Navy Working Capital Fund: Management Action Needed to Improve Reliability of the Naval Air Warfare Center's Reported Carryover Amounts
Published: 2007-06-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to the Department of Defense's (DOD) fiscal year 2007 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6 billion of funded work that will be carried over from fiscal year 2007 into fiscal year 2008. The congressional defense committees recognize that these groups need some carryover to ensure a smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine if (1) the Naval Air Warfare Center's (NAWC) reported actual carryover was reliable for fiscal years 2003 through 2006 and (2) NAWC was utilizing the required triannual review process to improve the reliability of its carryover information and underlying financial data.
section_title: What GAO Found
paragraphs: GAO's analysis of NAWC reports determined that NAWC's reported carryover information was not reliable. Since DOD changed its carryover policy in December 2002, NAWC reports showed that while under the ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens of millions of dollars from fiscal year 2003 through fiscal year 2005, as shown in the following table. To the extent that carryover is too high, Congress can redirect the customers' funds for other priorities. GAO's analysis of accounting information on customer orders and discussions with NAWC officials determined that its fiscal year 2003 and 2004 carryover information was unreliable due to (1) NAWC converting to a new accounting system in fiscal year 2003 and (2) NAWC not performing reviews of obligations, including the required DOD triannual reviews. To better manage carryover and improve the reliability of carryover information, starting in fiscal year 2005, NAWC (1) issued guidance on the acceptance of orders at year end and (2) began reviewing orders to correct its old financial records. While the reliability of carryover information improved in fiscal years 2005 and 2006, GAO determined that problems still exist. For example, GAO found that funds on some customer orders totaling $19.5 million were deobligated at fiscal year end and then reobligated at the beginning of the next fiscal year on these same orders. This artificially lowered reported NAWC carryover at fiscal year end. Further, even though DOD's 1996 guidance required NAWC as well as other activities to conduct triannual reviews of its financial information, NAWC did not perform these reviews until fiscal year 2006. If implemented properly, these reviews would improve the reliability of reported carryover information and the underlying financial data. In addition, as of September 2006, the two NAWC divisions were still not fully complying with several of the 16 specific DOD tasks required as part of the triannual reviews. For example, because the two divisions were not always effectively reviewing some obligations, especially dormant obligations (obligations over 120 days old), their reported actual carryover was overstated. Also, effective triannual reviews would help NAWC validate its financial records before it implements a new system that is scheduled to be installed in October 2007.

section_title: Letter
paragraphs: According to the Department of Defense’s (DOD) fiscal year 2007 budget  estimates, working capital fund activity groups (depot maintenance,  ordnance, and research and development) will have about $6 billion of  funded work that will be carried over from fiscal year 2007 into fiscal year  2008. The congressional defense committees recognize that these activity  groups need some carryover to ensure a smooth flow of work during the  transition from one fiscal year to the next. However, past congressional  defense committee reports raised concerns that the level of carryover may  be more than is needed. Excessive amounts of carryover financed with  customer appropriations are subject to reductions by DOD and the  congressional defense committees during the budget review process. To  the extent that carryover is too high, Congress may redirect the funds  gained from such reductions to pay for other priority initiatives.
In May 2001, we reported that DOD did not have a sound analytical basis  for its 3-month carryover standard, which it established in 1996. In  December 2002, DOD revised its carryover policy to eliminate the 3-month  across-the-board standard for allowable carryover. Under the new policy,  the allowable amount of carryover (known as the carryover ceiling) is to  be based on the outlay rate of the customers’ appropriations financing the  work. This means that in determining allowable carryover, the first year  outlay rate of the customers’ appropriations financing the work is used for  new orders received in the current year (first year of the work order).  However, we reported in June 2006 that the military services have not  consistently implemented DOD’s revised policy in calculating carryover.  Instead, the military services used different methodologies for calculating  reported actual and allowable amounts of carryover since DOD changed  its carryover policy in December 2002. We also reported that the Naval Air  Warfare Center (NAWC) exceeded the carryover ceiling for fiscal years  2003, 2004, and 2005 by millions of dollars each year.
As requested by and agreed to with your office, this report assesses  carryover related to NAWC. The objectives of this assignment were to  determine if (1) NAWC’s reported actual carryover was reliable for fiscal  years 2003 through 2006 and (2) NAWC was utilizing the required triannual  review process to improve the reliability of its carryover information and  underlying financial data. Our review was performed from July 2006  through April 2007 in accordance with U.S. generally accepted government  auditing standards. The carryover data used in this report were obtained  from official Navy budget and accounting documents. To assess the  reliability of the data, we (1) reviewed and analyzed the information used  to calculate reported actual carryover, (2) analyzed the NAWC aircraft and  weapons divisions’ fiscal years 2003 through 2006 financial statements, (3)  interviewed officials knowledgeable about the carryover data, (4)  reviewed NAWC’s implementation of the required DOD triannual review  process, and (5) reviewed selected orders to determine if the orders were  adequately supported by documentation. Further details on our scope and  methodology can be found in appendix I. We requested comments on a  draft of this report from the Secretary of Defense or his designee. Written  comments from the Under Secretary of Defense (Comptroller) are  reprinted in appendix III.
subsections: section_title: Background
paragraphs: A working capital fund relies on sales revenue rather than direct  appropriations to finance its continuing operations. A working capital fund  is intended to (1) generate sufficient resources to cover the full costs of its  operations and (2) operate on a break-even basis over time—that is,  neither make a gain nor incur a loss. Customers use appropriated funds to  finance orders placed with the working capital fund. According to the  Navy’s fiscal year 2007 budget, the Navy Working Capital Fund will earn  about $23.4 billion in revenue during fiscal year 2007. The Navy Working  Capital Fund consists of the following five major activity groups: supply  management, depot maintenance, transportation, base support, and  research and development. The Navy’s research and development working  capital fund activity group is Navy’s largest activity group in terms of  expected revenue with $10.1 billion in fiscal year 2007. The activity group  includes the following subactivity groups: (1) the Naval Surface Warfare  Center, (2) the Space and Naval Warfare Systems Centers, (3) the Naval  Undersea Warfare Center, (4) the Naval Research Laboratory, and (5) the  Naval Air Warfare Center.
The Naval Air Warfare Center consists of two divisions: (1) the aircraft  division, which is located at Lakehurst, New Jersey, and Patuxent River,  Maryland; and (2) the weapons division, which is located at China Lake,  California, and Point Mugu, California. NAWC employs about 10,300  civilian and military personnel and is expected to have revenues of almost  $3 billion in fiscal year 2007. The mission of NAWC’s aircraft division is to  operate the Navy’s principal research, development, test, and evaluation;  engineering; and fleet support activity for naval aircraft engines, avionics,  and aircraft support systems, and ships, shore, air operations. The mission  of NAWC’s weapons division is to operate as the Navy’s full-spectrum  research, development, test, and evaluation in-service engineering center  for air warfare weapons systems (except antisubmarine warfare systems),  missiles and missile subsystems, aircraft weapons integration, and  assigned airborne electronic warfare systems. The weapons division also  operates one of the Navy’s major range and test facility bases comprising a  complex of air, land, and sea test ranges.
subsections: section_title: What Is Carryover and Why Is It Important?
paragraphs: Carryover is the dollar value of work that has been ordered and funded  (obligated) by customers but not completed by working capital fund  activities at the end of the fiscal year. Carryover consists of both the  unfinished portion of work started but not completed, as well as requested  work that has not yet begun. Some carryover is necessary at fiscal year  end if working capital funds are to operate efficiently and effectively. For  example, if customers do not receive new appropriations at the beginning  of the fiscal year, carryover is necessary to ensure that the working capital  fund activities have enough work to ensure a smooth transition between  fiscal years. Too little carryover could result in some personnel not having  work to perform at the beginning of the fiscal year. On the other hand, too  much carryover could result in an activity group receiving funds from  customers in one fiscal year but not performing the work until well into  the next fiscal year or subsequent years. By optimizing the amount of  carryover, DOD can use its resources in the most effective manner and  minimize the “banking” of funds for work and programs to be performed  in subsequent years.
