Defense Management: DOD Needs to Strengthen Internal Controls over Funds Used to Support USO Activities
Published: 2003-12-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: For more than 60 years, the United Services Organization (USO), in partnership with the Department of Defense (DOD), has provided support and entertainment to U.S. armed forces, relying heavily on private contributions and on funds, goods, and services from DOD. To assist USO, Congress, beginning in fiscal year 2000, provided a total of $23.8 million in grants to be awarded through DOD as seed money for an endowment fund. The availability of these funds to USO, along with DOD's ongoing support funded in its regular annual appropriations, represents a substantial financial commitment. GAO determined (1) the source and amount of DOD's support to USO in fiscal years 2000-2002 and (2) the sufficiency of internal controls to provide reasonable assurance that federal funds are used in an appropriate manner. GAO focused its audit on USO World Headquarters' activities and audited a limited selection of USO transactions for the 3 fiscal years.
section_title: What GAO Found
paragraphs: During fiscal years 2000 through 2002, DOD provided USO with substantial appropriated and nonappropriated support, but the total amount cannot be determined because of limitations in DOD's and USO's record-keeping systems. GAO identified at least $34.7 million in appropriated funds that DOD provided to support USO during fiscal years 2000 through 2002. Of this amount, $20.8 million was in congressionally appropriated grants to help USO establish the Spirit of Hope Endowment Fund to ensure the continuation of USO's programs and services. Another $12.1 million was for reimbursements to USO, and at least $1.8 million was paid directly by DOD for tour-related expenses such as commercial airfares, visas, and passports. DOD also provided other appropriated support, such as lodging and transportation. However, GAO could not determine the total monetary value of DOD's support from appropriated funds because neither DOD nor USO has record-keeping systems that aggregate the needed information. DOD also provides USO with nonappropriated support, largely in the form of in-kind goods (e.g., food), services (e.g., Internet access), and infrastructure support (e.g., performance facilities), to help sustain USO's overseas tours, but the same limitations precluded GAO from determining the total monetary value. DOD and USO did not have sufficient financial and management controls to reasonably ensure that all appropriated funds were used appropriately. DOD properly awarded grant funds to USO, and USO properly administered these funds. However, USO did not require its independent auditor to fully test internal controls over grants or funds reimbursed to USO by DOD, as required by its agreements with DOD. In terms of reimbursements to USO and direct payments by DOD, DOD lacked clearly written supplemental guidance regarding allowable expenses, management oversight in reviewing USO's invoices, and procedures for capturing reimbursable expenses. In some cases, these weaknesses resulted in inappropriate expenditures of funds. Based on limited testing, GAO found problems with payments totaling about $433,000, including about $86,000 in improper expenditures, $3,000 in questionable expenditures, and $344,000 for unsupported expenditures. Had USO's independent auditor tested internal controls, the problems GAO identified might have surfaced. As a result of GAO's audit, DOD stated it has initiated several actions to improve financial and management controls and to recover funds from USO. As of September 2003, DOD had recovered about $19,000 from USO in improper payments for overseas tour expenses.

section_title: Letter
paragraphs: For more than 60 years, the United Services Organizations (USO), a  not-for-profit, nongovernmental but congressionally chartered  organization, has offered support and entertainment to the men and  women of America’s armed forces and their families. The USO mission is  to enhance the quality of life of the personnel within the U.S. armed forces  community wherever they are based.
Throughout the years, USO has relied on corporate donors and individual  contributors, as well as on funds, goods, and services provided by the  Department of Defense (DOD), to support its operations. With the creation  of a federal charter for USO in 1979, Pub. L. No. 96-165, DOD was granted  statutory authority to make the department’s resources available to help  USO achieve its mission. DOD provides both appropriated and  nonappropriated resources to support USO’s operations. Appropriated  support is derived from DOD’s operations and maintenance (O&M) funds,  and nonappropriated support is provided largely through DOD-donated  goods, services, and infrastructure. DOD’s Armed Forces Entertainment  Office (AFEO), through its Armed Forces Professional Entertainment  Program, is primarily responsible for coordinating with USO to deliver  overseas entertainment. Under a contractual arrangement, USO solicits  celebrity entertainers for gratis or reduced rates to perform at overseas  DOD locations. AFEO reimburses USO for certain expenses incurred in  securing celebrity entertainment, including honoraria, production  support, and other administrative costs. AFEO and other DOD entities also  pay directly from their respective O&M accounts, referred to as direct  payments, for certain goods and services provided for USO tours, such as  commercial airfare and military airlift services.
At your request, we determined (1) the source and amount of support  provided to USO during fiscal years 2000 through 2002 and (2) the  sufficiency of the financial and management controls to provide  reasonable assurance that funds were used appropriately.
We focused our audit on DOD’s support for activities of the USO World  Headquarters, which operated USO’s overseas entertainment tours, and  did not include the activities of chartered, stateside USO affiliates, which  are financially autonomous from the USO World Headquarters. We did not  audit support provided to USO from nonfederal sources. Because of  limitations in AFEO and USO record keeping, we limited our audit to  support provided by DOD during fiscal years 2000 through 2002. To assess  financial and management controls, we evaluated the adequacy of the  overall control environment and management oversight of controls at USO  and AFEO, audited selected transactions between AFEO and USO for  fiscal year 2002, analyzed AFEO’s centrally billed account for fiscal year  2002, and reviewed AFEO’s purchase card account for fiscal years 2001  and 2002. We also reviewed annual audits of USO’s consolidated statement  of financial position and the related consolidated statement of activities  and cash flows prepared by an independent audit firm. For more details on  our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: USO is a congressionally chartered, nonprofit, nongovernmental, and  charitable corporation whose mission is to enhance the quality of life for  U.S. armed forces personnel and their families. The USO World  Headquarters acts as the enabling body for the organization, sets overall  policy and strategy, is responsible for the operation of overseas USO  centers, and produces overseas celebrity entertainment tours in  partnership with AFEO. From World War II through the Vietnam War, USO  and DOD partnered to enhance troop morale and provide entertainment to  military outposts worldwide. Following the Vietnam War, legislation  establishing USO’s federal charter and various DOD directives and  instructions formalized this close association and made DOD resources,  including funds, available to the maximum extent possible to support  USO’s mission. DOD uses both appropriated and nonappropriated  resources to support USO’s operations. Appropriated support is derived  from DOD’s O&M funds, and nonappropriated support is provided largely  through DOD-donated goods, services, and infrastructure.
DOD regulations designate (1) the Under Secretary of Defense for  Personnel and Readiness as the official liaison between DOD and USO and  (2) AFEO, a joint-service operation, as the DOD liaison office for USO.  AFEO, established in 1951, administers DOD’s Armed Forces  Entertainment Program in partnership with USO. The U.S. Air Force is the  executive agent for AFEO, having assumed that role from the U.S. Army in  1997. AFEO’s mission is to provide free, high quality, live entertainment to  U.S. military personnel and their families stationed overseas. AFEO  supplies all noncelebrity entertainment, and USO is the primary provider  of celebrity entertainment. Noncelebrity entertainment is made up of up- and-coming performers professionally managed by an agent; celebrity  entertainment consists of well-known entertainers, listed in Billboard or  with gold or platinum recordings.
