DFAS Columbus uses MOCAS to make contract payments for the Army, Navy, Air Force, and other DOD organizations. In fiscal year 2002, DFAS Columbus reported that it made about $87 billion of contract payments. DOD, including DFAS Columbus, uses a line of accounting to accumulate appropriation, budget, and management information for contract payments. Figure 1 shows a line of accounting on the Air Force contract that we reviewed. A line of accounting provides various information, such as (1) department code (for example, those for the military services) and (2) fiscal year and appropriation account financing the contract. For all contracts, the contracting office assigns an ACRN to each line containing unique accounting information in accordance with the requirements contained in the Defense Federal Acquisition Regulation Supplement (DFARS). Obligations are established at the ACRN level to ensure that funds are available to cover disbursements. DFAS Columbus allocates payment amounts to ACRNs to match contractor payments to the corresponding obligations. DOD payment and accounting processes are complex, generally involving separate functions carried out by separate offices in different locations using different procurement, accounting, and payment systems. The processes are not always integrated and require data to be entered and sometimes reentered manually. Figure 2 shows the payment process information flow for the Air Force contract that we reviewed. As illustrated above, the payment process information flow for the Air Force contract began when DOD funding activities requested that the Air Force contracting office procure engineering and technical services as well as spare parts. The Air Force contracting office awarded the contract and modified it to procure additional items. The Air Force contracting office forwarded the contract and modifications to several organizations, such as the communications contractor and DFAS Columbus paying office. Upon receipt of the contract and modifications, the communications contractor performed work for the DOD activities and submitted invoices to DFAS Columbus for payment. For goods procured under the contract, the Defense Contract Management Agency, which is located at the contractor’s site, accepted the goods on behalf of the DOD activities and provided receiving report information to DFAS Columbus. The communications contractor then forwarded the goods to the DOD activities. For services provided by the contractor, the contractor submitted vouchers for services directly to DFAS Columbus for payment. The vouchers were subject to later audit by the Defense Contract Audit Agency. Before making payments to the contractor, DFAS Columbus matched the documents—through automated and manual processes—provided by the Air Force contracting office, the communications contractor, and Defense Contract Management Agency to ensure that (1) items ordered were received and (2) funds were obligated and available to make the payments. Finally, DFAS Columbus paid the contractor, recorded the payment data in DFAS Columbus records, and forwarded these data to the DFAS accounting stations responsible for recording the data in the various DOD organizations’ accounting systems. When errors occurred in allocating payments to the correct ACRNs, the DFAS Columbus contract reconciliation branch made adjustments to correct the payment allocations in DFAS Columbus and the applicable DFAS accounting station records. In order to identify some of the problems DFAS Columbus has experienced in properly allocating payments to the ACRNs on contracts, we selected an Army and an Air Force contract for a detailed review. These contracts support two programs—the Army Tactical Missile System and the Army Data Link System. A description of each of these programs is presented below. We reviewed an Army contract (contract number DAAH01-98-C-0093) with Lockheed Martin Vought Systems Corporation concerning the Army Tactical Missile System. This missile system is one of a family of complementary weapons initially developed by the Army and Air Force for engaging enemy forces deep behind the front battle lines. The missile system was designed to attack those forces that are in a position to have an immediate or directly supporting impact on the close-in battle, but are beyond the range of cannon and rocket artillery systems. It is intended to delay, disrupt, neutralize, or destroy targets, such as second echelon maneuver units, missile sites, and forward command posts. The Army Tactical Missile System consists of a surface-to-surface ballistic missile that can be launched from and controlled by the Army’s Multiple Launch Rocket System. The missile system was initially fielded with an “antipersonnel/antimaterial warhead” for attacking stationary targets. Since the weapon system was first fielded, the missile system has been modified to increase its range, improve its guidance systems, and reduce collateral damage. This missile system was used in the recent war in Iraq. Figure 3 is a photograph of the missile system. We reviewed an Air Force contract (contract number F09604-00-C-0090) with L-3 Communications to maintain the Army portion of the Army Data Link System. The Army and Air Force developed the Army Data