DOD Problem Disbursements: Long-standing Accounting Weaknesses Result in Inaccurate Records and Substantial Write-offs
Published: 2005-06-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Over the years, the Department of Defense (DOD) has recorded billions of dollars of disbursements and collections in suspense accounts because the proper appropriation accounts could not be identified and charged. DOD has also been unable to resolve discrepancies between its and Treasury's records of checks issued by DOD. Because documentation that would allow for resolution of these payment recording problems could not be found after so many years, DOD requested and received legislative authority to write off certain aged suspense transactions and check payment differences. The conference report (H.R. Conf. Rep. No. 107-772) that accompanied the legislation (Pub. L. No. 107-314) required GAO to review and report on DOD's use of this write-off authority.
section_title: What GAO Found
paragraphs: After decades of financial management and accounting weaknesses, information related to aged disbursement and collection activity was so inadequate that DOD was unable to determine the true value of the write-offs. While DOD records show that an absolute value of $35 billion or a net value of $629 million of suspense amounts and check payment differences were written off, the reported amounts are not reliable. Many of the write-offs represented transactions that had already been netted together (i.e., positive amounts offsetting negative amounts) at lower level accounting sites before they were recorded in the suspense accounts. This netting or summarizing of transactions misstated the total value of the write-offs and made it impossible for DOD to locate the support needed to identify what appropriations may have been under- or overcharged or determine whether individual transactions were valid. In particular, DOD could not determine whether any of the write-off amounts, had they been charged to the proper appropriation, would have caused an Antideficiency Act violation. It is important that DOD accurately and promptly charge transactions to appropriation accounts since these accounts provide the department with legal authority to incur and pay obligations for goods or services. DOD has hundreds of current and closed appropriation accounts that were authorized by law over the years. Similar to a checking account, the funds available in DOD's appropriation accounts must be reduced or increased as the department spends money or receives collections that it is authorized to retain for its own use. Just as an individual who maintains multiple checking accounts must be sure that transactions are recorded to the proper account, DOD also must ensure that the proper appropriation account is charged or credited for each specific disbursement and collection. Our review found that DOD's guidance and processes developed to ensure compliance with the legislation provided reasonable assurance that amounts were written off properly except that check payment differences did not have the required written certification. The write-off process did not correct underlying records and significant DOD resources were needed to ensure that write-off amounts were properly identified and handled. Also, using staff resources to process old transactions resulted in fewer staff to research and clear current problems. At December 31, 2004, DOD reports showed that after the write-offs, more than $1.3 billion (absolute value) of suspense amounts and $39 million of check differences remained uncleared for more than 60 days. However, DOD has acknowledged that its suspense reports are incomplete and inaccurate. Until DOD complies with existing laws and enforces its own guidance for reconciling, reporting, and resolving amounts in suspense and check differences on a regular basis, the buildup of current balances will likely continue, the department's appropriation accounts will remain unreliable, and another costly write-off process may eventually be required.

section_title: Letter
paragraphs: The Department of Defense’s (DOD) inability to accurately account for and  record its disbursements and collections has been a serious, long-standing,  and much reported financial management problem. The department’s  ability to improve its accounting has historically been hindered by its  reliance on fundamentally flawed financial management systems and  processes and a weak overall internal control environment. Rather than  promoting quality financial information, DOD’s complex and inefficient  payment processes have all too often inhibited the proper recording of  transactions when they occur, including the prompt and proper matching  of disbursements with obligations, which is a critical funds control  measure. Having such payment recording problems means that DOD does  not know the true amount of funds that it has available to obligate and  spend in each appropriation account. As a result, DOD may not be using its  funds in accordance with legislative requirements and risks overspending  its appropriations or, conversely, forgoing purchases of needed items. Such  problems also create an environment conducive to fraud, waste, and abuse  because it is difficult, if not impossible, to monitor and audit individual  disbursement transactions.
Over the years, we and DOD auditors have reported that the department  recorded billions of dollars of disbursements and collections in suspense  accounts because the proper appropriation accounts could not be  identified. It is important that DOD accurately and promptly charge  transactions to appropriation accounts since these accounts provide the  department with legal authority to incur and pay obligations for goods or  services. The Antideficiency Act requires that no officer or employee of  DOD incur obligations or make expenditures in excess of the amounts  made available by the appropriation accounts. Therefore, DOD must  (1) properly record obligations against appropriation accounts and  (2) track disbursements related to such obligations and collections that  should properly be credited to the account, in order to ensure that it is in  compliance with the law. In some ways, appropriation accounts are similar  to private checking accounts. The funds available in DOD’s appropriation  accounts must be reduced or increased as the department spends money or  receives collections that it is authorized to retain for its own use. Just as an  individual who maintains multiple checking accounts must be sure that  transactions are recorded to the proper account, DOD must also ensure  that the proper appropriation account is charged for each specific  disbursement and collection.