Under a contractual arrangement with AFEO, USO recruits celebrity  performers for the Armed Forces Entertainment Program. AFEO  reimburses USO for certain tour-related expenses such as honoraria,  production support, and other direct costs. In some cases, AFEO and  other DOD entities also make arrangements to support USO overseas  tours and pay directly for these expenses, such as for commercial airfares,  visas, passports, and military airlift services, from their respective O&M  accounts. Also, USO has agreed to pay for certain tour-related costs, for  example, paying the difference between the cost of business-class and  first-class air travel and the travel costs for individuals accompanying  performers whose costs are not covered under the contract with AFEO.
Following the 1991 Gulf War, USO faced serious financial problems  because of declining contributions and therefore became concerned about  its continued ability to serve the military. To address these concerns,  USO’s Board of Governors established the Spirit of Hope Endowment  Fund in 1998. According to a former USO official, the intent of the fund  was to infuse USO with funds to provide for the perpetuity of its programs  and services. To assist USO, the Congress, beginning in fiscal year 2000,  provided a total of $23.8 million in O&M funds in the form of grants for  USO. As of September 2003, DOD had provided about $20.8 million to  USO. USO used these funds as seed money for the endowment.
section_title: DOD Provided Substantial Appropriated and Nonappropriated Support to USO, but Total Amount Cannot Be Determined
paragraphs: During fiscal years 2000 through 2002, DOD provided substantial  appropriated and nonappropriated support, but the total amount cannot  be determined because of limitations in DOD’s and USO’s record-keeping  systems. For this 3-year period, we identified at least $34.7 million in  appropriated funds that DOD provided to support USO activities in the  form of grants, contract reimbursements, and direct payments. DOD also  provided other appropriated support such as lodging, transportation, and  use of some facilities. However, we could not identify the total monetary  value of DOD’s support derived from appropriated funds because neither  DOD nor USO has record-keeping systems to aggregate or report the  needed information. While DOD also provides nonappropriated support,  largely in the form of in-kind goods (e.g., food and refreshments), services  (e.g., Internet and telephone access), and infrastructure support (some  performance facilities), to help sustain USO’s overseas operations, the  same limitations precluded us from determining the total monetary value  for this support.
subsections: section_title: USO Received Appropriated and Nonappropriated Support from Many DOD Sources
paragraphs: During fiscal years 2000 through 2002, USO received appropriated and  nonappropriated support from a variety of DOD sources. As figure 1  shows, this appropriated money flowed to USO in the form of grants  awarded by the Office of the Secretary of Defense (OSD) and from  contract reimbursements and direct payments provided by AFEO and  other DOD components. Nonappropriated support was provided largely  through in-kind contributions that included goods (e.g., food and  refreshments), services (e.g., Internet and telephone access), and  infrastructure support (some performance facilities), contributed by  various DOD components.
We identified at least $34.7 million in appropriated funds that DOD  provided to support USO’s activities during fiscal years 2000 through 2002.  As table 1 shows, this funding included grants and contract  reimbursements to USO and direct payments by DOD.
We also found that DOD components often provide in-kind support,  derived from appropriated funds, to USO for its overseas tours such as  transportation, free lodging, and some office and performance facilities.
subsections: section_title: Grants
paragraphs: During fiscal years 2000 through 2003, the Congress authorized DOD to  provide a total of $23.8 million in grants to support USO’s activities. As of  September 2003, in fiscal years 2000 through 2002, DOD had provided a  total of $20.8 million in grants to USO as seed money to fund the Spirit of  Hope Endowment Fund, which is intended to ensure the continued  existence of USO’s programs and services. The Congress provided the  funds through DOD’s O&M appropriation in four annual defense  appropriations acts. The funds, appropriated only for grants to USO, were  first allocated to the Deputy Assistant Secretary of Defense for Personnel  Support, Families and Education. In 1998, USO established the Spirit of  Hope Endowment Fund and, after receiving the grants from DOD,  transferred the funds into the endowment fund. According to USO policy,  the USO Board of Governors established the Spirit of Hope Endowment  Fund, which is a restricted account. Money placed into the fund is to be  considered as principal and must remain in the account. USO can use the  income (e.g. interest and dividends) that accrues on the balance held in  the endowment fund to support its operations. USO used about $333,000 in  investment income in calendar years 1999 and 2000 for its operations.
section_title: Contracts
paragraphs: AFEO provided USO with about $12.1 million in contract reimbursements  during fiscal years 2000 through 2002. In September 1999, AFEO awarded  an $8.7 million sole source, indefinite delivery, indefinite quantity contract  to USO. The purpose of this contract was to provide celebrity  entertainment for U.S. armed forces at military installations overseas. The  contract performance period was for 3 years (October 1, 1999, to  September 30, 2002) with five 1-year option periods (October 1, 2002, to  September 30, 2007). According to AFEO and Air Force contracting  officials, AFEO spent the entire $8.7 million before the end of the first   3-year period, and it is currently amending the contract to increase the  amount of funding. In addition to the $8.7 million contract, AFEO  negotiated separate purchase orders for costs associated with specific  USO tours. The terms of the $8.7 million contract applied to each of these  separately negotiated purchase orders. Specifically, the contract provided  reimbursements to USO for    administrative support services—accounting and administrative services  needed to plan and execute overseas tours, including compiling and  submitting voucher packages to AFEO for expense reimbursements;    celebrity honoraria—payments to celebrity entertainers or groups and  their production and/or tour managers to help defray day-to-day expenses;  and    other direct costs—tour production and equipment rental costs; travel  costs to include commercial airfare, car rental or bus fares; lodging and  per diem if authorized by DOD’s Joint Travel Regulations; miscellaneous  expenses such as shipping, visas, and equipment repair or replacement for  celebrity tours; and a 19 percent management fee, calculated using the  total of other direct costs expended for noncelebrity tours.
section_title: Direct Payments
paragraphs: AFEO and the Air Mobility Command used appropriated O&M funds to  pay directly for USO tour-related expenses, such as commercial airfares,  visas and passports, and military airlift services. As table 2 shows, during  fiscal year 2002 alone, we identified direct payments that totaled at least  about $1.8 million. However, because of record-keeping limitations, AFEO  officials could not assure that these amounts represented all direct  payments.
