DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments
Published: 2011-09-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) is required to design and implement effective internal controls, including controls over its use of public funds ("funds controls") and controls over its payment processes ("payment controls"). As a steward of the public's resources, DOD is responsible and accountable for (1) using public funds efficiently and effectively and for the purposes and within the time frames and amounts prescribed by law, (2) making payments to the right parties in the correct amount within allowable time frames and recouping any improper payments, and (3) accurately recording and reporting on its transactions and use of public funds. GAO's testimony focuses on (1) challenges DOD faces in its funds control, and their effect on the reliability of DOD's financial information, especially the budgetary information in DOD's Statement of Budgetary Resources and (2) weaknesses in DOD's payment controls that put the department at risk of making improper payments. This statement is based on our prior work and reports issued by the department's Inspector General (DOD IG). The panel requested that GAO provide its perspective on the status of DOD's process for identifying and reporting on improper payments, examples of Antideficiency Act violations within DOD along with the causes of these violations, and the effect of problem disbursements on DOD's ability to report reliable information on its financial statements.
section_title: What GAO Found
paragraphs: For years, GAO and DOD IG have reported on DOD's inability to provide effective funds control and report reliable financial information, including budgetary information. In 2008, GAO reported that DOD's complex and inefficient payment processes, nonintegrated business systems, and weak internal controls impair its ability to maintain proper funds control, putting DOD at risk of overobligating or overspending its appropriations. Specifically, DOD's weak internal control environment has hindered its ability to ensure that transactions are accurately recorded, sufficiently supported, and properly executed by trained personnel subject to effective supervision. Funds control weaknesses place DOD at risk of violating the Antideficiency Act (ADA), specifically through overobligations and overexpenditures. DOD reported ADA violations from fiscal year 2007 through September 15, 2011, with a total dollar amount of $927.4 million. DOD has identified payment transactions and related accounting steps as "problem disbursements." Problem disbursements include unmatched disbursements (UMD) that represent disbursements that have been paid by an accounting office but that have not been matched to the correct obligation records. DOD reports that it has reduced overaged UMDs from $666.5 million to $109.6 million between second quarter of fiscal year 2009 to the same time in fiscal year 2011. These and other weaknesses have prevented DOD from reporting reliable financial information, including budgetary information in an auditable Statement of Budgetary Resources. Although DOD has dedicated significant resources to remediate its identified weaknesses, it faces significant challenges to address those persistent weaknesses. DOD reported for fiscal year 2010 that it made an estimated $1 billion in improper payments. However, this estimate is incomplete because DOD did not include estimates from its commercial payment programs, which account for approximately one-third of the value of DOD payments. Further, both GAO and the DOD IG have reported on weaknesses in DOD's payment controls, including weaknesses in its process for assessing the risk of improper payments and reporting estimated amounts of them. DOD's problem disbursements continue to be a concern and are a contributing factor to the department's funds control issues. The department's weak controls over payments increase the risk of inaccurate cost information and improper payments. Given DOD's stated goal of achieving audit readiness on its consolidated financial statements by the end of fiscal year 2017, it will be critical that the department continue to ensure that steady progress is being made. Moreover, for DOD to move forward, it will be important that the department resolve its problems with multiple, disparate nonintegrated systems to ensure that whatever systems solutions are chosen will provide the underlying foundation for auditable financial statements.

section_title: Letter
paragraphs: It is a pleasure to be here today to discuss the Department of Defense’s  (DOD) controls over the use of public funds and their effect on the  reliability of DOD’s reported budgetary information and DOD’s efforts to  account for and control improper payments.
DOD is one of the largest and most complex organizations in the world.  For fiscal year 2012, the budget requested for the department was  approximately $671 billion—$553 billion in spending authority for its  operations and an additional $118 billion to support overseas contingency  operations, such as those in Iraq and Afghanistan. DOD’s fiscal year  2012 budget request also noted that it employed over 3 million military  and civilian personnel—including active and reserve service members.  DOD operations span a wide range of defense organizations, including  the military services, large defense agencies and field activities, and  various combatant and joint operational commands that are responsible  for military operations for specific geographic regions or theaters of  operation. To execute its operations, the department performs interrelated  and interdependent business functions, including financial management,  logistics management, health care management, and procurement. To  support its business functions, DOD has reported that it relies on over  2,200 business systems, including accounting, acquisition, logistics, and  personnel systems.
Like all executive agencies of the federal government, DOD is required to  design and implement effective internal controls, including controls over  its use of public funds (“funds controls”) and controls over its payment  processes (“payment controls”). As a steward of the public’s resources,  DOD is responsible and accountable for (1) using public funds efficiently  and effectively and for the purposes and within the time frames and  amounts prescribed by law, (2) making payments to the right parties in  the correct amount within allowable time frames and recouping any  overpayments, and (3) accurately recording and reporting on its  transactions and use of public funds.
Due to longstanding and pervasive weaknesses in DOD’s internal control,  we have designated DOD’s financial management as one of DOD’s  programs at high risk of waste, fraud, abuse, or mismanagement. DOD’s  past initiatives to strengthen its internal control, become auditable, and  improve its financial management have fallen short. While current efforts  offer some encouragement, GAO and DOD auditors continue to find  significant deficiencies in internal control that contribute to DOD’s inability  to achieve effective financial management capabilities and prepare  auditable financial statements. Under the DOD Financial Improvement  and Audit Readiness (FIAR) Plan, first issued by the DOD Comptroller in  2005, DOD has begun to dedicate significant resources to remediate  identified weaknesses.
