Canceled DOD Appropriations: Improvements Made but More Corrective Actions Are Needed
Published: 2002-07-31T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: Congress changed the law governing the use of appropriation accounts in 1990 because it found that the Department of Defense (DOD) may have spent hundreds of millions of dollars for purposes that Congress had not approved. The 1990 law provided that, 5 years after the expiration of the period of availability of a fixed-term appropriation, the appropriation account be closed and all remaining balances canceled. After closing, the appropriation account could no longer be used for obligations or expenditures for any purpose. DOD has started the process of correcting the illegal or improper closed account adjustments made during fiscal year 2000. However, this will require substantial effort and, according to DOD, estimates will not be complete before the end of fiscal year 2002. DOD had upgraded its system control features by the end of fiscal year 2001 to preclude many of the wholesale adjustments that GAO had previously identified. Because its system enhancements were done in stages, including some near the end of fiscal year 2001, DOD continued to make large amounts of illegal and otherwise improper closed account adjustments during the year. However, given the intensity of staff efforts to address these issues, it did not expect to complete the correct accounting for transactions found to be in error until September 2004. A lack of fundamental controls and management oversight over the closed accounts was the primary reason DOD was making so many closed account adjustments. DOD's action to resolve its problems with closed account adjustments is beginning to produce positive short-term results. However, if DOD fails to sustain these positive results, Congress could require DOD to validate and report to the Congress all closed account adjustments.

section_title: Letter
paragraphs: In 1990, the Congress changed the law governing the use of appropriation  accounts because it determined that controls over them were not working.  In particular, the Congress found that the Department of Defense (DOD)  may have spent hundreds of millions of dollars for purposes that the  Congress had not approved. The 1990 law was intended to improve  congressional control by providing that, 5 years after the expiration of the  period of availability of a fixed-term appropriation, the appropriation  account be closed and all remaining balances canceled. After closing, the  appropriation account could no longer be used for obligations or  expenditures for any purpose.
Because agencies need to keep accurate records, they may, in limited  circumstances, adjust accounting records pertaining to closed accounts to  correct unrecorded or improperly charged disbursements. To justify such  an adjustment, an agency must have sufficient documentation for each  proposed adjustment to show that the disbursement was made when the appropriation account to be charged  was available to cover the disbursement,   agency either did not record the disbursement when it was made or  charged it to the wrong appropriation account at that time, and   proposed adjustment will result in the disbursement being charged to  the proper appropriation account.
During fiscal years 1997 through 2001, DOD records show that it made  about $12 billion of adjustments affecting closed appropriation accounts,  including $1.9 billion in fiscal year 2001.
Because of the magnitude of DOD closed account adjustments, you  previously asked that we review DOD’s controls over closed accounts to  determine if adjustments were being made in compliance with the 1990 law.  In response to that request, our July 2001 testimony and companion report  pointed out that DOD had made over $615 million of illegal and otherwise  improper adjustments to closed appropriation accounts during fiscal year  2000. As a result, you asked that we continue to review DOD’s progress in  addressing the problems we had identified.
Specifically, you asked that we (1) monitor DOD’s efforts to correct the  problems for fiscal year 2000 closed account adjustments that were  identified in our prior audit, (2) determine if DOD has experienced similar  problems with closed account adjustments made during fiscal year 2001,  (3) determine why DOD needs to make so many adjustments to the closed  accounts, and (4) identify options available to DOD or the Congress to end  the practice of adjusting closed appropriation accounts. Our previous  review included a detailed review of $2.2 billion (81 percent) of the  $2.7 billion DOD reported closed appropriation account adjustments made  during fiscal year 2000. DOD is now reviewing its fiscal year 2001 closed  account adjustments to determine if there are problems similar to those we  identified for fiscal year 2000. As agreed with your offices, for our current  review, we evaluated the $291 million of closed account adjustments for  which DOD had completed its own assessments. DOD has advised us that it  plans to review an additional $1.1 billion of its reported $1.9 billion of fiscal  year 2001 closed account adjustments. Appendix I contains more detailed  information on our scope and methodology. On June 11, 2002, we requested  comments on a draft of this report from the Secretary of Defense or his  designee. Written comments from the Defense Deputy Chief Financial  Officer are reprinted in appendix II.
subsections: section_title: Reversing Illegal and Otherwise Improper Adjustments Revealed Additional Accounting Problems
paragraphs: Our prior report recommended that DOD immediately reverse the  $615 million of illegal and otherwise improper closed account adjustments  identified in the report and determine the correct accounting for these  adjustments after the reversal. Of the $615 million of illegal and otherwise  improper adjustments, DOD has agreed that $592 million, or about 96  percent, of the adjustments should not have been made and has reversed  the adjustments. However, because of DOD’s long-standing accounting  accuracy problems, in many cases, reversing the transactions brought to  light additional accounting problems that will require detailed reviews to  determine the accounting actions necessary to correct the reversed  transactions. As a result, neither DOD nor we can determine how much  remains to be corrected as a result of reversing the adjustments. Table 1  provides additional details on DOD’s reversal of the $615 million fiscal year  2000 illegal and otherwise improper closed account adjustments.
