CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy's Financial Reports
Published: 1996-03-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO reviewed the Navy's fiscal year (FY) 1994 consolidated financial reports, focusing on how the Navy and the Defense Finance and Accounting Service (DFAS) can: (1) improve the credibility of the Navy's FY 1995 financial reports; and (2) enhance their ability to prepare the Navy's FY 1996 annual financial statements.
section_title: What GAO Found
paragraphs: GAO found that: (1) the Navy's FY 1994 consolidated financial reports were not reliable and could not be used to assess the results of the Navy' operations, stewardship over assets, and use of budgetary resources; (2) the unreliability of the Navy financial reports adversely affects the reliability of the government's consolidated financial reports; (3) all aspects of the reports had inaccurate financial information, including omissions or misrecordings of assets and costs and failure to make required disclosures; (4) the Navy's financial reporting deficiencies are due to long-standing internal control weaknesses and the lack of accounting discipline; (5) in September 1995, DFAS directed its centers to pay closer attention to internal control problems, which may help correct the Navy's and other departments' deficiencies; (6) the joint DFAS and Navy Chief Financial Officers (CFO) Project Plan to improve the Navy's financial reporting is inadequate; (7) DFAS and the Navy will have to monitor and enforce efforts to improve financial control procedures and increase emphasis on preparing and executing improvement plans, assessing the skills, experience, and number of financial personnel needed, and improving financial systems; and (8) the Department of Defense (DOD) Comptroller needs to enforce the November 1995 DOD policy on DFAS and the Navy's financial management roles and responsibility.

section_title: Letter
paragraphs: We conducted a broad-based review of various aspects of the Department of the Navy’s financial management operations. We are reporting on the reliability of the Navy’s fiscal year 1994 consolidated financial reports so that the Navy and the Defense Finance and Accounting Service (DFAS) can improve the credibility of the Navy’s financial reports, starting with those prepared for fiscal year 1995 and enhance their ability to prepare required reliable annual financial statements for the Navy, beginning with those for fiscal year 1996.
The Navy has made little progress in improving its general funds financial management and reporting since passage of the Chief Financial Officers (CFO) Act in 1990 (Public Law 101-576). Top leaders of the Department of Defense (DOD), the Navy, and DFAS must give a higher priority and instill a sense of urgency for meeting the objectives of the CFO Act in order to achieve needed improvements.
Preparing reliable financial statements is (1) key to safeguarding and effectively managing the public’s substantial investment in the Navy’s operations, (2) central to the Navy, DOD, and the Congress having a clear understanding of the Navy’s financial condition and being able to best control costs while maintaining military readiness, and (3) critical to the reliability of the agencywide consolidated financial statements DOD is statutorily required to prepare, beginning with those for fiscal year 1996.
The Navy, including the Marine Corps, accounts for about one-third of DOD’s gross budget authority, controls almost half of DOD’s assets, and employs one-third of all DOD personnel.
This report focuses on the challenges that the Navy and DFAS face to strengthen the Navy’s financial management and reporting and to adequately plan for preparing auditable financial statements for the Navy within the required time frame. It also outlines recommendations for improving the Navy’s and DFAS’s financial management and reporting processes and internal controls. Our objective, scope, and methodology are described in appendix I. We will communicate the results of our examinations of certain other Navy financial management operations at a later time.
subsections: section_title: Background
paragraphs: The Navy comprises a very significant amount of total DOD operations. It accounted for 31 percent, or $78 billion, of DOD’s fiscal year 1994 gross budget authority; controls about 50 percent, or a reported half trillion dollars in DOD’s assets, including 540 ships and over 5,200 aircraft; and employs over one million civilian and military personnel. In addition, the Navy encompasses Marine Corps operations, which in fiscal year 1994, had about $9 billion in gross budget authority, or about 11 percent, of the Navy’s gross budget authority that year. The Navy also operates certain Defense Business Operations Fund (DBOF) activities, which in fiscal year 1994 had $24 billion in reported revenue and were larger than both the Air Force’s or the Army’s DBOF activities.
DOD, and especially the Navy, have acknowledged serious and long-standing financial management and reporting problems. Because of these problems, in February 1995, GAO designated DOD’s financial management as a high-risk area especially vulnerable to waste, fraud, and mismanagement.
Several organizations are integrally involved in carrying out the Navy’s financial management and reporting: (1) the Office of the Navy’s Assistant Secretary for Financial Management and Comptroller, which has overall financial responsibility, (2) DFAS, which reports to the DOD Comptroller and provides accounting and disbursing services, and (3) Navy components that initiate and authorize financial transactions. The DFAS Cleveland Center is primarily responsible for preparing the Navy’s financial reports from data generated by accounting, financial management, and other management information systems operated by DFAS, the Navy, and the Marine Corps.
The CFO Act requires DOD and the other “CFO Act” agencies to improve their financial management and reporting operations. Among its specific requirements is that each agency CFO develop an integrated agency accounting and financial management system, including financial reporting and internal controls. Such systems are to comply with applicable principles and standards and provide for complete, reliable, consistent, and timely information that is responsive to the agency’s financial information needs. To help strengthen financial management, the CFO Act also requires that DOD prepare financial statements for its trust funds, revolving funds, and commercial activities, including those of the Navy. To test whether agencywide audited financial statements would yield additional benefits, the CFO Act also established a 3-year pilot program for the Army, the Air Force, and eight other “CFO Act” agencies or components of agencies.
In response to experiences gained under the CFO Act, the Congress concluded that agencywide financial statements contribute to cost- effective improvements in government operations. Accordingly, when the Congress passed the Government Management Reform Act of 1994 (GMRA) (Public Law 103-356), it expanded the CFO Act’s requirement for audited financial statements by requiring that all 24 “CFO Act” agencies, including DOD, annually prepare and have audited agencywide financial statements, beginning with those for fiscal year 1996. GMRA also authorizes the Director of the Office of Management and Budget (OMB) to identify component organizations of the 24 “CFO Act” agencies that will also be required to prepare financial statements for their operations and have them audited. Consistent with GMRA’s legislative history, OMB has indicated that it will identify the military services as DOD components required to prepare financial statements and have them audited. Therefore, fiscal year 1996 is the first year for which the Navy will be required to prepare a full set of financial statements for its general funds.
section_title: Widespread Weaknesses Hamper Effective Financial Management and Reporting
paragraphs: To an even greater extent than the other military services, the Navy is plagued by troublesome financial management problems involving billions of dollars. These problems include (1) internal control breakdowns over disbursements, (2) actual and potential violations of the Anti-Deficiency Act, and (3) widely inconsistent financial reporting on the results of operating Navy’s DBOF activities. The Navy’s serious and widespread financial management problems have been highlighted in audit reports, and embarrassing fraud cases and have severely impeded the Navy’s effective financial management. The following are examples of these problems.
