The Navy comprises a very significant amount of total DOD operations. It accounted for 31 percent, or $78 billion, of DOD’s fiscal year 1994 gross budget authority; controls about 50 percent, or a reported half trillion dollars in DOD’s assets, including 540 ships and over 5,200 aircraft; and employs over one million civilian and military personnel. In addition, the Navy encompasses Marine Corps operations, which in fiscal year 1994, had about $9 billion in gross budget authority, or about 11 percent, of the Navy’s gross budget authority that year. The Navy also operates certain Defense Business Operations Fund (DBOF) activities, which in fiscal year 1994 had $24 billion in reported revenue and were larger than both the Air Force’s or the Army’s DBOF activities. DOD, and especially the Navy, have acknowledged serious and long-standing financial management and reporting problems. Because of these problems, in February 1995, GAO designated DOD’s financial management as a high-risk area especially vulnerable to waste, fraud, and mismanagement. Several organizations are integrally involved in carrying out the Navy’s financial management and reporting: (1) the Office of the Navy’s Assistant Secretary for Financial Management and Comptroller, which has overall financial responsibility, (2) DFAS, which reports to the DOD Comptroller and provides accounting and disbursing services, and (3) Navy components that initiate and authorize financial transactions. The DFAS Cleveland Center is primarily responsible for preparing the Navy’s financial reports from data generated by accounting, financial management, and other management information systems operated by DFAS, the Navy, and the Marine Corps. The CFO Act requires DOD and the other “CFO Act” agencies to improve their financial management and reporting operations. Among its specific requirements is that each agency CFO develop an integrated agency accounting and financial management system, including financial reporting and internal controls. Such systems are to comply with applicable principles and standards and provide for complete, reliable, consistent, and timely information that is responsive to the agency’s financial information needs. To help strengthen financial management, the CFO Act also requires that DOD prepare financial statements for its trust funds, revolving funds, and commercial activities, including those of the Navy. To test whether agencywide audited financial statements would yield additional benefits, the CFO Act also established a 3-year pilot program for the Army, the Air Force, and eight other “CFO Act” agencies or components of agencies. In response to experiences gained under the CFO Act, the Congress concluded that agencywide financial statements contribute to cost- effective improvements in government operations. Accordingly, when the Congress passed the Government Management Reform Act of 1994 (GMRA) (Public Law 103-356), it expanded the CFO Act’s requirement for audited financial statements by requiring that all 24 “CFO Act” agencies, including DOD, annually prepare and have audited agencywide financial statements, beginning with those for fiscal year 1996. GMRA also authorizes the Director of the Office of Management and Budget (OMB) to identify component organizations of the 24 “CFO Act” agencies that will also be required to prepare financial statements for their operations and have them audited. Consistent with GMRA’s legislative history, OMB has indicated that it will identify the military services as DOD components required to prepare financial statements and have them audited. Therefore, fiscal year 1996 is the first year for which the Navy will be required to prepare a full set of financial statements for its general funds. To an even greater extent than the other military services, the Navy is plagued by troublesome financial management problems involving billions of dollars. These problems include (1) internal control breakdowns over disbursements, (2) actual and potential violations of the Anti-Deficiency Act, and (3) widely inconsistent financial reporting on the results of operating Navy’s DBOF activities. The Navy’s serious and widespread financial management problems have been highlighted in audit reports, and embarrassing fraud cases and have severely impeded the Navy’s effective financial management. The following are examples of these problems. In 1989, we reported to the Secretary of the Navy that the Navy’s consolidated financial reports for fiscal year 1986 were unreliable and understated assets by $58 billion.In 1994, we reported a $163 billion discrepancy between the value of property, plant, and equipment that the Navy reported for fiscal year 1993 and the amounts shown in the supporting information various Navy commands submitted to DFAS.In its fiscal year 1994 Federal Managers’ Financial Integrity Act (FMFIA) (Public Law 97-255) report to the Secretary of Defense, the Navy reported that none of the 28 operating accounting systems it evaluated complied with appropriate accounting standards and related