For the remaining $23 million that has not been reversed, DOD provided us  with additional documentation indicating that $8 million of the adjustments  were proper and do not need to be reversed. We still consider the  remaining $15 million to be unnecessary or unsupported adjustments since  DOD has not provided sufficient support to show otherwise.
subsections: section_title: Thirty Contracts Will Require Reaudits to Correct Accounting
paragraphs: The $592 million of illegal and otherwise improper closed account  adjustments discussed in our earlier report that have now been reversed  involved 45 contracts. For 30 of the 45 contracts, the reversals identified  additional accounting errors that must also be corrected. The 30 contracts  include over $457 million (77 percent) of the $592 million in reversed  transactions. Because of the complexity of the contracts and time it takes  to conduct a complete reaudit, officials at the Defense Finance and  Accounting Service’s (DFAS) Columbus Center estimate that it will take  over 21,000 hours to correct the accounting for the 30 contracts.
For example, for one contract we found that DFAS Columbus had made  $210 million of closed account adjustments that should not have been made  because the initial disbursement was recorded against the correct ACRN  on the contract. The reason given for the adjustment was that DFAS  Columbus could not pay a November 1999 invoice from a contractor for  $685,000 because the cited ACRN on the invoice did not have sufficient  funds. The inability to pay the invoice prompted DFAS to conduct an audit  of the contract that resulted in over $590 million of adjustments to closed  appropriation accounts. Our earlier audit found that of the $590 million of  adjustments, $210 million were unnecessary and should not have been  made because the actual disbursements—some of which were made over  10 years earlier—had been recorded correctly. The $210 million was part of  the $615 million of illegal or otherwise improper transactions we identified  in our earlier audit.
In response to our recommendation that DOD reverse and correct the  $210 million of unnecessary adjustments, DFAS Columbus reversed all  $590 million of the closed account adjustments. According to DFAS  officials, when reversing adjustments of this size, they generally have to  reverse all the transactions involved with an adjustment not just the  canceled ones. After the adjustments were reversed, other errors were  created that must now be researched and corrected. For example, for this  one contract, the reversal of the contract’s accounting records showed that  63 contract ACRNs had negative unliquidated obligations (NULO) totaling  $85.4 million. DFAS Columbus estimates that it will take about 2,300  hours to reaudit and correct the contract.
Our earlier review of another contract found that DFAS Columbus had  recorded an adjustment that illegally moved $79 million of disbursement  charges from fiscal years 1993 through 1995 research and development  appropriations to charges against a canceled fiscal year 1992 research and  development appropriation. According to the contract files, the adjustment  was made to redistribute the disbursement charges in accordance with the  “pay oldest funds first” payment terms specified in the contract. However,  we found that the redistribution was illegal because it moved disbursement  charges back to an appropriation account that had closed several months  before the initial disbursement was made. For example, the initial  $79 million disbursement occurred in February 1999, but the adjustment  resulted in a charge against an appropriation that canceled 4 months earlier  on September 30, 1998. DOD agreed that the adjustment was illegal and  reversed the $79 million. The reversal identified other accounting errors on  the contract that now must be corrected. According to DFAS contract  accounting records, as of April 2002, the contract had NULOs totaling over  $100 million that will need to be researched and corrected. DFAS  Columbus officials estimate that a reaudit of this contract will take over  1,850 hours to complete. DOD officials told us they plan to complete all 30  reaudits to correct the fiscal year 2000 illegal and otherwise improper  adjustments by September 30, 2002.
In addition to DFAS’s reaudit of the contract, Air Force officials have also  initiated an investigation into the circumstances surrounding the initial  $79 million illegal adjustment to determine if personnel responsible for  monitoring and administering the contract acted improperly, including the  possibility that the adjustments may have resulted in Antideficiency Act  violations. Air Force officials told us that they plan to complete the  investigation and issue their report before the end of fiscal year 2002.
section_title: Illegal or Otherwise Improper Adjustments Continued during Fiscal Year 2001
paragraphs: We previously reported that the DFAS contract reconciliation system (CRS)  and other controls necessary to ensure that adjustments to closed  appropriation accounts were proper were not in place. We noted that  DOD was in the process of upgrading CRS and correcting other control  problems that significantly contributed to many of the illegal or otherwise  improper adjustments to closed accounts. However, because DOD did not  complete many of these actions until the end of fiscal year 2001, controls  were not in place to ensure that the $1.9 billion of closed account  adjustments made during fiscal year 2001 were legal and proper.