Decision makers, including the Office of the Under Secretary of Defense  (Comptroller) and congressional defense committees, use reported  carryover information to make decisions concerning whether working  capital fund activities, such as NAWC, have too much carryover. If NAWC  has too much carryover, the decision makers may reduce the customers’  budgets and use these resources for other purposes. For example, during  its review of the fiscal year 2003 budget, the Office of the Under Secretary  of Defense (Comptroller) determined that the Navy research and  development activities’ carryover had been steadily increasing from about  $2.2 billion in fiscal year 1997 to about $3.4 billion in fiscal year 2003. Since  a significant portion of the carryover was related to work that was to be  contracted out, the Office of the Under Secretary of Defense (Comptroller)  reduced the customer funding by $161.1 million, because these efforts  could be funded in fiscal year 2004 with no impact on performance.
section_title: DOD Revised Its Carryover Policy
paragraphs: In 1996, DOD established a 3-month carryover standard for working  capital fund activities. In May 2001, we reported that DOD did not have a  basis for its carryover standard and recommended that DOD determine the  appropriate carryover standard for depot maintenance, ordnance, and  research and development activity groups. According to Office of the  Under Secretary of Defense (Comptroller) officials, DOD provided verbal  guidance concerning its new carryover policy for working capital fund  activities in December 2002. Subsequently, DOD included its revised  carryover policy in its DOD Financial Management Regulation 7000.14-R,  Volume 2B, Chapter 9, dated June 2004, which eliminated the 3-month  standard for allowable carryover. Under the new policy, the allowable  amount of carryover is to be based on the outlay rate of the customers’  appropriations financing the work. This meant that in determining  allowable carryover, the first year outlay rate of the customers’  appropriations financing the work would be used for new orders received  in the current year (first year of the work order). According to the DOD  regulation, this new metric allows for an analytical-based approach that  holds working capital fund activities to the same standard as general fund  execution and allows for more meaningful budget execution analysis.
To calculate the reported actual carryover for the Navy research and  development activity group that includes NAWC, the Navy uses the  summary-level formula shown below.
Balance of customer orders beginning of year  Plus: New orders received  Equals: Total available orders  Less: Revenue  Less: Work-in-process  Equals: Carryover  In accordance with DOD policy, the following orders and related work are  excluded from this calculation: (1) nonfederal orders, (2) non-DOD orders,  (3) foreign military sales, (4) work related to base realignment and  closure, and (5) major range and test facility base work. The reported  actual carryover is then compared to the amount of allowable carryover  using the above-mentioned outlay rate method to determine if the reported  actual amount was over or under the allowable amount.
section_title: DOD Established Triannual Review Requirement in 1996
paragraphs: The May 1996 memorandum from the Under Secretary of Defense  (Comptroller) that established DOD’s triannual review requirement noted  that the timely review of commitments and obligations to ensure the  accuracy and timeliness of financial transactions is a vital phase of  financial management. To illustrate the point, the Under Secretary stated  that the accurate recording of commitments and obligations (1) forms the  basis for formal financial reports issued by the department and (2)  provides information for management to make informed decisions  regarding resource allocation.
Carryover-related budget decisions are examples of resource allocation  decisions that require reliable obligation data. This is because there is a  direct link between the (1) carryover data that working capital fund  activities report to Congress and DOD decision makers and (2) obligation  data contained in the accounting records of working capital fund activities  and their customers. Specifically,    when working capital fund activities, such as NAWC, accept customer  orders, obligations are created in the customers’ accounting records, and  the activities become the “fund holders”; and   as work is performed and customers are billed, both the unliquidated  obligation balances in the customers’ accounting records and the working  capital fund activities’ reported carryover balances are reduced.
DOD included the triannual review requirements in its Financial  Management Regulation. DOD Financial Management Regulation 7000.14- R, Volume 3, Chapter 8, requires fund holders, such as NAWC, to provide  written confirmation that they have completed 16 specific tasks during  their reviews. For example, the regulation requires fund holders to  confirm, among other things, that they have (1) traced the obligations and  commitments that are recorded in their accounting systems back to source  documentation and (2) conducted adequate follow-up on all dormant  obligations and commitments over 120 days old to determine if they are  still valid. Additionally, the regulation requires fund holders to (1) identify  the problems that were noted during their reviews; (2) advise management  of whether, and to what extent, adjustments or corrections were taken to  remedy noted problems; (3) summarize, by type, the actions or corrections  remaining to be taken; (4) indicate when such actions/corrections are  expected to be completed; and (5) identify the actions that have been  taken to preclude identified problems from recurring in the future. Thus, if  properly implemented by the department, triannual reviews can provide a  systematic process that can help fund holders not only improve the  reliability of their financial data but also identify and correct the  underlying causes of data problems.
section_title: NAWC Implemented a New System in Fiscal Year 2003 and Plans to Implement a Different System in October 2007
paragraphs: In 1998, the Navy established four separate Enterprise Resource Planning  (ERP) pilot programs to address the need for business operations reform  within the Navy. We reported in September 2005 that (1) the Navy  invested approximately $1 billion in its four pilot ERP efforts, without  marked improvements in its day-to-day operations; (2) the lack of a  coordinated effort among the pilots led to a duplication of efforts in  implementing many business functions and resulted in ERP solutions that  carry out similar functions in different ways from one another; and (3) the  pilots resulted in four more stovepiped systems that did not enhance  DOD’s overall efficiency and resulted in $1 billion being largely wasted.
One of these pilots was managed by the Naval Air Systems Command and  called SIGMA. SIGMA was to improve program management including  linkage among contract management, financial management, and  workforce management. Prior to fiscal year 2003, NAWC used the Defense  Industrial Financial Management System to account for its funds. In  January 2003, NAWC began to implement SIGMA and completed  implementation of this new system in March 2003. As discussed later in  this report, NAWC encountered significant difficulties implementing  SIGMA, which affected the reliability of the financial information for fiscal  years 2003 and 2004. The Navy now plans to implement one overall ERP  system, referred to as Navy ERP, and discontinue using the four ERP  systems. This overall ERP system is planned to be implemented at NAWC  in October 2007.
section_title: NAWC’s Reported Actual Carryover Information Was Unreliable
paragraphs: Our analysis of accounting data that provide information on customer  orders and discussions with NAWC officials determined that the reported  carryover information was not reliable for fiscal years 2003 and 2004 as a  result of (1) NAWC’s conversion to a new accounting system in fiscal year  2003 and (2) the divisions not performing reviews of obligations including  the required DOD triannual reviews—as discussed later in this report.  Reliable carryover information is essential for DOD and congressional  defense committees during the budget review process since they may  redirect excessive carryover amounts to pay for other priority initiatives.  Both the NAWC aircraft and weapons divisions’ comptrollers did not  certify to the accuracy of financial information reported in their respective  fiscal year 2003 financial statements. To try to better manage carryover,  improve the reliability of the carryover information, and avoid exceeding  the ceiling, beginning in fiscal year 2005 and continuing into fiscal year  2006, NAWC (1) issued guidance on the acceptance of orders at year end  and (2) started to review orders to correct its old financial records and  reduce carryover. While the reliability of carryover information improved  in fiscal years 2005 and 2006, we determined that data reliability problems  still exist. For example, we found that funds on some customer orders  totaling $19.5 million were deobligated at the end of the fiscal year and  then reobligated at the beginning of the next fiscal year on these same  orders. This artificially lowered carryover at the end of the fiscal year.
subsections: section_title: NAWC Reports Showed that It Exceeded Its Carryover Ceiling from Fiscal Year 2003 through Fiscal Year 2005
paragraphs: Since DOD changed its carryover policy in December 2002, NAWC  exceeded its carryover ceiling by tens of millions of dollars from fiscal  year 2003 through fiscal year 2005. During this 3-year period, Navy reports  showed that NAWC had carryover amounts of $1.1 billion, $1.1 billion, and  $1.0 billion, respectively, which represented over one-third of NAWC’s  annual workload. Table 1 shows the dollar amount of the carryover  ceiling, the dollar amount of the Navy-reported actual carryover for  NAWC, and the dollar amount of carryover that was over or under the  ceiling for fiscal years 2003 through 2006.
section_title: Implementation of New System Affected Reliability of Carryover Information
paragraphs: NAWC reports showed that it exceeded the carryover ceiling in fiscal year  2003 by $16.3 million. NAWC reports showed that the weapons division  exceeded the ceiling by $31 million, while the aircraft division was $14.7  million under the ceiling. NAWC aircraft and weapons division officials  stated that their fiscal year 2003 carryover information was unreliable as a  result of NAWC’s conversion to SIGMA in fiscal year 2003. According to  NAWC aircraft and weapons division officials, immediately after the  conversion to SIGMA between January and March 2003, NAWC personnel  began experiencing problems with the reliability of the data. This resulted  from the lack of subject matter expertise and user training on the new  system, and system configuration problems between the previous system,  called the Defense Industrial Financial Management System, and SIGMA.  Further, due to the system not operating for approximately 3 months and  system-related problems, NAWC experienced significant backlogs in  processing financial documents during fiscal year 2003. For example,  NAWC weapons division officials noted that their personnel spent the first  2 months of fiscal year 2004 processing fiscal year 2003 customer bills.  Due to the delays in processing billing transactions, NAWC’s work-in- process balances at the end of fiscal year 2003 (a key component in the  carryover calculation) were about 10 times (aircraft) and 8 times  (weapons) higher than its fiscal year 2002 reported amount. As a result of  these system problems, both the NAWC aircraft and weapons divisions’  comptrollers would not certify to the accuracy of financial information  reported in their fiscal year 2003 financial statements.