requirements. Between 1989 and 1992, a former Military Sealift Command supply officer established a fictitious company, submitted over 100 bogus invoices, and received an estimated $3 million in fraudulent payments. With regard to internal control breakdowns over disbursements, over 2 years ago, we reported that the Navy had a severe and persistent problem with unmatched disbursements, which, in December 1992, amounted to about $13.6 billion. As of August 31, 1995, the Navy’s unmatched disbursements and other problem disbursements totaled $18.6 billion, by far the most of any DOD component, with over 67 percent of the DOD total, as shown in table 1. Particularly troubling, the Navy continues to have difficulty in solving its problem disbursements. For example, from October 31, 1994, through June 30, 1995, the Navy and DFAS resolved about $7.6 billion in unmatched disbursements, which is significant. This reduction was, however, largely eclipsed by $6.7 billion in new unmatched disbursements. Also, problems in keeping records on Navy disbursements have distorted governmentwide financial reporting. DFAS, Cleveland Center, incorrectly recorded billions of dollars of fiscal year 1995 Navy disbursements to a nonbudgetary deposit fund account. According to Department of the Treasury officials, this error resulted in the Treasury understating by at least $4 billion the federal government’s overall budget deficit reported as of June 30, 1995. Thus, maintaining accurate financial records and producing reliable financial information on the Navy’s operations is a meaningful process with relevance to and significant ramifications for the government as a whole. With respect to actual and potential violations of the Anti-Deficiency Act, for fiscal years 1993 and 1994, and through the first 10 months of fiscal year 1995, the Navy investigated 25 cases of potential Anti-Deficiency Act violations involving about $166 million. Of these, 18 cases have been closed with the following results. For 15 cases, involving about $87 million, DOD reported to the Congress that the Navy had violated the Anti-Deficiency Act. In 11 of these cases, the violations were due to misclassifications between appropriations and four cases represented overexpenditures of obligational authority. These violations resulted in disciplinary actions against 58 people. These actions included 1 removal from office, 2 suspensions, 3 letters of punitive reprimand, 20 letters of nonpunitive reprimand, and various other admonishments. In 3 cases, involving about $63 million, investigators found no violations of the act but discovered that accounting errors primarily caused what initially appeared to have been violations. Navy DBOF activities should operate in a businesslike manner with the objective of breaking even. However, in June 1994, we reported that, given the magnitude of differences reported for DBOF’s operating results, it is difficult for Navy and DOD managers to know the Navy DBOF activities’ actual operating results. Nevertheless, the Navy has continued to report misleading DBOF financial information. For fiscal year 1994, the Navy reported (1) a loss of $120 million in the fund’s budget overview, (2) a cumulative loss of $3.2 billion when the fund’s monthly reports for the fiscal year were totaled, and (3) income of $574 million on the fund’s year-end financial statements. Thus, it is unclear and undeterminable whether, in fiscal year 1994, the Navy’s DBOF activities operated at a gain or a loss, or whether they broke even as intended. In addition to these wide fluctuations, comparison of the reported results of the Navy DBOF activities between fiscal years also shows readily apparent inconsistencies. For instance, the Navy’s DBOF financial statements for fiscal year 1992 showed a $2.7 billion operating loss whereas the fiscal year 1993 statements showed operating income of $2.5 billion. The fiscal year 1994 statement showed operating income of $574 million. These extreme fluctuations in annual operating results raise questions regarding the effectiveness of fund management and the accuracy of reported amounts. In addition, the Naval Audit Service has been unable to express opinions on the Navy’s consolidated DBOF activities’ financial statements prepared under the CFO Act. The Service found extensive problems including that the reported cost of property, plant and equipment, and related depreciation, were not adequately supported, and account balances were materially misstated. Also, DFAS acknowledged in its 1994 FMFIA Statement of Assurance that its Navy-related accounting systems did not provide adequate general ledger control. As a result, the DOD Inspector General was unable to audit DOD’s consolidated DBOF financial statements citing significant deficiencies in accounting systems and the inability of Navy to submit timely and accurate statements for audit of its DBOF activities. DOD has initiatives underway that could help address the fundamental weaknesses we found that impede effective financial management and reporting for the Navy.