subsections: section_title: At Least $172 Million of Fiscal Year 2001 Adjustments Were Illegal or Otherwise Improper
paragraphs: Our evaluation of $291 million (15 percent) of DOD’s reported $1.9 billion  fiscal year 2001 closed appropriation account adjustments found that  $172 million (59 percent) were either illegal or otherwise improper. These  adjustments should not have been made because the initial disbursements  (1) occurred after the appropriation being charged had already canceled,  (2) occurred before the appropriation charged was enacted, or (3) were  charged to the correct appropriation in the first place and no adjustment  was necessary. Also included in the $172 million of illegal or otherwise  improper closed account adjustments were adjustments that were not  sufficiently documented to establish that they were proper. These  adjustments were considered improper because agencies must be able to  provide documentation to show that the adjustments are legal and that they  changed an incorrect charge to a correct one. Table 2 provides additional  details on the $172 million of adjustments that should not have been made.
DOD officials agreed to reverse and correct the $172 million of illegal and  otherwise improper closed account adjustments. The remaining  $119 million of the $291 million of adjustments was for adequately  documented corrections of errors that DOD had made over the years and,  therefore, were not in violation of appropriations law or otherwise  improper.
section_title: DOD to Review Additional $1.1 Billion of Fiscal Year 2001 Closed Account Adjustments
paragraphs: DOD officials told us they plan to review another $1.1 billion of fiscal year  2001 closed account adjustments in addition to the $291 million of closed  account adjustments that we already reviewed. According to the officials,  the additional $1.1 billion of adjustments were selected based on various  factors including large dollar amounts or indications that the adjustments  may be illegal. The officials noted that completion of the review of  additional adjustments would result in detailed reviews of $1.4 billion  (about 74 percent) of the total $1.9 billion of the closed account  adjustments made during fiscal year 2001. According to the officials, they  estimate that the additional reviews will involve several hundred contracts  and about 1,000 closed account adjustments. They plan to have the  additional reviews and reversals of any illegal or otherwise improper  adjustments completed by December 31, 2002. However, the officials told  us that because there are so many contracts that may have to be reaudited  to correct the accounting, they do not plan to have the reaudits and  corrections for fiscal year 2001 closed account adjustments completed  until September 2004.
section_title: Contract Reconciliation Controls Reduce Fiscal Year 2002 Closed Account Adjustments
paragraphs: In our July 2001 testimony and report, we pointed out that DOD did not  have adequate systems, controls, and managerial attention to ensure that  the $2.7 billion of fiscal year 2000 adjustments affecting closed  appropriation accounts were legal and otherwise proper. Our review  disclosed that CRS routinely processed billions of dollars of closed  appropriation account adjustments without regard to the requirements of  the 1990 account closing law. Further compounding this system deficiency  was the lack of DOD oversight on how contract modifications were written  and processed, which changed the payment terms of some contracts to  improperly make available current and expired funds. As discussed earlier,  our follow-on review of fiscal year 2001 closed account adjustments found  little improvement over fiscal year 2000. As a result, DOD still could not  ensure that closed account adjustments made during fiscal year 2001 were  legal and otherwise proper. However, once the controls were fully  implemented at the beginning of fiscal year 2002, we found that the first 6  months of fiscal year 2002 closed account adjustments dropped by about 80  percent to $200 million when compared with the same 6 months during  fiscal year 2001.
subsections: section_title: DFAS Implements CRS Controls at End of Fiscal Year 2001
paragraphs: In May 2001, DOD began implementing CRS controls to identify and  prevent illegal backward adjustments. This control compares the actual  disbursement date with the appropriation involved in the adjustment to  ensure that the adjustment does not result in moving disbursement charges  back to an appropriation that had been canceled before the actual  disbursement was made. In September 2001, DFAS upgraded CRS to  identify and prevent illegal adjustments from moving disbursement charges  forward to an appropriation that had not yet been enacted at the time the  initial disbursement was made.
In addition to upgrading CRS to identify and prevent illegal closed account  adjustments, DOD also changed the CRS default reallocation of adjusting  payments from oldest funds first to proration. Under the oldest funds first  reallocation method, CRS would change disbursements charged to current  and expired appropriation accounts to charges against older appropriation  accounts even if the initial disbursement charges were correct. Because the  DFAS contract payment system, commonly known as MOCAS  (Mechanization of Contract Administration Services), prorated payments  across various fund cites in the contract if no payment terms were  specified in the contract, this change was intended to reduce errors by  making both MOCAS and CRS payment allocation defaults the same.