Today, I will discuss the challenges DOD faces in its funds control and  their effect on the reliability of DOD’s financial information, especially the  budgetary information in DOD’s Statement of Budgetary Resources  (SBR), which the department has identified as its highest priority in  achieving auditability, as well as its ability to reduce the risk of  overobligating or overexpending resources. I will also discuss the  weaknesses in DOD’s payment controls that put the department at risk of  making improper payments. My statement today is based primarily on our  prior work and includes DOD-reported information that we monitor as part  of our annual audit of the Consolidated Financial Statements of the U.S.  Government. In addition, my statement includes information from reports  issued by the department’s Inspector General (DOD IG) that I present  because, while we did not independently validate the IG’s methodology,  the findings are similar to ours on relevant aspects of DOD’s funds and  payment controls. Our work, on which this statement is based, was  conducted in accordance with generally accepted government auditing  standards. Our previously published reports contain additional details on  the scope and methodology for those reviews. Those standards require  that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe the evidence obtained provides  a reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Background
paragraphs: The Budget and Accounting Procedures Act of 1950 and the law  commonly known as the Federal Managers’ Financial Integrity Act of  1982 (FMFIA) placed primary responsibility for establishing and  maintaining internal control on the head of the agency. Internal control is  an integral component of an organization’s management that when  properly implemented and operating effectively provides reasonable  assurance that the following objectives are being achieved: (1)  effectiveness and efficiency of operations; (2) reliability of financial  reporting; and (3) compliance with laws and regulations.
Within this broad framework of internal control, DOD must design and  implement effective funds control, payment controls, and internal control  over financial reporting. Auditors of DOD’s financial statements are to  assess the effectiveness of these controls as part of the financial  statement audit. However, DOD has acknowledged that long-standing  weaknesses in its internal controls, its business systems, and its  processes have prevented auditors from determining the reliability of  DOD’s financial statement information, including the budgetary  information included in DOD’s SBR. Moreover, we have previously  reported that a weak overall control environment and poor internal  controls limit DOD’s ability to prevent and detect fraud, waste, abuse, and  improper payments.
Because budgetary information is widely and regularly used for  management, the DOD Comptroller designated as one of DOD’s highest  priorities the improvement of its budgetary information and processes  underlying the SBR. The financial information in the SBR is predominantly  derived from an entity’s budgetary accounts, which are used by agencies  to account for and track the use of public funds, in accordance with  budgetary accounting rules. The SBR is designed to provide information  on authorized budgeted spending authority and links to the Budget of the  United States Government (President’s Budget), including the source and  availability of budgetary resources, and how obligated resources have  been used. According to the Office of Management and Budget, the SBR  was added as a basic federal financial statement so that the underlying  budgetary accounting information is audited and is, therefore, more  reliable for routine management use and budgetary reporting, such as the  President’s Budget.
In the FIAR Plan, DOD states that it expects to obtain five benefits from  its planned efforts to achieve an auditable SBR. According to DOD, its  efforts will  improve the visibility of budgetary transactions, ensuring a more  effective use of resources;    provide operational efficiencies through more readily available and  accurate cost and financial information;  improve financial stewardship through reduced improper payments;  improve budget processes and controls, thus reducing violations of  funds control laws; and  link execution to the President’s Budget, thus providing more  consistency with the financial environment.
section_title: Serious DOD Funds Control Challenges
paragraphs: For years, GAO and DOD IG have reported on DOD’s inability to provide  effective funds control and report reliable financial information, including  budgetary information. In 2008, we reported that DOD’s complex and  inefficient payment processes, nonintegrated business systems, and  weak internal controls impair its ability to maintain proper funds control,  putting DOD at risk of overobligating or overspending its appropriations.  Specifically, DOD’s weak internal control environment has hindered its  ability to ensure that transactions are accurately recorded, sufficiently  supported, and properly executed by trained personnel subject to  effective supervision. Further, these weaknesses impair DOD’s ability to  ensure that amounts recorded as disbursements are matched to the  corresponding recorded obligations, resulting in “unmatched  disbursements.” These and other weaknesses have prevented DOD  from reporting reliable financial information, including budgetary  information in an auditable SBR, which DOD’s FIAR Plan seeks to  address through a multiyear effort across the military services and  defense agencies. For example, we recently reported that inadequate  processes, systems controls, and controls for accounting and reporting  prevented the Marine Corps from passing an audit of its fiscal year 2010  SBR, the first SBR of a military service that DOD is attempting to  successfully audit since the SBR was first required in 1998. Although  DOD has dedicated significant resources to improving its financial  management, including addressing known weaknesses in its funds  control, neither the department nor its auditors have been able to verify  that weaknesses have been sufficiently corrected in order to pass an  audit. These weaknesses present challenges for DOD in: (1) reducing its  risk of overobligating and overexpending its appropriations in violation  of the law and making effective use of budgetary resources; (2) improving  its ability to eliminate unmatched disbursements and other significant  problem disbursements; and (3) producing reliable budgetary information.
