In October 1991, DOD implemented the Fund which consolidated the nine existing industrial and stock funds operated by DOD as well as DFAS, the Defense Industrial Plant Equipment Service, the Defense Reutilization and Marketing Service, the Defense Commissary Agency, and the Defense Technical Information Service. The Army, Navy, Air Force, and Defense agencies industrial and stock funds have maintained their individual identities as part of the Fund. The Fund’s estimated fiscal year 1996 revenue of $75 billion makes it equivalent to one of the world’s largest corporations. Effective cash management is directly dependent on DOD managers receiving accurate and timely data on the Fund’s cash balances, collections, and disbursements. According to DOD’s Financial Management Regulation, Volume 11B, the Fund is to maintain the minimum cash balance necessary to meet both operational requirements and to meet disbursement requirements in support of the capital asset program. In essence, the Fund is to maintain a minimum cash balance which, at the same time, is sufficient to cover expenses, such as paying employees for repairing ships and aircraft and vendors for inventory items. Currently, DOD’s policy requires the Fund to maintain cash levels to cover 7 to 10 days of operational costs ($1.5 billion to $2.1 billion) and 4 to 6 months of capital asset disbursements ($.5 to $.9 billion). The regulation further provides that if the overall cash level of the Fund falls below $1 billion, DFAS will take immediate actions to resolve cash shortages by advance billing customers. Cash generated from the sale of goods and services is the primary means of the Fund maintaining an adequate level of cash. The ability to generate cash consistent with DOD policy is dependent on (1) accurately setting prices to recover the full costs of producing goods and services, (2) accurately projecting workload, such as the number of aircraft to be repaired during the year, and (3) collecting funds in a timely manner from customers for work performed. To the extent that (1) the Fund is not paid for work performed in a timely manner or (2) DOD cannot produce accurate and timely information on the Fund’s collections and disbursements, unanticipated fluctuations or, worse yet, cash shortages will occur. DOD has experienced continual difficulties in effectively implementing and operating the Fund. Since the concept of the Fund was first put forth in February 1991, we have monitored and evaluated its implementation and operations. From its inception, over 4 years ago, we have pointed out that DOD did not have the procedures and systems in place to operate the Fund. In March 1995, we further reported that DOD’s ability to properly manage the Fund continued to be hindered in part because of its inability to adequately manage the Fund’s cash. In May 1995, we testified that we continued to have concerns about DOD’s management of the Fund’s cash. When the Fund was established, the responsibility for managing cash was placed under the Office of the Secretary of Defense (Comptroller). However, on February 1, 1995, cash management and related Antideficiency Act responsibilities were returned to the military service and DOD component level. This change was a major departure from the benefits of a single cash balance DOD cited in establishing the Fund. According to DOD officials, the policy was changed to better align accountability and responsibility for cash management. DOD pointed out that the operational control of actions taken by each Fund activity, which results in cash disbursements and collections, always has and continues to reside with the military services and DOD components. While this report focuses on cash management problems, they are symptomatic of the persistent weaknesses in DOD’s and the Fund’s financial management operations. DOD’s fiscal year 1995 Federal Managers’ Financial Integrity Act (FMFIA) report highlighted a number of serious weaknesses in DOD’s financial management operations and systems. GAO’s High-Risk Report Series also pointed out that DOD has serious, long-standing problems in providing reliable financial and cost information to those responsible for carrying out and overseeing DOD’s missions and programs. With regard to the Fund, the FMFIA report identified that it had inadequate accounting and reporting. Having systems and reports that provide timely and accurate information on the Fund’s cash balances for individual business areas and on collections and disbursements is integral to having effective controls over cash management. The overall objective of this assignment was to evaluate the Fund’s cash management practices with respect to the functions that impact on cash, such as billing customers and collecting receivables. To accomplish our objective, we (1) interviewed officials in the Office of the Secretary of Defense (Comptroller), DFAS, the military services, and Defense components regarding their reporting of monthly collection and disbursement information for the Fund, (2) reviewed DOD’s cash management policies and procedures to obtain an understanding of the Fund’s cash management practices, and (3) collected and analyzed