For fiscal year 2004, the aircraft and weapons divisions reported that their  carryover exceeded the ceiling by $35.7 million and $21.5 million,  respectively, for a total of $57.2 million. According to NAWC aircraft and  weapons division officials, several data fixes were made to SIGMA in fiscal  year 2004 that improved its processing times and data integrity issues.  However, some data reliability problems continued to exist. The NAWC  aircraft and weapons divisions’ comptrollers noted problems with the  reliability of some of their financial information presented in the fiscal  year 2004 financial statements. In fiscal year 2004, NAWC aircraft and  weapons division officials stated that, at the request of the Naval Air  Systems Command Comptroller, a team of consultants and analysts  conducted a review of SIGMA’s processes to address its multitude of data  integrity issues and its inability to provide accurate financial statements.  The team developed a detailed plan of action and milestones to fix these  problems with timelines that extended into fiscal year 2006. Further, for  most of fiscal year 2003 and 2004, NAWC aircraft and weapons division  officials stated that SIGMA lacked carryover management reports that  would allow NAWC program managers to monitor the status of each order  (funding document) and make informed decisions to control its carryover.  In the executive summary to the NAWC aircraft division’s fiscal year 2004  financial statements, the division reported that the implementation of  SIGMA resulted in the nonavailability of specific carryover reports  necessary for managing carryover at the program level. NAWC aircraft and  weapons division officials stated that while the reports became available  late in fiscal year 2004, they were of limited utility because of continuing  data integrity issues and NAWC’s inability to review and validate both aged  and current financial records.
section_title: NAWC Took Steps to Better Manage Carryover and Improve the Reliability of Carryover Information
paragraphs: Beginning in fiscal year 2005 and continuing into fiscal year 2006, NAWC  issued guidance on the acceptance of orders at fiscal year end in an  attempt to better manage carryover and avoid exceeding its carryover  ceiling for the third straight year. Specifically, in an August 2005  memorandum that contained fiscal year 2005 NAWC carryover guidance,  NAWC estimated that its year-end carryover balance would be $95 million  over its authorized level. The memorandum placed strict controls over  acceptance of year-end orders including (1) the rejection of noncritical  new orders, (2) the acceptance of requests for reversion of funds back to  customers, and (3) before the NAWC accepts any critical workload that  would result in additional unexpended carryover, the division must obtain  approval from the NAWC aircraft division or weapons division commander  and offset the outstanding carryover amounts by reversions of funds to the  customer of an equal or greater amount. Further, the NAWC comptrollers  were directed to provide program managers with a list of projects or tasks  that had 25 percent or less of authorized funding executed as a potential  source for reversion or offsets. Finally, the NAWC weapons division  provided its business financial management community with tools to give  them the capability to better manage carryover. For example, one tool  provided the business financial managers (BFM) with the capability to  compare planned carryover data to actual carryover data for individual  orders and at the summary level on a weekly basis to determine if actual  carryover may exceed the carryover ceiling at year end. If actual carryover  may exceed the ceiling at year end, the weapons division can use the tool  to identify problems—such as a significant delay in a major program’s  start date—and begin working on solutions to mitigate them. Even with  these stronger management controls over new orders and the increased  efforts to validate old accounts, NAWC’s reports showed that it still  exceeded the carryover ceiling in fiscal year 2005 by $51.7 million. The  aircraft division exceeded the ceiling by $52.4 million while the weapons  division was under the ceiling by $0.7 million.
For fiscal year 2006, NAWC’s reported actual carryover amount was below  the carryover ceiling for the first time since DOD revised its carryover  policy in December 2002. The aircraft and weapons divisions were under  the ceiling by about $10 million and $18 million, respectively. NAWC  officials informed us that they continued to emphasize the management of  carryover during fiscal year 2006 by reviewing orders and issuing  additional guidance. Key elements of this guidance include the following.
The aircraft division issued additional carryover guidance in September  2006 to reiterate several requirements cited in fiscal year 2005.  Furthermore, an aircraft division official noted that the increased focus  resulting from the prior GAO report recommending that the research and  development subactivity groups report their carryover balances separately  in the Navy’s annual budget encouraged NAWC management to more  closely monitor and manage its carryover.
The weapons division issued carryover guidance in August 2006, which  continued to stress the reviews of customers’ orders that are financed with  appropriations that are canceling or expiring. The guidance states that  such reviews would (1) improve the quality of the year-end carryover and  (2) validate the records, which is an essential task for accomplishing a  smooth financial conversion to the new Navy ERP system planned for  October 2007. The guidance further provided that funds accepted during  the remainder of the fourth quarter should not negatively impact the  division’s carryover position. Otherwise, the division should notify the  customer that the order cannot be accepted and renegotiate, if possible,  the amount of the order that can be accomplished using the DOD  carryover guidance on outlay rates.
Furthermore, starting primarily in fiscal year 2005, the aircraft and  weapons divisions began reviewing certain types of orders to validate old  financial records and reduce carryover. According to NAWC aircraft and  weapons division officials, most of these reviews were not done in fiscal  years 2003 and 2004 because of NAWC’s conversion to SIGMA and the  problems, mentioned earlier, it encountered with implementing the system  and the reliability of the data in the system. Some of the reviews  performed by the aircraft or weapons divisions include (1) reviews of  funding documents (orders) citing appropriations that are canceling at  the end of each fiscal year (such reviews have been done since the 1990s),  (2) reviews of funding documents citing accounts that were to expire at  the end of the fiscal year (these reviews started in fiscal year 2005), and  (3) a fiscal year 2006 review of unused funds with work completion dates  of September 30, 2005, and before. According to NAWC officials, these  reviews resulted in correcting millions of dollars in unsupported or  unneeded funds on orders, and greatly improved the reliability of the  financial data. For example, according to a NAWC aircraft division official,  as of August 2005, this division had 14,353 orders that were still open on its  books when it converted to SIGMA in fiscal year 2003. As a result of the  aircraft division’s review of these orders from August 2005 through  November 2006, this number was reduced to 7,053 open orders—a  reduction of about 50 percent—and $10 million of unneeded funds were  removed from its books.
section_title: Some Customer Orders Were Reduced at Year End, which Artificially Lowered Carryover
paragraphs: While we are encouraged by NAWC’s actions to review and validate its  financial records and better manage its carryover, we identified some  cases where NAWC deobligated millions of dollars of funds at fiscal year  end on orders for work it still planned to perform. NAWC then reobligated  funds at the beginning of the next fiscal year to perform the work. This  action artificially lowered NAWC’s actual year-end carryover balances in  fiscal years 2004 and 2005 that were reported to DOD and congressional  decision makers. We analyzed fiscal years 2004 and 2005 year-end orders  where amendments or adjustments were made to deobligate funds on  these orders at the end of the fiscal year. We found a total of $19.5 million  was deobligated at the end of fiscal year 2004 or 2005 and reobligated at  the beginning of the next fiscal year. These actions had the effect of  reducing carryover even though the requirement for the funds still  remained at the time the funds were returned to their customers. We  reported on a similar problem in fiscal year 2003 on our review of the  Space and Naval Warfare Systems Command. The following examples  illustrate the orders that were deobligated at the end of fiscal year 2004 or  2005, which had the effect of reducing reported carryover even though the  requirement for the funds still remained but the work could not be  completed by the end of the fiscal year.
Aircraft division officials stated that they did not know why adjustments  totaling $10.5 million on 14 orders were made to deobligate customer  funds at the end of fiscal year 2004 or 2005 and why the funds were  reobligated at the beginning of the next fiscal year on these same orders.  They said that lack of documentation, turnover of personnel, and  difficulties implementing SIGMA hindered their ability to determine why  these year-end adjustments were made. For example, from December 1,  2003, to September 23, 2004, the NAWC aircraft division accepted a work  order and related amendments from the Naval Air Systems Command  totaling approximately $2.1 million for engineering support for the CH-53E  helicopter program. Accounting records showed that $404,435 was  deobligated in September 2004—at the end of the fiscal year—and that this  same amount was reobligated 1 month later in October 2004—at the  beginning of the next fiscal year. According to an aircraft division official,  “no documentation for reason of the deobligation has been located.”