Previously, problems with payment reallocations arose during contract  reconciliation when payments that MOCAS had initially allocated across  various ACRNs on a pro rata basis were redistributed by CRS across  ACRNs on an oldest funds first basis. When this occurred, the CRS payment  redistributions would differ substantially from how MOCAS had originally  applied the payments. As our previous audit showed, these situations  created significant problems by moving payment charges from correct  ACRNs to incorrect ACRNs on the contract. For example, in one case, DOD  initiated a contract reconciliation because there were insufficient funds  remaining on an ACRN to pay a $685,000 contractor invoice, and this  redistribution process resulted in moving $210 million of correct payment  charges to incorrect ACRNs. According to DFAS Columbus officials,  supervisory personnel must now approve any deviation from the CRS  default program before CRS controls can be overridden to reallocate  disbursements in a manner other than proration.
section_title: Upgraded Controls Help Reduce Amount of Closed Account Adjustments
paragraphs: DOD’s reported closed account adjustments during the first 6 months of  fiscal year 2002 totaled about $200 million, or about 80 percent less than  the over $1 billion of closed account adjustments DOD reportedly made  during the same 6-month period of fiscal year 2001. According to DFAS  officials, they believe that the significant decline in closed account  adjustments is a direct result of increased DOD management and employee  emphasis on resolving the problems identified in our earlier report that  contributed to illegal and otherwise improper closed account adjustments.
While DFAS’s controls had greatly reduced closed account adjustments  during the first 6 months of fiscal year 2002, our analysis of closed account  transactions found that $253,212 of illegal closed account adjustments had  been processed from October 1, 2001, through March 31, 2002. These illegal  adjustments moved disbursement charges back to appropriations that had  canceled before the initial disbursements occurred. We found these  adjustments had processed through a DFAS Columbus computer terminal  that did not properly identify and prevent these types of illegal  adjustments. DFAS officials could not explain why the computer terminal  was not operating properly but took immediate action to upgrade it with  the appropriate controls. The officials agreed to reverse and correct the  $253,212 of illegal adjustments. Our analysis of subsequent closed account  adjustments reported after the upgrade did not identify any additional  illegal closed account adjustments.
section_title: Numerous ACRNs and Payment Allocation Changes Cause Errors
paragraphs: Our earlier testimony and report pointed out that DOD’s illegal and  otherwise improper closed account adjustments resulted from the lack of  basic controls and managerial attention required to properly account for its  disbursements consistent with the 1990 account closing law. We also noted  that DOD had been aware since 1996 that one of its major systems allowed  for disbursements to be charged in a way that was inconsistent with the  law, but had done nothing to fix the problem. This lack of fundamental  controls and management oversight fostered an atmosphere in which  responsible DOD contracting and accounting personnel took it for granted  that it was an acceptable practice to adjust the accounting records to use  unspent canceled funds on a contract in order to maximize the use of  appropriated funds—a process that we concluded, and DOD agreed, was  illegal. We stated that DOD would need to effect changes to its systems,  policies, procedures, and the overall weak control environment that  fostered the $615 million of illegal and otherwise improper adjustments  made during fiscal year 2000. To do this, we pointed out that DOD top  management must clearly demonstrate its commitment to adhering to the  account closing law and eliminate the abuses of appropriations law.
The 80 percent reduction of closed account adjustments during the first 6  months of fiscal year 2002 is an indication that, in the short term, DOD  policies, procedures, and management commitment aimed at reducing the  amount of illegal and otherwise improper closed account adjustments are  having the desired effect. However, DOD’s inability to accurately account  for and report on disbursements overall are long-term, major problems that  are pervasive and complex in nature. For example, for fiscal year 1999,  DFAS data showed that almost $1 of every $3 in contract payment  transactions was for adjustments to previously recorded payments— $51 billion of adjustments out of $157 billion in transactions. Some of the  key causes of these adjustments—for both closed and unclosed accounts— relate to the complex accounting for contracts along with frequent changes  in payment allocation terms.
Over the years, we have issued numerous reports discussing DOD’s  financial management problems, and we have designated DOD financial  management as a high-risk area since 1995. The following discussion on  DOD’s use of ACRNs and changes in contract payment allocations is  illustrative of the convoluted process that contributes to the need to adjust  accounting records to correct errors.
subsections: section_title: Contracts Contain Numerous ACRNs
paragraphs: Contracts can be assigned anywhere from 1 to over 1,000 ACRNs to  accumulate appropriation, budget, and management information. Our  review of fiscal years 2000 and 2001 closed account adjustments found  that, in many cases, the contracts had large numbers of ACRNs. According  to DFAS Columbus officials, numerous ACRNs and changes in payment  allocations create payment problems by increasing the amount of data that  must be entered and opportunities for errors. These problems also lead to  costly and extensive contract reconciliations. For example, our review of  fiscal year 2001 closed account adjustments on a Navy contract valued at  about $38 million found that the contract contained 548 ACRNs and had  been modified over 150 times. Also, according to DFAS Columbus’  reconciliation staff, the contract had received two reconciliations, one of  which in 1998 produced 15,322 accounting adjustments. In total, we found  about $3 million of fiscal year 2001 closed account adjustments for this  contract were not adequately supported and, thus, should not have been  made. In discussing the contract’s improper closed account adjustments  with DFAS Columbus officials, they agreed that the adjustments were not  proper and agreed to reverse and correct them. Because of the large  number of ACRNs and contract modifications involved, they estimate that  it will take over 9,000 hours to complete the contract audit.