for selected Fund business areas financial information related to collections, disbursements, accounts receivables, and accounts payable. In addition, through discussions with appropriate DOD officials and a review of pertinent documents, such as the Report on Budget Execution Defense Business Operation Fund (DD Form 1176) and the Defense Business Operations Fund Accounting Report (1307), we determined whether the Fund’s systems provided managers with information conducive to managing cash. We performed our work at the headquarters, Office of the Under Secretary of Defense (Comptroller); Departments of the Army, Navy, and Air Force; Defense Logistics Agency (DLA); Defense Finance and Accounting Service (DFAS); the Cleveland, Columbus, Denver, and Indianapolis DFAS Finance Centers; DFAS operating locations in Norfolk and San Diego; and selected Fund business activities. Our review was performed from July 1995 through February 1996, in accordance with generally accepted government auditing standards. The quantitative financial information used in this report on the Fund’s financial operations was produced from DOD’s systems and was not independently verified by GAO. DOD’s fiscal year 1995 FMFIA report acknowledges inadequacies in the Fund’s accounting and reporting. In addition, the DOD IG has cited system deficiencies as one of the major obstacles to the preparation of financial statements that fairly present the Fund’s financial position. We provided a draft of this report to DOD for comment. On March 20, 1996, we discussed the facts, conclusions, and recommendations in our draft report with cognizant DOD officials and have incorporated their comments where appropriate. The Fund’s financial reports are untimely, incomplete, and inaccurate and, therefore, do not provide Fund managers with the information they need to manage cash. Specifically, we found that (1) the monthly financial reports do not contain cash balances for each individual Fund business area, (2) collection and disbursement data are not timely since the data are reported approximately 3 to 4 weeks after the month in which the transaction took place, and (3) monthly financial reports do not fully disclose billions of dollars of adjustments made to accounts receivable and payable balances, which could mask the actual amount of future collections and disbursements. Effective cash management is dependent on the availability of timely and accurate information that impact the Fund’s cash balance. The absence of this information could (1) result in an increase in the Fund’s cash requirements to cover the day-to-day fluctuations in the Fund’s cash balance and (2) impact major programmatic decisions which may be driven largely by cash balance considerations. In accordance with DOD policy, the Fund’s monthly financial reports provide cash balance information at the military service and DOD component level who presently have cash management responsibility. However, the Fund’s monthly financial reports do not provide cash balance information on the Fund’s individual business areas although most decisions that impact cash, such as buying inventory items from vendors, are made at the business area or activity level. Instead, the monthly financial reports only show collections and disbursements. As such, the reports lack key information such as the amount of the initial allocation of the cash by DOD to the military services and DOD components in February 1995, when cash management responsibility was decentralized. The initial allocation—a substantial amount of the Fund’s cash—was $1.7 billion, or 39 percent of the Fund’s $4.4 billion cash balance at the end of September 1995. Lacking this basic information can put entities charged with Antideficiency Act responsibilities in the position of having to comply with the Act without the tools to do so. For example, since the Antideficiency Act responsibility was passed from DLA to the Transportation Command (TRANSCOM) in May of 1995, TRANSCOM managers are responsible for ensuring that they do not spend more than they have. However, they do not know their cash balance. The position the managers are in is similar to an individual writing personal checks without ever knowing his or her checkbook balance. In April 1995, just before cash management responsibility was transferred, TRANSCOM called attention to the difficulties it would have in complying with the Act to DLA, stating that it “does not have an accounting system to properly account for or report cash transactions,” and that “during contingency operations, we have no control over cash collections of transportation bills.” In response to TRANSCOM’s memorandum, the DLA comptroller stated that “the lack of control over cash cited in your memorandum applies equally to all Defense agencies, including DLA.” Further, managers only receive official information once a month on the amount of collections and disbursements that impact the cash balance. These data are not timely since they are not received until 3 to 4 weeks after the end of the month in which transactions took place. For example, the reports for February 1996 will not be available until the end of March 1996.