Auditors have also reported problems with DOD’s ability to resolve  differences between the summary and detail amounts reported by DOD for  the paper checks it issued as well as differences with the amounts reported  by banks for the paper checks that were cashed. DOD has long  acknowledged that many disbursements, collections, and check  differences remained in suspense for years and that the support needed to  properly record them to specific appropriations no longer existed.  Therefore, DOD requested and received legislative authority to write off  certain aged suspense transactions and aged differences between checks  issued and checks paid, hereafter referred to as check payment differences.
Section 1009 of the Bob Stump National Defense Authorization Act for  Fiscal Year 2003 (NDA Act) authorized DOD to write off long-standing  debit and credit transactions that could not be cleared from the  department’s books because DOD lacked the supporting documentation  necessary to record the transactions to the correct appropriations. To be  eligible for write-off, suspense account transactions must have occurred  prior to March 1, 2001, and check payment differences before October 31,  1998. The Secretary of Defense was required to make a written  determination that further efforts to identify the correct appropriation to  charge are not in the best interest of the government. The legislation  specified that DOD must complete any write-offs by December 2, 2004.
The conferees, in the report that accompanied the NDA Act, directed that  we review and report on DOD’s use of this write-off authority. As agreed  with your offices, our objectives were to determine (1) what amount DOD  wrote off using its legislative authority, (2) whether DOD had effective  procedures and controls to provide reasonable assurance that amounts  were written off in accordance with the legislation, (3) how the write-offs  affected Treasury and DOD financial reports, and (4) what aged DOD  suspense account balances and check differences are being reported after  the write-offs have been accomplished. In addressing this last objective, we  also looked at whether DOD had procedures in place to prevent another  build-up of aged, unsupported suspense transactions and check payment  differences.
In conducting this work, we visited various Defense Finance and  Accounting Service (DFAS) centers, the Department of the Treasury, and  the office of the Secretary of Defense and gathered, analyzed, and  compared information on how write-off amounts were identified and  processed. We interviewed DOD officials to obtain a general understanding  of DOD’s use of suspense accounts and compared DOD’s policies and  practices for the write-offs to the specific provisions contained in the  legislation and with any Treasury requirements. We identified and tested  DOD’s primary controls over the suspense account write-offs. We  interviewed officials to identify the impact of the write-offs on DOD and  governmentwide suspense accounts and appropriation balances. We also  reviewed DOD management reports, performance metrics data, and fiscal  year 2004 financial statements to identify current outstanding suspense  account balances and check differences. Because of serious data reliability  deficiencies, which the department has acknowledged, it was not our  objective to—and we did not—audit the completeness and accuracy of  DOD reported amounts, including the write-off amounts. We performed our  work from June 2004 through April 2005 in accordance with generally  accepted government auditing standards. Appendix I provides details of  our scope and methodology. We requested comments from the Secretary of  Defense or his designee. We received written comments from the Principal  Deputy Under Secretary of Defense (Comptroller), which are reprinted in  appendix II. We also sent the draft report to the Secretary of the Treasury.  Treasury sent us a few technical comments, which we have incorporated in  the report as appropriate.
subsections: section_title: Background
paragraphs: For decades, we and DOD auditors have reported that DOD has not  promptly or accurately charged its appropriation accounts for all of its  disbursements and collections. Instead, DOD has recorded billions of  dollars in suspense and other accounts that were set up to temporarily hold  disbursements and collections until the proper appropriation account  could be identified. But, rather than being a temporary solution, amounts  accumulated and remained in suspense for years because DOD did not  routinely research and correct its records. Over time, DOD lost the ability  to identify the underlying disbursement and collection transactions in  suspense because they had been summarized and netted over and over.  Also, in many cases the documentation necessary to properly account for  the transactions was lost or destroyed.
It is important that DOD charge transactions to appropriation accounts  promptly and accurately because these accounts provide the department  with legal authority to incur and pay obligations for various kinds of goods  and services. DOD has hundreds of current and closed appropriation  accounts that were authorized by law over the years. In some ways,  appropriation accounts are similar to an individual’s checking account— the funds available in DOD’s appropriation accounts must be reduced or  increased as the department disburses money or receives collections that it  is authorized to retain. Just as an individual who maintains multiple  checking accounts must be sure that transactions are recorded to the  proper account, DOD also must ensure that the proper appropriation  account is charged or credited for each specific disbursement and receipt.  DOD’s failure over the years to promptly and correctly charge and credit its  appropriation accounts has prevented the department and Congress from  knowing  whether specific appropriations were over- or underspent,  whether money was spent for authorized purposes, and  how much money was still available for spending in individual  appropriation accounts.
Many disbursements and collections remained in DOD suspense accounts  well beyond the date that the associated spending authority expired and  canceled.