Our combined review of the 101 contracts included in our detailed review  of fiscal years 2000 and 2001 closed account adjustments found that there  were 7,440 ACRNs on the 101 contracts—an average of about 74 ACRNs  per contract. As table 3 shows, 38 of the 101 contracts (38 percent) had 51  or more ACRNs.
We did not determine for each of these contracts why and for what purpose  the numerous ACRNs were being used. However, it is clear that simplified  contract accounting will be a key element to reform DOD’s financial  management. For example, as we pointed out in our July 2001 report, even  a simple purchase could cause extensive and costly rework if assigned  numerous ACRNs. We noted that a $1,209 Navy contract for children’s toys,  candy, and holiday decorations for a child care center was written with  most line items (e.g., bubble gum, tootsie rolls, and balloons) assigned  separate ACRNs. A separate requisition number was generated for each  item ordered, and a separate ACRN was assigned for each requisition. In  total, the contract was assigned 46 ACRNs to account for contract  obligations against a single appropriation. To record this payment against  the one appropriation DFAS Columbus had to manually allocate the  payment to all 46 ACRNs.
In addition, the contract was modified three times—twice to correct  funding data and once to delete (deobligate) the funding on the contract for  out-of-stock items. The modification deleting funding did not cite all the  affected ACRNs. DFAS Columbus made errors in both entering and  allocating payment data, compounding errors made in the modification.  Consequently, DFAS Columbus allocated payment for the toy jewelry line  item to fruit chew, jump rope, and jack set ACRNs—all of which should  have been deleted by modification. Contract delivery was completed in  March 1995, but payment was delayed until October 1995. DFAS Columbus  officials acknowledged that this payment consumed an excessive amount  of time and effort when compared to the time to process a payment  charged to only one ACRN. A single ACRN would also have significantly  reduced the amount of data entered into the system and the opportunities  for errors.
section_title: Change in Contract Payment Allocation Terms
paragraphs: Further compounding the problem of numerous ACRNs are changes in how  payments are to be allocated across various ACRNs on a contract. For  example, our review of an Air Force contract that had 50 ACRNs contained  about $126 million of closed account adjustments of which we found that  about $100 million (79 percent) were illegal or otherwise improper. Further,  the contract had been modified 292 times for various reasons, including  changes to how payments were to be allocated across the various ACRNs.  For example, the following instructions were included in contract  modifications to specify payment instructions for special ACRN XB—one  of several special ACRNs on the contract.
Contract modification 94 dated October 22, 1993, stated that, “During  FY90 pay FY90 funds first until exhausted and during FY91 pay FY91  funds first until exhausted. After these funds are exhausted, pay from  the oldest ACRNs first.”
Two years later, contract modification 126 added additional payment  terms for special ACRN XB as follows: “During FY90 pay FY90 funds  first until exhausted and during FY91 pay FY91 funds first until  exhausted. During FY94 pay FY88 funds first until exhausted. After  these funds are exhausted, pay from oldest ACRNs first.”
In June 2000, modification 160 provided more payment instructions for  special ACRN XB. The modification noted that special ACRN XB  consisted of funds from both the United States and North Atlantic  Treaty Organization (NATO). The payment instructions specified that  payments were to be made using the oldest U.S. funds before using  NATO funds.
According to a July 2000 Air Force memorandum from the Air Force  Materiel Command’s Deputy Director of Contracting, the special ACRNs  were not to be added to any existing contracts or used in new contracts.  The Deputy Director noted that the Air Force still had over 1,300 special  ACRNs in the system related to the older contracts, and that there was  evidence that special ACRNs were still being created or used for new  contract line items or subcontract line items. In discussing this  memorandum with responsible Air Force contracting officials, we were  told that the Air Force no longer uses special ACRNs and that once all the  contracts that currently contain special ACRNs are closed out, errors or  other accounting problems caused by this type of contract funding should  no longer be a problem.
DFAS Columbus officials acknowledged that the combination of numerous  ACRNs and modifications that change contract payment allocation terms  makes it difficult to maintain accurate payment records. They agreed that  the $100 million of illegal and otherwise improper closed account  adjustments for the Air Force contract discussed above should not have  been made. They told us they plan to reverse and correct the illegal and  otherwise improper closed account adjustments on the contract as part of  their overall effort to correct fiscal year 2001 closed account adjustments.  Because of the numerous ACRNs and contract modifications on the  contract, DOD estimates that it will take over 1,500 hours to completely  correct the accounting for this contract.