AFEO used its centrally billed account to pay about $783,000 for its  personnel travel expenses and commercial airfares for USO personnel and  tour entertainers; its purchase card account to pay around $2,500 for visas,  passports, and shipping expenses for entertainment equipment; and its  appropriated funds cite to make direct payments totaling about $602,200  for its personnel travel expenses and airlift services provided by the U.S.  Air Force, Air Mobility Command. We also identified about $412,000 that  the Air Mobility Command paid directly for airlift services for one USO  tour. According to AFEO and Air Mobility Command officials, the  command’s airlift services included the movement of passengers and  baggage either on regularly scheduled flights or on special assignment  airlift missions from designated U.S. stateside military locations to  overseas military locations. These special assignment airlift missions  involve chartering a military aircraft for a specific purpose.
section_title: Nonappropriated Support
paragraphs: DOD components provide nonappropriated support largely in the form of  in-kind goods, services, and infrastructure, such as food and refreshments,  Internet and telephone access, and free office space, lodging, and some  performance facilities, to help sustain USO’s overseas tours.
section_title: Total Amount of Support Could Not Be Determined Because of Limitations in DOD’s and USO’s Record- keeping Systems
paragraphs: We could not determine the total amount of appropriated and  nonappropriated support to USO’s activities because of limitations in  DOD’s and USO’s record-keeping systems. Specifically, we were unable to  identify the total value of appropriated support for the fiscal year 2000  through 2002 period because DOD’s records were incomplete. For  example, AFEO could not readily provide an accurate accounting of  contract reimbursements or direct payments for charges to its centrally  billed and purchase card accounts, primarily because it did not track and  identify which transactions were for USO celebrity tours and which  transactions were for noncelebrity tours that did not involve USO. (Most  federal funds that are provided to support USO’s activities are provided for  celebrity tours. The cost of noncelebrity tours is paid by AFEO.) Our audit  of AFEO’s purchase card transactions confirmed that one could not  distinguish between USO and non-USO activities. Without such detail,  AFEO could not provide complete reports on funding for USO’s activities.
During our audit, AFEO provided us with total amounts for contract  reimbursements and some direct payments for fiscal year 2002, but it  could not ensure that the totals included all appropriated funds provided  in support of USO’s overseas tours. Moreover, AFEO could not provide the  same information for fiscal years 2000 and 2001 because the records for  those years were less complete, and the time and resources required to  gather and verify the information were more than AFEO could expend  given the unit’s workload.
Additionally, AFEO could not provide data on how much appropriated  funds were spent for military airlift services to support USO’s overseas  tours because neither AFEO nor the Air Mobility Command has   record-keeping systems to aggregate or report the needed information. For  example, the command’s records can track and report all airlift services  charged to AFEO, but those records do not indicate whether the services  were provided to support USO’s tours, nor do they differentiate between  celebrity and noncelebrity tours. Furthermore, neither AFEO nor the Air  Mobility Command maintains records of the cost of airlift services that  other U.S. military units (such as the Army and the Navy) provided in  support of USO’s tours.
We also could not identify the monetary value for other support derived  from appropriated funds, such as transportation, free lodging, and some  office and performance facilities provided by military units other than the  Air Mobility Command. We could not identify the value of this support  because neither DOD nor its components have record-keeping systems to  aggregate or report the needed information.
Finally, we could not identify the value of DOD’s nonappropriated support  to USO, provided largely through in-kind contributions that included  goods (e.g., food and refreshments), services (e.g., Internet and telephone  access), and infrastructure support (some performance facilities) again,  because neither DOD nor its components have record-keeping systems to  aggregate or report the needed information. Furthermore, USO’s records  for in-kind contributions do not clearly identify all private sector and DOD  contributions.
section_title: Sufficient Financial and Management Controls Did Not Exist to Assure Appropriate Use of Appropriated Funds
paragraphs: DOD and USO did not have sufficient financial and management controls  in place to provide reasonable assurance that all appropriated funds were  used appropriately. DOD properly awarded grant funds to USO, and USO  appropriately administered these funds. However, USO did not require its  independent auditor to fully test internal controls over grant funds or  funds reimbursed by DOD, as required under grant and contractual  agreements with DOD. For support provided through contract  reimbursements and direct payments, AFEO lacked clearly written  supplemental guidance regarding allowable expenses, effective  management oversight in reviewing USO invoices, and adequate  procedures for capturing reimbursable expenses. In some cases, these  weaknesses resulted in inappropriate expenditures of funds. Specifically,  we found problems with expenditures totaling about $433,000, including  approximately $86,000 in improper expenditures, $3,000 in questionable  expenditures, and $344,000 for unsupported expenditures. As a result of  our audit, AFEO officials told us they have initiated several actions to  improve financial and management controls and to recover funds from  USO.
subsections: section_title: DOD and USO Had Sufficient Procedures for Administering Grants, but USO Did Not Fully Comply with Audit Requirements
paragraphs: During fiscal years 2000 through 2002, DOD awarded about $20.8 million in  congressionally appropriated grants to USO. DOD properly transferred  these funds. Specifically, before transferring funds, it entered into grant  agreements with USO that included conditions for the use of these funds.  For example, these agreements allowed USO to deposit the funds in the  Spirit of Hope Endowment Fund or use any investment income earned  from the funds for operational expenses.
The agreements also set forth administrative and accounting requirements,  to include compliance with the Office of Management and Budget (OMB)
Circular A-133, Audits of States, Local Governments, and Non-Profit  Organizations, as revised June 1997, which implements the Single Audit  Act, as amended. The Single Audit Act is intended to promote sound  financial management, including effective internal controls over federal  funds. The single audit is an important tool utilized by federal agencies— including DOD—to monitor federal awards to nonprofit organizations and  ensure that the federal funds are properly used. OMB Circular A-133  §_.500 requires an audit of the financial statement(s) for the program  receiving federal funds in accordance with generally accepted government  audit standards. The audit should be an organizationwide audit that  focuses on the recipient’s internal controls and compliance with laws and  regulations governing federal awards and be designed to test the  program’s internal controls in a manner sufficient to illustrate that a low  level of risk exists for the program.
Furthermore, OMB Circular A-133, subpart B, §.200, requires nonfederal  entities expending $300,000 or more a year in federal awards to have a  single or program-specific audit conducted for that year in accordance  with the provisions of the circular. Specifically, §.205 states that the  determination of when an award is expended should be based on when the  activity related to the award occurs. Generally, the activity pertains to the  expenditure or expense transactions associated with grants. Specifically,  the cumulative balance of federal awards for endowment funds, which are  federally restricted, is considered expended in each year in which the  funds are restricted.
Consistent with the grant agreements, USO deposited the entire   $20.8 million in grant funds in investment accounts designated specifically  for the Spirit of Hope Endowment Fund, and used investment income  earned on these funds for operational expenses. With respect to these  deposits, USO invested the funds in income-producing assets such as  stocks, bonds and U.S. Treasury bills. USO used about $333,000 drawn  from investment income for operational expenses, and the entire amount  of deposited grant funds remained invested. However, USO did not fully  comply with the agreements’ audit requirements in identifying the scope of  work to be performed by its independent auditor in performing annual  audits. While USO arranges for its independent auditor to perform an  annual audit, this audit focuses on verifying the sources and accuracy of  amounts included in USO’s financial statements and does not  comprehensively test internal controls on the receipt and use of grant  funds or document tests performed as required by OMB Circular A-133.  USO officials initially believed there was no need for an audit that  complied with the Single Audit Act, since it spent only investment income  from the grant funds and none of the actual grant funds. Based on our  review, USO officials now agree that the act applies and that the annual  audit should be performed in accordance with the act’s requirements and  OMB Circular A-133.
section_title: Internal Control Weaknesses Led to Problem Expenditures for Contract Reimbursements and Direct Payments
paragraphs: For contract reimbursements and direct payments, we found significant  problems with DOD and USO controls over these funds. For example,  AFEO lacked clearly written supplemental guidance regarding allowable  expenses, effective management oversight in reviewing USO’s invoices,  and adequate procedures for capturing reimbursable expenses. Also,  similar to the grant funds, USO did not fully comply with audit  requirements contained in its contracts with DOD.
subsections: section_title: Lack of Clear and Current Written Supplemental Guidance
paragraphs: At the time of our audit, the guidance in effect concerning the expenses  AFEO will pay in support of USO’s overseas tours was not sufficiently  detailed to provide clear, consistent instructions to be followed by AFEO  or USO. This guidance included the contract agreement between AFEO  and USO, general rules regarding AFEO’s direct payment accounts, federal  acquisition and travel regulations, and DOD Instruction 1330.13.