DOD’s inability to properly record its financial transactions has also  created an environment conducive to fraud, waste, and mismanagement.  Auditors have issued numerous reports over the years that identify specific  problems related to DOD’s poor controls over its accounting for  disbursements and collections. But DOD’s ability to improve its  accounting has historically been hindered by its reliance on fundamentally  flawed financial management systems and processes and a weak overall  internal control environment. Complex disbursement processes, missing  information, and errors often combine to prevent DOD from promptly and  accurately charging its appropriation accounts.
subsections: section_title: Disbursement Problems
paragraphs: In general, DOD’s disbursement process begins with military service or  defense agency personnel obligating funds in specific appropriations for  the procurement of various goods and services. Once the goods or services  are received, DFAS personnel pay for them using electronic funds transfers  (EFT), manual checks, or interagency transfers. Although the bill for goods  and services received should be matched to the relevant obligation to  ensure that funds are available for payment before any disbursement is  made, DFAS, military service, or defense agency personnel often do not  identify the correct appropriation and perform the match until after making  the payment. If the appropriation and obligation then cannot be identified  based on the available information, the disbursement is recorded in a  suspense account until research is performed, additional information is  received, or any errors are corrected. If DFAS staff cannot determine the  correct appropriation account to charge, DOD policies allow DFAS staff to  request approval for charging current funds.
Several military services and DOD agencies can be involved in a single  disbursement, and each has differing financial policies, processes, and  nonstandard nonintegrated systems. As a result, millions of disbursement  transactions must be keyed and rekeyed into the vast number of systems  involved in any given DOD business process. Also, DOD disbursements  must be recorded using an account coding structure that can exceed  75 digits, and this coding structure often differs by military service in terms  of the type, quantity, and format of data required. The manual entry and  reentry of the account code alone often results in errors and missing  information about transactions. Automated system edit checks identify  transaction records with invalid or missing account coding information,  such as the appropriation account number or the chargeable entity, and  refuse to process the faulty records. DFAS then records the problem  disbursements in suspense accounts until the individual transactions can  be corrected and reprocessed by the accounting systems.
Other reasons for disbursement transactions to be recorded to suspense  accounts include  no valid obligation data identified,  DOD disbursement records and Treasury disbursement records differ,   unsupported charges between DOD services and defense agencies.
section_title: Collection Problems
paragraphs: DOD uses suspense accounts to hold several different kinds of collections  until they can be properly credited to the relevant appropriation account or  organization. For example, contractors often return overpayments they  received for the goods and services they provided without including  sufficient information for DOD to identify which account or which service  location should be credited for the reimbursement. DOD also routinely  accumulates estimated payroll tax withholding amounts in suspense  accounts until the payments must be transferred to the Internal Revenue  Service. If the estimates are higher than actual payments, amounts can be  left in suspense indefinitely. Similarly, DOD records user fees collected for  various purposes, such as grazing rights and forestry products, to suspense  accounts until the accumulated funds are credited to the correct  appropriation account or organization. DOD has recognized that using  suspense accounts for accumulating withholding taxes and user fees is not  appropriate and exacerbates its problems with these accounts but has  stated that system and other problems prevent establishment of proper  holding accounts for these collections.
section_title: Check Differences
paragraphs: Check differences refer to differences between the summary and detail  amounts reported by DOD for the paper checks it issued as well as  differences with the amounts reported by banks for the paper checks that  were cashed. Monthly, Treasury compares the DOD summary and detail  amounts and bank discrepancy reports, identifies check issue and payment  differences, and sends a report to DOD with the cumulative difference  amount. While the check issue and payment differences could occur for  various reasons, some of the common reasons are  check issue records excluded from DOD detail reports but included in  DOD summary reports to Treasury,  erroneous check amount reported by DOD,  check paid by the bank but not reported by DOD,  voided check erroneously reported by DOD as check issued, and  check dated and paid by the bank in a previous month but DOD reported  its issuance in the current month.
DOD does not record these differences in a suspense account or any other  holding account. However, Treasury continues to track and report aged  check differences monthly to DOD until they are cleared.
section_title: Legislative Requirements
paragraphs: DOD recognized that it would never be able to correctly account for  billions of dollars of aged, unidentifiable, and unsupportable amounts  recorded in its suspense accounts or reported as check payment  differences. Therefore, DOD management requested and received statutory  authority to write off these problem transactions. The NDA Act authorized  DOD to cancel long-standing debit and credit transactions that could not be  cleared from the department’s books because DOD lacked the supporting  documentation necessary to record the transactions to the correct  appropriations. The legislation specified that the write-offs  include only suspense account disbursement and collection  transactions that occurred prior to March 1, 2001, and that were  recorded in suspense accounts F3875, F3880, or F3885; include only check payment differences identified by Treasury for  checks issued prior to October 31, 1998;  be supported by a written determination from the Secretary of Defense  that the documentation necessary for correct recording of the  transactions could not be located and that further research attempts  were not in the best interest of the government;  be processed within 30 days of the Secretary’s written determination;   be accomplished by December 2, 2004.
section_title: Actual Amount of Write-offs Cannot Be Calculated
paragraphs: DOD officials estimated the value of the suspense account and check  payment write-offs to be an absolute amount of nearly $35 billion, or a net  amount of $629 million. However, neither of these amounts accurately  represented the total value of all the individual transactions that DOD  could not correctly record to appropriations and, therefore, left in suspense  for years.
