount with the remainder

written off, or written off in total if the debt falls below established dollar

thresholds. DFAS updates its accounting records to reflect any of these

events and reports the information back to the military services. If any

debt is collected, it is refunded to the military service that incurred the

debt or deposited into the Treasury Miscellaneous Receipts Account.

Page 47 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix II 

Objective, Scope, and Methodology

The Subcommittee on Defense, Senate Committee on Appropriations,

asked us to provide an overview of DOD finance and accounting activities.

We focused our work on describing how DOD is organized to perform

finance and accounting, the size of the finance and accounting

infrastructure, and the various activities that are performed by DFAS and

the military services. To determine how DOD is organized to perform

finance and accounting activities, we reviewed documents that discussed

the rationale for centralizing accounting activities within DFAS and DFAS

and military service finance and accounting organizational charts. We also

discussed the organizational structure with officials at DFAS Headquarters

and the military services’ Office of the Assistant Secretary for Financial

Management.

To determine the current size of DOD’s finance and accounting

infrastructure, we obtained and reviewed budget, personnel, workload,

and cost figures provided by DFAS. The military services did not have

comparable information readily available. Therefore, officials from the

Army’s and the Marine Corps’ financial management offices sent out a data

call to their respective installations to obtain information on the number of

personnel currently performing finance and accounting activities. The Air

Force updated personnel figures obtained from DOD’s central personnel

database. The Navy updated its personnel figures using a variety of Navy

reports and DOD’s central personnel database. From these numbers, each

of the services estimated the amount of money it spends on personnel

costs to perform finance and accounting activities. Given our overall

assignment objectives and the descriptive nature of our report, we did not

verify the data provided to us by either DFAS or the military services.

For purposes of this report, we did not obtain information from defense

agencies related to how many personnel are currently performing finance

and accounting activities. This decision was based on the lack of a single

focal point within DOD that could provide us with the needed information

from approximately 24 defense agencies and the small number of

personnel involved with defense agency finance and accounting activities

prior to the establishment of DFAS in 1991.

To determine the type of activities DOD finance and accounting personnel

are responsible for performing, we reviewed DOD’s Chief Financial Officer

Financial Management 5-Year Plan, the DFAS Customer Service Plan, the

responsibility matrices negotiated by DFAS with each of the military

services, and work flow descriptions for each finance and accounting

Page 48 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix II 

Objective, Scope, and Methodology

activity. To supplement information included in formal reports, we

interviewed headquarters and field officials at the following locations:

• DFAS headquarters in Arlington, Virginia;

• DFAS centers in Cleveland, Ohio; Columbus, Ohio; Denver, Colorado; and

Indianapolis, Indiana;

• the Army’s and the Navy’s Office of the Assistant Secretary for Financial

Management in Arlington, Virginia;

• the Air Force’s Secretary of the Air Force (Financial Management and

Plans) in Arlington, Virginia; and

• the Marine Corps’ Office of the Deputy Chief of Staff for Program and

Resources in Arlington, Virginia.

Page 49 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

David R. Warren

Brad H. Hathaway

James E. Hatcher

Cheryl K. Andrew

Leticia V. Bates

Accounting and

Information

Management Division,

Washington, D.C.

Lisa G. Jacobson

Geoffrey B. Frank

Galen L. Goss

Page 50 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix III 

Major Contributors to This Report

Page 51 GAO/NSIAD/AIMD-97-61 Financial Management
Appendix III 

Major Contributors to This Report

Page 52 GAO/NSIAD/AIMD-97-61 Financial Management
Related GAO Products

Contractor Pay Financial Management: DOD Needs to Lower the Disbursement

Prevalidation Threshold (GAO/AIMD-96-82, June 11, 1996).

DOD Procurement: Millions in Contract Payment Errors Not Detected and

Resolved Promptly (GAO/NSIAD-96-8, Oct. 6, 1995).

Financial Management: Status of Defense Efforts to Correct Disbursement

Problems (GAO/AIMD-95-7, Oct. 5, 1994).

DOD Procurement: Overpayments and Underpayments at Selected

Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994).

DOD Procurement: Millions in Overpayments Returned by DOD Contractors

(GAO/NSIAD-94-106, Mar. 14, 1994).

Financial Management: Navy Records Contain Billions of Dollars in

Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993).

Financial Management: Air Force Systems Command Is Unaware of Status

of Negative Unliquidated Obligations (GAO/AFMD-91-42, Aug. 29, 1991).

Defense Business

Operations Fund

Defense Business Operations Fund: DOD Is Experiencing Difficulty in

Managing the Fund’s Cash (GAO/AIMD-96-54, Apr. 10, 1996).