subsections: section_title: Funds Control Weaknesses Can Place DOD at Risk of Overobligation and Overexpenditure and Violations of the Law
paragraphs: We have reported that the department is at risk of overobligating and  overexpending its appropriations because of its weaknesses in identifying  and training its personnel who are responsible for funds control and  carrying out supervisory duties, its challenges in properly supporting and  accounting for its transactions, and its poor financial systems. These  weaknesses have contributed to 64 DOD-reported instances of  overobligation or overexpenditure of funds in violation of the law totaling  $927.4 million from fiscal year 2007 through September 15, 2011.  However, there may be other violations that may not be detected,  investigated, and reported because of the weaknesses in DOD’s funds  control and financial management overall. According to DOD, the most  frequent causes of DOD’s overobligations and overexpenditures include  inadequate internal controls and standard operating procedures, not  following prescribed internal controls and standard operating procedures,  lack of appropriate training, and inadequate supervisory involvement or  oversight. Examples of reported weaknesses in DOD’s funds control  include:  Inadequately trained funds control personnel. In 2008, we reported  that DOD had not effectively identified and established training  programs for departmental personnel who carry out DOD’s funds  control. According to DOD, its funds control system relies  extensively on the department’s ability to (1) identify individuals who  are performing key funds control roles, such as certifying officers,  contracting officers, program managers, funds certifying officials, and  other departmental accountable officials, who incur obligations and  make disbursements and perform related duties, and (2) ensure that  those individuals have received the training necessary to fulfill their  responsibilities in compliance with the DOD Financial Management  Regulation (FMR). We made recommendations to DOD in our report  to improve its process and system of identifying and training its key  funds control personnel, which DOD agreed to implement, and last  year DOD revised the policies in its FMR on this aspect of its funds  control. We have not assessed the effectiveness of DOD’s actions.  However, as I testified before this Panel in July 2011, DOD has not  completed a competency analysis of its financial management  personnel and still has significant work to do to address this challenge  to achieving its financial improvement goals.    Unsupported transactions. We have reported that DOD components  have significant weaknesses in their ability to properly support  transactions in order to reliably determine whether their obligations  and disbursements are being used for authorized purposes and within  the amounts and time frames established by law. For example, we  recently reported that the auditors who attempted to audit the Marine  Corps fiscal year 2010 SBR were unable to conduct the audit  because, among other internal control deficiencies, the Marine Corps  lacked documentation to support its transactions, which put the  Marine Corps at risk of not being able to verify whether payments  were made in the appropriate amount for authorized purposes, and to  the appropriate parties. In its Agency Financial Report for Fiscal  Year 2010, DOD officials stated that one of 13 material weaknesses  that prevent an audit of its financial statements will be resolved by  2017 by implementing processes and systems that can provide  necessary transaction-level supporting documentation for its  disbursements and collections.  Inadequate recording of transactions. DOD faces challenges in  properly recording its obligations and disbursements in its accounting  and other business systems that impair its ability to track and control  the use of public funds. According to DOD’s FMR, obligations and  expenditures are required to be recorded accurately and promptly,  even if the recording results in a negative amount in the appropriation,  fund, or other accounting level. Last week, we reported that the  auditors of the Marine Corps’ fiscal year 2010 SBR found that the  Marine Corps inappropriately used “bulk obligations” to record  estimated liabilities that the Marine Corps did not match to actual  payments due to weak internal controls. As discussed below, a  similar practice by the military departments led to overobligations in  violation of the law. Further, DOD reported in its Agency Financial  Report for Fiscal Year 2010 that another of 13 material weaknesses  that prevented an audit of its financial statements relates, in part, to  the department’s inability to properly record payments due from other  agencies and the public.  Ineffective business systems. In our 2008 report on DOD’s funds  control, we found that DOD’s nonintegrated and outdated business  systems, including its financial systems and other systems that  provide most of DOD’s financial data to the financial systems, were a  key impediment to effective funds control, and we noted that DOD had  long-term plans to implement modernized, fully integrated, and  reliable business systems. However, as I stated before this panel in  July, DOD faces significant challenges in its effort to implement these  new systems over the next several years. In its Agency Financial  Report for Fiscal Year 2010 and its FIAR Plan, DOD acknowledges  the challenges related to weaknesses in DOD’s financial management  systems. For example, in DOD’s annual statement on the status of its  internal controls included in its Agency Financial Report, DOD  reported that the department is not in conformance with internal  control requirements because of a material weakness in its financial  management systems. DOD’s FIAR Plan states that implementing  modernized, effective, and integrated business systems that reliably  support financial needs of the department are critical to achieving the  department’s financial improvement and audit readiness efforts.