Many DOD accounting systems and processes routinely offset individual  disbursements, collections, adjustments, and correcting entries against  each other and record only the net amount in suspense accounts. Over  time, amounts might even have been netted more than once. Because DOD  had not developed effective tools for tracking or archiving the individual  transactions that had been netted together, there was no way for DOD to  know how much of the suspense amounts recorded prior to March 1, 2001,  represented disbursements and collections versus how much represented  adjustments and correcting entries. In order to calculate absolute values  for the suspense account write-offs, DOD could only add together the  already netted disbursement, collection, adjustment, and correcting  amounts. Table 1 shows the net and absolute values of the suspense  write-offs as calculated by DOD and illustrates how the use of net values  can present an entirely different picture than the use of absolute values.  While suspense account write-offs related to Army appropriations  represented nearly the total of the calculated absolute values, they  represented less than 30 percent of the calculated net values—far less than  the net write-off amounts related to Navy appropriations.
Also, amounts that have been netted and that cannot be traced back to the  underlying transactions cannot be audited. For the nearly $34 billion of  suspense write-offs related to Army appropriations, DFAS had almost no  transaction level information that could differentiate between  individual disbursement and collection transactions that related to   net reconciling adjustments that resulted from comparing monthly  totals for Army records with Treasury records;  net cumulative monthly charges from other military services, defense  agencies, or federal agencies for goods or services provided to the  Army;  summarized suspense account activity reported by Army field   correcting entries from center or field staff meant to clear amounts from  suspense.
According to DFAS officials, the system used to account for Army  appropriations had accumulated about 30 years worth of individual, netted,  summarized, and correcting entries that could not be identified and  therefore were eligible for write-off.
Unlike the accounting system used for Army, the systems used by DFAS  centers to account for the other military services and the defense agencies  did not accumulate billions of dollars in correcting entries that were meant  to clear amounts from suspense. However, they did include significant  amounts of non-transaction-level information, such as reconciling  adjustments, net charges, and summarized account activity. For example,  one of the write-offs processed for the Navy consisted of a single  $326 million amount for which DFAS Cleveland was unable to distinguish  any of the underlying individual transactions. As a result, DFAS Cleveland  had no way of knowing what amounts might have been netted or  summarized in order to arrive at the $326 million figure.
DOD also wrote off $14.5 million of differences between what DOD  reported as its check payment amounts and what Treasury reported as  check amounts cleared through the banking system. Treasury had  accumulated these check payment differences and reported them to DOD  monthly on its Comparison of Checks Issued reports. Since the Treasury  reports contained only the cumulative net check payment differences and  DOD could not identify all of the underlying checks, as with suspense  account write-offs, it was not possible to calculate an absolute value for all  of the individual check errors. All of the monthly summary totals reported  by Treasury for paper checks cashed during the period covered by the  legislation were higher than the totals reported by DOD for paper checks  issued during that period.
section_title: Write-off Process Reasonably Effective but Resource Intensive
paragraphs: To manage the suspense account write-off process, DOD developed  detailed guidance and review procedures that provided reasonable  assurance, given the limitations in the quality of the underlying data, that  the department complied with legislative requirements. Before suspense  amounts were approved for write-off, multiple layers of DOD officials and  internal auditors reviewed the packages submitted by the five DFAS  centers. The write-off packages varied in content but generally included a  certification statement from the DFAS center director, an electronic file  and a narrative description of the individual amounts that made up the  package, and any additional system reports or documents that  demonstrated compliance with legislative limits regarding dates and  accounts. For check payment differences, DOD’s management process was  less complicated—written instructions on how to submit the write-off  amounts to Treasury were prepared, but there were no reviews other than  those done at the DFAS centers. The check differences write-offs also met  the legislative requirements except that the Secretary of Defense did not  make a written determination regarding the necessity for the write-offs.  The overall write-off process was not without cost to DOD, however;  DOD’s lack of enforcement of proper accounting procedures and its own  regulations meant that significant management and staff resources were  required to prepare, support, and review the packages submitted for  write-off.
subsections: section_title: Suspense Account Write-off Guidance and Review Processes
paragraphs: DOD developed guidance for the preparation of the write-off packages and  implemented a series of reviews by high-ranking DOD officials. The  guidance identified different types of transactions in suspense and  specified the documentation requirements for each. For example, nearly a  quarter of the write-offs represented disbursement transactions for which  vouchers existed, but the vouchers did not contain sufficient information  for the transactions to be posted to valid lines of accounting. For this type,  the DFAS center director had to certify that steps were taken to obtain the  missing information to clear the transactions and that further action was  not warranted. For more than half of the write-off amounts, the underlying  transactions could not be identified and vouchers and supporting  documentation did not exist. Guidance included requirements that this  write-off type be accompanied by written narrative from the DFAS center  that described in detail the reason why amounts could not be cleared  through normal processing.
DFAS centers identified amounts to be written off in various ways  depending upon the systems and processes in place at each center. Using  the guidance discussed above, center officials then separated the amounts  into transaction types, prepared the required supporting documentation or  narratives, and grouped the amounts into “packages” to be sent forward for  review.