In 1989, we reported to the Secretary of the Navy that the Navy’s consolidated financial reports for fiscal year 1986 were unreliable and understated assets by $58 billion.In 1994, we reported a $163 billion discrepancy between the value of property, plant, and equipment that the Navy reported for fiscal year 1993 and the amounts shown in the supporting information various Navy commands submitted to DFAS.In its fiscal year 1994 Federal Managers’ Financial Integrity Act (FMFIA) (Public Law 97-255) report to the Secretary of Defense, the Navy reported that none of the 28 operating accounting systems it evaluated complied with appropriate accounting standards and related requirements.
Between 1989 and 1992, a former Military Sealift Command supply officer established a fictitious company, submitted over 100 bogus invoices, and received an estimated $3 million in fraudulent payments.
With regard to internal control breakdowns over disbursements, over 2 years ago, we reported that the Navy had a severe and persistent problem with unmatched disbursements, which, in December 1992, amounted to about $13.6 billion. As of August 31, 1995, the Navy’s unmatched disbursements and other problem disbursements totaled $18.6 billion, by far the most of any DOD component, with over 67 percent of the DOD total, as shown in table 1.
Particularly troubling, the Navy continues to have difficulty in solving its problem disbursements. For example, from October 31, 1994, through June 30, 1995, the Navy and DFAS resolved about $7.6 billion in unmatched disbursements, which is significant. This reduction was, however, largely eclipsed by $6.7 billion in new unmatched disbursements.
Also, problems in keeping records on Navy disbursements have distorted governmentwide financial reporting. DFAS, Cleveland Center, incorrectly recorded billions of dollars of fiscal year 1995 Navy disbursements to a nonbudgetary deposit fund account. According to Department of the Treasury officials, this error resulted in the Treasury understating by at least $4 billion the federal government’s overall budget deficit reported as of June 30, 1995. Thus, maintaining accurate financial records and producing reliable financial information on the Navy’s operations is a meaningful process with relevance to and significant ramifications for the government as a whole.
With respect to actual and potential violations of the Anti-Deficiency Act, for fiscal years 1993 and 1994, and through the first 10 months of fiscal year 1995, the Navy investigated 25 cases of potential Anti-Deficiency Act violations involving about $166 million. Of these, 18 cases have been closed with the following results.
For 15 cases, involving about $87 million, DOD reported to the Congress that the Navy had violated the Anti-Deficiency Act. In 11 of these cases, the violations were due to misclassifications between appropriations and four cases represented overexpenditures of obligational authority. These violations resulted in disciplinary actions against 58 people. These actions included 1 removal from office, 2 suspensions, 3 letters of punitive reprimand, 20 letters of nonpunitive reprimand, and various other admonishments. In 3 cases, involving about $63 million, investigators found no violations of the act but discovered that accounting errors primarily caused what initially appeared to have been violations.
Navy DBOF activities should operate in a businesslike manner with the objective of breaking even. However, in June 1994, we reported that, given the magnitude of differences reported for DBOF’s operating results, it is difficult for Navy and DOD managers to know the Navy DBOF activities’ actual operating results. Nevertheless, the Navy has continued to report misleading DBOF financial information. For fiscal year 1994, the Navy reported (1) a loss of $120 million in the fund’s budget overview, (2) a cumulative loss of $3.2 billion when the fund’s monthly reports for the fiscal year were totaled, and (3) income of $574 million on the fund’s year-end financial statements. Thus, it is unclear and undeterminable whether, in fiscal year 1994, the Navy’s DBOF activities operated at a gain or a loss, or whether they broke even as intended.
In addition to these wide fluctuations, comparison of the reported results of the Navy DBOF activities between fiscal years also shows readily apparent inconsistencies. For instance, the Navy’s DBOF financial statements for fiscal year 1992 showed a $2.7 billion operating loss whereas the fiscal year 1993 statements showed operating income of $2.5 billion. The fiscal year 1994 statement showed operating income of $574 million. These extreme fluctuations in annual operating results raise questions regarding the effectiveness of fund management and the accuracy of reported amounts.
In addition, the Naval Audit Service has been unable to express opinions on the Navy’s consolidated DBOF activities’ financial statements prepared under the CFO Act. The Service found extensive problems including that the reported cost of property, plant and equipment, and related depreciation, were not adequately supported, and account balances were materially misstated. Also, DFAS acknowledged in its 1994 FMFIA Statement of Assurance that its Navy-related accounting systems did not provide adequate general ledger control. As a result, the DOD Inspector General was unable to audit DOD’s consolidated DBOF financial statements citing significant deficiencies in accounting systems and the inability of Navy to submit timely and accurate statements for audit of its DBOF activities.
DOD has initiatives underway that could help address the fundamental weaknesses we found that impede effective financial management and reporting for the Navy. Specifically, the June 1995 DFAS Business Plan includes actions intended to achieve the finance and accounting improvement goals laid out in Secretary Perry’s blueprint for financial management reform. For example, the DFAS Business Plan includes 5 actions to address DOD’s problem disbursements, 19 actions to improve compliance with the Anti-Deficiency Act, and 6 actions to improve the systems supporting DOD’s DBOF operations.
section_title: Financial Reports Are Grossly Inaccurate
paragraphs: For fiscal year 1994, the Navy’s consolidated financial reports showed $506 billion in assets, $7 billion in liabilities, and $87 billion in operating expenses. However, each of these amounts was substantially misstated. Overall, we identified at least $225 billion of errors in the Navy’s fiscal year 1994 consolidated financial reports. As a result, these reports were unreliable and misleading and, thus, of no use to the Congress and to DOD and Navy managers. Furthermore, the reports were, in part, prepared from budgetary data that also contained questionable and abnormal balances, such as negative unliquidated obligations.
The Navy’s financial reports were submitted to the Treasury. The Treasury used data from the reports to prepare consolidated financial reports for the federal government. Therefore, the significant errors and problems we identified in the Navy’s financial reports also affect the reliability of the overall government financial reports.
We have discussed with DOD, Navy, and DFAS officials and provided to them our workpapers documenting the errors we identified in the Navy’s reports. Nonetheless, because of the Navy’s and DFAS’s inadequate financial records, we cannot be sure that we identified all significant mistakes.
subsections: section_title: Financial Data Were Omitted, Erroneous, and Misclassified
paragraphs: Our analysis showed that the Navy’s fiscal year 1994 consolidated financial reports were riddled with billions of dollars in omissions, errors, and misclassifications. The effects of these misstatements on the Navy’s fiscal year 1994 consolidated Reports on Financial Position and Operations are summarized in table 2.
Specifically, the Navy’s fiscal year 1994 consolidated financial reports did not depict its true financial status and operating results because of: $66 billion in material omissions, including $31 billion in ammunition held worldwide; $14 billion in supply inventories at air stations, supply centers, other shore activities, and on vessels; and $7 billion in unfunded liabilities for projected environmental cleanup costs for which estimated costs are available; $43 billion in errors, including $32 billion in assets, such as structures and facilities, and government-furnished and contractor-acquired property that were reported twice; $9 billion of understated revenues due to an erroneous calculation; and $2 billion in property that were, in fact, DBOF assets, and, thus, should not have been reported in the Navy’s consolidated financial reports; and $116 billion in misclassifications, including $72 billion in accrued expenditures reported as revenue; $28 billion in capital expenditures reported as operating expenses; and $12 billion in ammunition reported as military equipment.