DOD’s ineffective funds control has resulted in overobligations and  overexpenditures in violation of the Antideficiency Act (ADA). As we  reported in 2008, weaknesses in DOD’s funds control impaired its ability  to accurately detect, investigate, and report such violations. Under the  ADA, agencies are prohibited from, among other things, incurring  obligations or making expenditures in excess or in advance of  appropriations or in excess of apportionments or formal subdivisions of  those apportionments. When DOD determines that a violation of the  ADA has occurred, the department is to immediately report to the  President and Congress all relevant facts and a statement of actions  taken and submit a copy to the Comptroller General at the same time.  According to copies of ADA violation reports received by the Comptroller  General, and as shown in table 1, DOD reported 64 ADA violations from  fiscal year 2007 through September 15, 2011, with a total dollar amount  of $927.4 million. However, due to DOD’s weaknesses in its funds control  process, including the weaknesses described above related to DOD’s  challenges in controlling and recording obligations and disbursements  and detecting violations, this listing may not be complete because all ADA  violations may not have been identified or reported. For example, GAO  identified a violation in June 2010 involving the Army’s overobligation of  its fiscal year 2008 Military Personnel–Army (MPA) appropriation, as  evidenced by a $200 million transfer DOD made to the MPA account from  DOD’s working capital fund, which has not yet been reported by DOD.  Mr. Chairman, Ranking Member Andrews, I know that you and other  members of Congress recently sent a letter to the DOD Comptroller  asking for an explanation of why DOD has not reported this and other  potential ADA violations. Such an explanation could provide greater  transparency over the accuracy of reported numbers and amounts of  violations.
Because the ADA prohibits, and effective funds control should prevent,  overobligations and overexpenditures of public funds, the number and  dollar amount of ADA violations are an indicator of the status of DOD’s  funds control. However, the nature of reported violations can also indicate  systemic weaknesses in DOD’s funds control. The following ADA  violations involved systemic breakdowns in the controls necessary to  track actual amounts of obligations incurred against amounts of available  funding:    As noted above, we found in June 2010 that the Army Budget Office  lacked an adequate funds control process to provide it with ongoing  assurance that obligations and expenditures do not exceed funds  available in the fiscal year 2008 Military Personnel–Army (MPA)  appropriation. We found that the Army’s total obligations against the  fiscal year 2008 MPA appropriation exceeded the amount available in  the account, as evidenced by the Army’s need to transfer $200 million  from the Defense Working Capital Fund, Army appropriation to cover  the shortfall. The overobligation likely stemmed, in part, from lack of  communication between the Army budget office and program  managers so that the Army budget office’s accounting records  reflected estimates instead of actual amounts until it was too late to  control the incurrence of excessive obligations in violation of the act.
Thus, at any given time in the fiscal year, the Army budget office did  not know the actual obligation and expenditure levels of the account.  The Army budget office explained that it relies on estimated  obligations—despite the availability of actual data from program  managers—because of inadequate financial management systems.    Similarly, in 2008, Navy officials reported an ADA violation in the  Military Personnel–Navy (MPN) appropriation in the amount of $183  million. The violation occurred when the Bureau of Naval Personnel  (BUPERS) overobligated the fiscal year 2008 MPN appropriation due  to its inability to accurately track the status of obligations and identify  the need for additional funding.
To its credit, the department has issued and periodically updated policies  that address responsibilities for preventing and identifying ADA  violations. DOD’s guidance also describes frequent causes of violations  within the department and explains the actions necessary to avoid them,  including emphasizing management and supervisory duties, training of  key funds control personnel, and effective systems and procedures.
section_title: Efforts to Address DOD’s “Problem” Disbursements
paragraphs: Basic controls to match payments with the obligation records and account  for and reconcile payments are not effective within the department. DOD  has identified payment transactions and related accounting steps as  “problem disbursements” and monitors them through management  tracking reports as it attempts to correct them. Problem disbursements  include unmatched disbursements (UMD) that represent disbursements  that have been paid by an accounting office but that have not been  matched to the correct obligation records. For example, if one or more of  the accounting line elements for each transaction, such as appropriation,  fiscal year, and program code do not match the information in the  accounting records, then the transaction is considered unmatched. For a  description of two examples of DOD’s problem disbursements, see  appendix II.
Problem disbursements increase the risk of making fraudulent or  erroneous payments without detection. In addition, problem  disbursements impair the reliability of DOD financial statements and  DOD’s ability to control its disbursements, a key aspect of funds control.  According to DOD’s tracking reports, the department has made progress  in addressing problem disbursements, but the department has not  achieved its goals in this area.
As we reported in 2003, the Defense Finance and Accounting Service  (DFAS) expanded its use of existing financial management performance  metrics to include special measures for the recording of payments,  including the amount of disbursements that are not matched to the  corresponding obligations, or UMDs. DOD, in its May 2011 FIAR Plan  Status Report on the implementation of its FIAR Plan, included a metric  on UMDs. This metric tracks UMDs that are over 120 days old, which  DOD refers to as “overaged UMDs.” As stated in that report, DOD’s  goal is to have no UMD amounts greater than 120 days old. According to the report, the benefit of reducing UMDs, especially overaged UMDs, greater accuracy of DOD components’ account balances on management  reports and the SBR. Reduction of the amount of UMDs will allow DOD to  have more accurate information about the obligations that have been  liquidated, improving its budgetary accounting. The presence of UMDs  prevents the department from having accurate information about the  amount of funds available for obligation and expenditure to carry out its  mission, thus increasing the risk of possible ADA violations. The following  table appears in the May 2011 status report on the FIAR Plan for  overaged UMDs and indicates that, from the second quarter of fiscal year   is  2009 through the second quarter of fiscal year 2011, DOD is making  progress at reducing overaged UMDs:  In the results section accompanying this table, DOD officials noted Army’s  UMDs reportedly increased due to systems issues with recording  obligations and lines of accounting in its Enterprise Resource Planning  (ERP) systems.