AFEO refers to the aforementioned guidance in paying for USO overseas  tour expenses through contract reimbursements and direct charges to its  centrally billed and purchase card accounts. However, as described below,  we found several weaknesses in the guidance.
Contract reimbursements. The contract between AFEO and USO  identifies the general categories of tour-related expenses for which USO  can be reimbursed to include administrative support services; honoraria;  and other direct costs such as production support/equipment rental, travel,  lodging, and miscellaneous expenses. The contract contains numerous  clauses and statements that indicate reimbursements will be made in the  accordance with Joint Travel Regulations and the Federal Acquisition  Regulation. However, the contract is not specific concerning the types of  costs—such as the type of production support and other incidental direct  costs—and the supporting documentation needed to ensure that AFEO  only pays for costs that are allowable and proper. AFEO officials stated  that they follow additional policies related to the allowable contract  reimbursements for tour-related expenses, such as “thank you” dinners,  but these policies are not documented in writing.
Centrally billed account. AFEO stated that it uses the account primarily  to pay for commercial airfares for USO personnel and entertainers covered  under invitational travel orders. Federal travel regulations contain  stringent circumstances under which first-class and business-class travel  can be authorized. However, according to AFEO and USO officials, neither  has more detailed, written, and program specific guidance to determine  when and how USO will pay for first- or business-class travel.
Other direct charges. AFEO provides additional support to USO by  directly charging the cost of travel-related expenses, such as visas and  passports, to its purchase card account, and by allowing its O&M funds  account cite to be charged for Air Mobility Command airlift services.  However, AFEO has no specific program guidance regarding how USO  should be billed for unauthorized travelers on Air Mobility Command  flights.
Furthermore, DOD Instruction 1330.13, last updated September 8, 1985,  establishes policy and assigns responsibility for carrying out the Armed  Forces Professional Entertainment Program for entertaining troops  overseas. This instruction states that the Secretary of the Army has  responsibility for administering the program; however, the Air Force  assumed responsibility in fiscal year 1997. An AFEO official acknowledged  that this instruction is out of date. Also, this policy lacks clear statements  regarding expenses that should be paid by AFEO and USO, respectively.
section_title: Insufficient Management Oversight
paragraphs: The lack of sufficient management oversight of funds provided to USO  was also a key internal control problem. For example, AFEO officials  generally did not closely review or question expenses USO submitted for  reimbursement. Additionally, AFEO’s review and reconciliation process  for its centrally billed account and billings from the Air Mobility Command  was not sufficient to identify airlift expenses that should be charged to  USO. Furthermore, during our audit of contract files at the Air Force  contracting office responsible for administering the contracts between  AFEO and USO, we found no evidence of contract reviews. An Air Force  contracting official stated its office sometimes questioned the need for  some expenses for celebrity tours when modifications to the contracts  were requested. At these times, the expenses were questioned because the  supporting documentation provided to the contracting office by AFEO was  not always adequate. However, according to the Air Force contracting  officer currently responsible for the contracts, the existing workload and  higher priorities require her to perform more detailed oversight of high- dollar defense contracts. Because celebrity tour costs generally ranged  from $10,000 to $300,000, they are given lower priority for contract  oversight.
Furthermore, we found that USO did not perform the type of audit  required under the terms of its contracts with AFEO. Similar to the grant  agreements, the contracts contain a requirement for a single audit that  would focus on USO’s internal controls as they relate to the federal funds  provided through contracts to USO to support the Armed Forces  Entertainment Program. USO signed the contracts with AFEO. These  contracts were to provide celebrity entertainment for U.S. armed forces at  military installations overseas, on a fixed price and cost reimbursable  basis. When USO signed these contractual agreements, it agreed to comply  with all contractual requirements. These contractual agreements set forth  accounting requirements to be met in accordance with Federal Acquisition  Regulation 52.215-2, Alternate II, which requires compliance with OMB  Circular A-133. As previously discussed, this circular implements the  Single Audit Act, as amended, and is intended to promote sound financial  management, including effective internal controls over federal funds.
Our review of USO’s audited financial statements, discussions with the  independent auditor responsible for performing the audit, and discussions  with USO officials indicated that the single audit requirement set forth in  the contractual agreements was not met. As discussed previously, USO  arranges for an annual audit of its financial statements, but this audit does  not include comprehensive testing of internal controls and the  documentation of tests performed that is required by OMB Circular A-133.  USO officials initially believed there was no need for an audit that  complied with the Single Audit Act, since USO is merely a vendor  providing services for AFEO, but now, based on our audit, it agrees that  such an audit is required.
section_title: Payment of Improper, Questionable, and Unsupported Expenses
paragraphs: In the absence of strong internal controls, we found numerous instances  where AFEO paid for improper, questionable, and unsupported expenses  in support of USO’s overseas celebrity tours. Based on our limited testing  of six celebrity tour files, our analysis of AFEO’s centrally billed account,  and our examination of Air Mobility Command records, we identified a  total of about $433,000 in problem expenditures during fiscal years 2000 to  2002 including improper and questionable expenses totaling around  $89,021 and unsupported expenses totaling approximately $344,000. We  defined an expense as improper when an item was not authorized or  properly justified in accordance with the contracts between AFEO and  USO, the Joint Travel Regulations and the Joint Federal Travel Regulations  issued by DOD, and the Federal Travel Regulation issued by the General  Services Administration. For example, we found improper  reimbursements for expenses such as alcoholic beverages, meals, lodging,  and duplicate billings for administrative services. AFEO also  inappropriately paid for first-class and business-class travel and some  military airlift services. We identified numerous examples of questionable  payments of USO tour costs by AFEO for items such as limousine services,  hotels, and airport VIP lounge services. We defined a questionable  payment as any item that was reimbursed without documentation showing  that the item was necessary for official government business under the  Armed Forces Entertainment Program. We also identified numerous  unsupported payments. We defined an unsupported payment as any item  that was reimbursed without documentation detailing the nature of the  expense and the way the price for the expense was determined.
section_title: Improper Expenses
paragraphs: We found payments for improper expenses for items such as unallowable  alcoholic beverages, meals, and lodging, honorarium, and production  support for an entertainer who did not participate in a tour for which  expenses were reimbursed, and a duplicate billing for administrative  services. Moreover, AFEO inappropriately paid for first-class and business- class travel and some military airlift services. AFEO acknowledged that  these expenses should not have been reimbursed or paid. For example,  AFEO explained that meal expenses for celebrities receiving honorarium  are not reimbursable because the honorarium is intended to help defray  the cost of meals and other essentials, and the invitational travel orders we  reviewed specifically stated that meal expenses were not authorized.  Expenses for alcoholic beverages are never allowable in conjunction with  government travel. The cost for first-class travel, and the cost for  unauthorized travelers on Air Mobility Command airlifts, should have been  borne by USO. Table 3 highlights the improper payments we identified.