Moreover, we found that the Navy’s financial reports did not include billions of dollars invested in building aircraft and missiles and modernizing weapons systems. Also, while the Navy reported $26.4 billion for ships under construction as of September 30, 1994, it did not include outfitting and post delivery costs, costs related to Military Sealift Command vessel construction, and components for future construction. The Navy did not have sufficient data from which we could determine amounts for these items.
In commenting on a draft of this report, DOD agreed that misclassifications and errors were made in the Navy’s fiscal year 1994 financial reports, however, DOD stated that it could not concur with the specifics of the finding regarding the errors until it completes further research.
section_title: Required Disclosures Were Not Made
paragraphs: In addition, the Navy’s consolidated financial reports did not disclose the government’s contingent liability for potentially large losses likely to occur but for which reasonable cost estimates could not be made at the time the reports were prepared. Disclosing that these contingent liabilities exist, although they cannot be quantified at present, is significant because they could ultimately cost the government billions of dollars.
For example, the Navy’s fiscal year 1994 consolidated financial reports did not describe contingent liabilities for the future costs to the government of cleaning up the environment at Navy sites, for which amounts were not estimable, and the Navy’s share ($643 million) of DOD’s $2 billion liability for pollution prevention activities which covers fiscal years 1995 through 1999; indemnifying contractors under contracts for procurement of nuclear-powered vessels, missiles, and components, and disposal of low-level nuclear waste; and decommissioning ships, including the disposal of nuclear propulsion plants and closing dozens of naval bases and air stations.
We found that the Navy’s fiscal year 1994 consolidated financial reports did not disclose obligation and disbursement problems. First, part of the $66 billion in material omissions previously discussed resulted because the Navy did not disclose an estimated $888 million that will eventually be required to pay currently undelivered orders and unpaid obligations associated with appropriations that were canceled as of September 30, 1994. Second, the Navy did not report its billions of dollars of problem disbursements as of September 30, 1994.
section_title: Reporting of Operating Expenses and Capital Expenditures Is Unreliable
paragraphs: The Navy’s financial systems, for the most part, do not distinguish between disbursements made for operating expenses and for capital expenditures and, thus, the amounts for these items were improperly reported. DFAS, Cleveland Center, incorrectly (1) used the total obligations incurred for all appropriations to report the Navy’s operating expenses for fiscal year 1994 and (2) reported no amount for capital expenditures.
Transaction codes (specifically, object class codes), which are fundamental for properly classifying disbursements, could be used to distinguish between, and, thus, properly report, disbursements for operating expenses and capital expenditures. However, the Navy and DFAS do not require the consistent use of object class codes when recording disbursements for these purposes. OMB has recognized the importance of object class information and encourages its use for financial statement presentation under the CFO Act.
In this regard, we extracted approximately 174,000 disbursement transactions totaling about $7.3 billion recorded in the Navy’s Standard Accounting and Reporting System from July through September 1994. Sixty-eight percent of these transactions, representing about $6.4 billion, did not contain object class codes. Also, we identified 2.8 million transactions processed through the Navy’s Centralized Expenditure/Reimbursement Processing System for May and June 1994. We found that 2.2 million of the transactions (78 percent) were processed without object class codes.
A Navy finance official told us that Navy and DFAS activities are required to use expense element codes to record transactions for operation and maintenance and research, development, test, and evaluation appropriations, and that in his opinion, DFAS, Cleveland Center, should be able to generate expense data, at least for these appropriations, using these codes. However, similar to object class codes, our analysis of about 630,000 disbursement transactions for 2 months of fiscal year 1995 for the two appropriations showed that expense element codes were not consistently used. Of the transactions we analyzed, about 454,000 either (1) did not have expense element codes or (2) the recorded codes were invalid.
In the absence of object class and expense element code data, we believe that information from which to more accurately report these two types of disbursements could have been derived from the Navy’s budget execution reports as of September 30, 1994. Using these reports, we estimated amounts for operating expense and capital expenditures to be $61 billion and $28 billion, respectively, for fiscal year 1994. As a result, we estimated that the $87 billion that the Navy reported as operating expenses was overstated by $26 billion, or almost 30 percent.
section_title: Lack of Basic Internal Controls and Discipline Cause Financial Reporting Problems
paragraphs: A root cause of the Navy’s financial reporting deficiencies is the lack of basic internal controls and well-disciplined financial operations. Effective financial management requires strong systems of internal control to help ensure the integrity and reliability of financial information, safeguard assets, and promote conformity with accounting requirements and operating procedures. However, we found that the Navy and DFAS used financial control practices that were fundamentally deficient.
subsections: section_title: Accounts Are Not Routinely Reconciled
paragraphs: Reconciliations are a primary control practice to detect differences between summary and detailed records and accounts. When independently derived records do not agree, managers are to investigate the causes, resolve discrepancies, and make appropriate adjustments. Thus, periodic reconciliations are a first-line defense to detect potential problems, such as the loss or theft of assets.
However, we found that the Navy and DFAS did not routinely perform quarterly reconciliations between (1) the Navy’s official accounting records at DFAS’s Defense Accounting Offices (DAO) and (2) custodial property records at Navy activities, as required by the Navy Comptroller Manual. We found, for instance, that the Navy’s official accounting records at DAO-Arlington, had not been reconciled with any of the Navy’s custodial property records for at least 18 months. We found unresolved differences of at least $21 million.
section_title: Financial Reports and Trends Are Not Reviewed and Analyzed
paragraphs: The periodic review and analysis of financial information generated by an accounting system is a basic control technique to maintain the integrity of the information by helping to ensure that errors have not occurred. Typically, this control technique would entail processes such as (1) reviewing financial reports to detect unusual information or account balances and (2) analyzing account balance trends between reporting periods. When abnormal account balances or unexpected trends occur, their cause should be investigated and any necessary corrections made.
When an agency’s records or reports show abnormal information or account balances, that is a strong indication that errors have occurred in recording or processing the underlying transactions. In this respect, for example, the Navy’s fiscal year 1994 consolidated financial reports showed an operating loss of $9.1 billion. This followed reported losses of $12 billion for fiscal year 1993 and $7.1 billion for fiscal year 1992. Taken at face value, the magnitude of these losses should have alerted the Navy that it may have overspent its appropriations during these 3 fiscal years.
Also, the financial reports DFAS used to prepare and support the Navy’s consolidated financial reports for fiscal year 1994 showed various abnormal account balances, such as the following.
The military construction appropriation report showed a negative accounts receivable balance of $95 million.
The ship procurement appropriation report showed a negative accounts receivable balance of $13 million.