DOD’s multilayered review process served as the primary control for  providing reasonable assurance that the suspense account write-offs met  legislative requirements. As illustrated in figure 1, the reviews were  performed sequentially by officials from the DFAS centers, the military  service and defense agency FMOs, DFAS Arlington and DFAS internal  review and by the DOD Comptroller, the Secretary of Defense’s designee.  As each level of review was completed, the reviewing official was required  to sign a certification statement or memorandum. The certification was a  DOD requirement to demonstrate that reviews had been performed by  various management officials and all agreed that the proposed write-off  amounts met the legislative requirements.
DOD’s review process was effective in identifying write-off amounts that  did not appear to meet legislative requirements. DOD reviewers told us— and documentary evidence supports their claims—that additional  information was requested from DFAS centers to support various  questioned amounts or that packages with unsupported amounts were  rejected and returned to the centers. For example, a $326 million package,  consisting of a single amount supposedly representing transactions dating  back to May 1992, was questioned by DFAS Arlington, DFAS internal  review, and the Comptroller’s office. Because no supporting detailed  transactions were identified and because the package did not clearly  demonstrate that the amount had been recorded prior to March 1, 2001, the  package was flagged. Reviewers contacted the originating DFAS center and  requested additional documentation and explanation. The center provided  the reviewers with detailed analyses demonstrating that the proposed  write-off amounts had to represent transactions transferred into the  center’s suspense accounts when the center was established in May 1992.  Based on the additional evidence, the reviewers concluded that the  proposed write-off met legislative requirements and approved the package.  DOD reviewers rejected numerous proposed write-off amounts that did not  comply with the legislation, including 18 of the original 116 packages  submitted by the DFAS centers, often because they did not clearly support  a transaction date prior to March 1, 2001.
To ensure suspense write-off amounts were recorded within 30 days of the  determination by the Secretary of Defense’s designee and before the  legislative deadline of December 2, 2004, DFAS center officials reviewed  accounting system records and requested additional information from their  staff. The Columbus, Denver, and Indianapolis DFAS centers provided us  with information that demonstrated the time frames were met with a few  exceptions. DFAS Cleveland and DFAS Kansas City officials told us that  they met the time frames for write-offs but could not provide any  supporting documentation. Officials at these centers explained that as soon  as the Comptroller’s office certified each write-off package, center staff  sent data files to system technicians specifying the information to be  deleted from suspense account records. According to officials, once the  technicians had deleted the records, they sent e-mails back to the  requesting center officials confirming that they had deleted the information  within the required time frames. However, center officials were unable to  provide us with copies of these e-mails or the deleted files.
section_title: Check Payment Differences Write-off Process
paragraphs: Although DOD did not establish a multilayered review process for  check payment differences, the department did comply with legislative  requirements for the write-offs with one exception—the Secretary of  Defense did not provide the required written determination prior to  Treasury’s recording of the write-off amounts.
As specified in the legislation, DFAS centers used Treasury reports (the  Treasury Comparison of Checks Issued reports) to identify check payment  differences dated prior to October 31, 1998. DFAS staff reviewed available  documents to determine that sufficient information was no longer available  to identify the proper appropriation account. Even for very large  differences, DOD’s accounting records provided no information to help  explain the difference in checks issued and paid or to identify what records  needed correction. For example, the Treasury report included a single  difference of almost $6 million (over 40 percent of the total write-off  amount) that represented a check issued on October 31, 1991, by DFAS  Columbus payable to the U.S. Treasury. DFAS Columbus was unable to  locate any documentation to support the reason for the check payment, the  amount of the check, or the associated appropriation.
DOD established a much abbreviated process for check payment  differences write-offs. Rather than having check payment write-offs  reviewed by the Comptroller’s office, DFAS Arlington, DFAS internal  review, and military service and defense agency FMOs prior to submission  to Treasury, DOD relied solely on DFAS center management to ensure  compliance with the legislation. Our review indicated that center officials  adequately documented that all amounts written off were dated prior to  October 31, 1998, and were reported on the Treasury Comparison of  Checks Issued report. However, DOD did not comply with the requirement  in the legislation that prior to submission to Treasury, the Secretary of  Defense make a written determination that DOD officials have attempted  without success to locate the documentation necessary to identify which  appropriation should be charged with the amount of the check and that  further efforts to do so are not in the best interests of the United States.  In October 2004, after DOD had submitted all of the check payment  difference write-offs to Treasury and Treasury had recorded them,  DOD asked DFAS internal review to look at all the submissions and  determine whether they complied with the legislation. According to a DFAS  Arlington official, internal review completed its work and concluded that  the check payment write-offs sent to Treasury were certified by disbursing  officers, DFAS centers, and the services (either in writing or orally) prior to  clearing the transactions. The official also stated that this matter has been  forwarded to the DOD Comptroller’s office for a formal determination to  meet the legal requirements under the now expired law. Figure 2 below  illustrates the write-off process for check payment differences.
section_title: Resource Intensive Write-off Process
paragraphs: The write-off process itself could not and did not fix DOD’s underlying  problems—outdated, nonstandard, and nonintegrated financial systems  and lack of enforcement of proper accounting policies and procedures— that led to the build-up of aged, unsupported suspense transactions and  check payment differences. To the extent that DOD allows large aged  suspense and check difference balances to recur, the department will again  be required to undertake costly procedures to try to support the proper  recording of those transactions or to write them off.