In April 2005, the NAWC weapons division accepted two orders from the  U.S. Army Space and Missile Defense Command totaling $5.5 million for  range instrumentation services and missile flight safety support for two  separate tests of the Missile Defense Agency Target Intercontinental  Ballistic Missiles. The tests were originally scheduled to be completed in  fiscal year 2005, but were delayed into fiscal year 2006 due to weather and  instrumentation problems. Due to program delays and expenditure rates  that were 25 percent or less of authorized funding on the orders, NAWC  identified these orders as potential funds that could be returned to the  customer. According to a BFM, the NAWC weapons division needed to  have these funds “off the books” to relieve the carryover problem. The  NAWC weapons division’s comptroller officials stated that the return of  funds to customers is appropriate when mission support requirements slip  from one fiscal year to the next and the tasking to be accomplished is  severable, as in this case. On September 23, 2005, the U.S. Army Space and  Missile Defense Command issued an amendment to each order  deobligating a total of $4.85 million. Approximately 1 month later, the  command issued amendments on the orders returning the $4.85 million— the exact amount that was deobligated in September 2005. The two tests  were performed in fiscal year 2006.
In January 2005, the NAWC aircraft division accepted an order from the  Naval Air Systems Command totaling $100,000 for the research and  development of a low-cost, automated fiber optic cable. In September  2005—8 months later—the Naval Air Systems Command issued an  amendment to the order deobligating the entire amount. In October 2005— approximately 1 month later—the command issued another amendment to  the order returning funds to the program totaling $110,000. Work on the  order began in November 2005 and was completed in September 2006.  According to a BFM, delays in completing work in fiscal years 2003 and  2004 on other jobs delayed the start of fiscal year 2005 work. NAWC  aircraft division accounting officials said, and we agree, that work should  have been started within a reasonable amount of time after accepting the  order in January 2005—within 90 days. Otherwise, the funds should have  been deobligated when the delays caused the work to commence beyond a  reasonable amount of time as specified in the DOD financial management  regulation.
section_title: NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year 2006
paragraphs: NAWC did not perform the triannual reviews of its financial information  until fiscal year 2006, even though DOD guidance had long required NAWC  and all other fund holders to conduct these reviews of their financial data  (outstanding commitments, obligations, and accrued expenditures). These  reviews would likely have improved the reliability of carryover  information and the underlying financial data. DOD established its  triannual review requirement in 1996 in order to improve the timeliness  and accuracy of its financial data. However, the aircraft and weapons  divisions did not conduct their first reviews until January 2006—about 10  years later. Further, as of September 2006, the two divisions were still not  fully complying with several of the 16 specific DOD tasks that they were  required to accomplish during their reviews. Because the two divisions did  not always effectively review some obligations, particularly dormant  obligations (i.e., those over 120 days old), (1) their reported actual  carryover was overstated and (2) they sometimes returned unneeded  funds to customers after the funds had expired. Further details on  dormant obligations and accrued expenditures are included in appendix II.  Furthermore, if effectively implemented, the triannual reviews could help  NAWC validate its financial records before it implements a new system  that is scheduled to be installed in October 2007.
subsections: section_title: NAWC Did Not Properly Implement DOD’s Triannual Review Guidance
paragraphs: NAWC did not properly implement DOD’s triannual review guidance cited  in DOD Financial Management Regulation 7000.14-R, Volume 3, Chapter 8.  Specifically, (1) NAWC did not perform the required triannual reviews  prior to fiscal year 2006 although these reviews were required in a May  1996 memorandum from the Under Secretary of Defense (Comptroller)  and in the November 2000 DOD Financial Management Regulation and (2)  NAWC did not review all obligations at least once during fiscal year 2006  as required by the November 2000 DOD regulation. In addition, the  November 2000 DOD regulation (triannual guidance) on the dollar  threshold for reviewing obligations was unclear.
subsections: section_title: NAWC Did Not Perform Required Triannual Reviews Prior to Fiscal Year 2006
paragraphs: Prior to fiscal year 2006, NAWC did not perform triannual reviews, even  though these reviews were required by the DOD Financial Management  Regulation. According to NAWC officials at the aircraft and weapons  divisions, these reviews were not done because they received e-mail  guidance from the Naval Air Systems Command that stated the NAWC  divisions were not required to submit the triannual review confirmation  report because this requirement was only for general funds. In October  2005, the Naval Air Systems Command provided guidance to the NAWC  aircraft and weapons divisions that they were now required to perform the  triannual reviews and complete the confirmation statements. Officials  from the NAWC aircraft and weapons divisions stated that the first time  they completed a triannual review and confirmation statement was for the  period ending January 31, 2006.
section_title: NAWC Did Not Review All Obligations in Fiscal Year 2006 as Required by DOD Regulation
paragraphs: Although the DOD regulation requires that all obligations be reviewed at  least annually in order to substantiate year-end triannual review  requirements, the NAWC aircraft and weapons divisions only reviewed  obligations, including dormant obligations, over a certain dollar  threshold—$50,000 or $200,000. The weapons division did not review all  the obligations because guidance received from the Naval Air Systems  Command dated June 2, 2006, and September 28, 2006, and guidance  issued by NAWC weapons divisions dated September 29, 2006, did not  require a review of all of them. Officials from Naval Air Systems Command  and the NAWC weapons division informed us that they did not require the  review of all obligations at least once a year because they did not realize  that the DOD regulation required such a review. NAWC aircraft division  officials told us that although the DOD regulation required such reviews,  they did not have the time or resources to perform the reviews. If  effectively implemented, the triannual reviews could help NAWC validate  its financial records before it implements a new system that is scheduled  to be installed in October 2007.
section_title: DOD Triannual Review Guidance on Dollar Threshold for Reviewing Obligations Is Unclear
paragraphs: We also found that DOD’s triannual review guidance regarding the dollar  threshold for reviewing outstanding obligations was unclear. The DOD  Financial Management Regulation 7000.14-R, Volume 3, Chapter 8,  guidance states that during the January and May reviews, obligations of (1)  $200,000 or more for investment appropriations (e.g., procurement and the  capital budget of the working capital funds) should be reviewed and (2)  $50,000 or more for operating appropriations (e.g., operation and  maintenance funds and the operating portion of the working capital funds)  should be reviewed. However, the Naval Air Systems Command and the  NAWC weapons division interpreted the guidance to mean that customer  orders—which are the operating portion of the working capital fund— financed with investment funds fell into the $200,000 threshold category  for review purposes, rather than the $50,000 category. The NAWC  weapons division conducted its triannual reviews accordingly. In  discussing this issue with accounting and budgeting officials from the  Office of the Under Secretary of Defense (Comptroller), they stated that  customer orders received by working capital fund activities are part of the  operating portion of the working capital fund regardless of the  appropriation financing the order. Thus, the January and May triannual  reviews should have included all obligations over $50,000.
section_title: NAWC Continues to Refine Its Triannual Review Process
paragraphs: Our review of the process that the NAWC aircraft and weapons divisions  used to conduct their triannual reviews identified several areas that need  improvements. The aircraft and weapons divisions developed their own  separate processes for performing the triannual reviews. For fiscal year  2006, the weapons division used a decentralized process that relied on  both the accounting department and the BFMs to conduct its reviews,  while the aircraft division used a centralized process that relied on the  accounting department to conduct its reviews. During our review, we  identified problems with the two divisions’ triannual reviews of obligation  and accrued expenditure balances. Based on the results of our review and  discussions with NAWC officials, the aircraft and weapons divisions issued  written guidance on performing the triannual reviews and are now  including the BFMs in the process. If the process is implemented properly,  the aircraft and weapons divisions’ decision to include the BFMs in its  triannual review process should result in better reviews and more reliable  financial information, including carryover information, in the future.
subsections: section_title: NAWC Weapons Division Improved Its Decentralized Review Process throughout 2006
paragraphs: The NAWC weapons division accomplished its triannual reviews on a  decentralized basis. During the first step of the process, the Office of the  Comptroller for the NAWC weapons division, which has overall  responsibility for the reviews, developed computer lists that contain  information on the division’s outstanding commitments, obligations, and  accrued expenditures. The Comptroller’s office then placed these lists on  the Business Financial Management Community shared server so that the  BFMs could access the data and conduct their triannual reviews. When the  BFMs finished their reviews, the competency heads certified that their  reviews had been completed and then forwarded their certifications to the  Comptroller’s office. On the basis of the technical department’s  certifications, the Comptroller then certified that the division has  completed its review.
We found problems with the weapons division’s implementation of the  triannual review process. The NAWC weapons division performed its first  triannual review for the period ending January 31, 2006. The review was  performed on a limited basis by the Comptroller’s office since no formal  triannual review procedures had been developed by the weapons division.  For the second triannual review performed for the period ending May 31,  2006, the Comptroller’s office modified its process to place primary  responsibility for reviewing its division’s commitments, obligations, and  accrued expenditures on the BFMs within the division’s technical  departments. NAWC weapons division officials stated that the BFMs had  information that was not immediately available to the Comptroller’s office  on whether work was performed on its orders. Consequently, they were in  the best position to determine whether outstanding obligations and  accrued expenditures were valid and whether the funds were still needed  to perform the work.