Another procurement appropriation report showed an account balance for uncollectible receivables of $88 million, which exceeded the reported value of receivables by $30 million.
Although the information and account balances in each of these cases were highly unusual and unlikely to be correct, the Navy and DFAS did not investigate and correct them.
Also, we found unusual trends and large variances in account balances that were not investigated, explained, or resolved, even though the Navy’s regulations require them to be. For example, the Navy’s September 30, 1994, consolidated financial reports showed the value of structures and facilities to be $62 billion, or more than double the $29 billion reported a year earlier. A cursory review of these reports would have identified this unreasonable upward fluctuation.
Once identified, the underlying cause, which in this case was double counting, could have been readily identified and the financial reports corrected. Specifically, this double counting occurred because DFAS personnel inadvertently included in the worksheets used to prepare the Navy’s fiscal year 1994 consolidated financial reports the same structures and facilities data reported from two sources—the Naval Facilities Engineering Command, which maintains Navywide real estate and facilities data, and individual Navy accounting offices.
In its comments on a draft of this report, DOD stated that Navy’s SF-220 series of reports for fiscal year 1994 provided appropriation level totals but did not provide breakdowns of financial data by command or individual activity. DOD also stated that since these financial reports were prepared only at the total appropriation levels, errors at an activity or command were difficult to discern. Finally, DOD stated that it is improbable that errors at the appropriation level will be found without a breakout by command and activity data.
Effective financial systems and internal controls would prevent and/or detect errors in recording and processing transactions, regardless of the level at which they occurred. Also, it should be recognized that the fiscal year 1994 SF-220 reports which we evaluated were prepared at the overall Navy departmental level, not at the appropriation level as the comments suggest. Contrary to the department’s assertion, most of the errors we identified were not difficult to discern because they dealt with relatively obvious data omissions, double-counting, and misclassifications. In most cases, they occurred because information available at Navy commands was not requested by DFAS, Cleveland Center, errors were made in recording information in the correct “line items” of the reports, or information was entered in the reports twice.
section_title: Adequate Physical Inventories of Plant Property Were Not Assured
paragraphs: The Navy Comptroller Manual specifies that (1) DAOs schedule physical inventories of plant property and monitor their completion at Navy activities, (2) activities perform such physical inventories at least once every 3 years and correct their property records for any differences, and (3) activities inform the DAOs when physical inventories have been completed. However, we found that DAO-Arlington and DAO-San Diego, which accounted for $5.2 billion of the Navy plant property reported in fiscal year 1994, did not ensure that Navy activities reporting to them had completed the required physical inventories. The activities did not properly inform the DAOs as to whether the triennial physical inventories had been completed, and the DAOs did not follow up with the activities.
Specifically, as of September 30, 1994, 124 Navy activities out of 148, or 84 percent, that DAO-Arlington had scheduled for inventories in fiscal years 1993 and 1994 had not reported to the DAO that the inventories had been completed. In February 1995, DAO-Charleston assumed plant property accounting responsibilities for these activities. As of September 30, 1995, DAO officials told us that none of the transferred activities had reported completion of their physical inventories to DAO-Charleston.
DAO-San Diego reported plant property amounts for 43 activities as of September 30, 1994. Although the plant property official at the DAO scheduled the physical inventories at these activities, the official did not check to see if the activities were reporting the completion of the physical inventories. Therefore, the DAO had no assurance that these required inventories were being done and the records corrected.
We also found that, when inventories were completed, errors were not always identified and corrected. For example, although an Air Maintenance Training Group conducted a physical inventory every 6 months, we found over $46 million of operating inventory items inappropriately included in its plant property records. At a diving unit, our physical inventory of equipment, which was performed shortly after the unit had completed its inventory, noted over $1 million in errors. We also found $1 million of discrepancies at a Naval Computer and Telecommunications Detachment when compared to the DAO-Pensacola property records for the activity.
We are now completing our review of other categories of inventory, such as operating materials and supplies, and will report later on the results of that work.
section_title: Many Adjustments Are Unsupported
paragraphs: There are various sound and necessary reasons for adjusting accounting records, such as to correct errors or to write off bad debts. DOD’s financial management regulations require that adjustments be clearly documented to help ensure that only proper adjustments are made. Otherwise, adjustments could be used to cover up embezzlements, hide losses, or mask errors. Accordingly, it is essential to establish and enforce internal controls that (1) allow only legitimate, authorized adjustments to be made and (2) require maintenance of documentation that explains their basis and purpose, and indicates which official approved them.
However, we found that adjustments totaling billions of dollars were routinely made to accounting records and account balances, largely without adequate documentation. From October 1994 through January 1995, over $14 billion of adjustments were processed by DFAS operating locations against the Navy’s financial records. From these transactions, we judgmentally selected 64 adjustments totaling about  $1 billion and requested supporting documentation from the applicable DFAS operating locations. These locations provided us documenting records for 33, or about half, of these adjustment transactions, valued at $498 million. For the remaining $527 million, no documentation was provided.
section_title: Supervisory Reviews Are Not Always Performed
paragraphs: Supervisory review of staff work and products is a basic internal control to ensure the quality of work processes and financial reports. Without supervisory review and approval, adjustments could be used to circumvent essential internal controls and, thus, hide errors, fraud, or misuse of assets. Nonetheless, in our view, many of the inaccuracies in the Navy’s financial reports discussed in the previous section could have been identified if Navy and DFAS managers had conducted adequate supervisory reviews. Also, many of the adjustments just discussed were not provided to supervisors for their review and approval.
By using basic reasoning to assess account and report balances, evaluate changes from previous periods, and compare reported amounts with available documentation, we were able to identify numerous errors, such as the abnormal account balances and unusual trends previously discussed. The discrepancies in the financial reports and records we found were not, however, detected and investigated by either the DFAS, Cleveland Center, or the Navy.
section_title: DFAS Director Lays Groundwork to Improve Control Practices
paragraphs: On September 1, 1995, the DFAS Director requested that the DFAS center directors be personally involved in improving DOD’s financial statements and in preventing a repetition of reporting errors disclosed by DOD’s CFO Act financial audits. The Director’s guidance noted that many of the errors were preventable if proper validation steps had been in place before issuance of the reports.
The DFAS Director called for increased emphasis on basic internal control areas by ensuring that adequate documentation is available to support the validity and accuracy of accounting transactions; identifying and recording accounts receivable, accounts payable, collections, and disbursements accurately, consistently, and completely, including reconciliation to supporting subsidiary ledgers; obtaining management approval of accounting adjusting entries; compiling and reporting contingent liabilities; and ensuring that component reports of property, equipment, and inventory are promptly submitted and certified as to accuracy.