section_title: DOD’s Funds Control Weaknesses and Problem Disbursements Impair the Reliability of DOD’s Financial Information
paragraphs: As we and DOD’s auditors have reported, DOD’s funds control and  related internal control weaknesses and problem disbursements have  impaired its ability to produce reliable financial information for reporting,  especially the reliability of the department’s SBR, as well as its other  budgetary information. For example, we reported in 1999 that the  reliability of DOD’s budgetary information reported in its SBR was  impaired. In 2009, the DOD Comptroller directed that the department’s  components focus their efforts on budgetary information and the ability to  prepare an auditable SBR as one of two first priorities that are now being  implemented through the DOD’s FIAR Plan, its FIAR Guidance, and the  components’ individual financial improvement plans. As a pilot, DOD  designated the Marine Corps SBR as the first military service SBR to  undergo an audit. However, as we reported last week, the Marine Corps  was unable to undergo an audit of its fiscal year 2010 SBR due to serious  control weaknesses that prevented the auditors from performing the  audit. Although we found that the Marine Corps was able to address  some of these weaknesses, many remained unresolved. We found that  the Marine Corps did not develop an effective overall corrective action  plan to address the 70 audit findings and related 139 recommendations  that identified risks, prioritized actions, and identified required resources  needed to help ensure that actions adequately respond to  recommendations. Instead, its approach to addressing auditor findings  and recommendations for its prior and current audit efforts focuses on  short-term corrective actions necessary to support heroic efforts to  produce reliable financial reporting at year-end. Such approach may not  result in sustained improvements over the long term that would help  ensure that the Marine Corps could routinely produce sound data on a  timely basis for decision making and reporting. We also reported key  lessons learned from this pilot that, if effectively shared with the other  military services, could help them to address similar known challenges in  preparing reliable SBRs.
The SBR is designed to provide information on budgeted spending  authority reported in the President’s Budget, including budgetary  resources, availability of budgetary resources, and how obligated  resources have been used. Both Congress and the administration use  this information to make decisions about the amounts of appropriations  DOD needs to carry out its operations. However, as we stated in our  February 2011 High-Risk Series: An Update, DOD’s pervasive control  weaknesses adversely affect DOD’s ability to, among other things,  anticipate future costs and claims on the budget.
section_title: Risk of DOD Improper Payments
paragraphs: DOD, in its Agency Financial Report for Fiscal Year 2010, reported that it  made an estimated $1 billion in improper payments under five of its  programs. However, this estimate is incomplete because DOD did not  include estimates from its commercial payment programs, which account  for approximately one-third of the value of DOD payments. Further, both  we and the DOD IG have reported on weaknesses in DOD’s payment  controls, including weaknesses in its process for assessing the risk of  improper payments and reporting estimated amounts of them. DOD’s  payment controls are hindered by problems related to inadequate  payment processing, poor financial systems, and inadequate supporting  documentation.
subsections: section_title: Weaknesses in DOD’s Payment Controls
paragraphs: In our February 2011 High-Risk Series: An Update, we identified various  DOD high-risk areas, including contract management (designated in  1992) and financial management (designated in 1995), that we have  previously reported make the department vulnerable to improper  payments. DOD’s contract management weaknesses, such as  ineffective oversight, increase the risk that DOD will pay more than the  value of the goods delivered or services performed. Financial  management deficiencies have adversely affected the department’s  ability to control costs, to ensure basic accountability, and to prevent and  detect fraud, waste, and abuse, and represent a significant obstacle to  achieving an unqualified opinion on DOD’s and the U.S. government’s  consolidated financial statements. In addition, the DOD IG recently  reported their assessment that DOD’s risk of making improper payments  is high. This assessment was based on control deficiencies identified by  the Defense Finance and Accounting Service (DFAS) as well as prior  assessments made by GAO and DOD IG.