Improper expenses of particular note are explained in more detail below:    Duplicate billing for administrative services. In calendar year 2002,  AFEO paid USO twice for administrative expenses associated with  overseas tours. We identified improper payments totaling about $9,000. A  USO contract employee, responsible for preparing the expense reports for  overseas tours, included invoices for these services in several of the tour  files we audited. According to the contract employee, USO officials  directed that the invoices be submitted to AFEO for payment. The Air  Force contracting officials responsible for managing the contract stated  that in accordance with the terms of the contract between AFEO and USO,  USO is paid a monthly administrative fee that covers numerous  administrative tasks, including preparing the expense reports for USO  tours. Contracting officials stated that the monthly administrative fee  included the cost for all accounting services, including those performed by  the contractor. Neither AFEO nor USO could provide an estimate of how  long the double billings occurred. However, one USO official believed that  the contract employee started to submit the invoices with the inception of  the contract in 1999 and ended with the termination of the contractor’s  services in May 2003. Based on our review of documentation provided by  USO for calendar years 2001 and 2002, the amount billed could have  totaled $78,000. We found no indication that the individual was paid twice  for the services performed.
Improper payments for first-class and business-class travel. Our  analysis of AFEO’s centrally billed account for fiscal year 2002 and  selected tour files revealed numerous instances of improper payments by  DOD for first-class and business-class travel totaling about $66,000. These  first-class and business-class airline tickets were considered improper  because they were not authorized and/or properly justified in accordance  with the Joint Travel Regulations and the Joint Federal Travel  Regulations issued by DOD and the Federal Travel Regulation issued by  the General Services Administration (GSA).
AFEO’s policy, while not written, is to authorize up to business-class travel  for overseas flights for USO celebrity tours. According to an AFEO official,  AFEO’s policy is to not authorize first-class travel, and the Director of  Services, Air Force Office of Installations & Logistics, the office to which  AFEO reports, is required to approve business-class travel. If first-class  travel is requested, USO is supposed to pay for the cost of the upgrade  from business-class to first-class. However, contrary to the stated policy  and statements made by AFEO officials, this was not always the case. In  each case, we found AFEO purchased and paid for either the unauthorized  first-class or business-class ticket. We found no instances in which AFEO  requested reimbursement from USO for the cost difference between  business-class and first-class airline tickets. Further, neither AFEO nor  USO could provide any documentation that indicated that USO paid the  additional cost of first-class travel at the time the tickets were purchased.
USO officials stated that they were unaware that first-class airline tickets  were charged to AFEO’s centrally billed account for USO tours. USO  officials stated they would have reimbursed AFEO for the cost of the  upgrade from business-class to first-class if AFEO had notified them or if  they were provided documentation of the first-class charges. AFEO  officials acknowledged that closer scrutiny of the documentation received  from USO should have identified those instances in which first-class and  business-class airline tickets were improperly paid by AFEO. Additionally,  AFEO noted that the monthly reconciliation of the centrally billed account  statement to the individual airline ticket transactions should have  identified the discrepancies we found. Our review of the monthly  reconciliations showed that first-class travel was clearly identified, but  AFEO failed to seek reimbursement from USO. A more in-depth discussion  of our analysis of the improper first-class and business-class travel we  identified is detailed in appendix II.
Improper payments for Air Mobility Command Airlift Services. Our  analysis of AFEO-issued invitational travel orders and Air Mobility  Command billing data for airlift services showed that AFEO paid around  $9,000 for airlift services provided by the Air Mobility Command, for  individuals traveling on “no cost” travel orders. According to AFEO, no  cost travel orders are issued to USO tour support personnel and some  entertainers in those cases where AFEO has stated the government will  not pay the transportation costs. These orders enable certain support  personnel or guests of entertainers to utilize government transportation  with the costs of their transportation being the ultimate responsibility of  USO. In cases where AFEO has paid for travel conducted on no cost  orders, it is necessary for USO to reimburse AFEO.
According to AFEO, these improper charges and payments occurred  because it was unaware that the travel was being billed to its appropriated  fund cite. An AFEO official believed that the Air Mobility Command was  billing USO directly for the airlift services. According to an Air Mobility  Command official, its billing system recognizes airlift charges incurred by  AFEO personnel and personnel traveling in support of AFEO’s mission,  but the system does not identify if the travel is USO related. Nor can the  Air Mobility Command bill a nongovernmental entity for airlift services  unless that entity has an account in the command’s billing system.
section_title: Questionable Expenses
paragraphs: We identified numerous examples of questionable payments of USO tour  costs by AFEO totaling about $3,000, as shown in table 4.
More specifically, we found that AFEO paid for    19 hours of limousine services from hotels in the Washington, D.C., area to  Andrews Air Force Base, Maryland, at a cost of $1,656 before an overseas  tour began and    several USO thank you dinners for the USO entertainers at the end of a  tour.
We could find no documentation to indicate why these expenses were  necessary. For example, concerning the thank you dinners, AFEO officials  said it was their policy, although unwritten, to reimburse USO for one  dinner per tour. Our audit of the documentation indicated that this  practice was inconsistently applied. In one instance, we found that AFEO  disallowed a thank you dinner for one tour, but it paid for several meals  that were classified as thank you dinners for another tour. Additionally,  the documentation was not always adequate to identify whether these  expenses were for meals for celebrities or for other individuals on the  tour. For example, we found that tour managers and a USO tour  producer’s meals were reimbursed over a number of days. An AFEO  official acknowledged that there was no existing guidance that identified  these items as allowable expenses. AFEO officials told us that they plan to  discontinue the practice of reimbursing USO for thank you dinners.
section_title: Unsupported Expenses
paragraphs: We identified numerous examples of unsupported payments by AFEO  totaling approximately $344,000 for production support for USO tours.  Table 5 highlights the unsupported payments we identified.
We found that supporting documentation for the six celebrity tour files we  audited was inadequate for a number of invoices, and therefore AFEO had  no assurance that the reimbursed costs were proper. We asked AFEO to  provide additional documentation on these invoices. AFEO could not  provide the necessary documentation and stated that this was the only  documentation USO provided. We asked USO for detailed support for a  number of selected invoices. USO did not have support readily available in  its records. In response to our request for additional documentation, USO  contacted the vendors and received details on several invoices. USO  provided additional support for $43,910 of the $343,910 included in table 5.
For the largest case in our testing, AFEO reimbursed $216,750 for  production support based on a single entry on an invoice. In contrast, our  examination of another invoice for production support included an  itemized list of specific items such as microphone stands, speakers, and  stage supports. Additionally, based on our audit of five noncelebrity tours,  we found that documentation was far more comprehensive in support of  the expenses paid by AFEO.