The Director’s guidance is based on DOD’s lessons learned in preparing financial statements under the CFO Act and having them audited. We believe that the guidance gets to the heart of the Navy’s and DFAS’s financial management problems and outlines control techniques that could have detected or prevented many of the financial reporting problems we identified. The DFAS Director stressed that the guidance must be fully and effectively implemented to prevent all types of reporting deficiencies identified throughout DOD.
section_title: Financial Management Improvement Planning Is Inadequate
paragraphs: The Navy and DFAS, Cleveland Center, developed the joint CFO Project Plan to set out the steps necessary to meet requirements for preparing consolidated financial statements for the Navy’s general fund operations for fiscal year 1996. The plan describes tasks to be completed, such as holding project meetings and visiting DFAS centers; identifies, for each task, the responsible participating organization, other participating organizations, and deliverables, such as plans or summaries; and includes milestones, such as planned and actual start and completion dates.
The plan, which had been under development by Navy and DFAS for approximately 6 months, was approved by the two organizations on October 4, 1995. At the time of its approval, 58 of the 204 tasks that had been identified as underway or completed as of that date were already behind schedule or not yet started. Moreover, given the scope and depth of the Navy’s prior problems, we believe that the plan is not sufficiently detailed to enable the Navy and DFAS to successfully meet the requirements for the preparation of auditable financial statements within the next year. Specifically, the CFO Project Plan does not specify the:
Specific offices or positions within the Navy and DFAS which are to be accountable for accomplishing the specific planned actions required to carry out the identified tasks. Instead, the plan identifies only organizational responsibilities for each task. For example, the plan identifies 168 tasks as the responsibility of DFAS, Cleveland Center, but does not designate a specific office or position accountable for completing the tasks.
Actions to address previously reported deficiencies. For example, the plan calls for reviewing reports on financial operations as a discrete task with the associated deliverable specified as a summary. However, the plan does not specify the actions to be taken to deal with previously reported deficiencies identified as a result of the reviews.
Manner in which it will be coordinated with DOD’s requirement to meet governmentwide financial management improvement initiatives. These initiatives include meeting the requirements of the U.S. Standard General Ledger (SGL), which OMB has required governmentwide for almost a decade. As of September 30, 1994, OMB reported that 34 percent of all executive branch systems fully implemented the SGL and 18 percent partially implemented it. Another governmentwide financial management initiative involves the Treasury’s Federal Agencies Centralized Trial-balance System (FACTS), an automated financial reporting system using the SGL. For fiscal year 1994, the Treasury began using FACTS to collect agency standard general ledger account balances for use in producing the government’s consolidated financial statements. The Treasury gave three DOD organizations and one other executive branch agency waivers for meeting this reporting requirement for fiscal year 1994.
In its comments on a draft of this report, DOD did not concur with this last finding and stated that “task 10” of the Navy/DFAS CFO Project Plan provides for coordination with the DOD FACTS effort. The cited task simply reads “Coordinate effort with FACTS effort” without providing any additional specificity. Even though it did not concur with this finding, DOD stated that the ongoing FACTS tasks will be incorporated into the Navy/DFAS plan which should resolve most of our concerns. The Navy/DFAS plan does not have any tasks specifically addressing the SGL issue.
An adequate plan would also encompass strategies to provide (1) enough financial management personnel with adequate financial management expertise and experience in Navy operations and (2) short-term solutions to improve the quality of financial data pending completion of long-term financial systems modernization plans.
subsections: section_title: Meeting Personnel Resource Needs
paragraphs: Navy and DFAS officials have told us on numerous occasions that they do not have enough personnel with the right experience to effectively implement the CFO Act’s requirements. However, neither the Navy nor DFAS has taken steps to assess the personnel levels, skills, and experience necessary to effectively carry out Navy-related financial management responsibilities and prepare the Navy’s financial reports and statements. In addition, the CFO Project Plan does not address alternatives, such as the use of contractors, for meeting Navy and DFAS financial management personnel resource needs.
An official from the Navy’s Office of the Assistant Secretary for Financial Management and Comptroller told us that higher priorities, such as resolving the Navy’s continuing unmatched disbursements problem, have prevented the Navy from dedicating sufficient personnel to its general fund financial reporting. Similarly, the Director of DFAS’s headquarters Financial Statements Directorate stated that insufficient personnel is a primary impediment to preparing reliable financial reports on the Navy’s operations.
Regarding personnel resources, we found that DFAS, Cleveland Center’s Departmental Accounting and Analysis Directorate
Had 186 authorized staff positions, but as of June 1995, 57 of these positions, or 31 percent, were vacant. Of these vacancies, 13 were at the mid- and senior-level (GS-12 and above). For generally comparable financial reporting responsibilities supporting the Air Force and the Army, DFAS, Denver Center, had 207 authorized staff positions and DFAS, Indianapolis Center, had 212 positions, with vacancy rates of about 15 percent.
Does not have sufficient personnel experienced in Navy operations.
Before 1991, DFAS, Cleveland Center, served as the Navy’s military payroll processing center. In 1991, DOD began transferring responsibility for the Navy’s departmental financial reporting from the Navy’s Office of the Assistant Secretary for Financial Management and Comptroller in Washington, D.C., to DFAS, Cleveland Center. Since then, only 13 personnel experienced in the Navy’s financial operations, and only 3 experienced in Navy financial reporting, transferred to DFAS, Cleveland Center.
Had 50 mid- and senior-level accountants in the 510 accounting job classification series allocated to the financial reporting area. This is fewer than the 60 staff in these positions at DFAS, Denver Center, and significantly fewer than the 87 at DFAS, Indianapolis Center. As of October 1995, 22 percent of DFAS, Cleveland Center’s 510 mid- and senior-level staff positions were vacant.
Had 17, or 30 percent, of its 56 mid- and senior-level positions filled with personnel in the 501 accounting-related job classification series, although this series requires no accounting education.
Ensuring that sufficient numbers of personnel with appropriate expertise are assigned financial reporting responsibilities at DFAS, Cleveland Center, is particularly important because of the deficiencies we noted in that center’s financial reporting operations and the substantial effort that will be required to correct them. Consequently, an adequate financial management improvement resource plan would help ensure that the Navy and DFAS, Cleveland Center, have an adequate allocation of personnel with the requisite technical skills to effectively carry out financial reporting responsibilities for the Navy.
In its comments on a draft of this report, DOD stated that DFAS, Cleveland Center, had recently received personnel resource authorizations from DFAS headquarters and that 14 accountants and financial analysts recently started work in the center’s CFO area. DOD further stated that 13 more personnel were expected to join the center’s CFO team by the end of February 1996. Although the hirings should logically alleviate some of the personnel shortages, a viable financial management improvement resource plan is still needed to ensure that adequate CFO technical skills are available at the center.
section_title: Improving Financial Systems
paragraphs: The CFO Project Plan also does not provide short-term strategies for improving existing financial systems’ operations. Overall, systems deficiencies substantially increase the difficulty and time required to develop the Navy’s financial reports. Further, such deficiencies significantly increase the risk of errors, and, without compensating controls, increase the Navy’s and DOD’s exposure to undetected fraud, waste, and mismanagement.