While the May 2006 process was better than the one used for the weapons  division’s January 2006 review, our analysis and discussions with technical  department and Comptroller’s office officials found that (1) no written  procedures had been developed by the weapons division, (2) not all BFMs  that were responsible for reviewing the transactions participated in the  training offered by the Comptroller’s office, (3) the Comptroller’s office  did not specifically identify which transactions the technical departments  were required to review, (4) the weapons division did not have a standard  methodology for reporting the results of its technical departments’ reviews  to the Comptroller’s office in order to ensure that all required transactions  were certified, (5) not all BFMs that reviewed transactions were  maintaining documentation for 24 months on their reviews as required by  the DOD Financial Management Regulation, and (6) the division did not  have a procedure in place to ensure the technical departments were  performing the triannual reviews properly. For example, many of the  technical departments’ BFMs that we interviewed stated that the lists  provided by the Comptroller’s office contained hundreds of commitment,  obligation, and accrued expenditure transactions for review, but the lists  did not contain enough information to identify the specific transactions  that the BFMs were responsible for reviewing. As a result, some BFMs did  not perform the May 2006 triannual review at all because they could not  identify the transactions that they were responsible for reviewing. Further,  several of the BFMs that did perform reviews stated that they did not  report their results to the Comptroller’s office because a clearly defined  procedure for reporting the results did not exist.
In August 2006, we met with weapons division officials to discuss the  division’s triannual review process. Based on those discussions, we  pointed out internal control weaknesses we identified in the May 2006  process. The officials agreed that the weapons division’s triannual review  process could be improved and the division needed to document its  triannual review procedures. Shortly after our meeting, the division  established a team to develop guidance on its triannual review procedures.  The team decided to use a phased approach to achieve compliance with  the DOD triannual review regulation. On September 29, 2006, the weapons  division issued interim guidance containing the triannual review  procedures for reporting on the period ending September 30, 2006. The  weapons division made a number of improvements to the May 2006  process. The weapons division (1) modified the process to clearly identify  which technical departments were responsible for the transactions, (2)  directed the department heads who were responsible for the transactions  assigned to their departments to certify that these transactions were  reviewed, and (3) established a procedure for reporting results to the  Comptroller’s office.
Our discussions with several weapons division technical departments’  BFMs found that these officials thought the September 2006 triannual  review process was a significant improvement over the May 2006 review  process because the computer lists provided by the Comptroller’s office  contained sufficient information to identify the technical department and  BFM responsible for reviewing the September 2006 transactions. Further,  the interim guidance contained clear instructions for reporting their  results to the Comptroller’s office through their technical department  managers. Our analysis showed that while the guidance for the September  2006 triannual reviews was an improvement, the guidance (1) did not  comply with all the requirements of the DOD Financial Management  Regulation to review all outstanding commitments, obligations, and  accrued expenditures at least once annually; (2) did not require training  for all the technical departments’ BFMs involved in the review; (3) did not  require all BFMs that were responsible for performing triannual reviews to  maintain documentation for 24 months on their reviews; and (4) did not  establish a procedure for ensuring that the technical departments are  completing their reviews in compliance with the September 2006 interim  guidance.
On December 21, 2006—about 3 months later—the NAWC weapons  division issued additional guidance containing instructions for performing  all future triannual reviews beginning with the review period ending  January 31, 2007. The guidance stated that the triannual reviews are a  critical factor in the NAWC weapons division efforts to eliminate problem  disbursements, reduce potential violations of the Anti-Deficiency Act, and  improve obligation and expenditure rates. The guidance requires all  commitments and obligations to be reviewed at least annually in  compliance with the DOD Financial Management Regulation and requires  the technical departments’ BFMs to attend mandatory annual triannual  review training. While the new guidance addresses many of our concerns,  it still does not establish procedures for ensuring that the technical  departments are completing their reviews in compliance with the new  guidance. Without these procedures, the Comptroller’s office does not  have a sound basis for providing written confirmation that the NAWC  weapons division’s transactions are complete and accurate.
section_title: NAWC Aircraft Division Did Not Generally Involve BFMs in Its Triannual Reviews
paragraphs: Unlike the weapons division, the NAWC aircraft division accomplished its  triannual reviews on a centralized basis within the accounting department  and the BFMs were generally not included in the process. During the first  step of the aircraft division process, the accounting department generated  computer lists that contained information on the division’s outstanding  commitments, obligations, and accrued expenditures. The accounting  department then forwarded these lists to the various team leaders within  the accounting department to conduct the needed research to ensure that  the outstanding obligations, accruals, or commitments are still valid. For  example, the accounting department reconciled the disbursements  recorded in SIGMA to the disbursements recorded in the DOD payment  system called the Mechanization of Contract Administration Services  (MOCAS). In performing the triannual reviews, the accounting department  involved the BFMs on an as-needed basis. When the accounting  department team leaders finished their reviews, they sent the completed  lists back to the cost accounting supervisor, who then coordinated with  the accounting officer to certify that the reviews were completed and  forwarded these certifications to the Comptroller’s office. On the basis of  these certifications, the Comptroller certified that the division had  completed its review and the transactions reviewed were accurate.
NAWC aircraft division did not complete its first triannual review until  January 2006. Our analysis and discussions with NAWC aircraft division  officials determined that the aircraft division had not (1) developed and  implemented written procedures for performing the triannual reviews and  (2) developed or provided training to the BFMs on how to conduct the  triannual reviews since they have not been specifically involved in  performing these reviews. The accounting officer stated that they were  unable to review all outstanding obligations, as required by the DOD  regulation at least annually, due to time and resource constraints.
In addition to the triannual reviews, the accounting officer stated that the  aircraft division accounting department reviews commitments,  obligations, and accrued expenditures as part of its routine operations.  Specifically, the accounting department is to take the following actions.
Identify outstanding orders funded with appropriations that are canceling  at the end of the fiscal year and perform detailed analyses to resolve these  transactions in order to get them off the books prior to the end of the  fiscal year.
Forward information to the budget department, which coordinates with  the BFMs to review outstanding commitments over 90 days old on a  monthly basis and respond back to the accounting department as to  whether the commitments on the list are valid or invalid.
Perform research on outstanding accrued expenditures. The first accrued  expenditure data file was produced as of the end of fiscal year 2005.  According to a NAWC aircraft division official, throughout fiscal year 2006,  the accrued expenditure information improved. The aircraft division now  compares the information in this file to information received from  MOCAS. The accounting department had not provided the accrued  expenditure file to the BFMs for review prior to January 2007. However,  beginning in January 2007, the Comptroller’s office began generating files  that identified which accrued expenditure records belonged to which  BFMs. In addition, one of the data elements identifies the person in the  accounting department who performed the initial research and what  research had been performed to date to alleviate the duplication of efforts  between accounting and BFM personnel. This will enable the accounting  department to begin using the BFMs in researching the accrued  expenditures.
Even though the procedures provide for some BFM involvement, our  review of 21 dormant obligations involving 17 different BFMs disclosed  that they had not reviewed the specific transactions in our sample prior to  our visit. This is an indication that the aircraft division’s routine reviews of  obligations were not always effective. Additionally, our analyses identified  that the aircraft division’s current process did not provide an adequate  review of its obligations and accrued expenditures. We found that:    As of September 30, 2006, $43 million (or 23 percent) of the NAWC aircraft  division’s obligations were over 120 days old and $20 million (or 11  percent) were over 1 year old. The accounting officer stated that they were  unable to review all the obligations as required by the DOD regulation at  least annually, due to time and resource constraints. Accordingly, this item  was not certified on the September 30, 2006, triannual review confirmation  checklist.
As of June 30, 2006, $70 million (or 62 percent) of the NAWC aircraft  division’s accrued expenditures were over 120 days old and $35 million (or  31 percent) were over 1 year old. The accounting officer stated that  accrued expenditures were only reviewed within the accounting  department and that they had not developed policies or procedures for  reviewing the accrued expenditures.
