The Concessions Committee succeeded the Pentagon Post Restaurant Council, which was established in 1942 by the Secretary of the War Department. The Council managed the cafeterias and allied operations, including a drugstore, newsstand, and shoe shine and repair shop. The Committee was created and operates pursuant to the Secretary of Defense’s statutory authority under 10 U.S.C. 133 and is responsible for providing for the administration, operation, and control of services deemed essential to the health, welfare, and morale of employees and for the convenience of the government. The Committee is a nonappropriated fund instrumentality serving civilian and military employees in the Pentagon and the Navy Annex. Specifically, the Committee issues contracts to others for the provision of all food services, 331 vending machines, and 33 activities providing retail goods and personal services. (See app. I for a listing of activities.) During fiscal year 1997, these activities generated sales of approximately $30 million, resulting in nearly $3.3 million in revenues for the Committee. The Committee uses its revenues to provide funding to six civilian MWR funds benefiting military and civilian employees working in the Pentagon and the Navy Annex after paying its operational costs. The MWR funds use the contributions from the Committee to pay administrative and operating expenses and to subsidize welfare and recreation activities, including discount tickets to sporting and cultural events and group events. The Director of Administration and Management, Office of the Secretary of Defense, is responsible for overseeing the Committee’s operations. The Committee has eight members, including representatives from each of the military services and the Office of the Secretary of Defense (see app. II). The Committee employs four full-time staff, paid from nonappropriated funds, including a business manager who is responsible for day-to-day operations. The current manager, who had extensive experience with the Army and Air Force Exchange Service, has been employed in his current capacity for more than 10 years. The Concessions Committee does not receive appropriated funds. It generates its revenues, about $3.3 million for fiscal year 1997, primarily by charging concessionaires and others a fee for operating in the Pentagon or the Navy Annex. Although the Committee does not directly receive any appropriated funds, it (1) received equipment, with a net book value of $349,997, in 1992 and 1996, when it assumed certain operations previously performed by appropriated activities and (2) has the benefit of a board of directors and legal counsel whose salaries are paid for by appropriated activities—a practice that is consistent with other DOD nonappropriated fund instrumentalities. Serving as a committee member is a collateral duty for all of these personnel. Between fiscal year 1994 and 1997, the Committee used, on average, over 76 percent of its revenues to pay its expenses, including general and administrative costs, and operating expenses associated with the food service and other concessionaire operations. The remaining funds were available for funding future operations, capital expenditures, and contributions to civilian MWR funds. The Committee prepares annual financial statements that detail its revenues and expenses and that are audited by an independent public accounting firm. The Committee received unqualified opinions on its fiscal year 1997 and 1996 financial statements based on audits performed by the independent public accounting firm. Our review of the audit reports and supporting workpapers did not identify any instances where the audits appeared to deviate from generally accepted government auditing standards. The independent public accounting firm, which specializes in nonappropriated fund MWR audits, has audited the Committee’s financial statements for the past 50 years. The partner-in-charge of the audits since 1993 could not recall any significant reportable problems identified during work at the Committee. Findings or recommended operational improvements identified during the audits that do not affect the reliability of financial statements are generally communicated through management letters. On February 16, 1998, the independent public accounting firm issued a management letter to the Committee resulting from its fiscal year 1997 audit. The accounting firm recommended that, for internal control purposes, more than one person be involved in processing cash receipts from temporary concessionaires,the food service inventory process be moved closer to year end, and a new general ledger account be created to report bad debt expense. The Committee Chairman told us he agreed with the recommendations and asked the business manager to provide information on implementation plans. No management letter was issued for fiscal year 1996. The Committee’s revenues have averaged $2.8 million a year since 1994 while its expenses have averaged $2.1 million. From fiscal year 1994 to 1997, the Committee declared MWR contributions ranging from $500,000 to $625,000. MWR contributions, as a percentage of net income during the same period, ranged from a high of 102 percent in fiscal year 1994 to a low of 77 percent in fiscal year 1997. Earnings that were not used to pay expenses or MWR contributions were retained by the DOD Concessions Committee for future use in purchasing new equipment, funding renovations, and paying operating expenses. Table 1 documents concessionaire sales and the Committee’s