Both DOD and Navy officials have forthrightly acknowledged that systems deficiencies severely hamper their ability to effectively carry out accounting and financial reporting for the Navy. For example, in its fiscal year 1994 report pursuant to the Federal Managers’ Financial Integrity Act, DFAS, Cleveland Center, reported that it was unable to prepare complete, reliable, and accurate financial statements because of systems deficiencies. More specifically, DFAS, Cleveland Center, reported that the nonintegrated systems it used for the Navy’s financial reporting were not designed to conform with DOD’s general ledger requirements, did not use the standard data elements needed to ensure consistent definition of accounts, and required considerable manual intervention to summarize and interpret data from subordinate systems.
The absence of a fully integrated general ledger system necessitates reliance on labor-intensive, error-prone processes to ascertain whether all required items and accounts are reported in the Navy’s financial reports and statements. Without integrated systems operating under general ledger control, there is no overall discipline to ensure the veracity and completeness for the amounts reported.
As a result, for example, the value of perhaps as much as 83 percent of Navy’s assets—primarily property—cannot be derived from the existing financial systems structure. To report information on the dollar value of the Navy’s fixed assets, the Navy and DFAS, Cleveland Center, must rely on “data calls” to various Navy commands and other organizations, which use their logistics systems and databases to provide the information.
DOD began its Corporate Information Management (CIM) initiative in 1989 with the objective of improving its business processes and information systems. With respect to accounting and finance systems, DFAS’s approach to implementing the CIM concept has been to select and adapt as an interim step the best existing systems for use as “migratory” financial systems to be followed eventually by “target” systems. Most recently, DFAS has set out its strategy for consolidating DOD’s accounting systems as part of the July 1995 DFAS Business Plan.
Although the DFAS strategy calls for systems improvements, few, if any, improvements have been made in the systems the Navy or the other military services, will use for financial management and reporting. Historically, DOD’s system improvement plans have fallen far short of goals and its continuing systems problems are a serious challenge that will require a number of years to correct.
In the short term, many Navy and DFAS financial management problems can be successfully remedied without developing new systems. In this regard, it is imperative that the Navy and DFAS make concerted efforts now to improve the data produced by their existing systems. Consequently, an adequate CFO Project Plan would address the specific actions that both the Navy and DFAS will take to (1) improve data in existing systems, (2) ensure the use of existing systems’ capabilities to account for transactions by object class or expense element, and (3) follow existing systems’ operating and transaction processing requirements. It will also be important to have procedures to monitor throughout the year whether rudimentary controls, such as those the DFAS Director called for in September 1995, are being used throughout Navy and DFAS financial operations.
In commenting on a draft of this report, DOD stated that the Standard Accounting and Reporting System-Departmental Reporting (STARS-DR) (a system currently under development) has been designated as the “target” system for Navy’s general fund financial reporting. It remains to be demonstrated whether STARS-DR, once developed and implemented, will adequately serve as the Navy’s overall financial reporting system. We would also note that many of the problems we identified resulted from Navy and/or DFAS personnel not following established procedures, a condition that would detrimentally affect data in even the most well-designed and implemented systems.
section_title: Recently-Issued DOD Policy Intended to Clarify Accountability for Financial Management and Reporting
paragraphs: In the past, DOD has not clearly defined or strictly enforced accountability between the Navy and DFAS for the Navy’s financial management and reporting operations and for meeting the CFO Act’s requirements. On November 15, 1995, the DOD Comptroller issued a departmentwide policy, “Roles and Responsibilities of the DOD Component and the Defense Finance and Accounting Service Relative to Finance and Accounting Operations and Departmental Reports.”
The policy, for example, requires DFAS to perform quality control reviews of the financial reports and statements it prepares; furnish these documents to its “customers” for review and concurrence before release; obtain preapproval from “customers” for any prior period adjustments to their financial reports that exceed established thresholds; adequately and properly document all adjustments, including appropriate documentation to support the need to correct an error and adjust the affected balances; and report potential violations of the Anti-Deficiency Act to the cognizant military service or other DOD component.
Similarly, the policy mandates specific responsibilities for data accuracy to the DOD components, such as the military services, for which DFAS prepares financial statements. This policy establishes specific requirements for the components with respect to such things as (1) installing and operating appropriate internal controls to help ensure the accuracy of data provided to DFAS and (2) assessing the quality of information in DFAS-prepared reports prior to their release.
If effectively implemented, the policy, along with the DFAS Director’s September 1995 guidance, should help to resolve many of the reporting problems we found involving the Navy and DFAS. However, the policy generally does not impose new requirements, as many of the provisions were already required by DOD regulations prior to the Comptroller’s issuance of the guidance. Further, neither DFAS nor the military services have consistently followed required procedures. We found no evidence that failure to follow established procedures resulted in disciplinary or other adverse actions except in instances also involving violations of laws.
Consequently, to make the present arrangement work more effectively, the policy must be expeditiously and fully implemented so that the Navy’s and DFAS’s specific financial management roles and responsibilities are clearly delineated. To follow through and determine whether all provisions of the new policy are enforced and effectively implemented, or whether refinements are necessary, it is important for the DOD Comptroller to establish time frames within which to achieve results from the clarified roles and responsibilities, and establish milestones for assessing progress toward financial management improvement; designate specific offices or positions to be held accountable for actions to improve the Navy’s financial management and reports; and discipline managers for failing to improve the Navy’s financial management operations and to meet the CFO Act’s requirements to enhance financial systems.
In its comments on a draft of this report, DOD stated that it was concerned that our finding tends to underplay the importance of the DOD Comptroller’s November 15, 1995, “roles and responsibility” document by stating that the document generally does not impose new requirements, as many of the provisions were already required by DOD regulations. DOD further stated that, prior to the Comptroller’s guidance, it was not always clearly stated whether DFAS or DOD components were responsible for specific financial management and reporting requirements. Finally, DOD stated that, due to various accounting and finance consolidations, DFAS’s roles and responsibilities relative to its customers were not formalized and therefore, were not clear to all parties.
The need to clarify the respective roles and responsibilities of DFAS and the military services has existed since DFAS began operations in 1991. In August 1992, we first reported that DOD needed to clearly define DFAS’s role and accountability for financial management and reporting. While the DOD Comptroller’s November 1995 guidance clarifies the roles and responsibilities of DFAS and the DOD components, it does not greatly change existing financial management requirements, such as properly documenting transactions, accurately and completely processing transactions in a timely manner, and establishing appropriate internal controls. These and many more requirements existed prior to the Comptroller’s guidance. We recognize that the guidance now fulfills the need to more clearly define whether DFAS or DOD components are responsible for implementing the various requirements. The guidance should provide a vehicle to begin holding the appropriate DFAS and military service officials accountable for meeting those requirements.
section_title: Conclusions
paragraphs: The serious financial management and reporting problems we found place the Navy at significant risk of waste, fraud, and misappropriation and drain resources needed for military readiness. We found widespread financial reporting inaccuracies, involving billions of dollars in erroneous balances covering the spectrum of key accounts. These inaccuracies undermine the credibility of financial reports and information on the Navy’s operations available to the Congress and Navy and DOD managers. Equally disturbing, the Navy’s financial reports mask various problems with data, including abnormal budgetary account balances, used to prepare these reports.