Link System to transfer near-real-time targeting information collected by aircraft, satellites, and ground stations and provides this information to aircraft and tactical commanders on the ground in-theater. The system consists of three major components—the Army Interoperable Data Link, the Direct Air to Satellite Relay, and the Reach Back Relay. The Army Interoperable Data Link provides two-way secure direct communications between aircraft and aircraft-to-ground stations. The Direct Air to Satellite Relay communicates data gathered by aircraft through a secure satellite link to an in-theater ground processing facility. The Reach Back Relay communicates data gathered through a secure satellite link to ground processing facilities in the continental United States. The Data Link System was also used in the recent war in Iraq. Figure 4 shows how the communications system transfers data. For fiscal year 2002, our analysis of DFAS Columbus data showed that about $1 of every $4 in contract payment transactions in MOCAS was for adjustments to previously recorded payments—$49 billion of adjustments out of $198 billion in disbursement, collection, and adjustment transactions. This is an improvement over fiscal year 1999 when DFAS Columbus data showed that about $1 of every $3 in contract payment transactions (transactions for disbursements, collections, and adjustments) in MOCAS was for adjustments to previously recorded payments—$51 billion of adjustments out of $157 billion in transactions. While DOD has been working on resolving these problems for years, it has yet to correct them. To research the payment allocation problems and make adjustments to correct the disbursing and accounting records, DFAS Columbus reported that it incurred costs of about $34 million in fiscal year 2002, primarily for hundreds of DOD and contractor staff. This represented about 35 percent of the $97.4 million that DFAS Columbus spent on contract pay service operations. Our review showed that the specific contracting offices that contributed to payment allocation problems resulting in adjustments did not pay for all of the work DFAS Columbus performed to make the adjustments. This occurred because DFAS Columbus currently bills DOD activities (for example, the Army) for contract pay services based solely on the number of lines of accounting on an invoice. Consequently, all DOD activities pay the same line rate, regardless of whether substantial work is needed to reconcile problem contracts and adjust the payment records. As a result, the contracting offices that contributed to payment allocation problems had insufficient incentives to reduce payment errors and associated costs. As discussed later in this report, DOD is taking action to change its billing structure for DOD activities. Our analysis of an Army and an Air Force contract showed that the contracts and related payment instructions were complex because of a combination of factors, including the (1) legal and DOD requirements to track and report on the funds used to finance the contract, (2) number of modifications made to the contract over the years that added goods and/or services, or added or changed payment instructions for these goods and/or services, and (3) different pricing provisions to pay for goods and services on the contract. While we identified these three factors as unique areas, the factors are interrelated and contributed to the contracts containing complex payment instructions and the difficulty DFAS Columbus had in properly allocating payment amounts to the correct ACRNs, ultimately contributing to a high rate of adjustments. In order to maintain administrative control over appropriated funds, DOD has established a system of controls to help ensure that funds obligated and then expended for the procurement of goods and services were used as intended and in accordance with applicable laws and regulations. A system of controls should be designed to help ensure that agencies do not obligate or expend more funds than available. However, DOD’s system contributes to the complexity of the contracts. To report on the status of its appropriated funds—including amounts obligated and expended—DOD uses a line of accounting to accumulate appropriation, budget, and management information. For all contracts, the contracting office assigns a two-digit ACRN to each line containing unique accounting information in accordance with the requirements contained in DFARS 204.7107 (c). DFAS Columbus allocates payments to the ACRNs to match contract payments to the corresponding obligations. For the two contracts that we reviewed, the Army contract that was valued at $565 million contained 74 separate ACRNs funded by 8 different appropriation accounts and sales to three foreign countries, and the Air Force contract that was valued at $49 million contained 89 ACRNs funded by 23 different appropriation accounts. Each ACRN was established to comply with the DFARS requirement for a separate ACRN for each unique line of accounting. The information on the line of accounting (1) is needed to track the obligations and disbursements back to the DOD activity authorizing the work and (2) provides information on the obligations and disbursement data, such as the organizations providing the funding.