Our prior work and reports issued by DOD IG have highlighted the  department’s long-standing and significant problems with estimating and  preventing improper payments. Specific weaknesses in DOD’s payment  controls include inadequate payment processing, inadequate supporting  documentation for expenditures, financial system deficiencies, and weak  contract audit and payment controls. For example:  Inadequate payment processing. The DOD IG reported that the U.S.  Marine Corps Forces Special Operations Command did not have  effective controls over the reporting and processing of baseline and  contingency funds, resulting in improper payments.  Specifically, the  DOD IG reported that the command did not have effective controls  over the recording and processing of 35,699 transactions. Of the  320 sample transactions, 245 had one or more deficiencies. In  addition, of the 29 travel vouchers with deficiencies or unsupported  expenses, the payments made on 10 vouchers were improper  payments. According to the DOD IG report, the improper payments  occurred because the certifying officers and departmental  accountable officials approved the travel vouchers with deficiencies  and unsupported expenses without thoroughly reviewing them.  Inadequate documentation. As we reported last week, we continue to  find that the Navy and Marine Corps have issues with maintaining  adequate documentation for their transactions. On the basis of the  sample of items we tested for an ongoing audit, the Navy did not  maintain adequate documentation for us to independently validate its  efforts to research and resolve differences between its Fund Balance  with Treasury balances with the records of the Department of the  Treasury, which is a process similar to reconciling a checkbook with a  bank statement. Some payments are considered improper payments  due to insufficient or missing documentation. In July 2011, the DOD  IG reported that DFAS made potentially improper payments of $4.2  million from January 2005 through December 2009 related to active  duty military personnel. According to the report, DOD did not ensure  that the Defense Joint Military Pay System–Active Component  contained only valid active-duty military accounts. For example, the  DOD IG found that this system contained military personnel that  received payments after their reported date of death.    Financial system deficiencies. In 2009, we reported that DOD traced  the root cause of many improper payments in its military and civilian  pay to the inaccurate or untimely reporting of entitlement data to  DOD’s automated systems on such areas as time and attendance,  personnel actions, and pay allowances. We reported that DOD had  described steps to monitor and track these improper payments;  however, it was unclear whether these actions would address the root  causes of these deficiencies. In August 2011, the DOD IG reported  that the Army’s controls over its Deployable Disbursing System  (DDS) payments were inadequate and resulted in, among other  things, improper payments. The DOD IG found that the Army was at  risk of improper payments because its Financial Management Centers  did not effectively review user access to DDS or oversee the payment  process. The DOD IG reported that the Army’s disbursing personnel  made nine duplicate payments to vendors and did not collect on these  improper payments. Two of the duplicate payments were referred by  the DOD IG to the Defense Criminal Investigative Service because of  the suspicious and potentially fraudulent nature of the payments.    Weak contract audit and payment controls. As we testified in February  2011, our 2009 audit work identified, among other weaknesses in  DOD’s contract payment controls, weaknesses in contract auditing,  which increase the risk of improper payments. In 2009, we reported  on audit quality problems at Defense Contract Audit Agency (DCAA)  offices nationwide, including compromise of auditor independence,  insufficient audit testing, and inadequate planning and supervision.  In addition, DCAA’s management environment and quality assurance  structure were based on a production-oriented mission that put DCAA  in the role of facilitating DOD contracting without also protecting the  public interest. At that time, we found serious quality problems in the  69 audits and cost-related assignments we reviewed, resulting in  DCAA rescinding over 80 audit reports and removing over 200 DOD  contractors from direct billing privileges, which allow them to submit  invoices for payment without review by the government.
section_title: Concerns over Incomplete DOD Reviews and Reporting on Improper Payments
paragraphs: The Improper Payments Information Act of 2002 (IPIA) requires DOD to  annually identify programs and activities susceptible to significant  improper payments, estimate amounts improperly paid under those  programs and activities, and report on these estimates and the actions to  reduce improper payments. In July 2009, we reported that DOD did not  conduct risk assessments on all of its payment activities, as $322 billion  in agency outlays were excluded from the amounts DOD assessed.  While DOD components conducted risk assessments for six payment  activities totaling about $493 billion in fiscal year 2007, we identified an  additional $322 billion in outlays reported in DOD’s SBR that had not  been assessed. Also, the DOD IG recently reported that DOD’s First  Quarter FY 2010 High Dollar Overpayments Report (Overpayments  Report) did not accurately portray the department’s risk of high-dollar  overpayments. The DOD IG reported that the Overpayments Report  was incomplete because not all DOD payments were examined. DFAS  reviews for high dollar overpayments excluded approximately $167.5  billion or 55 percent of DOD’s total $303.7 gross outlays. DOD’s inability  to identify and reconcile total payments to its SBR affected the reliability  and completeness of its estimates for and reviews of improper payments.
GAO-09-442. could leverage the results from its existing Recovery Auditing Act  processes identifying actual commercial under- and overpayments to  develop its statistical sampling methodology and enhance the reported  estimate.
The DOD Comptroller testified in May 2011 that DOD had not estimated  the amount of improper payments for commercial pay because the  department uses prepayment screening, both automated and manual, to  prevent improper payments. He added that one especially important  tool to prevent commercial pay improper payments is the department’s  Business Activity Monitoring (BAM) software program introduced in  August 2008. However, the DOD IG reported, among other things, that  the BAM tool had a false positive rate of more than 95 percent and that  the BAM review methodology was not standardized across payment  systems or even within the same office. The large number of payments  flagged for review (false positives) made it difficult to conduct the  appropriate research in a timely manner without delaying payment. The  IG reported that the lack of a standardized methodology could lead to  DFAS not detecting and preventing improper payments due to poor  quality review. The Comptroller stated, in his May 2011 testimony, that in  view of legislative changes and more recent OMB guidance, DOD plans  to do postpayment statistical sampling for commercial payments for those  systems not currently covered by the BAM tool to supplement its  prepayment measures.
section_title: Concluding Observations
paragraphs: Although DOD has dedicated significant resources under its FIAR Plan to  remediate its identified financial management weaknesses, it faces  significant challenges in addressing those persistent weaknesses. DOD’s  large number of nonintegrated business systems, complex and inefficient  payment processes, and weak internal controls put the department at risk  of overobligating or overspending its appropriations. DOD has been  addressing its problem disbursements, but they are a contributing factor  to the department’s funds control issues. The department’s weak controls  over payments increase the risk of inaccurate cost information and  improper payments. Given DOD’s stated goal of achieving audit  readiness on its consolidated financial statements by the end of fiscal  year 2017, it will be critical that the department continue to ensure that  steady progress is being made. Moreover, for DOD to move forward, it  will be important for the department to resolve its problems with multiple,  disparate nonintegrated systems and to ensure that whatever systems  solutions are chosen will provide the underlying foundation for auditable  financial statements.