Defense Business Operations Fund: Management Issues Challenge Fund

Implementation (GAO/AIMD-95-79, Mar. 1, 1995).

Defense Business Operations Fund: Improved Pricing Practices and

Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132,

June 22, 1994).

Financial Management: DOD’s Efforts to Improve Operations of the

Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24, 1994).

Financial Management: Status of the Defense Business Operations Fund

(GAO/AIMD-94-80, Mar. 9, 1994).

Financial Management: Opportunities to Strengthen Management of the

Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993).

Page 53 GAO/NSIAD/AIMD-97-61 Financial Management
Related GAO Products

Financial Management: Defense Business Operations Fund

Implementation Status (GAO/T-AFMD-92-8, Apr. 30, 1992).

Defense’s Planned Implementation of the $77 Billion Defense Business

Operations Fund (GAO/T-AFMD-91-5, Apr. 30, 1991).

Financial

Management

Financial Management: DOD Inventory of Financial Management Systems Is

Incomplete (GAO/AIMD-97-29, Jan. 31, 1997).

DOD Accounting Systems: Efforts to Improve System for Navy Need Overall

Structure (GAO/AIMD-96-99, Sept. 30, 1996).

Navy Financial Management: Improved Management of Operating

Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94,

Aug. 16, 1996).

CFO Act Financial Audits: Navy Plant Property Accounting and Reporting Is

Unreliable (GAO/AIMD-96-65, July 8, 1996).

CFO Act Financial Audits: Increased Attention Must Be Given to Preparing

Navy’s Financial Reports (GAO/AIMD-96-7, Mar. 27, 1996).

Financial Management: Challenges Facing DOD in Meeting the Goals of the

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

Financial Management: Challenges Confronting DOD’s Reform Initiatives

(GAO/T-AIMD-95-146, May 23, 1995).

Financial Management: Challenges Confronting DOD’s Reform Initiatives

(GAO/T-AIMD-95-143, May 16, 1995).

Financial Management: Control Weaknesses Increase Risk of Improper

Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995).

Financial Management: Financial Control and System Weaknesses

Continue to Waste DOD Resources and Undermine Operations

(GAO/T-AIMD/NSIAD-94-154, Apr. 12, 1994).

Financial Management: Strong Leadership Needed to Improve Army’s

Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993).

Page 54 GAO/NSIAD/AIMD-97-61 Financial Management
Related GAO Products

Financial Management: Army Real Property Accounting and Reporting

Weaknesses Impede Management Decision-Making (GAO/AIMD-94-9, Nov. 2,

1993).

Financial Management: Defense’s System for Army Military Payroll Is

Unreliable (GAO/AIMD-93-32, Sept. 30, 1993).

Financial Management: DOD Has Not Responded Effectively to Serious,

Long-Standing Problems (GAO/T-AIMD-93-1, July 1, 1993).

Financial Audit: Examination of the Army’s Financial Statements for Fiscal

Years 1992 and 1991 (GAO/AIMD-93-1, June 30, 1993).

Financial Audit: Examination of the Army’s Financial Statements for Fiscal

Year 1991 (GAO/AFMD-92-83, Aug. 7, 1992).

Financial Management: Immediate Actions Needed to Improve Army

Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992).

Financial Audit: Aggressive Actions Needed for Air Force to Meet

Objectives of the CFO Act (GAO/AFMD-92-12, Feb. 19, 1992).

Financial Audit: Status of Air Force Actions to Correct Deficiencies in

Financial Management Systems (GAO/AFMD-91-55, May 16, 1991).

Financial Audit: Financial Reporting and Internal Controls at the Air

Logistics Centers (GAO/AFMD-91-34, Apr. 5, 1991).

Financial Audit: Air Force’s Base-Level Financial Systems Do Not Provide

Reliable Information (GAO/AFMD-91-26, Jan. 31, 1991).

Financial Audit: Financial Reporting and Internal Controls at the Air Force

Systems Command (GAO/AFMD-91-22, Jan. 23, 1991).

Locations Performing

Finance and

Accounting Activities

DOD Infrastructure: DOD Is Opening Unneeded Finance and Accounting

Offices (GAO/NSIAD-96-113, Apr. 24, 1996).

DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not

Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995).

Page 55 GAO/NSIAD/AIMD-97-61 Financial Management
Related GAO Products

Military Bases: Analysis of DOD’s 1995 Process and Recommendations for

Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995).

Defense Infrastructure: Enhancing Performance Through Better Business

Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995).

Military Bases: Analysis of DOD’s Recommendations and Selection Process

for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15, 1993).

(709207) Page 56 GAO/NSIAD/AIMD-97-61 Financial Management
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