Testimony

Before the Subcommittee on Government Efficiency,

Financial Management and Intergovernmental

Relations, Committee on Government Reform, House

of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at

10 a.m. Thursday,

July 26, 2001

CANCELED DOD

APPROPRIATIONS

$615 Million of Illegal or

Otherwise Improper

Adjustments

Statement of Jeffrey C. Steinhoff

Managing Director

Financial Management and Assurance

GAO-01-994T
Page 1 GAO-01-994T

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me here today to discuss the Department of

Defense’s (DOD) adjustments to canceled appropriation accounts. Our

related report,1

 issued today and developed at the request of this

Subcommittee and the House Budget Committee, describes DOD’s

problems in establishing the requisite systems, controls, and managerial

attention to properly account for its disbursements. My testimony today

will summarize the detailed findings included in our report.

In 1990, the Congress changed the law governing the use of appropriation

accounts because it determined that controls over them were not

working.2

 Committee reports and other statements relating to the

legislation show that members of the Congress were concerned that the

Congress had inadequate control over the expenditure of hundreds of

millions of dollars of expired appropriations, particularly at DOD. Without

adequate control, the Congress was concerned that agencies could

disburse money in amounts and for purposes that it had not approved. The

1990 law was intended to improve congressional control by providing that,

5 years after the expiration of the period of availability of a fixed-term

appropriation, the appropriation account be closed and all remaining

balances canceled. After closing, the appropriation account could no

longer be used for obligations or expenditures for any purpose.

Because agencies need to keep accurate records, they may, in limited

circumstances, adjust accounting records pertaining to closed accounts to

correct unrecorded or improperly charged disbursements. To justify such

an adjustment, an agency must have sufficient documentation for each

proposed adjustment to show that it clearly meets each of the following

three criteria:

• the disbursement was made when the appropriation account to be

charged was available to cover the disbursement,

• the agency either did not record the disbursement when it was made or

charged it to the wrong appropriation account at that time, and

 1 Canceled DOD Appropriations: $615 Million of Illegal or Otherwise Improper

Adjustments (GAO-01-697, July 26, 2001).

2

National Defense Authorization Act for Fiscal Year 1991 (Public Law 101-510, dated

November 1990).
Page 2 GAO-01-994T

• the proposed adjustment will result in the disbursement being charged

to the proper appropriation account.

From the enactment of the 1990 law through September 30, 1999, DOD

requested that the Department of the Treasury (Treasury) make

adjustments affecting 333 closed accounts valued at $26 billion. By

comparison, during the same period, all other federal agencies combined

requested that Treasury make adjustments affecting only 21 closed

accounts valued at $5 million.

According to DOD, adjustments affecting closed appropriation accounts

during fiscal year 2000 exceeded $2.7 billion. Amid concerns over the

magnitude of DOD adjustments affecting closed appropriation accounts

and whether they complied with the 1990 account closing law, you and the

Chairman of the House Budget Committee asked that we review the

adjustments. Our review focused primarily on large dollar value

adjustments made during fiscal year 2000, representing $2.2 billion (81

percent) of the $2.7 billion of DOD’s reported closed appropriation

account adjustments made during fiscal year 2000.

Our review of $2.2 billion of DOD’s fiscal year 2000 adjustments affecting

closed appropriation accounts found that about $615 million (28 percent)

of the adjustments were illegal ($146 million) or otherwise improper ($469

million). As shown in table 1, these adjustments to closed accounts should

not have been made for four reasons.

Table 1: Fiscal Year 2000 Illegal or Otherwise Improper Adjustments

(Dollars in millions)

Problem with adjustment Adjustment amount

Appropriation already canceled when disbursement was made $107.7

Appropriation not yet enacted when disbursement was made 38.2

No adjustment was necessary 364.0

Insufficient documentation 104.9

 Total $614.8

The following is an explanation of each of the four categories of

adjustment problems.

Illegal or Otherwise

Improper

Adjustments
Page 3 GAO-01-994T

The 1990 account closing law specifically provides that closed

appropriation accounts are not available for expenditures. We found that

about $108 million of the adjustments resulted in charging appropriation

accounts that had closed before the disbursements were made. These

adjustments produced the same result as if DOD had made expenditures

from and charged closed appropriation accounts at the time the

disbursements were made. Therefore, these adjustments violated the 1990

account closing law. For example, in December 1999, the Defense Finance

and Accounting Service (DFAS) Columbus Center recorded an adjustment

that changed $79 million of disbursements from charges against fiscal

years 1993 through 1995 research and development appropriations to

charges against a fiscal year 1992 research and development

appropriation. According to documentation in the contract files, the

adjustment was to correct previous disbursing errors by redistributing the

payments in accordance with the payment terms specified in the contract.