Mr. Chairman and members of the panel, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other members of the panel may have at this time.
For further information regarding this testimony, please contact Asif A.  Khan, (202) 512-9869 or khana@gao.gov. Key contributors to this  testimony include F. Abe Dymond, Assistant Director; Daniel Egan;  Maxine Hattery; Robert Sharpe; and Sandra Silzer.
section_title: Appendix I: Requirements and Standards for Federal Agencies’ Internal Controls
paragraphs: Congress has long recognized the importance of internal control,  beginning with the Budget and Accounting Procedures Act of 1950, over  60 years ago. The 1950 act placed primary responsibility for establishing  and maintaining internal control squarely on the shoulders of agency  management. In 1982, Congress enacted the law commonly known as  the Federal Managers’ Financial Integrity Act (FMFIA), and the Office of  Management and Budget (OMB) issued Circular No. A-123 to require  each agency to establish and maintain internal control systems that would  enable obligations and costs to be recorded in compliance with applicable  law; funds, property, and other assets to be safeguarded; and revenues  and expenditures applicable to agency operations to be properly recorded  and accounted for. Within this broad framework of internal control  required by FMFIA, the Department of Defense, like other executive- branch agencies, must also design and implement effective systems of  funds control, payment controls, and internal control over financial  reporting. Auditors of DOD’s financial statements assess the  effectiveness of these four types of internal controls in varying degrees as  part of the financial statement audit. Further, one financial statement, the  Statement of Budgetary Resources, was designed for the purpose of  reporting on agencies’ use of federal funds and to subject agencies’ funds  control to audit. Listed below is a brief description of the four types of  controls.
subsections: section_title: Internal Control
paragraphs: Internal control represents an organization’s plans, methods, and  procedures used to meet its missions, goals, and objectives and serves  as the first line of defense in safeguarding assets and preventing and  detecting errors, fraud, waste, abuse, and mismanagement. Internal  control is to provide reasonable assurance that an organization’s  objectives are achieved through (1) effective and efficient operations, (2)  reliable financial reporting, and (3) compliance with laws and regulations.  Safeguarding of assets is a subset of all these objectives.
section_title: Funds Control
paragraphs: The purpose of funds control is to implement controls that restrict both  obligations and disbursements from exceeding appropriations and  supporting the proper preparation and execution of the budget. Funds  control systems must be able to accurately record obligations, collections,  and disbursements against appropriations and the accounts established  to track the status of appropriations. An agency’s fund control system is  the primary tool for ensuring that the agency complies with congressional  spending mandates, and is, therefore, central to Congress’s ability to  exercise its constitutional power of the public purse. In the executive  branch of the federal government, funds control requirements are  implemented by executive agencies consistent with policies and guidance  issued by OMB, the Department of the Treasury (Treasury), and the head  of each executive agency. According to OMB Circular No. A-11, proper  funds control should include the following elements:    agency regulations that are required by, and designed to ensure  compliance with the prohibitions contained in, the Antideficiency Act  (ADA), which are described below;  the purpose of funds control is to implement controls that restrict both  obligations and expenditures from exceeding appropriations and  related administrative accounts, as well as hold officers and  employees accountable when they violate the restrictions; and  the funds control systems must operate within the internal control  systems, including the objective of complying with laws and  regulations.
The ADA prohibits federal officers and employees from    making or authorizing an expenditure from, or creating or authorizing  an obligation under, any appropriation or fund in excess of the amount  available in the appropriation or fund unless authorized by law,  31 U.S.C. § 1341(a)(1)(A);  involving the government in any obligation to pay money before funds  have been appropriated for that purpose, unless otherwise allowed by  law, 31 U.S.C. § 1341(a)(1)(B);    accepting voluntary services for the United States, or employing  personal services not authorized by law, except in cases of  emergency involving the safety of human life or the protection of  property, 31 U.S.C. § 1342; and    making obligations or expenditures in excess of an apportionment or  reapportionment, or in excess of the amount permitted by agency  regulations, 31 U.S.C. § 1517(a).
Once it is determined that there has been a violation, the agency head  “shall report immediately to the President and Congress all relevant facts  and a statement of actions taken,” and they shall transmit a copy to the  Comptroller General at the same time. OMB has issued further  instructions on preparing the reports, which may be found in OMB  Circular No. A-11, Preparation, Submission, and Execution of the Budget,  § 145.
section_title: Internal Control over Financial Reporting
paragraphs: Internal control over financial reporting should assure the safeguarding of  assets from waste, loss, unauthorized use, or misappropriation as well as  assure compliance with laws and regulations pertaining to financial  reporting. Financial reporting includes annual financial statements of an  agency as well as other significant internal or external financial reports.  Other significant financial reports are defined as any financial reports that  could have a material effect on a significant spending, budgetary, or other  financial decision of the agency or that is used to determine compliance  with laws and regulations on the part of the agency. An agency needs to  determine the scope of financial reports that are significant, that is, which  reports are included in the assessment of internal control over financial  reporting. In addition to the annual financial statements, significant reports  might include: quarterly financial statements; financial statements at the  operating division or program level; budget execution reports; reports  used to monitor specific activities such as specific revenues, receivables,  or liabilities; reports used to monitor compliance with laws and regulations  such as the Anti-Deficiency Act.