In discussing the issues of payment errors caused by numerous ACRNs and  changing contract payment allocation terms, military service contracting  officials agreed that in the past their contracts contained numerous ACRNs  and modifications to change payment allocations. They told us that during  the last 2 or 3 years, they have started to write contracts to include more  specific payment allocation terms, which should make it much easier for  DFAS Columbus to pay contractors without making errors that require  subsequent adjustments. Further, on October 1, 2001, the Under Secretary  of Defense for Acquisition, Technology, and Logistics issued a  memorandum in response to our recommendation that he issue a policy to  prohibit the writing of contract modifications to change the payment terms  of a contract if the change would result in illegal or otherwise improper  adjustments. The memorandum instructed the military service secretaries  and defense agency directors to make certain that all contracting activities  have procedures in place that ensure compliance with the department’s  financial management policies, which currently preclude the improper  adjustments we identified in our report. It also required all contract  modifications that include adjustments to closed appropriation accounts to  be supported with contract file documentation sufficient to establish that  the adjustments are legal and proper and received supervisory review. It  further required that contract modifications involving closed accounts be  approved in writing by the appropriate level comptroller or financial  resource manager.
DFAS Columbus officials acknowledged that the change in contract writing  policies and procedures should result in fewer payment errors and  adjustments. While we agree that the changes in contract writing  procedures and additional policy requirements should help to reduce  errors that require subsequent correcting, we found that there are still  thousands of older contracts in MOCAS that have one or more closed  accounts that will need to be monitored closely to ensure that illegal or  otherwise improper adjustments do not occur. For example, at our request,  DFAS Columbus analyzed the MOCAS database to identify contracts for  which at least one of the appropriations was canceled. The results of the  MOCAS inquiry showed that as of April 2002, there were 15,421 active  contracts valued at $519 billion for which at least one appropriation had  been canceled. DFAS officials told us that these older contracts may  contain errors that will not be discovered until a contract is completed and  final contract reconciliation is performed.
section_title: Options Available That Will Reduce or Eliminate Closed Account Adjustments
paragraphs: As we have indicated, since we began our closed account work, and  especially since our testimony and report on this issue in July 2001, DOD  has taken actions to eliminate illegal or otherwise improper adjustments  involving closed account records. As noted earlier in this report, these  actions are beginning to produce positive short-term results while efforts to  address the long-term problems are still ongoing. At the same time, given  the severity of the existing problems and the long-term nature of DOD’s  transformation efforts, you asked us to identify options the Congress could  consider, including prohibiting some or all adjustments to closed accounts.  We basically see two options—do nothing at this time or prohibit any  adjustments immediately or shortly after an appropriation account is  closed. These options are discussed in the context of our closed account  work at DOD. However, options that change the account closing law would  also apply to all federal agencies unless the Congress specifically limited  them to DOD.
subsections: section_title: The “No Legislative Action” Option
paragraphs: One option is to take no legislative action at this time and to continue to  allow DOD to adjust closed account records when appropriate to correct  accounting errors. This would mean that DOD could make adjustments to  closed account records when there is sufficient documentation to show  that the (1) disbursement was made when the appropriation account to be  charged was available to cover the disbursement, (2) agency either did not  record the disbursement when it was made or charged it to the wrong  appropriation account at the time, and (3) proposed adjustment will result  in the disbursement being charged to the proper appropriation account.  Given that DOD’s implementation of controls to identify and prevent illegal  and otherwise improper adjustments seem to be having a positive effect  based on 6 months of analysis, the Congress could postpone any decision  to change the law in order to allow DOD additional time to monitor how its  implementation of controls, policies, and procedures needed to eliminate  illegal and otherwise improper closed account adjustments is working.  However, given DOD’s weak overall control environment, unless DOD’s  internal controls and management commitment to this problem are  sustained, new ways may be developed to circumvent the controls recently  put into place. Thus, there is a risk that, over time, illegal or otherwise  improper closed account adjustments could reoccur.
If the Congress finds in the future that DOD top management does not  sustain its commitment to address its overall disbursement problems, the  Congress could require a combination of oversight and reporting by DOD  as to the validity of any closed account adjustments.
section_title: Prohibit Adjustments after Appropriation Account Closes
paragraphs: The second option is to amend the account closing law to prohibit any  adjustments to an appropriation account after it is closed. Under this  option, accounting records of an appropriation account would be final  when the account was closed. This option would eliminate adjustments to  closed accounts as well as the substantial time and expense associated  with making them. It would also provide an additional incentive for DOD to  keep better records during the time the account is open since there would  be no opportunity to correct the records once the account was closed.