According to DOD officials, numerous staff members at every level were  needed to prepare, support, and review the write-off packages and, in some  instances, to rework previously submitted packages. For example, DOD  officials told us that for the most part, the research and preparation of the  write-off packages represented additional tasks that were added to the  staff’s normal workload. We were told that, although staff tried to prioritize  their work in order to prevent a backlog related to current suspense  account balances, they could not keep up with their daily activities and  current suspense account balances increased over the period. Also, several  DFAS center officials told us that for much of 2003, DFAS Arlington, the  Comptroller’s office, and Treasury officials tried to reach an agreement on  exactly how to process the write-off amounts. Because the official  guidance was not issued by DFAS Arlington until January 2004, there was a  significant delay in preparing the write-off packages. Although DOD had  hoped to finish the write-offs by the end of fiscal year 2004, only  24 packages had been approved by that time. DOD had to assign additional  resources to enable the remaining 71 packages to be reviewed, approved,  and processed by December 2, 2004, the legislative cutoff date.
section_title: Write-offs Had Little Effect on Financial Reporting
paragraphs: Writing off aged suspense account amounts and check payment differences  did not change DOD’s reported appropriation account balances. Nor did  the write-offs correct any of the over- and undercharges that may have been  made to those appropriations over the years as a result of not promptly  resolving suspense account transactions and check payment differences.  DOD will never identify which, if any, of the aged underlying transactions in  suspense would have resulted in Antideficiency Act violations had they  been correctly charged. The suspense account write-offs also did not affect  the reported federal cumulative budget deficit; however, the write-off of  check payment differences increased the deficit by $14.5 million. The most  significant result of the write-off process was to guarantee that current  appropriation balances would not be required to cover the aged  unrecorded transactions.
subsections: section_title: Appropriation Account Reports
paragraphs: The legislated write-off of aged suspense account amounts and check  payment differences did not change DOD’s current or past appropriation  account balances. Because amounts in suspense and check payment  differences had never been recorded to the proper appropriation accounts,  DOD had over- or undercharged these appropriations. To accomplish the  write-off, Treasury reclassified the aged suspense amounts that met  legislative requirements from DOD-specific suspense accounts to  non-agency-specific general government suspense accounts. The check  payment differences, which had never been recorded in any DOD accounts,  were simply “sent” to Treasury for recording in that same general  government suspense account. Although it was unlikely that DOD would  ever identify individual aged transactions and the support for their proper  recording, the write-off process was the final step in ensuring that the over-  and undercharged DOD appropriation accounts will never be corrected.
While the write-off authority did not change or correct any DOD  appropriation balances, it did mean that DOD’s current appropriations  would not be used to pay for the uncharged disbursements. Generally,  authorized disbursements may be made only to pay valid obligations  properly chargeable to an appropriation account. If the correct  appropriation and obligation cannot be identified and charged with a  disbursement, DOD regulations provide that the disbursement be treated  as an obligation that is chargeable against current appropriations.  However, using current funding authority to cover past disbursements  reduces the funds available to purchase goods and services needed to  support current operations.
section_title: Federal Deficit Reports
paragraphs: We found that the write-off of suspense amounts had no effect on the  cumulative federal deficit. The suspense account transactions had already  been charged to the federal surplus or deficit in the specific year that DOD  reported the related collection and disbursement transactions to Treasury.  The reclassification of suspense amounts from DOD accounts to general  government suspense accounts did not affect Treasury’s previous recording  of the underlying collection and disbursement transactions to the  cumulative deficit.
With regard to the write-off of check payment differences, according to  Treasury, the surplus/deficit had not been adjusted to recognize differences  between issued check amounts as reported by DOD and paid check  amounts as reported by banks. Since the check payment differences had  not previously been reported as disbursements by DOD and thus included  in the deficit calculation, the cumulative federal deficit was increased by  DOD’s write-off amount of $14.5 million.
section_title: Current DOD Policies Are Not Being Enforced
paragraphs: We found that, even though DOD policies require that most suspense  account transactions and check differences be resolved within 60 days,  DFAS centers were reporting an absolute value of $1.3 billion in aged  suspense account amounts and an absolute value of $39 million in aged  check differences as of December 31, 2004. DFAS knows that the reported  suspense amounts are not complete and accurate because  DFAS center officials are still not performing the required  reconciliations of their appropriation accounts, including suspense  accounts, with Treasury records;  some field sites are not reporting any suspense activity to the centers or  are reporting inaccurate suspense account information; and  some of the reported amounts for suspense and check differences still  reflect netted and summarized underlying transaction information.