section_title: Payment Controls
paragraphs: Payment controls, as a discrete subset of internal controls and funds  control, establish an effective system of internal controls needed to  maintain accountability over resources, including identifying, reporting,  and reducing improper payments and problem disbursements, and  recouping improper payments when they are made. Controls should  ensure payments and collections are timely and accurate and that public  funds are used properly for the payments. Managers are responsible for  ensuring that internal controls are established and functioning properly.  Managers with responsibilities for determining entitlement, authorizing  and executing payments and collections shall  create, document, and maintain an organizational structure and  business processes that appropriately segregates assigned duties,  emphasizes adherence to policies and procedures, and employs  sound internal accounting and system access controls;  implement finance and accounting systems that comply with the  federal financial management systems requirements, keep  disbursement (entitlement), and accounting records accurate and in  balance from contract execution through closeout, and monitor the  causes of late payments and interest penalties incurred;    establish systematic controls that capture adequate audit trails to  allow the tracing from source documents of financial events to general  ledger account balances through successive levels of summarization  and financial reports/statements;    ensure data is processed using accurate coding and errors are    employ systems that ensure the authenticity of data that are  electronically transmitted, including the electronic signature and  ensure controls provide reasonable assurance that deliberate or  inadvertent manipulation, modification, or loss of data during  transmission is detected; and  validate cash management and payment performance quality and  effectiveness on an annual basis: and periodically test effectiveness  of internal controls, document results of testing, and take necessary  corrective actions.
section_title: Appendix II: DOD “Problem Disbursements”
paragraphs: ppendix II: DOD “Problem Disbursements”
The Department of Defense’s (DOD) disbursement posting policy is in  Chapter 11 of Volume 3 of its Financial Management Regulation (FMR).  According to Chapter 11, DOD’s policy is that a disbursement be matched  to its corresponding, detail-level obligation and be recorded as promptly  as current systems and business practices reasonably permit. DOD  recognizes that while most obligations and disbursements are matched  automatically, some obligations and disbursements are required to be  manually matched, mainly due to nonautomated processes or the  rejection of transactions by automated systems.
As defined by DOD, problem disbursements include unmatched  disbursements and negative unliquidated obligations. The definitions for  these terms are also in Volume 3, Chapter 11 of the DOD FMR.
subsections: section_title: Unmatched Disbursement (UMD)
paragraphs:   An unmatched disbursement is defined as a disbursement transaction  that has been received and accepted by an accounting office, but has  not been matched to the correct detail obligation. This includes  transactions that have been rejected back to the paying office or  central disbursement clearing organization by an accounting office.
section_title: Negative Unliquidated Obligation (NULO)
paragraphs:   A negative unliquidated obligation is a disbursement transaction that  has been matched to a cited detail obligation (unlike unmatched  disbursements), but the total recorded disbursement(s) exceed the  recorded obligation.
Chapter 11 also prescribes the requirements for researching UMDs and  NULOs. For example, prevalidation is defined as a procedure that  requires a proposed payment be identified/matched to its applicable  proper supporting obligation that has been recorded in the official  accounting system and that the line(s) of accounting cited on the payment  match the data recorded in the accounting system. As stated in Chapter  11, prevalidation procedures help better ensure that contracts are not  overpaid.
section_title: Related GAO Products
paragraphs: DOD Financial Management: Ongoing Challenges in Implementing the  Financial Improvement and Audit Readiness Plan. GAO-11-932T.  Washington D.C.: September 15, 2011.
DOD Financial Management: Marine Corps Statement of Budgetary  Resources Audit Results and Lessons Learned. GAO-11-830.  Washington, D.C.: September 15, 2011.
DOD Financial Management: Numerous Challenges Must Be addressed  to Achieve Auditability. GAO-11-864T. Washington D.C.: July 28, 2011.
Improper Payments: Recent Efforts to Address Improper Payments and  Remaining Challenges. GAO-11-575. Washington D.C.: April 15, 2011.
Contract Audits: Role in Helping Ensure Effective Oversight and  Reducing Improper Payments. GAO-11-331T. Washington, D.C.:  February 1, 2011.
High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February  2011.
Defense Health: Management Weaknesses at Defense Centers of  Excellence for Psychological Health and Traumatic Brain Injury Require  Attention. GAO-11-219. Washington, D.C.: February 28, 2011.
DCAA Audits: Widespread Problems with Audit Quality Require  Significant Reform. GAO-09-468. Washington, D.C.: September 23, 2009.
Improper Payments: Significant Improvements Needed in DOD’s Efforts  to Address Improper Payment and Recovery Auditing Requirements.  GAO-09-442. Washington, D.C.: July 29, 2009.
DOD Financial Management: Improvements Are Needed in Antideficiency  Act Controls and Investigations. GAO-08-1063. Washington, D.C.:  September 26, 2008.
Financial Audit Guide: Auditing the Statement of Budgetary Resources.  GAO-02-126G. Washington, D.C.: December 2001.
Financial Management: DOD’s Metrics Program Provides Focus for  Improving Performance. GAO-03-457. Washington, D.C.: March 28,  2003.
Department of Defense: Status of Financial Management Weaknesses  and Actions Needed to Correct Continuing Challenges. GAO/T- AIMD/NSIAD-99-171. Washington, D.C.: May 4, 1999.
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