At the same time, this change would mean that known errors in accounting  records could not be corrected once the account was closed and therefore  accounting records would be permanently inaccurate. These inaccurate  records could also affect DOD’s ability to promptly pay for goods and  services. For example, assume that because of accounting errors  associated with a closed appropriation account, the unspent balance of a  currently available account was reduced to less than the amount needed to  make a subsequent payment. If DOD could not correct the error, it would  not be able to make the current payment.
In another example, assume that because of accounting errors, the balance  of a closed account was less than the amount needed to pay an obligation  that had been charged to the closed account when it was open. Current law  allows the payment to be made from current funds if the closed account  balance exceeds the amount of the payment. Prohibiting all adjustments to  closed accounts would make permanent the erroneously reduced balance  and therefore the payment could not be made with current funds. In each  of these examples, DOD would be unable to pay for the goods or services  without obtaining an additional appropriation or other form of legislative  relief, which could cause a hardship for the contractor.
The Congress could also provide a variation of this option by allowing DOD  a limited period, such as 6 months or 1 year, after an account is closed to  adjust the accounting records for known errors. This option would provide  for finality of records, but only after DOD has some additional opportunity  to correct errors it detects immediately after the account is closed. This  legislation, while not totally eliminating closed account adjustments, would  provide some of the benefits discussed above while increasing the  likelihood that DOD records relating to the closed account are more  accurate. However, this option also presents some of the same payment  and fund availability limitations discussed above.
section_title: Conclusion
paragraphs: DOD has made significant improvements to its controls to identify and  prevent illegal and otherwise improper closed account adjustments as  evidenced by the 80 percent reduction of closed account adjustments  during the first 6 months of fiscal year 2002. These short-term efforts serve  as an example of what can be achieved when DOD takes prompt action to  correct known problems through a strong top management commitment.
At the same time, closed account adjustments are only a small fraction of  the overall disbursement adjustments DOD makes each year as a result of  its long-standing financial accounting and management problems. There  are no quick fixes to the underlying problems, which must be dealt with  over the long term. Nevertheless, there are some additional short-term  actions that can be taken by focusing on simplifying accounting and  contract payment allocation terms. Modernizing financial management  systems, and improving the systems adherence to basic accounting  requirements, will ultimately be key to DOD effectively resolving its  financial management and contract payment problems. This will require a  sustained commitment by DOD’s top management team over a number of  years.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Under Secretary of  Defense (Comptroller) to direct the Director of the Defense Finance and  Accounting Service to   help ensure that DFAS Columbus completes its review and correction of  the remaining fiscal year 2000 illegal and otherwise improper  adjustments,  reverse closed account adjustments made during fiscal year 2001  identified in this report as illegal or otherwise improper,  determine the entries necessary to correct the accounting for reversed  fiscal year 2001 transactions,   help ensure that DFAS Columbus completes the review and correction  of the additional $1.1 billion of fiscal year 2001 adjustments it has  scheduled for detailed review, and   continue with DFAS’s top-level management attention and monitoring of  the program for future adjustments to closed appropriation accounts.
We also recommend that the Secretary of Defense direct the Under  Secretary of Defense (Comptroller) to continue to monitor these  adjustments so that any potential Antideficiency Act violations that may  occur are promptly investigated and reported as required by the  Antideficiency Act, 31 U.S.C. 1351, and implementing guidance.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD agreed with our recommendations and outlined its ongoing and  planned actions to identify, reverse, and correct illegal and otherwise  improper fiscal year 2000 and 2001 closed appropriation account  adjustments. DOD pointed out that this process may create adverse  accounting conditions for a large number of contracts that will require  either complete or partial reaudit to determine the correct accounting  necessary to resolve the illegal or otherwise improper closed account  adjustments we identified. For example, as we noted in our report, for one  contract where DOD made a total of $590 million of closed account  adjustments, we found that $210 million of the $590 million of adjustments  were unnecessary and should not have been made because the actual  disbursements had been recorded correctly. In order to reverse and correct  the $210 million of unnecessary adjustments, DOD had to reverse the total  $590 million in adjustments, which created other accounting errors that  must now be researched and corrected. As our report noted, DOD  estimates that it will take about 2,300 hours to resolve all the errors  necessary to correct the $210 million of unnecessary adjustments we  identified for this contract. DOD said it planned to have all its reaudits and  corrective actions completed by September 30, 2004. DOD’s comments are  reprinted in appendix II.
We are sending copies of the report to interested congressional  committees. We are also sending copies of this report to the Secretary of  Defense; the Principal Deputy Under Secretary of Defense for Acquisition,  Technology, and Logistics; the Secretaries of the Army, Navy, and Air Force;  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. In addition, the  report will be available at no charge on the GAO Web site at  http://www.gao.gov. If you or your staffs have any questions regarding this  report, please contact me at (202) 512-9505 or kutzg@gao.gov, or Larry W.