Given these deficiencies with suspense account reporting, the actual value  of aged problem transactions could be significantly understated.
subsections: section_title: Suspense Account Reconciliations
paragraphs: DFAS centers are not performing effective reconciliations of their  appropriation activity, including suspense account activity, even though  DOD policies have long required them. Similar to checkbook  reconciliations, DFAS centers need to compare their records of monthly  activity to Treasury’s records and then promptly research any differences in  order to identify and correct erroneous or missing transactions. When we  reviewed the DFAS centers’ December 31, 2004, reconciliations of suspense  account activity, we found that all of the centers had unexplained  differences between their records and Treasury records—differences for  which they could not identify transaction-level information. DFAS  excluded transactions related to the unexplained differences from its  reports on suspense account activity. In addition, we noted that amounts  recorded in DFAS suspense accounts often reflected transactions that had  been netted or summarized at a field site level. As illustrated by the recent  write-off activity, netting transactions often obscures the underlying  transactions, makes it more difficult for the centers to identify and correct  errors and omissions, and understates the magnitude of suspense account  problems.
section_title: Suspense Account Reports
paragraphs: In 1999, DFAS Arlington issued guidance that instructed each of its centers  to develop their own procedures for preparing a monthly suspense account  report (SAR) that would show the net value, absolute value, and aging of  amounts charged to each suspense account. Because the systems and  processes are not uniform across the centers, they were instructed to  develop their own procedures for obtaining the necessary information from  their systems, reconcile their suspense account records to Treasury  records to help ensure accuracy and completeness, and explain any  improper charges or overaged amounts.
However, as discussed previously, we found that the centers were not  effectively reconciling their suspense accounts and, therefore, could not  demonstrate that their SARs were complete and accurate. In fact, center  officials told us that some field sites did not report any of their suspense  information or they reported inaccurate information in the SAR; however,  those officials could not quantify the missing information or inaccuracies.  As discussed above, the SARs also did not include transactions related to  the unreconciled differences between center and Treasury records,  including residual balances from prior to March 2001 that DOD was unable  to write off. Figure 3 shows the aging of the $1.3 billion of suspense  amounts reported on the December 31, 2004, SAR.
We also found that DFAS Arlington officials had not performed any  comprehensive reviews to determine whether the centers were compiling  the SARs in accordance with their own guidance. DFAS Arlington officials  and other center officials told us that it would be an overwhelming task to  review the information submitted by the hundreds of DFAS field sites  responsible for compiling the SARs. Although not required, some centers  have documented the processes they are following to gather suspense  account information and prepare the SARs; however, DFAS Arlington  officials have not reviewed the written documentation. Arlington officials  also did not know whether the centers were using the same criteria for  reconciling and calculating absolute values.
section_title: Required Recording Procedures
paragraphs: As previously stated, as of December 31, 2004, DFAS reports identified  $1.3 billion absolute value of aged suspense account amounts and Treasury  reports identified $39 million in absolute value of unresolved check  differences. These aged problem transactions persist despite the DOD  Financial Management Regulation (FMR) that requires staff to identify and  charge the correct appropriation account within 60 days. The FMR allows  DFAS to charge current appropriations for suspense account transactions  and problem disbursements that cannot be resolved through research if  approved by the fund holder, military service assistant secretaries, or  defense agency Comptroller.
For suspense account transactions, DFAS officials stated that the primary  reasons for not consistently following the FMR are (1) staff have been too  busy processing the write-off amounts and have not had the resources to  clear more recent suspense transactions promptly and (2) military service  and defense agency officials are unwilling to accept charges to current  appropriation accounts without DFAS supplying them with sufficient proof  that the charges actually belong to them.
For the $39 million of unresolved check differences, DFAS officials stated  that $36 million is related to transactions initiated by Army staff overseas.  DFAS officials claimed that with the exception of the $36 million, they have  been able to resolve almost all check differences within 60 days due to  increased oversight and staff efforts, implementation of new controls over  the check reconciliation process, and the increasing use of EFTs rather  than checks.
section_title: Conclusion
paragraphs: Overall, the write-off process enabled DOD to clear aged, unsupported  amounts from its accounting systems and records and ensured that current  appropriations would not be required to cover these amounts. However,  the write-off did not correct appropriation account records or fix any of  DOD’s deficient systems or accounting procedures. Therefore, DOD needs  to continue its focus on the keys to eliminating aged problem  disbursements and preventing their future occurrence, including improved  disbursement processes and better management controls. Until DOD  enforces its own guidance for reconciling and resolving its suspense  accounts and check differences regularly, balances will likely grow.  Without adequate tools for tracking and archiving the individual  transactions charged to suspense, DOD will continue to have difficulty  researching and determining proper accounting treatment. DOD’s inability  over the years to promptly and correctly charge its appropriation accounts  has prevented the department and Congress from knowing whether  specific appropriation accounts were overspent or underspent and from  identifying any potential Antideficiency Act violations. Unless DOD  complies with existing laws and its own regulations, its appropriation  accounts will remain unreliable and another costly write-off process may  eventually be required.