In February 2007, NAWC aircraft division officials stated that they were  developing a new draft instruction for conducting their triannual reviews.  These officials added that they started with the December 2006 NAWC  weapons division guidance and are revising it to better reflect the aircraft  division’s operations. A month later, on March 20, 2007, the NAWC aircraft  division issued written procedures that (1) require the division to review  all outstanding obligations and accrued expenditures at least annually in  order to substantiate the year-end certification process, (2) clearly  delineate the responsibilities of the individuals performing the review, (3)  require the BFMs to participate in performing the triannual reviews, (4)  clearly describe the process for reporting the triannual review results to  the division’s Comptroller office, and (5) require the division to maintain  all documentation related to the transactions reviewed for a period of 24  months following the review to ensure that independent organizations,  such as the Office of Inspector General, can verify that the reviews were  accomplished as required. While we agree with the aircraft division’s  issuance of written triannual review procedures that increase the  involvement of the BFMs in the triannual review process, we note that the  division had not yet developed and implemented training that provides  detailed instructions to the BFMs on performing the triannual reviews.  Although this may require a short-term increase in resources to provide  this training, the long-term benefit will be a more complete review of  obligations, commitments, and accrued expenditures. This, in turn, should  improve the reliability of the aircraft division’s financial information,  including carryover.
section_title: Conclusions
paragraphs: Reliable carryover information is essential for Congress and DOD to  perform their oversight responsibilities, including reviewing and making  well-informed decisions on DOD’s budget. Moreover, by improving the  reliability of the underlying data used to calculate carryover, NAWC’s  financial data, such as obligation and accrued expenditure balances, will  also be more reliable. Management accountability at the divisions for the  accuracy of reported carryover and the timely identification of unneeded  funds will be a key factor in improving these data. This includes increased  management attention to help assure that the divisions are effectively  conducting their triannual reviews, including reviewing funded orders.  Further, in light of NAWC’s planned conversion to a new Navy accounting  system in October 2007, it is especially important for NAWC to review and  correct any errors in recorded obligations and accrued expenditures,  particularly dormant ones. If not corrected prior to conversion, any such  errors could cause additional resource-intensive research to fully resolve  them and these problem transactions could potentially remain unresolved  for years.
section_title: Recommendations for Executive Action
paragraphs: In order to improve the reliability of carryover information at NAWC, we  are making the following six recommendations to the Secretary of  Defense.
We recommend that the Secretary of Defense direct the Secretary of the  Navy to take the following actions.
Reiterate its guidance that clearly prohibits Navy working capital fund  activities from deobligating reimbursable customer orders at fiscal year  end and immediately reobligating them in the next fiscal year, a process  that results in artificially reducing the carryover balances that are  ultimately reported to Congress.
Develop and implement procedures for the Naval Air Warfare Center’s  aircraft and weapons divisions to provide assurance that triannual reviews  of obligation and accrued expenditure balances are performed in  accordance with the DOD Financial Management Regulation.
Develop and implement a required training course for BFMs that provides  instructions on performing the triannual review requirements for the Naval  Air Warfare Center’s aircraft division.
Require individuals, including BFMs responsible for performing the  reviews at the Naval Air Warfare Center’s aircraft division, to attend the  training to ensure that they are aware of the triannual review  requirements.
Review and validate the accuracy of NAWC’s aircraft and weapons  divisions’ reported outstanding obligations and accrued expenditures,  especially those that have remained outstanding since the conversion to  SIGMA, prior to its conversion to a new accounting system in October  2007.
We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to clarify the triannual review guidance for the  January and May reviews in the DOD Financial Management Regulation as  it pertains to the dollar threshold for reviewing outstanding commitments  and obligations for the capital budget and operating portion of the working  capital fund.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. DOD concurred  with our six recommendations and plans to complete actions on five of the  six recommendations by the end of fiscal year 2007. We appreciate DOD’s  efforts and find them generally responsive to our recommendations. For  example, DOD stated that it would complete the following actions.
Direct the Navy to reiterate its policy on handling reimbursable customer  orders in its fiscal year end closing guidance.
Direct the Navy to develop and implement procedures that provide  assurance that the required triannual reviews are properly performed.
Direct the Navy to develop and implement a training course or courses for  all Naval Air Warfare Center employees involved with the triannual  reviews and require these employees, including the business financial  managers, to attend the training.
However, we are concerned with the timing of the corrective action for  one of the recommendations and also with the completeness of DOD’s  planned actions related to the one recommendation with which it  “concurred with comment.” Specifically, in its written comments, DOD  stated that the Navy would emphasize reviewing and validating  outstanding obligations and accrued expenditures that have remained  outstanding since the conversion to SIGMA and estimated that this action  would be completed by September 2008. As noted in our draft report, we  believe that it is critical that such reviews and validations be completed  prior to the planned conversion to a new accounting system in October  2007. While we appreciate that the Navy has already started these reviews,  validating these transactions prior to the system conversion is a best  practice that would help avoid some of the problems that were  encountered when NAWC implemented its current accounting system in  2003.
Further, in response to our recommendation that the triannual review  guidance in the FMR be clarified, DOD “concurred with comment” and  stated that a letter would be issued directing the Navy to comply with the  FMR concerning the dollar thresholds for performing the triannual review.  DOD commented that the FMR was clear as currently written. As noted in  our draft report, officials from the Naval Air Systems Command, the  NAWC weapons division, and the NAWC aircraft division had varying  interpretations of the FMR requirements. Thus, while we continue to  believe that a revision to the FMR would be the most efficient means to  resolve this issue, a letter such as that proposed in DOD’s response could  suffice as long as it includes clarification of the FMR guidance, particularly  with regard to the dollar thresholds for reviewing outstanding  commitments and obligations for the capital budget and operating portion  of the working capital fund.
We are sending copies of this report to the Chairmen and Ranking  Minority Members of the Senate Committee on Armed Services; the  Subcommittee on Readiness and Management Support, Senate Committee  on Armed Services; the Subcommittee on Defense, Senate Committee on  Appropriations; the House Committee on Armed Services; and the  Subcommittee on Readiness, House Committee on Armed Services. We  are also sending copies to the Secretary of Defense, the Secretary of the  Navy, and other interested parties. Copies will be made available to others  upon request.
Should you or your staff have any questions concerning this report, please  contact McCoy Williams, Director, at (202) 512-9095 or  williamsm1@gao.gov, or William M. Solis, Director, at (202) 512-8365 or  solisw@gao.gov. Contact points for our Offices of Congressional Relations  and Public Affairs may be found on the last page of this report. Key  contributors to this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine if the Naval Air Warfare Center’s (NAWC) reported actual  carryover was reliable for fiscal years 2003 through 2006, we obtained  budget and accounting documents that provided information on reported  actual carryover and the carryover ceiling for fiscal years 2003 through  2006. We analyzed the carryover information to determine if the NAWC  aircraft or weapons divisions’ reported actual carryover exceeded the  ceiling for fiscal years 2003 through 2006. We (1) discussed with NAWC  officials the reliability of the carryover information, (2) obtained and  analyzed the NAWC aircraft and weapons divisions’ financial statements  for fiscal year 2003 through 2006 to determine if NAWC certified to the  reliability of the information, and (3) discussed with NAWC officials  actions they were taking to improve the reliability of the carryover  information. We also reviewed year-end transactions that reduced the  dollar amount of reported actual carryover. For these transactions, we  obtained data on orders from August through December for 2004 and 2005.  We identified orders that showed deobligated amounts in August or  September and matched them to the same orders that showed obligated  amounts in October through December. We analyzed the orders and any  amendments to the orders and met with officials from the NAWC aircraft  and weapons divisions to determine why these transactions occurred at  the end of the fiscal year. We also discussed with NAWC aircraft division  and weapons division officials actions they were taking or have taken to  help ensure that the reported actual carryover amount stays below the  ceiling.
To determine if NAWC was utilizing the required triannual review process  to improve the reliability of its carryover information and underlying  financial data, we reviewed the policies and procedures the Naval Air  Systems Command and NAWC used to implement the Department of  Defense’s (DOD) triannual review guidance. Specifically, we (1) reviewed  the DOD, Navy, Naval Air Systems Command, and NAWC triannual review  guidance and discussed it with cognizant individuals; (2) requested the  triannual review confirmation statements that NAWC submitted since  fiscal year 2003, and discussed these statements with cognizant  individuals; (3) discussed NAWC’s triannual review procedures with  cognizant individuals, including those who completed the reviews; and (4)  reviewed documentation on the results of the review. We also reviewed  obligations and accrued expenditures to identify problems and actions  that could be taken to fix these problems if NAWC had performed the  triannual reviews.
We obtained data on the status of obligations related to carryover  (contracts between NAWC and contractors) at the end of fiscal year 2006.  From these data, we selected and analyzed 41 obligations that had  outstanding carryover balances at the end of fiscal year 2006 to determine  if the carryover balances accurately reflected the amount of work that  remained to be performed. We selected obligations that were old (over 120  days) and did not have any recent financial activity (no activity for at least  1 year) since these obligations were more likely to have unneeded funds  and because a review of these obligations was, therefore, more likely to  identify problems with the triannual review procedures.