Logsdon, Assistant Director, at (703) 695-7510 or logsdonl@gao.gov. Major  contributors to this report are acknowledged in appendix III.
section_title: Scope and Methodology
paragraphs: To meet our first objective of monitoring DOD’s efforts to correct the  problems we identified in our prior audit, we reviewed DFAS officials'  corrective actions taken on 162 adjustments that we previously reported as  $615 million of illegal or otherwise improper adjustments. As part of this  review, we gathered vouchers that documented the reversal of the  adjustments and analyzed financial information from DFAS Columbus’  records and reports, including contracts, contract modifications, shipping  notices, invoices, payment vouchers, and schedules of adjustments. We  identified and met with the DFAS Columbus officials knowledgeable about  each reversed adjustment. We also identified the responsible DFAS or  military service locations that maintained the official account records and  obtained documentation to show how adjustments were reversed or  corrected in the accounting records.
To meet our second objective of determining if DOD experienced problems  with adjustments to closed appropriation accounts in 2001 similar to the  problems with the 2000 adjustments, we monitored DFAS Columbus’  review of $291 million of the $1.9 billion of closed account adjustments  DOD reportedly made during fiscal year 2001. DFAS Columbus had already  selected the $291 million of closed account adjustments for review at the  time we began our audit. We took this approach rather than selecting a  large number of adjustments for our own independent review because we  knew that DOD had not fully implemented the controls necessary to  identify and prevent fiscal year 2001 illegal and otherwise improper closed  account adjustments. We reviewed the results of DFAS Columbus’ efforts  and worked with staff members responsible for conducting the reviews to  resolve any disagreements between DFAS and GAO on whether the  documentation showed that the adjustments were legal and proper. As part  of our analysis of DFAS Columbus’ reviews, we analyzed documentation  supporting DFAS's detailed summaries for each adjustment to determine  the reason for the adjustment and whether it was valid. For each  adjustment, we reviewed the contract files for supporting hard copy  documentation including modifications, invoices, payment vouchers, and  MOCAS print screens. We also identified and met with the DFAS Columbus  staff members who completed the reviews to discuss the reasons for the  adjustments and resolve any differences of opinion between DFAS’s and  our conclusions on whether the adjustments were legal and proper.
To determine if DOD had implemented the effective system controls, which  we identified in our prior report, to its contract reconciliation system to  prevent illegal adjustments, we tested the CRS for two types of potentially  illegal adjustments during a 6-month period. To do this, we independently  analyzed the closed account adjustments included in the CRS database for  the first 6 months of fiscal year 2002 to ascertain if CRS had processed any  closed account adjustments that resulted in moving a disbursement charge  (1) back to an appropriation that was canceled before the actual  disbursement was made or (2) forward to an appropriation that had not yet  been enacted at the time the actual disbursement was made. We met with  responsible DFAS Columbus officials to discuss and resolve any  transactions that our analysis identified as violations of either of these two  measurements. In instances where there were violations, we met with  DFAS Columbus personnel to determine why CRS controls had not  prevented the transactions from processing and worked with DFAS’s staff  to correct the system deficiencies. We did not validate the accuracy of the  CRS database information pertaining to the disbursement dates or  appropriations.
To meet our third objective of determining why DOD makes so many  adjustments to closed accounts, we reviewed the reconciliation summaries  for the fiscal years 2000 and 2001 closed account adjustments that we  reviewed in detail. We also met with the DFAS Columbus staff members  who performed reconciliations to obtain their opinions on the primary  reasons why errors occur. However, we did not determine the specific  reasons why certain contracts have numerous ACRNs or how the detailed  cost information was to be used.
Finally, to determine options available to DOD and actions for the Congress  to consider that would eliminate or reduce adjustments to closed  appropriation accounts, we developed and presented options based on our  reviews of fiscal year 2000 and 2001 closed account adjustments and  discussions with DOD accounting and procurement officials.
We performed our work primarily at the DFAS Center in Columbus, Ohio.  We also obtained documentation from the following DFAS locations that  were responsible for maintaining official accounting records: Cleveland,  and Dayton, Ohio; Denver, Colorado; San Bernardino, California; and St.  Louis, Missouri. Our review was conducted from June 2001 through April  2002 in accordance with U.S. generally accepted government auditing  standards, except that we did not validate the accuracy of CRS information  pertaining to the number of closed account adjustments and related dollar  values.
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 members who made key contributions to this report were Bertram J.  Berlin, Francine M. Delvecchio, Stephen P. Donahue, Dennis B. Fauber,  Jeffrey A. Jacobson, Keith E. McDaniel, and Harold P. Santarelli.
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