Our work showed little tangible progress toward resolving the Navy’s financial management problems. The pervasive financial management problems we identified involve both the Navy and DFAS and stem primarily from these organizations not adequately observing basic accounting and control conventions; implementing financial management improvement efforts to achieve accurate reporting; addressing serious financial management staffing shortfalls; using existing systems to their full potential in controlling, managing, and reporting on the Navy’s financial operations; and exercising effective financial management accountability in the current arrangement of shared responsibility between DFAS and the Navy.
The Navy and DFAS have had several years to address the pervasive and long-standing problems that hamper the Navy’s financial management operations, and, as the CFO Act requires, to begin readying themselves to prepare reliable financial statements for the Navy for fiscal year 1996. The Navy has not taken advantage of the 5 years since the act’s passage, or the lessons learned from the experiences of its counterparts, the Army and the Air Force, in preparing financial statements. The Navy and DFAS must now “catch up” through measures that will lead to successfully preparing reliable financial statements on the Navy’s operations within the next year or so.
The DFAS Director has set the underpinnings for improved financial controls. This groundwork is an important step in finally coming to grips with a long record of neglect, underscored by the lack of accounting discipline and of a perceived value in this function. As a key “CFO Act” agency, it is imperative for DOD to now ensure that the difficulties the Navy and DFAS have experienced in preparing reliable Navy financial reports do not prevent DOD from meeting its statutory responsibility to prepare reliable agencywide financial statements beginning with those for fiscal year 1996.
section_title: Recommendations
paragraphs: We recommend that the DOD Comptroller and the Navy’s Assistant Secretary for Financial Management and Comptroller jointly act to improve the credibility of the Navy’s financial reports and to adequately position the Navy and DFAS to prepare auditable financial statements for the Navy, beginning with those for fiscal year 1996, and periodically report to the Secretary of Defense the status of their results.
First, to avoid the mistakes made in preparing the Navy’s fiscal year 1994 consolidated financial reports, the Navy and DFAS should diligently attain the greatest degree of accuracy possible in finalizing the Navy’s fiscal year 1995 consolidated financial reports. This is especially critical because data in these reports will help establish the opening balances for fiscal year 1996. These actions would, at minimum, require that financial statements and reports be compiled in accordance with applicable Treasury, OMB, and DOD requirements; financial information be reviewed thoroughly to determine its reasonableness, accuracy, and completeness; adjustments to account balances and reports be fully documented as to their basis and purpose; and the Assistant Secretary of the Navy for Financial Management and Comptroller certify that financial reports comply with applicable requirements.
Second, so that fiscal year 1996 and subsequent financial statements for Navy operations are auditable, the Navy and DFAS should place high priority on implementing basic required financial controls over Navy financial accounts and reports. The minimum requirements to carry out this step would include assurance that
Navy’s periodic physical inventories of equipment, property, and inventories are taken, the results are reported to DFAS, and any discrepancies are investigated as to cause and resolved; reconciliations of accounts and records are made, significant discrepancies are examined and resolved, and appropriate adjustments are made; transactions are clearly and completely documented and such documentation is retained and readily available to support account balances; and account balances are analyzed and financial reports are reviewed to detect abnormal account balances and unusual fluctuations and trends, any significant variances are researched and are explainable, and any necessary corrections are made.
Also, to ensure that these basic internal control requirements are enforced, the Navy and DFAS should develop and implement strategies for monitoring progress throughout the year.
Third, the Navy and DFAS should immediately prepare implementing strategies for producing reliable financial statements for the Navy, beginning with those for fiscal year 1996. This plan should, at a minimum address staffing issues, such as filling financial management vacancies, upgrading the experience of financial managers, and using contractors, as necessary, to improve financial management operations; include short-term measures to improve the data in existing financial systems, follow existing systems operating and transaction processing requirements, and use standard data elements, such as object class codes; incorporate strategies for promptly meeting DOD’s requirement to use the U.S. Standard General Ledger and the Treasury’s Federal Agencies Centralized Trial Balance System; and identify the specific offices or positions accountable for accomplishing the actions established by the strategies and provide a means for monitoring implementation throughout the year.
Finally, given the history of problems in preparing the Navy’s financial reports, we recommend that the DOD Comptroller’s November 15, 1995, policy on roles and responsibilities of DOD components and DFAS be supplemented with strategies to hold organizations and individuals accountable for effectively milestones for monitoring implementation progress during the year, and periodic assessments during annual financial reporting cycles to ensure that the roles and responsibilities are continually enforced.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, DOD generally concurred with our findings and recommendations. However, DOD maintained that both DFAS and the Navy have taken and are continuing to take enormous strides in meeting the requirements of the CFO Act and GMRA. DOD stated that while, ideally, faster progress may be desirable, the significant progress that the department believes it has made since 1990 should be recognized. DOD stated that actions underway to better position it for the future, such as the financial management reform initiatives to improve processes and major reorganizations to reduce resources, should also be recognized. DOD further stated that it would be inaccurate to state that the Navy has made little progress in improving its financial management and reporting since passage of the CFO Act. DOD cited the progress made by the Navy in improving financial reporting for its DBOF activities and trust funds while recognizing that the Navy has not had to previously prepare financial statements for its general fund operations.
This report acknowledges that the Navy has not previously been required to prepare financial statements for its general funds and that fiscal year 1996 is the first year for which the Navy will be required to prepare such statements. As a result, we focused our work on the required Treasury reports, not the more extensive financial statements required by the CFO Act, as expanded by the GMRA. Navy’s and DFAS’s inability to accurately prepare the less-comprehensive financial reports and the extent of the problems and deficiencies we identified with those reports is the focus of this report and raises serious questions regarding Navy’s and DFAS’s commitment and ability to prepare the fiscal year 1996 financial statements, which, for the most part, will be based on the same data sources.
We state in our report that DOD has begun departmentwide initiatives that could help address the fundamental weaknesses we found in the Navy’s general fund financial management and reporting. However, our review showed that severe deficiencies, including billions of dollars in problem disbursements, grossly inaccurate and unreliable financial reports, and significant internal control breakdowns, pervade the Navy’s general fund financial operations. As a result, a great deal more progress must be achieved by the Navy and DFAS to meet the requirements of the CFO Act and prepare reliable financial statements by the date stipulated in law. Considering the enormity of the problems and deficiencies to be overcome, the progress made to date by the Navy and DFAS in the Navy’s general funds is relatively small and, in our view, warrants our finding that little progress has been made.