Additionally, in some instances we were unable to identify which  individuals received celebrity honoraria. We traced names from the  invitational travel orders on the six tours audited but were unable to verify  which individuals were being paid honoraria and which ones were not. In  some cases, individuals who were part of a celebrity’s entourage were  classified as celebrities and received honoraria while others were not.  AFEO agreed that it was not always possible to identify which names  listed on invitational travel orders received honoraria. In one instance,  honoraria and production support costs were charged for 13 individuals,  but the supporting documentation indicated that only 12 individuals  participated in the tour. An AFEO official stated that the individual’s  itinerary must have changed and acknowledged that this should have been  documented in the file. Based on available documentation, AFEO was  charged $900 in honoraria and production support costs for an individual  who did not participate in the tour. As a result of our analysis, AFEO  verified that this individual did not participate in the tour, and it is seeking  reimbursement from USO.
USO officials acknowledged the problems we identified with the  transactions we reviewed. They stated they did not have a clear  understanding of AFEO’s policy as to which expenses were reimbursable  and which ones were not. They stated that they submitted invoices based  on prior verbal agreements and past practices with AFEO. USO officials  stated that AFEO’s practice over the last several years was inconsistent  and that reimbursement for certain expense items was “hit or miss” from  one tour to the next. According to USO officials, it was their intention to  submit invoices and vouchers for expenses in accordance with federal  laws and regulations. However, because they had no specific instructions  identifying which costs were allowable and which costs were not  allowable, it was sometimes frustrating for them to decide what to include  as an expense item in an invoice package.
section_title: Actions Taken to Improve Controls over Support Provided to USO
paragraphs: USO and AFEO acknowledged that they need better policies and  procedures to provide reasonable assurance that expenses are authorized  in an appropriate manner and are reimbursable based upon the contracts  between the organizations. As a result of our audit, USO and AFEO  officials told us they have initiated some actions to improve accountability  and controls over federal funds used to support USO’s activities and to  recover funds paid by AFEO that USO should have paid. For example, a  USO official told us USO is in the process of developing written guidance  for its celebrity tour managers and accounting staff that specifies those  expenses that are reimbursable under the contracts with AFEO and those  that are not.
AFEO officials told us that to improve financial and management controls,  their office, in conjunction with the Air Force Directorate of Services, is in  the process of drafting an operating instruction for AFEO. They stated that  this operating instruction will address AFEO roles and responsibilities,  overseas areas served, points of contact, promotional package selection  process, tour projections, authorized reimbursements, invitational travel  orders, passports, visas, immunizations, military and commercial  transportation, final payment process, and tour evaluation forms.  Additionally, according to AFEO officials, they have taken the following  actions.
Established procedures to track those contract reimbursement and  purchase card transactions used to fund USO celebrity tours versus  noncelebrity tours.
Created a listing of reimbursable items, specified by contract line item  number, allowed and the required documents needed for final payment  processing. The listing was provided to USO, as well as to the U.S. Air  Force contracting office responsible for administering the contracts  between AFEO and USO for a modification to the basic contract.  Improved controls over the purchase of airline tickets charged to the  centrally billed account by implementing procedures for processing  requests for approval of upgrades to business-class travel through the U.S.  Air Force, Director of Services. According to AFEO officials, they now  document cost comparisons of economy-class airline tickets versus  business-class travel in the AFEO business-class authorization letter. A  copy of the approved upgrade letter will be provided to the contract travel  office and maintained in the individual tour folders with copies of the  annotated invitational travel orders. For those portions of overseas travel  that are upgraded to business-class because no other class of travel is  available, the commercial travel office will certify these circumstances by  entering a statement on the itinerary as required by the Joint Travel  Regulations. No prior approval is necessary under these circumstances.  USO will fund any domestic portion of travel that incurs additional costs  above economy- and/or coach-class standards. If any other type of upgrade  is provided, at no additional cost to AFEO, the change in travel class will  be noted with a memorandum for the record and filed in the tour folder.  Improved oversight of expenses reimbursed to USO for overseas tours.  According to AFEO officials, now, at least three individuals are reviewing  expense packages for payment certification. First, the applicable AFEO  circuit manager reviews the voucher package to assure receipts and  requests for reimbursement match the itinerary and are appropriate.
Second, the AFEO financial advisor reviews the package to assure  reimbursements are authorized and properly documented, then signs the  package as the acceptance officer. Third, either the AFEO administrative  assistant or the AFEO deputy director performs a final review and certifies  the package for payment. The Defense Finance and Accounting Form 250  is prepared and certified by two signatures. Additionally, as of September  2003, AFEO had recovered about $19,000 in improper and questionable  payments it made to support USO overseas tours.
We have not audited any transactions since AFEO officials stated these  actions have been taken and thus cannot conclude whether these actions  have actually taken place or have resulted in improved financial and  management controls.
section_title: Conclusions
paragraphs: As U.S. armed forces continue to be actively engaged in operations  throughout the world, it is important that troop morale is maintained at  high levels. USO’s overseas entertainment tours have provided quality  entertainment to the troops, and DOD’s financial and in-kind support has  been key to the Armed Forces Professional Entertainment Program’s  continued success. When a nongovernmental organization, such as USO,  receives federal funds to assist a government organization, such as DOD,  that organization is accountable for the proper use of the funds. A key  factor in helping achieve that accountability is to implement appropriate  internal controls. However, our audit found that DOD’s program lacks  effective financial and management controls to provide reasonable  assurance that federal funds are used consistent with the terms specified  in grant and contract agreements. Neither AFEO nor USO can determine  the total amount of financial or in-kind support DOD provides to sustain  USO’s overseas tours. Furthermore, without adequate supplemental  guidance to identify allowable costs for overseas tours and effective  management oversight, AFEO does not have reasonable assurance that it  is paying for only allowable costs and that appropriated funds are being  spent in accordance with federal laws and regulations. Moreover, USO’s  failure to fully comply with audit requirements in grant and contract  agreements reduces DOD’s assurance that USO has adequate internal  controls over federal program funds, leaving the program vulnerable to  fraud, waste, and abuse. Had USO’s independent auditor fully tested  internal controls, the problems we identified might have surfaced. AFEO  officials stated they have taken action to improve management oversight  during the review of invoice packages and to develop written policies and  procedures consistent with DOD and federal travel regulations. Although  these actions, if implemented, should assist AFEO in achieving a stronger  control environment, an earnest commitment by DOD and USO  management is also needed to ensure proper controls and use of DOD  funds.
section_title: Recommendations for Executive Action
paragraphs: To improve financial and management controls over support provided to  USO, we recommend that the Secretary of Defense direct the Under  Secretary of Defense for Personnel and Readiness, in consultation with the  Secretary of the Air Force, to take the following actions.
Develop and implement a record-keeping system capable of reporting all  appropriated and nonappropriated funds, including all in-kind goods,  services, and infrastructure provided by DOD in support of USO overseas  tours and operations. Among other things, this system should clearly  identify airlift services provided in support of USO tours.