section_title: Recommendations for Executive Action
paragraphs: To prevent the future buildup of aged suspense accounts and check  payment differences, we recommend that the Secretary of Defense take the  following three actions:  enforce DOD’s policy that DFAS centers and field-level accounting sites  perform proper reconciliations of their records with Treasury records  each month,  use the results of the monthly reconciliations to improve the quality of  DFAS suspense account reports, and  enforce guidance requiring that disbursements in suspense be resolved  within 60 days or be charged to current appropriations if research  attempts are unsuccessful.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of the report, the Principal Deputy Under  Secretary of Defense (Comptroller) stated that the department concurred  with our recommendations and described actions that are being taken to  address them. DOD’s comments are reprinted in appendix II.
We are sending copies of this report to other interested congressional  committees; the Secretary of the Treasury; the Secretary of Defense; the  Under Secretary of Defense (Comptroller); the Director, Defense Finance  and Accounting Service; and the Assistant Secretaries for Financial  Management (Comptroller) for the Army, the Navy, and the Air Force.  Copies will be made available to others upon request. In addition, this  report is available at no charge on the GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-9505 or kutzg@gao.gov if you or your staffs  have any questions about this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Other GAO contacts and key contributors to this report are  listed in appendix III.
section_title: Objectives, Scope, and Methodology
paragraphs: As required by the conference report (H.R. Conf. Rep. No. 107-772) that  accompanied the Bob Stump National Defense Authorization Act for Fiscal  Year 2003 (Pub. L. No. 107-314 § 1009, 116 Stat. 2458, 2635), we undertook a  review of the Department of Defense’s (DOD) use of authority to write off  certain aged suspense account transactions and check payment  differences. Our objectives were to determine (1) what amount DOD wrote  off using the legislative authority, (2) whether DOD had effective  procedures and controls to provide reasonable assurance that amounts  were written off in accordance with the legislation, (3) how the write-offs  affected Treasury and DOD financial reports, and (4) what aged DOD  suspense account balances and check payment differences remain after the  write-offs have been accomplished.
In conducting this work, we identified prior audit reports and other  background information to determine the events that led DOD to request  write-off authority. We visited DOD Comptroller offices, visited DFAS  centers in Arlington, Indianapolis, Cleveland, and Denver, and contacted  officials in DFAS Columbus and Kansas City to perform the following:  Interviewed Comptroller and DFAS officials to obtain a general  understanding of DOD’s use of suspense accounts and the department’s  request for write-off authority.
Gathered, analyzed, and compared information on how write-off  amounts were identified and processed.
Compared DOD’s policies and practices for the write-offs (including  those policies and practices in effect at the relevant DFAS centers) to  the specific provisions contained in the legislation and with any  Treasury requirements.
Identified DOD’s primary controls over the suspense account  write-offs—a series of reviews performed by DOD/DFAS management  and DFAS internal review—and tested the effectiveness of these  controls by reviewing all certification statements resulting from the  control procedures, comparing amounts reviewed to amounts written  off, inquiring about and reviewing examples of rejected write-off  amounts, and reviewing all of the support available for selected  individual write-off amounts.
Compared all check payment difference write-offs to Treasury reports  to ensure the amounts were in compliance with the legislative  requirements.
To determine the impact of the suspense account and check payment  write-offs on DOD’s budgetary and financial reports, we determined which  specific DOD/Treasury accounts were affected by the write-off entries. We  asked DOD and Treasury officials how the write-off entries affected DOD  budgetary accounts and the federal deficit. We also reviewed financial  reports, journal vouchers, and other documents provided by DOD and  Treasury.
To identify the current outstanding suspense account balances and check  payment differences, we reviewed amounts disclosed in DOD’s fiscal year  2004 financial statements and obtained relevant performance metrics as of  September 30, 2004, and December 31, 2004. We identified any remaining  aged suspense account or check differences being monitored by DOD  management. To determine whether DOD reconciles its records to  Treasury, we requested proof of DOD’s most current suspense account  reconciliations and check difference reports.
We performed our work from June 2004 through April 2005. Because of  serious data reliability deficiencies, which the department has  acknowledged, it was not our objective to—and we did not—verify the  completeness and accuracy of DOD reported amounts, including current  suspense account report amounts. We requested comments from the  Secretary of Defense or his designee. We received written comments from  the Principal Deputy Under Secretary of Defense (Comptroller), which are  reprinted in appendix II. We also sent the draft report to the Secretary of  the Treasury. Treasury sent us a few technical comments, which we have  incorporated in the report as appropriate. We performed our work in  accordance with generally accepted government auditing standards.
section_title: Comments from the Department of Defense
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Staff making key contributions to this report were Shawkat Ahmed,  Rathi Bose, Molly Boyle, Sharon Byrd, Rich Cambosos, Francine  Delvecchio, Gloria Hernandez-Saunders, Wilfred Holloway, Jason Kelly,  and Carolyn Voltz.