We obtained data on accrued expenditures related to carryover at the end  of fiscal year 2005 and June 2006. From these data, we selected and  analyzed 17 accrued expenditures to determine if the accrued expenditure  balances were correct. Accrued expenditures are critical in the  computation of carryover since NAWC recognizes revenue and bills  customers based on the accrued expenditures, which in turn, reduces its  amount of carryover. We selected accrued expenditures that were over 1  year old and showed no financial activity for at least 1 year since these  accrued expenditures were more likely to have unneeded funds and  because a review of these orders was, therefore, more likely to identify  problems with the triannual review procedures.
We performed our work at or obtained information from headquarters  offices of the Under Secretary of Defense (Comptroller) and the Assistant  Secretary of the Navy (Financial Management and Comptroller),  Washington, D.C.; the Naval Air Systems Command, Patuxent River,  Maryland; the Naval Air Warfare Center, Aircraft Division, Patuxent River,  Maryland and Lakehurst, New Jersey; and the Naval Air Warfare Center,  Weapons Division, China Lake and Point Mugu, California. To assess the  reliability of the data used in this report, we (1) reviewed and analyzed the  factors used in calculating carryover, (2) analyzed the NAWC aircraft and  weapons divisions’ fiscal years 2003 through 2006 financial statements,   (3) analyzed the NAWC aircraft and weapons divisions’ fiscal year 2006  triannual review confirmation statements, (4) interviewed NAWC officials  knowledgeable about the carryover data, and (5) reviewed obligations and  accrued expenditures to determine if they were adequately supported by  documentation.
The carryover information in this report was obtained from official Navy  budget and accounting documents. We conducted our work from July 2006  through April 2007 in accordance with U.S. generally accepted government  auditing standards. We requested comments on a draft of this report from  the Secretary of Defense or his designee. The Under Secretary of Defense  (Comptroller) provided written comments, which are presented in the  Agency Comments and Our Evaluation section of this report and are  reprinted in appendix III.
section_title: Appendix II: Analysis of Dormant Obligations and Accrued Expenditures
paragraphs: Our analysis of the Naval Air Warfare Center (NAWC) aircraft and  weapons divisions’ fiscal year 2006 dormant obligations and accrued  expenditures showed the two divisions had tens of millions of dollars of  obligations and accrued expenditures that went unresolved for more than  1 year. For the transactions we reviewed, we determined that the two  divisions did not perform adequate reviews on some of their dormant  obligation and accrued expenditures. If the aircraft and weapons divisions  had performed adequate triannual reviews as required, NAWC could have  significantly improved the reliability of the carryover balances reported to  the Department of Defense (DOD) and congressional defense committees.
subsections: section_title: More Effective Reviews of Dormant Obligations Could Result in Better Use of Customer Funds and Reduce Reported Carryover
paragraphs: A key element of the triannual reviews is the requirement to follow up on  all obligations that have been dormant for more than 120 days to  determine if unused funds are still needed. The task is one of the 16 DOD  triannual review requirements and is important because it will facilitate  the (1) identification and recording of work performed on these orders,  thereby reducing NAWC’s reported carryover and, in turn, the likelihood  of customers’ budget cuts; and (2) identification and return of unneeded  funds to customers so that the customers can reuse the funds for other  purposes if they are returned before they expire. Furthermore, this task is  especially important for NAWC as it is scheduled to convert to a new  system—Navy Enterprise Resource Planning (ERP)—in October 2007, and  reviewing and validating its records to help ensure they are accurate  before converting to the new system would help ensure a smooth  transition.
The task of validating obligations to determine if they are still needed is  especially important for NAWC’s aircraft and weapons divisions. NAWC’s  September 30, 2006, report on obligations related to carryover showed that  $252 million was associated with orders received from customers. Our  analysis of the obligation report showed that about $59 million of the $252  million, or 23 percent, was over 120 days old as of September 30, 2006, and  $27 million of the $252 million, or about 11 percent, was over 1 year old.
As previously discussed, NAWC’s aircraft and weapons divisions did not  perform the required triannual reviews of obligations to determine their  validity prior to fiscal year 2006. Even though the two divisions did not  begin reviewing dormant obligations until fiscal year 2006, both divisions  certified that adequate follow-up was conducted on all dormant  obligations over 120 days old in the January and May 2006 reports.  However, after we began our review, the two divisions did not provide  written confirmation that adequate follow-up reviews of dormant  obligations over 120 days old to determine if they were valid were  conducted in their respective September 2006 reports.
To identify problems and actions that could be taken to fix these problems  if the NAWC had performed the triannual reviews, we selected and  reviewed 41 outstanding obligations totaling about $4.1 million that were  more than 120 days old and had not had any recent financial activity  (sometimes no activity for years). For the obligations we reviewed, we  determined that the aircraft and weapons divisions did not perform  adequate reviews on some of their obligations. In addition, obligations  were overstated, which means that the year-end carryover for this work  was also overstated by varying amounts for several years. In reviewing the  41 obligations, we found that 14 obligations totaling about $3 million were  valid, and 27 obligations totaling about $1.1 million overstated carryover.  The following provides a breakout of the obligations that overstated  carryover.
Eight obligations totaling $467,786 were for work that had been performed  but (1) no payments had been made to liquidate the obligations and (2) no  accrued expenditures were recorded for the work that was performed.
Eleven obligations totaling $273,628 had no work completed on them or  NAWC was in the process of deobligating the funds.
Ten obligations totaling $312,727 were for work that had been performed  and paid for but (1) the payment had either not been correctly recorded or  matched to the obligations in order to liquidate the obligations and (2) no  accrued expenditures were recorded for the work performed.
The following are some examples of the problems we identified with the  dormant obligations that we reviewed.
In March 2004, the NAWC aircraft division obligated $172,552 for the  inspection of flight test propellers. Since May 2004, no financial activity  occurred for this obligation (such as payments made or accrued  expenditures recorded for work performed). According to NAWC aircraft  division officials, the accounting department reviewed this obligation prior  to our visit and confirmed that this appeared to be a valid outstanding  obligation since they had not received a bill for this work. As part of our  review, we requested that the business financial manager (BFM) review  the status of the dormant obligation. Further research performed by the  BFM disclosed that while the work had been completed by July 15, 2004,  the vendor had not submitted a bill. At the time we performed our work,  the NAWC aircraft division was in the process of paying the contractor  and liquidating the obligation. If the triannual review had been effectively  performed, this problem could have been identified years earlier and  NAWC could have reduced its year-end obligations and carryover by  $172,552 for fiscal years 2004, 2005, and 2006.
In February 2004, the NAWC aircraft division obligated $25,000 for ship  installation drawings for an aircraft carrier. Since that time, no financial  activity had occurred. Due to a schedule change regarding the availability  of the aircraft carrier, the shipyard was unable to gain access to the ship in  order to develop the technical drawings. Consequently, the NAWC aircraft  division was unable to perform the work and use the funds. NAWC  officials agreed that this obligation should have been closed out several  years ago and the funds returned to the customer. According to these  officials, they did not review this obligation as part of the division’s  triannual review because they lacked the time and resources to review all  transactions below $50,000. As a result of not deobligating the funds from  the records, the NAWC aircraft division overstated its reported year-end  obligations and carryover by $25,000 for fiscal years 2004, 2005, and 2006.
In fiscal year 2002, the NAWC weapons division obligated $30,000 for  updating electronic software in EP-3 planes. As of September 2006, the  weapons division’s accounting records showed that $22,798 of the  obligation remained on the accounting records. As part of our review of  NAWC carryover, we requested that the BFM review the status of this  dormant obligation. The BFM found that (1) the work was completed in  2002, (2) the contractor processed about $18,986 in invoices but only  $7,305 in invoices were recorded as being paid, and (3) about $11,014 of  the original $30,000 was not used by the contractor. The BFM agreed that  the accounting records were in error and, as a result of our inquiry, NAWC  weapons division officials are researching the invoice difference of  $11,681 ($18,986 less $7,305) and plan to return the remaining unused  amount of $11,014 to the customer. As a result of this failure to match  invoices with the obligation and revert unused funds back to the customer  in a timely manner, the NAWC weapons division overstated reported year- end obligations and carryover by $22,798 in fiscal years 2003, 2004, 2005,  and 2006 while also precluding the customer from using some of these  funds for some other purpose because the funds had expired.
section_title: More Effective Reviews of Dormant Accrued Expenditures Could Improve Reliability of Reported Carryover
paragraphs: At the conclusion of their triannual reviews, fund holders are required to  provide written confirmation that they have conducted adequate research  on all accrued expenditures that are more than 120 days old to determine  if they are valid. This task is important because  large accrued expenditures balances in general, and large dormant  accrued expenditure balances in particular, can indicate either serious  accounting problems or ineffective procedures for developing accrued  expenditure schedules; and    accrued expenditures reduce reported carryover balances, and overly  optimistic accrued expenditures can, therefore, cause reported carryover  to be understated.