Take steps to ensure USO complies with the Single Audit Act as stipulated  in its grant and contractual agreements with DOD, which require an  annual audit that tests internal controls over federal funds to assess  control risk.
Develop and consistently implement supplemental guidance, in  accordance with contract terms, and federal travel and acquisition  regulations, to identify allowable expenses and reimbursements and  appropriate documentation for   travel-related USO expenses, including commercial air travel,    honoraria, and    services and equipment provided for USO.  Identify all expenses AFEO inappropriately paid, which should have been  paid by USO, and request that USO fully reimburse AFEO for the  expenses.
Arrange for DOD’s Inspector General to perform internal control audits  periodically to determine if the control weaknesses we identified are  resolved, and report the results of these audits to the Secretary of Defense  and the Secretary of the Air Force.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, the Principal Deputy Under  Secretary of Defense for Personnel and Readiness concurred with four of  our recommendations and partially concurred with the fifth.  The Principal  Deputy Under Secretary indicated that actions are underway or completed  to address our recommendations and correct the deficiencies noted in our  report.  Furthermore, although he concurred with our first  recommendation, he acknowledged that DOD financial systems do not  support an automated means for reporting the type of information we  suggested.  However, he noted that AFEO continues to implement and  improve its record-keeping systems to clearly identify and report USO tour  costs by establishing a separate Bank of America centrally billed account for all commercial  transportation costs associated with USO celebrity tours; a separate purchase card account for visas, excess baggage, printing,  shipping, and miscellaneous costs associated with USO celebrity tours;  and an accounting line in the Air Mobility Command billing process to  identify, where possible, military airlift transportation costs associated  with USO celebrity tours.
The Principal Deputy Under Secretary further indicated AFEO has taken  action to identify and recoup expenses inappropriately reimbursed to  USO, and that DOD Instruction 1330.13, Armed Forces Entertainment, will  also be revised to require the military services to submit to AFEO an  annual report identifying appropriated funds, nonappropriated funds, and  in-kind goods or services provided to USO. According to the Principal  Deputy Under Secretary, all actions are to be completed by April 30, 2004.
Finally, the Principal Deputy Under Secretary partially concurred with our  final recommendation, agreeing that periodic internal control audits are  necessary to determine whether control weaknesses we identified are  resolved.  He believes, however, that USO’s independent auditor’s annual  audit, performed in accordance with the Single Audit Act, rather than  audits performed by the DOD Inspector General, would meet the  requirement to test internal controls over federal funds to assess control  risk, and that the DOD Inspector General would provide periodic oversight  of the single audits performed for USO.  We agree that these actions meet  the intent of our recommendation.
The Principal Deputy Under Secretary’s comments are included in  appendix III of this report.
Unless you publicly announce its contents earlier, we plan no further  distribution of this report until 10 days from the date of this letter.  At that  time, we will send copies of this report to interested congressional  committees with jurisdiction over DOD’s budget, as well as to the  Secretary of Defense, the Secretary of the Air Force, and the President and  Chief Executive Officer of USO. We will make copies available to others  on request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
Please contact Sharon L. Pickup on (202) 512-9619 or Greg D. Kutz on  (202) 512-9505 if you or staff have any questions. You may also contact  George F. Poindexter, Assistant Director, on (202) 512-7213, or Darby W.  Smith, Assistant Director, on (202) 512-7803. Major contributors to this  report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: We reviewed the Department of Defense’s (DOD) Armed Forces  Entertainment Program and its partnership with the United Services  Organization (USO) in providing U.S. armed forces with celebrity  entertainment overseas. We collected, reviewed, and analyzed relevant  program information and conducted interviews with DOD and USO  officials responsible for administering the Armed Forces Entertainment  Program, specifically officials from the Office of the Under Secretary of  Defense (Personnel and Readiness), Morale, Welfare and Recreation  Policy; Armed Forces Entertainment Office (AFEO); Defense Supply  Service—Washington, Department of the Army; 11th Contracting  Squadron, Department of the Air Force, Bolling Air Force Base, District of  Columbia; and USO. Additionally, we interviewed personnel with the  Deloitte and Touche Accounting Firm, the independent auditing firm  responsible for auditing USO’s annual consolidated financial statements  and supplemental schedules.
To determine the source and amount of federal funding provided to  support USO, we reviewed and analyzed relevant congressional  authorization and appropriations acts. We also reviewed and analyzed  applicable grant agreements; contract negotiation files; DOD and Air Force  operations and maintenance budget data; USO’s annual audited financial  statements and supporting documentation and annual financial reports;  AFEO financial records, including the centrally billed and purchase card  accounts; and Air Mobility Command billing data for passengers and  baggage for selected airlift missions. We discussed discrepancies that  existed among the various financial records with AFEO, USO, Air Force  Contracting Squadron, and Air Mobility Command officials. Other than for  the grants, we were unable to obtain complete appropriated funding data  for fiscal years 2000 through 2002 for federal funds provided to USO for  overseas tours. We could not obtain complete funding data because of  limitations in DOD’s record-keeping systems, which did not differentiate  between costs for celebrity versus noncelebrity tours. Therefore, AFEO  officials agreed to take the steps necessary to provide, to the extent  possible, complete funding data for fiscal year 2002. However, AFEO  officials could not assure us that the totals included all appropriated funds  provided in support of USO overseas tours. Additionally, they told us they  could not provide the same information for fiscal years 2000 and 2001,  because the records for those years were less complete, and the time and  resources required to gather and verify the information were more than  could be expended given the unit’s current workload. DOD officials could  not provide sources and amounts for total nonappropriated support  provided to USO because their recording-keeping systems do not  aggregate or report the needed information. We reviewed USO records for  in-kind contributions, but those records do not clearly distinguish private  sector contributions from federal contributions.
To assess the adequacy of internal controls in place to provide reasonable  assurance that appropriated federal funds are used consistent with the  terms specified, we reviewed applicable federal laws and regulations, DOD  policies and procedures, and GAO’s Standards for Internal Control in the  Federal Government. Additionally, we audited the contract between USO  and AFEO. We interviewed USO and AFEO officials to gain an  understanding of internal controls, and reviewed the payment process for  celebrity and noncelebrity tours. In gathering this information, we  concluded that internal controls over the payment process were  ineffective, and therefore we limited our auditing to a nonrepresentative  selection of tours. We audited selected USO tour transactions to evaluate  the design and implementation of key internal control procedures and  activities. We selected 11 tours—6 celebrity and 5 noncelebrity tours. We  traced expenses that were paid by AFEO to supporting invoices and  receipts, requesting additional documentation from AFEO as well as from  vendors for certain transactions. In addition to our audit of selected  transactions, we looked at whether indications existed of potentially  improper and questionable transactions as well as invoices that were  reimbursed without adequate documentation. We discussed discrepancies  with AFEO, USO or contract officials at Bolling Air Force, District of  Columbia, who were responsible for administering the contract between  USO and AFEO. Additionally, we interviewed the USO contract  accountant to determine the relationship between accounting fees  collected under the contract and those billed as part of tour expenses that  were submitted to AFEO by USO for reimbursement. Based on our initial  review of the tour files, we also audited AFEO’s centrally billed and  purchase card accounts for fiscal year 2002.