revenues, expenses, net income, MWR contributions declared, and MWR contributions declared as a percentage of net income. All of the Committee’s revenues result from fees it charges concessionaires for operating in the Pentagon and the Navy Annex. The Committee does not engage in resale activities. Rather, the Committee competitively solicits proposals, seeking a fee arrangement that is based on the type of activity—a percentage of sales and/or a flat fee that is based on space occupied. Following its review of the competitive proposals, it makes a tentative selection that is submitted to the Director of Administration and Management, Office of the Secretary of Defense, for final approval. Once approved, the fee arrangement becomes part of the contractual agreement between the Committee and the concessionaire. During fiscal year 1997, concessionaire activities accounted for over $3.1 million of the Committee’s total $3.3 million in revenues. Interest earnings accounted for most of the remaining revenue. The Committee’s major expenses involve food service concessions expenses, such as depreciation and equipment repair and maintenance; other concessions expenses, such as space rent, parking lot costs, and vending commission expenses; and administrative and general expenses, such as salaries and benefits. During fiscal year 1997, expenses totaled about $2.5 million (76 percent of total revenue), of which $2.1 million represented concessionaire expenses and $0.4 million represented administrative and general expenses. In its June 16, 1997, report, the National Security Committee, House of Representatives, expressed concern that the Concessions Committee was operating without adequate congressional oversight and coordination. Although the Committee’s operations are reviewed by a high level official within the Office of the Secretary of Defense, the Committee is not subject to the reporting and oversight requirements of other nonappropriated fund instrumentalities. Information on the financial activities of the other nonappropriated fund instrumentalities is reviewed centrally within the Office of the Secretary of Defense and submitted to the Congress through the military services. Other nonappropriated fund instrumentalities are required to submit financial data to the Office of the Assistant Secretary of Defense for Force Management and Policy, which uses this information to perform statistical comparative analyses and to monitor the performance indicators. These instrumentalities also submit information through the heads of their military components that is consolidated into reports to the Congress. For example, the Army and Air Force Exchange Service prepares an annual report summarizing its resale and concessions activities in the United States and overseas. The Committee’s operations are overseen by the Director, Administration and Management, Office of the Secretary of Defense. The Director’s responsibilities include approving the minutes of all Committee meetings and all contracts and other transactions that exceed $2,500. The Director is the final decisionmaker for all business activities. Reports of the Committee’s activities and plans are not submitted to any other offices within the Office of the Secretary of Defense or included in any external reports. Similarly, the Committee’s financial statements are not submitted to any other office or consolidated into external financial reports. The Committee’s current operating guidance does not specify the procedures by which the Committee is to exercise its authority or the types of goods and services that can be offered by concessionaires. In the absence of specific operating procedures, the Committee has elected to follow Army regulations applicable to nonappropriated fund instrumentalities. While the Committee has chosen to follow these regulations, it is not required to do so and therefore cannot be held accountable for deviations. The Committee derives its operating authority from a DOD directive. This directive authorizes the Committee to “operate directly or through an independent contractor restaurants, cafeterias, snack bars, and dining rooms in the Pentagon Building.” It also authorizes the Committee to provide commercial type concessions. The directive does not specify the procedures by which the Committee is to plan, organize, direct, and control day-to-day operations, nor does it provide specific guidance on the types of goods and services that can be offered through its concessionaires. In the absence of required operating procedures, and based on directions provided by the Deputy Chief of Staff of the War Department in 1942, the Committee has historically followed the Army Regulations 215 Series—Nonappropriated Fund Instrumentalities—Morale, Welfare, and Recreation with its subsections that prescribe procedures for day-to-day operations involving personnel practices, contracting, and accounting and reporting. The purpose of these regulations is to establish policies and procedures governing Army MWR activities and nonappropriated fund instrumentalities to include those for which the Army has been designated executive agent. The June 16, 1997, report on the National Defense Authorization Act for Fiscal Year 1998, by the Committee on National Security, House of Representatives, also expressed concern that the Concessions Committee may not be operating in consonance with congressional resale policy. Our work indicates that the Committee is not required to follow DOD regulations governing resale policy.