The task of validating accrued expenditures is especially important for the  aircraft and weapons divisions because NAWC’s report on accrued  expenditures related to carryover showed that it had about $138 million of  accrued expenditures as of June 30, 2006, that were associated with orders  received from customers over the years. Accurately accounting for  accrued expenditures is important from a carryover standpoint since  NAWC recognizes revenue and bills customers based on accrued  expenditures. The Office of the Under Secretary of Defense (Comptroller)  has also recognized the importance of accrued expenditures in its review  of Navy working capital fund activities. During its review of the Navy’s  working capital fund research and development fiscal year 2008 budget,  the Comptroller’s Office questioned the large amount of recorded accrued  expenditures. As a result, the Office of the Under Secretary of Defense  (Comptroller) reduced the Navy’s working capital fund research and  development fiscal year 2008 budget for three research and development  subactivity groups, including NAWC, by $214.7 million.
Our analysis of NAWC’s accrued expenditures report showed that about  $85 million of the $138 million of accrued expenditures, or 62 percent,  were over 120 days old as of June 30, 2006. Further, $45 million of the $138  million, or about one-third of the reported accrued expenditures, were  over 1 year old. NAWC officials informed us that when NAWC  implemented SIGMA in fiscal year 2003, the system did not produce an  accrued expenditure report. Since the new system did not produce a  report, the NAWC aircraft division designed and developed its own  accrued expenditure report. The first report was issued in September  2005—over 2 years after the implementation of the new system. As a  result, comprehensive reviews of accrued expenditures were not  performed for fiscal years 2003, 2004, and 2005. The two divisions began  performing reviews of accrued expenditures during fiscal year 2006 but  they did not have any written procedures for such reviews. The following  summarizes the fiscal year 2006 results.
The aircraft division provided written confirmation that adequate follow- up was conducted on all dormant accrued expenditures over 120 days old  in its January, May, and September 2006 triannual review reports. Our  analysis of the aircraft division’s accrued expenditure report as of June  2006 showed that $70 million of the $113 million of the accrued  expenditures—or 62 percent—were over 120 days old and about $35  million of the $113 million, or 31 percent, were over 1 year old.
The weapons division provided written confirmation that adequate follow- up was performed in its January and May 2006 reports but it did not  provide written confirmation that adequate follow-up reviews were done  of dormant accrued expenditures over 120 days old in its September 2006  report. Our analysis of the weapons division’s accrued expenditure report  as of June 2006 showed that $14.7 million of the $24.5 million of the  accrued expenditures—or 60 percent—were over 120 days old and $10.6  million of the $24.5 million, or 43 percent, were over 1 year old.
To identify problems and actions that could be taken to fix these problems  if the NAWC had performed the triannual reviews, we selected and  reviewed 17 accrued expenditures totaling about $4.4 million that were  over 1 year old as of June 30, 2006, and did not have any recent financial  activity (sometimes no activity for years). Since accrued expenditures  represent the amount of paid and unpaid expenditures for services  performed by employees or contractors, accrued expenditures that remain  outstanding for long periods of time are an indication of a potential  problem with the accuracy of recorded accrued expenditure data because  the work should have already been performed and payment made. In most  of the cases we reviewed, we determined that the aircraft and weapons  divisions did not perform adequate reviews of their accrued expenditures.  Specifically, we found that    no work was performed on 10 accrued expenditures totaling about $2.2  million (about half the dollar amount reviewed);   work was performed for 4 accrued expenditures totaling about $1 million  and while the contractor had billed NAWC, the payment was not correctly  recorded in the accounting system to liquidate the accrued expenditure; for 4 accrued expenditures totaling about $1 million, the accrued  expenditures were so old that neither we nor NAWC officials could  determine their status; and   documentation for 2 accrued expenditures totaling about $100,000 showed  they were correctly recorded.
The following are examples of the problems we identified with the  accrued expenditures that we reviewed including their impact on reported  NAWC carryover balances.
On July 7, 2003, the NAWC weapons division obligated $232,318 on a  contract with Northrop Grumman Field Support Services to provide  engineering services in support of the F-14 Weapons System Support  Activity. On September 29, 2003, the weapons division recorded an  accrued expenditure in its system totaling $201,651—the balance  remaining unpaid to the contractor that was obligated in fiscal year 2003.  As part of the weapons division’s May 2006 triannual review, the BFM that  had responsibility for this contract determined that the accrued  expenditure recorded in fiscal year 2003 was unsupported. NAWC  weapons division officials stated that the final invoice for this contract  was processed on September 20, 2006. In October 2006, the administrative  contracting officer issued an amendment to the contract that deobligated  these funds which had expired. One month later, the weapons division  reversed the accrued expenditure and returned the funds to its customer.  As a result of the erroneous accrued expenditure, our analysis showed  that the weapons division understated its carryover in fiscal years 2003,  2004, 2005, and 2006 by $201,651 and billed its customer for work that was  not performed.
As of March 2002, the NAWC aircraft division obligated $226,901 on an  order with Northrop Grumman to provide engineering design data  services. In fiscal year 2003, the contractor billed and received payment of  $5,626, leaving a remaining balance of $221,275. Our analysis of the aircraft  division’s June 2006 accrued expenditure report indicated that the aircraft  division recorded accrued expenditures in its accounting system for  $221,275—the outstanding balance—over 3½ years ago. Although no  further work was performed on this order, the accrued expenditure of  $221,275 remained outstanding until August 2006. In August 2006, NAWC  reversed the remaining accrued expenditure of $221,275 and deobligated  the funds because the customer appropriation financing the order was  canceling at the end of the fiscal year. By not performing the triannual  reviews prior to fiscal year 2006 which would have identified this problem,  the aircraft division recognized revenue and billed its customer $221,275  for work that was not performed and understated its carryover by this  amount in fiscal years 2003, 2004, and 2005.
In March 1996, the NAWC weapons division issued an order to the  Electronic Proving Ground totaling $333,000 to provide funding for Global  Positioning System test support. On September 18, 1996, the NAWC  weapons division recorded an accrued expenditure for the full amount of  the obligation in its financial management system. In February 1997, a  payment totaling $123,195 was processed against these funds. The  remaining accrued expenditure amount ($209,805) has been outstanding  since it was recorded in 1996. These transactions were recorded in a  financial management system that has been replaced twice. Many details  associated with these transactions are no longer available. Because of the  limited data available, we could not determine the validity of the accrued  expenditure amount. However, if the weapons division had performed the  triannual reviews as required by DOD regulation, the records may have  been available to either reverse the outstanding accrued expenditure  amount or liquidate the accrued expenditure amount against vendor  payments.
In July 2003, the NAWC aircraft division increased funding on a task order  by $126,477 to provide software support services for the Navy’s HE-2K  aircraft tactical systems program. In July 2004, the NAWC aircraft division  recorded an accrued expenditure in its accounting system totaling  $126,477—the entire balance for the software support services to be  performed. According to a BFM, the work for the software support  services was never performed. In January 2006, an amendment to this task  order decreased excess funds for the entire $126,477 that was previously  obligated for the additional software support services. However, the  NAWC aircraft division did not reverse the accrued expenditure until  August 2006—about 2 years after it had recorded the accrued expenditure.  As a result, we determined that the NAWC aircraft division recognized  revenue and billed its customers $126,477 for work that was not performed  and understated its carryover by this amount in fiscal years 2003, 2004, and  2005.
Between March 1997 and April 1998, the NAWC weapons division issued  an order and three amendments totaling $505,000 to the 46th test group at  Holloman Air Force Base for work on the radar cross section of the QF-4E  range targets. Between September 1997 and August 2001, the NAWC  weapons division recorded accrued expenditure amounts totaling $505,000  in its financial management system—the full amount obligated on the  order. In the late 1990s, Holloman Air Force Base and the Defense Finance  and Accounting Service Denver paid the 46th test group the full amount  obligated on the order. However, the NAWC weapons division records  showed that only $151,074 was recorded in the financial management  system as paid. Thus, an accrued expenditure totaling approximately  $353,926 remains outstanding. If the NAWC weapons division had  performed its triannual review as required by DOD regulation, the  weapons division could have reduced its end of fiscal year outstanding  accrued expenditures by $353,926 for fiscal years 2001 through 2006.  NAWC weapons division officials stated that in this case, the carryover  amount was accurately reported but the accrued expenditure amount was  distorted by $353,926.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Staff who made key contributions to this report were Richard Cambosos,  Francine DelVecchio, Steve Donahue, Mary Jo LaCasse, Keith McDaniel,  Greg Pugnetti, Chris Rice, and Hal Santarelli.