DOD fully concurred with 16 of our recommendations and partially concurred with 2 others. First, DOD partially concurred with our recommendation that the Assistant Secretary of the Navy for Financial Management and Comptroller certify that the Navy’s financial reports comply with applicable requirements. DOD stated that the annual Navy financial statements prepared pursuant to the CFO Act are required to be accompanied by a management representation letter signed by the Secretary of the Navy or the Under Secretary of the Navy. In DOD’s view, the management representation letter is the appropriate medium to provide management comments on financial statements. With respect to our recommendation, we agree that management representation letters are an appropriate medium for certification of financial statements and, therefore, if properly used, should fulfill the intent of our recommendation. The letters should acknowledge management’s responsibility for the fair presentation of information in the accompanying financial statements. However, in instances where management has concerns reagrding the viability of its financial statements, management representation letters should be used to highlight and communicate those concerns to the statements’ auditors.
Second, DOD partially concurred with our recommendation that the Navy and DFAS identify the specific offices or positions accountable for accomplishing actions established by strategies for preparing the Navy’s financial statements and monitoring progress throughout the year. Although DOD did not fully concur with the recommendation, its intended action—revising the Navy and DFAS CFO Project Plan to indicate participating organizations and responsible elements within those organizations—fulfills the intent of our recommendation. Once the participating organizations and responsible elements are identified, it is important that the Navy and DFAS monitor the progress of those organizations and elements to ensure that planned actions are effectively carried out within established milestones.
DOD, for the most part, agreed with our findings in this report although it partially concurred with several findings and disputed the facts in one case. We have evaluated and addressed DOD’s comments to the extent necessary in the appropriate sections of this report.
The full text of DOD’s comments is provided in appendix II.
We are sending copies of this report to the Chairmen and the Ranking Minority Members of the Senate and House Committees on Appropriations, Subcommittees on Defense; the Senate Committee on Armed Services and its Subcommittee on Readiness; the Senate Committee on Governmental Affairs; and the House Committee on Government Reform and Oversight as well as its Subcommittee on Government Management, Information, and Technology. We are also sending copies to the Director of the Defense Finance and Accounting Service, the Secretary of the Treasury, and the Director of the Office of Management and Budget. We will make copies available to others upon request.
The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days of the date of this report. You must also send a written statement to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made over 60 days after the date of this report.
If you have questions regarding this report, please call Lisa G. Jacobson, Director, Defense Financial Audits, at (202) 512-9095, or Gerald W. Thomas, Assistant Director, Defense Financial Audits, at (202) 512-8841.
section_title: Objective, Scope, and Methodology
paragraphs: Our objective was to determine the Navy’s readiness to prepare reliable financial statements for fiscal year 1996. We examined the overall reliability of the Navy’s fiscal year 1994 financial reports, and the adequacy of the processes and controls the Navy and DFAS used to prepare them; the adequacy of the Navy’s and DFAS’s financial management planning, staffing, and systems; and the effectiveness of accountability for ensuring the reliability of the Navy’s financial reporting.
We examined the Navy’s fiscal year 1994 financial reports (the Treasury “SF-220” series) because (1) the information for these reports was derived from the sources the Navy and DFAS would, for the most part, use to prepare statutorily required financial statements and (2) the reliability of the fiscal year-end accounts balances used to prepare these reports is integral to the Navy’s accurately establishing the ending account balances for fiscal year-end 1995 and, consequently, beginning balances for fiscal year 1996. Inaccurate beginning account balances would affect the reliability of the Navy’s fiscal year 1996 financial statements. We have not, however, audited the Navy’s fiscal year 1994 financial reports and, therefore, express no opinion on them.
To assess the overall reliability of the Navy’s financial reports we evaluated whether the reported data were logical and presented in accordance with Treasury, DOD, and Navy guidance and requirements; verified the mathematical accuracy of reported amounts; and traced reported amounts to available supporting documentation and reports at DFAS, Cleveland Center.
In making our assessment, we considered the Navy’s previously reported financial management problems. We identified these problems from our prior audit reports and those of the DOD Inspector General and the Naval Audit Service and determined whether the problems continued. We also examined DOD and Navy reports of internal control and accounting systems weaknesses based on self-assessments made under the Federal Managers’ Financial Integrity Act of 1982.
To examine the adequacy of the Navy and DFAS financial reporting processes and controls, we identified and reviewed pertinent financial management policies and procedures that the Navy and DFAS had in place.
We also observed whether these processes and controls were working as the Navy and DFAS intended, and tested selected transactions affecting reported account balances. We also reviewed applicable Treasury, OMB, and DOD guidance and requirements for reporting financial transactions and preparing financial reports.
To determine the adequacy of Navy financial management planning, staffing, and systems, we discussed with Navy and DFAS officials current plans and strategies for preparing the Navy’s financial statements for fiscal year 1996. We analyzed available documents relating to these plans and focused on whether they adequately (1) addressed the types of deficiencies we noted in assessing the Navy’s fiscal year 1994 financial reports and (2) supported meeting the statutory time frame for preparing financial statements. discussed financial reporting staffing issues with Navy and DFAS, Cleveland Center, officials. We also identified DFAS, Cleveland Center’s financial reporting staff level and experience, and compared them with the financial reporting staff levels and experience of other DFAS centers. identified and reviewed previously reported Navy and DFAS financial management systems deficiencies and financial systems modernization plans.
To examine the organizational accountability established to ensure the reliability of the Navy’s financial reporting, we determined the financial management lines of authority and responsibility established by the Navy, DFAS, and DOD. In addition, we identified previously reported DOD problems in these areas, and discussed with DOD and Navy officials the current status of efforts to resolve them. We also obtained and analyzed a proposed new DOD Comptroller policy, Roles and Responsibilities of DFAS and Other DOD Components, and a draft DOD financial management regulation, “Reporting Policies and Procedures.”
In a briefing on November 17, 1994, we advised the Assistant Secretary of the Navy for Financial Management and Comptroller and key DOD financial management officials on the preliminary results of our review. On April 20, 1995, we briefed the Director of the DFAS, Cleveland Center, and senior officials from the Navy Comptroller’s Office. During both meetings, we made suggestions for correcting financial management and reporting problems hindering the Navy’s development of reliable financial statements for future fiscal years.
In addition to the adequacy of the Navy’s financial reporting, which is the subject of this report, we are also evaluating certain other aspects of the Navy’s financial management operations. We will report later on these areas.
We conducted our work primarily at Navy and DFAS Headquarters in Washington, D.C., and at DFAS, Cleveland Center. Our work was performed from August 1993 through October 1995 in accordance with generally accepted government auditing standards.
section_title: Comments From the Department of Defense
paragraphs: The following are GAO’s comments on the Department of Defense letter dated February 9, 1996.
subsections: section_title: GAO Comments
paragraphs: 1. We have changed the title of this report to CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy’s Financial Reports. 2. The “improvements and progress” listed by DOD represent actions from which envisioned benefits have yet to be achieved. While these actions may lead to improvements in the Navy’s financial management operations, in our view they do not materially affect our finding. 3. OMB, under authority established by the CFO Act, prescribes the form and content of agency financial statements prepared pursuant to that act and GMRA. Therefore, we have modified our recommendation to incorporate the OMB requirements.
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