In fiscal year 1993, GAO made over 1,600 recommendations. This report includes summaries highlighting the impact of GAO’s work and information on the status of all GAO recommendations that have not been fully implemented. This information should help congressional and agency leaders prepare for upcoming appropriations and oversight activities and stimulate further actions to achieve the desired improvements in government operations. Several changes have been made to this year’s report. The printed volume summarizes the impact of GAO’s work and highlights the key open recommendations. This volume also includes a set of computer diskettes with details on all open recommendations. The diskettes have several menu options to help users find information easily. For example, a user may search for an open recommendation by using product numbers, titles, dates, names of federal entities, congressional committees, or any other word or phrase that may appear in the report. Instructions for operating the electronic edition are at the end of this publication. The name and telephone number of the GAO manager to contact for information or assistance about a product is included on the diskettes. Information or questions not related to a specific product or recommendation should be referred to GAO’s Office of Congressional Relations on 202/512-4400. Copies of complete GAO printed products may be ordered by calling 202/512-6000. Please direct comments, questions, or suggestions for improving this report to Lawson “Rick” Gist, Assistant Director, Office of Policy, on 202/512-4478. Given the ongoing reductions in U.S. defense funding, a new relationship is evolving between the government and the defense industry. Our work focused on the major issues related to this changing relationship. We addressed questions such as the following: (1) Is the defense industrial base being restructured to best serve U.S. security interests? (2) Is defense technology being effectively maintained and protected? (3) Is the Department of Defense (DOD) reforming its acquisition process to address long-standing problems? (4) Do DOD contracting policies and practices ensure that public funds are spent properly? Increased emphasis is being placed on ensuring that as defense downsizing takes place, there is an orderly, efficient, and effective restructuring of the defense industrial base. We are examining key industrial base activities, as well as the effectiveness of plans to spend $20 billion over the next 5 years, on defense conversion. We are also examining DOD policies and practices to ensure that as efforts to enhance U.S. competitiveness are promoted, critical defense technologies are adequately protected. DOD and the Congress continue to pursue proposals to reform the defense acquisition system. We increased our efforts to evaluate these proposals to ensure that they achieve the benefits intended at reasonable costs. We also continued our review of DOD contracting practices to ensure that they adequately protect the taxpayer against fraud, waste, and abuse. Our reports and testimonies highlighted areas where DOD and defense contractor controls were not adequate to protect against improper use of government funds. For example, our work reviewing contractor overhead charges found examples of defense contractors’ charging the taxpayers for costs that were not allowable under federal regulations. Our audit work related to contract overpricing also found that a small percentage of defense contractors were responsible for most contract overpricing. In addition, we made several recommendations that, if effectively implemented, could save the taxpayers millions of dollars. For example, in our report on DOD operational test and evaluation, we pointed out that substantial savings were available by consolidating existing testing facilities, and we recommended actions to achieve this objective. The Federal Acquisition Regulation cost principles require defense contractors to identify and exclude unallowable costs from their overhead submissions. At all six contractors we reviewed, contractors did not exclude all unallowable costs. For example, in addition to identifying almost $1 million in costs questioned by the Defense Contract Audit Agency (DCAA) at these six contractors, we identified about $2 million more in overhead costs that were either expressly unallowable or questionable. We concluded that the federal cost principles governing allowability for entertainment, employee morale and welfare, and business meetings costs lacked sufficient clarity to ensure consistent and appropriate application. We also concluded that limited transaction testing by DCAA may have also contributed to the nearly $2 million undetected unallowable or questionable costs. We recommended that, to address these problems, DOD clarify the Federal Acquisition Regulation in some cases and, in other cases, evaluate the cost principles to determine whether additional guidance was needed. We further recommended that DCAA evaluate the extent to which its field offices needed to spend more time in transaction testing. (GAO/NSIAD-93-79) With the defense industry downsizing, defense companies can make significant cost reductions by incorporating modern technologies and innovative management techniques. Of the 24 defense companies we surveyed, 3 had instituted more-efficient techniques and practices. Savings to DOD from such cost reductions can be significant. One of the defense companies reported reducing work-in-process costs by $80 million and passing the savings on to the government. Competitive market forces may not be sufficient to motivate many defense companies to significantly lower costs, however. Significant progress in this area will require DOD efforts to stimulate contractor actions. We recommended that DOD, as part of its efforts to reform the defense acquisition system, identify and eliminate the factors that result in defense contractors not incorporating technologies and management techniques to reduce costs.