The payment terms of the contract specified that payments should be

made using “oldest funds first.” Under this instruction, payments should be

charged to the oldest appropriation cited on the contract until the

obligated balance has been exhausted for that appropriation. Subsequent

payments are then charged to the next oldest available appropriation, and

so on, until all the funds are used up or the contract is complete. Making

the adjustment that charged the $79 million disbursement to the closed

fiscal year 1992 research and development account used up the unspent

balances in that appropriation account and freed up funds on still open

1993 through 1995 research and development appropriation accounts for

other disbursement charges.

We found that charging the $79 million of disbursements to the fiscal year

1992 research and development appropriation was illegal because the

disbursements were made in February 1999—4 months after the fiscal year

1992 research and development appropriation account had closed on

September 30, 1998. DFAS Columbus officials agreed that the adjustment

violated the 1990 law and should not have been made. Our report, issued

today, includes several additional examples of this type of illegal

adjustment.

Under 31 U.S.C. 1502 (a), an appropriation may be used to pay only those

expenses properly incurred during the appropriation’s period of

availability. However, we found that over $38 million of the closed

appropriation account adjustments resulted in charging disbursements to

appropriation accounts that had not yet been enacted at the time the

disbursements were actually made. For example, in January 2000, a total

Appropriation Already

Canceled

Appropriation Not Yet

Enacted
Page 4 GAO-01-994T

of $21 million of disbursements charged to fiscal years 1989 and 1990

appropriations were changed to charges against fiscal years 1998 and 1999

missile procurement appropriations. Since the actual disbursements were

for expenses that were incurred before the fiscal years 1998 and 1999

appropriations were enacted, charging disbursements to these two

appropriations violated 31 U.S.C. 1502 (a).

Further, included in the $21 million were $9.9 million in overpayments,

which the contractor identified as a return of funds that were paid from

the fiscal years 1988 through 1990 appropriations. These appropriations

were canceled at the time the overpayments were returned. As discussed

in our companion report, the 1990 law requires that the collection of

canceled funds be deposited into the Treasury as miscellaneous receipts.

However, we found that instead of forwarding the overpayments to the

Treasury, DFAS Columbus redistributed the $9.9 million to current and

expired appropriations that were funding the still-open contract. In

discussing these errors with responsible DOD officials, they agreed that

the $21 million adjustment and the $9.9 million redistribution were

incorrect and should not have been made. According to the officials, they

plan to reverse the adjustments and determine what actions are required

to correct the accounting records, including returning the $9.9 million to

the Treasury.

Closed account adjustments totaling $364 million were improper because

the initial payments had been charged to the correct appropriations and

should not have been adjusted. DOD made these adjustments during

contract reconciliations to try to correct errors in recording disbursements

made under the contracts. Generally, these reconciliations were initiated if

DOD could not pay invoices because other disbursements had been

erroneously recorded against the wrong appropriations funding contracts.

For example, in November 1999, DFAS Columbus received an invoice

from a contractor for $685,000. DFAS Columbus could not pay the

contractor because there were not sufficient funds available in the cited

accounting line to pay the invoice. As a result, DFAS Columbus reconciled

the fiscal year 1988 contract, which resulted in over $590 million of

adjustments affecting closed appropriation accounts. Our review of these

found that $210 million of the adjustments should not have been made

because the actual disbursements—some of which were made over 10

years earlier—were initially recorded correctly. As a result of this process

to free up sufficient funds to pay the $685,000 invoice, DFAS Columbus

made improper adjustments affecting the closed accounts. Thus, the

No Adjustment Necessary
Page 5 GAO-01-994T

reconciliation resulted in at least $210 million of accounting errors that did

not exist before the reconciliation took place.

To adjust its records, an agency must have sufficient documentation to

show that the adjustment is legal and changed an incorrect charge to a

correct one. However, neither DOD nor we could find sufficient

documentation in DOD’s accounting and contract records to support

about $105 million of closed appropriation account adjustments. For

example, in June 2000, DFAS Columbus made an adjustment that changed

over $2.4 million of disbursements from charges against a fiscal year 1993

appropriation that had not yet been canceled to a fiscal year 1992

appropriation that had been canceled. According to the contract files, the

adjustment was to correct a previous disbursing error. However, in

reviewing the contract files for this adjustment, neither DOD nor we could

identify the original invoice or other supporting documentation to show

which appropriation should have been charged for the goods or service.