We audited AFEO’s centrally billed account for fiscal year 2002 to  determine if the amount spent on first-class and business-class airline  travel in support of USO tours was in accordance with DOD and federal  policies and procedures. To assess the magnitude of first-class and  business-class travel, we isolated those transactions billed to AFEO’s  centrally billed account specifically related to airline travel. We created a  new file that contained only the first-class and business-class travel billed  to AFEO’s centrally account. The airline industry uses certain fare and  service codes to indicate the class of service purchased and provided. The  database contained transaction specific information, including the fare  and service code to price the tickets AFEO purchased. Using data-mining  techniques, we identified the fare basis codes that corresponded to the  issuance of first-, business-, and coach-class travel. Using these codes, we  selected all airline transactions that contained at least one leg in which  AFEO paid for first-class and business-class travel accommodations. We  estimated the cost of coach travel using the government rates established  by General Services Administration (GSA). For flights not covered by GSA,  we estimated coach travel using the lowest current rates identified from  Expedia.com. We also analyzed purchase card transactions for fiscal years  2001 and 2002 to provide reasonable assurance that charges were in  accordance with DOD policies and procedures and in support of USO  tours.
We also reviewed USO’s independent auditor’s reports and management  letters for calendar years 1996 through 2001, as well as the independent  auditor’s work papers for audit work related to USO transactions with  AFEO for calendar year 2001. The 2001 audit was the most recently  completed audit that was available through the end of our field work.
In performing this audit, we used the same accounting records and  financial reports DOD and USO use to manage the Armed Forces  Entertainment Program. We did not independently determine the  reliability of all the reported financial information. However, our recent  audits addressing the reliability of DOD’s financial statements question the  reliability of reported financial information. Furthermore, our recent  audits of DOD’s travel card and purchase card accounts identified  weaknesses in the overall control environments and breakdowns in key  controls relied on to manage these programs, leaving them vulnerable to  fraud, waste, and abuse.
We performed our audit from March 2003 through September 2003 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Details of Improper First-Class and Business-Class Travel
paragraphs: Table 1 details our analysis of the improper first-class and business-class  travel we identified based on our limited testing. Without authorization or  adequate justification, these cases illustrate the improper use of first-class  and business-class travel and the resulting increase in travel costs.  Following the table is more detailed information on some of these cases.
Example 1 involved five individuals traveling first class at a cost to the  government of $16,658. An audit of the tour files and the travel order  indicated that the travel order specifically states that travel at government  expense shall not exceed the cost of common carrier (i.e., the rate  authorized under the government contract). However, the individuals were  issued first-class tickets for this trip, resulting in an additional cost to the  government of $14,978 compared to an estimated total cost of about $1,680  for eight coach tickets.
Example 2 involved six individuals traveling first class at a cost to the  government of $8,397. An audit of the tour files and the travel order  indicated that the travel order specifically states that travel at government  expense shall not exceed the cost of common carrier. However, the  individuals were issued first-class tickets for this trip, resulting in an  additional cost to the government of $6,496 compared to an estimated total  cost of about $1,901 for six coach tickets. This tour also had seven  individuals traveling business-class at a cost to the government of $13,488  for domestic flights. According to AFEO, business-class is only authorized  for overseas flights, not domestic flights. This resulted in an additional  cost to the government of $12,088 compared to an estimated cost of about  $1,400 for coach-class tickets.
Example 5 involved two individuals who traveled first class from New  York–LaGuardia to Jacksonville, Florida. Supporting documentation  indicates that business-class was authorized. The cost of two business- class tickets amounted to $720 compared to the two first-class tickets of  $1,556. Without authorization or valid justification, the additional $836  spent on the first-class ticket was improper. Furthermore, our audit  showed that the difference in the cost of first-class travel and the cost of  economy class can be significant. For example, during a review of one  tour, we found that the cost of one first-class round trip ticket was $3,982,  whereas an economy-class airline ticket for the same trip cost $280.
GSA and DOD travel regulations specify stringent circumstances under  which premium-class travel (e.g., first-class, business-class) can be  authorized. For example, the Joint Travel Regulations (JTR) and the Joint  Federal Travel Regulations (JFTR) limit the authority to authorize first- class travel to the Secretary of Defense, his Deputy, or another authority  as designated by the Secretary of Defense. Further, the delegation of  authority to authorize and/or approve first-class travel is to be held at “as  high an administrative level as practicable to ensure adequate  consideration and review of the circumstances necessitating the first-class  accommodations.” A DOD directive on transportation and management  specifically states that the secretaries for personnel within the military  services and secretariats are the approving authorities for first-class travel.  The military service secretaries may delegate approval authority for first- class travel to under secretaries, service chiefs of staff or their vice and/or  deputy chief of staff, and four-star major commanders or their three-star  vice and/or deputy commander. The directive explicitly states that  approving authority cannot be delegated to anyone lower than these  officials. DOD and GSA policies also require that authorization for  premium-class airline accommodations be made in advance of the actual  travel unless extenuating circumstances or emergency situations make  advance authorization impossible.
Specifically, JTR and JFTR require that first-class accommodation be  authorized only when:    coach-class airline accommodations or premium-class other than first- class airline accommodations are not reasonably available;  first-class airline accommodations are necessary because the employee  and/or dependent is so handicapped or otherwise physically impaired that  other accommodations cannot be used, and such condition is  substantiated by competent medical authority; or  first-class airline accommodations are needed when exceptional security  circumstances require such travel.
JTR and JFTR allow the transportation officer, in conjunction with the  official who issued the travel order, to approve premium-class travel (i.e.  business-class) other than first-class travel. DOD restricts premium-class  travel to the following eight circumstances:    Regularly scheduled flights between origin and destination provide only  premium-class accommodations and it is certified on the travel voucher.
Coach-class travel is not available in time to accomplish the purpose of the  official travel, which is so urgent it cannot be postponed.
The traveler’s disability or other physical impairment requires use of other  than first-class service and the condition is substantiated in writing.
Premium-class accommodations are required for security purposes or  because exceptional circumstances make the use essential to the  successful performance of the mission.
Coach-class service on authorized and/or approved foreign carriers does  not provide adequate sanitation or meet health standards.
Premium-class accommodations would result in overall savings to the  government because of subsistence costs, overtime, or lost productive  time that would be incurred while awaiting coach-class accommodations.
Transportation is paid in full by a nonfederal source.    Travel is to or from a destination outside the continental United States,  and the scheduled flight time (including stopovers) is in excess of 14  hours. However, a rest stop is prohibited when travel is authorized by  premium-class accommodations.
Both GSA and DOD regulations allow a traveler to upgrade to premium- class, other than first-class travel at personal expense, including through  redemption of frequent traveler benefits. GSA also identified agency  mission as one of the criteria for premium-class travel.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: Staff Acknowledgments
paragraphs: Claudia J. Dickey, Stephen P. Donahue, Johnny R. Bowen, Wayne A,.  Ekblad, Kenneth E. Patton, M. Jane Hunt, Nancy L. Benco, and Julio A.  Luna made significant contributions to this report.