We considered these types of unsupported adjustments improper because

DOD must be able to provide documentation to show that the adjustments

are legal and that they changed incorrect charges to correct ones. DOD is

researching these transactions further to determine if additional

documentation can be located to support the adjustments.

DOD’s contract reconciliation process lacked the controls necessary to

ensure that adjustments to closed appropriation accounts were proper.

For example, system deficiencies in DOD’s Contract Reconciliation

System (CRS) significantly contributed to many of the illegal closed

account adjustments.3

 Specifically, CRS did not compare the actual

disbursement date with the appropriation being adjusted to ensure that

the adjustment met certain appropriation law requirements. DOD had been

aware of the system deficiency since at least 1996, but took no action to

upgrade CRS until we brought this problem to its attention. DOD officials

could not tell us why they had not taken action to correct the problem,

which they estimated would have cost $24,460 to fix in 1996. Had CRS

been upgraded to make this comparison in 1996 when the programming

defect was first identified, the $146 million of illegal adjustments made

during fiscal year 2000 may not have occurred.

 3

CRS is an automated reconciliation system that has been used since 1995 by DFAS

Columbus to perform contract reconciliations and to correct errors.

Insufficient

Documentation

Lack of Fundamental

Controls
Page 6 GAO-01-994T

We also noted that DOD contracting officers were using contract

modifications and other methods of communications to instruct DFAS

Columbus to charge disbursements to older appropriation accounts

without regard to whether adjustments would result in charging

disbursements to appropriations that had been canceled. This practice,

when combined with the deficiencies in CRS, resulted in some improper

adjustments.

Finally, the remaining $1.6 billion (72 percent) of the $2.2 billion of

adjustments we reviewed were adequately documented corrections of

errors that DOD had made over the years and, therefore, were not illegal

or improper. They do, however, exemplify the broad-based, high-risk

problems associated with the accuracy of DOD’s payment and accounting

process. As we have previously reported, DOD has long-standing, serious

problems with its ability to accurately account for and report on payments

to contractors, which in these cases resulted in $2.7 billion in adjustments

to closed appropriation accounts in fiscal year 2000 alone. Such issues

have led us to report on the DOD’s financial management as an area of

high risk since 1995.4

 DOD acknowledges that it has major problems with

its accounting and reporting of disbursements and has various ongoing

initiatives aimed at resolving them.

In conclusion, Mr. Chairman, DOD circumvented the provisions in the

account closing law that were intended to strengthen the Congress’

control over the amounts and purposes for which appropriated funds were

spent. DOD was aware of the limitations the account closing law placed on

the availability of canceled appropriations and that the law was enacted

because of previous abuses by DOD’s use of old appropriations. DOD also

knew that a major system used to control its use of appropriations allowed

for disbursements to be charged inconsistent with that law. However, it

did nothing to fix the system, although it estimated the cost to do so to be

minimal.

 4

 GAO has designated government operations and programs as “high risk” because of either

their greater vulnerabilities to waste, abuse, and mismanagement or major challenges

associated with their economy, efficiency, or effectiveness. See Major Management

Challenges and Program Risks: Department of Defense (GAO-01-244, Jan. 2001) and HighRisk Series (GAO-01-263, Jan. 2001).

Large Number of

Adjustments

Exemplify DOD’s

Long-standing

Financial

Management

Problems
Page 7 GAO-01-994T

Our companion report on these issues includes recommendations that

address the need for DOD to immediately reverse and correct the $615

million of closed account adjustments we identified as illegal or otherwise

improper and to take action to strengthen its policies, procedures, and

controls over closed appropriation account adjustments. To the extent

DOD is unable to make proper correcting adjustments because insufficient

balances remain in the correct accounts, we are also recommending that

DOD investigate and report on these adjustments, as required by the

Antideficiency Act, 31 U.S.C. 1351, and implementing guidance.

In the longer term, DOD will need to resolve its financial management

problems, including the lack of leadership and accountability that have

been the subject of numerous reports and recommended corrective

actions over the years. The Secretary and the Comptroller of DOD have

stated their intention to vigorously pursue financial management reform

and plans are being developed to transform DOD’s financial management

systems and practices.

Mr. Chairman, this concludes my formal statement. I would be pleased to

answer any questions that you or other members of the Subcommittee

may have.

For future contacts regarding this testimony, please contact Jeffrey C.

Steinhoff at (202) 512-2600. Individuals making key contributions to this

testimony include Bertram J. Berlin, Dennis B. Fauber, Jeffrey A.

Jacobson, Mary Jo Lewnard, Larry W. Logsdon, Keith E. McDaniel,

Michael S. Peacock, and Harold P. Santarelli.

Contact and

Acknowledgements
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