Our prior report recommended that DOD immediately reverse the $615 million of illegal and otherwise improper closed account adjustments identified in the report and determine the correct accounting for these adjustments after the reversal. Of the $615 million of illegal and otherwise improper adjustments, DOD has agreed that $592 million, or about 96 percent, of the adjustments should not have been made and has reversed the adjustments. However, because of DOD’s long-standing accounting accuracy problems, in many cases, reversing the transactions brought to light additional accounting problems that will require detailed reviews to determine the accounting actions necessary to correct the reversed transactions. As a result, neither DOD nor we can determine how much remains to be corrected as a result of reversing the adjustments. Table 1 provides additional details on DOD’s reversal of the $615 million fiscal year 2000 illegal and otherwise improper closed account adjustments. For the remaining $23 million that has not been reversed, DOD provided us with additional documentation indicating that $8 million of the adjustments were proper and do not need to be reversed. We still consider the remaining $15 million to be unnecessary or unsupported adjustments since DOD has not provided sufficient support to show otherwise. The $592 million of illegal and otherwise improper closed account adjustments discussed in our earlier report that have now been reversed involved 45 contracts. For 30 of the 45 contracts, the reversals identified additional accounting errors that must also be corrected. The 30 contracts include over $457 million (77 percent) of the $592 million in reversed transactions. Because of the complexity of the contracts and time it takes to conduct a complete reaudit, officials at the Defense Finance and Accounting Service’s (DFAS) Columbus Center estimate that it will take over 21,000 hours to correct the accounting for the 30 contracts. For example, for one contract we found that DFAS Columbus had made $210 million of closed account adjustments that should not have been made because the initial disbursement was recorded against the correct ACRN on the contract. The reason given for the adjustment was that DFAS Columbus could not pay a November 1999 invoice from a contractor for $685,000 because the cited ACRN on the invoice did not have sufficient funds. The inability to pay the invoice prompted DFAS to conduct an audit of the contract that resulted in over $590 million of adjustments to closed appropriation accounts. Our earlier audit found that of the $590 million of adjustments, $210 million were unnecessary and should not have been made because the actual disbursements—some of which were made over 10 years earlier—had been recorded correctly. The $210 million was part of the $615 million of illegal or otherwise improper transactions we identified in our earlier audit. In response to our recommendation that DOD reverse and correct the $210 million of unnecessary adjustments, DFAS Columbus reversed all $590 million of the closed account adjustments. According to DFAS officials, when reversing adjustments of this size, they generally have to reverse all the transactions involved with an adjustment not just the canceled ones. After the adjustments were reversed, other errors were created that must now be researched and corrected. For example, for this one contract, the reversal of the contract’s accounting records showed that 63 contract ACRNs had negative unliquidated obligations (NULO) totaling $85.4 million. DFAS Columbus estimates that it will take about 2,300 hours to reaudit and correct the contract. Our earlier review of another contract found that DFAS Columbus had recorded an adjustment that illegally moved $79 million of disbursement charges from fiscal years 1993 through 1995 research and development appropriations to charges against a canceled fiscal year 1992 research and development appropriation. According to the contract files, the adjustment was made to redistribute the disbursement charges in accordance with the “pay oldest funds first” payment terms specified in the contract. However, we found that the redistribution was illegal because it moved disbursement charges back to an appropriation account that had closed several months before the initial disbursement was made. For example, the initial $79 million disbursement occurred in February 1999, but the adjustment resulted in a charge against an appropriation that canceled 4 months earlier on September 30, 1998. DOD agreed that the adjustment was illegal and reversed the $79 million. The reversal identified other accounting errors on the contract that now must be corrected. According to DFAS contract accounting records, as of April 2002, the contract had NULOs totaling over $100 million that will need to be researched and corrected. DFAS Columbus officials estimate that a reaudit of this contract will take over 1,850 hours to complete. DOD officials told us they plan to complete all 30 reaudits to correct the fiscal year 2000 illegal and otherwise improper adjustments by September 30, 2002. In addition to DFAS’s reaudit of the contract, Air Force officials have also initiated an investigation into the circumstances surrounding the initial $79 million illegal adjustment to determine if personnel responsible for monitoring and administering the contract acted improperly, including the possibility that the adjustments may have resulted in Antideficiency Act violations. Air Force officials told us that they plan to complete the investigation and issue their report before the end of fiscal year 2002. We previously reported that the DFAS contract reconciliation system (CRS) and other controls necessary to ensure that adjustments to closed appropriation accounts were proper were not in place. We noted that DOD was in the process of upgrading CRS and correcting other control problems that significantly contributed to many of the illegal or otherwise improper adjustments to closed accounts. However, because DOD did not complete many of these actions until the end of fiscal year 2001, controls were not in place to ensure that the $1.9 billion of closed account adjustments made during fiscal year 2001 were legal and proper. Our evaluation of $291 million (15 percent) of DOD’s reported $1.9 billion fiscal year 2001 closed appropriation account adjustments found that $172 million (59 percent) were either illegal or otherwise improper. These adjustments should not have been made because the initial disbursements (1) occurred after the appropriation being charged had already canceled, (2) occurred before the appropriation charged was enacted, or (3) were charged to the correct appropriation in the first place and no adjustment was necessary. Also included in the $172 million of illegal or otherwise improper closed account adjustments were adjustments that were not sufficiently documented to establish that they were proper. These adjustments were considered improper because agencies must be able to provide documentation to show that the adjustments are legal and that they changed an incorrect charge to a correct one. Table 2 provides additional details on the $172 million of adjustments that should not have been made. DOD officials agreed to reverse and correct the $172 million of illegal and otherwise improper closed account adjustments. The remaining $119 million of the $291 million of adjustments was for adequately documented corrections of errors that DOD had made over the years and, therefore, were not in violation of appropriations law or otherwise improper. DOD officials told us they plan to review another $1.1 billion of fiscal year 2001 closed account adjustments in addition to the $291 million of closed account adjustments that we already reviewed. According to the officials, the additional $1.1 billion of adjustments were selected based on various factors including large dollar amounts or indications that the adjustments may be illegal. The officials noted that completion of the review of additional adjustments would result in detailed reviews of $1.4 billion (about 74 percent) of the total $1.9 billion of the closed account adjustments made during fiscal year 2001. According to the officials, they estimate that the additional reviews will involve several hundred contracts and about 1,000 closed account adjustments. They plan to have the additional reviews and reversals of any illegal or otherwise improper adjustments completed by December 31, 2002. However, the officials told us that because there are so many contracts that may have to be reaudited to correct the accounting, they do not plan to have the reaudits and corrections for fiscal year 2001 closed account adjustments completed until September 2004. In our July 2001 testimony and report, we pointed out that DOD did not have adequate systems, controls, and managerial attention to ensure that the $2.7 billion of fiscal year 2000 adjustments affecting closed appropriation accounts were legal and otherwise proper. Our review disclosed that CRS routinely processed billions of dollars of closed appropriation account adjustments without regard to the requirements of the 1990 account closing law. Further compounding this system deficiency was the lack of DOD oversight on how contract modifications were written and processed, which changed the payment terms of some contracts to improperly make available current and expired funds. As discussed earlier, our follow-on review of fiscal year 2001 closed account adjustments found little improvement over fiscal year 2000. As a result, DOD still could not ensure that closed account adjustments made during fiscal year 2001 were legal and otherwise proper. However, once the controls were fully implemented at the beginning of fiscal year 2002, we found that the first 6 months of fiscal year 2002 closed account adjustments dropped by about 80 percent to $200 million when compared with the same 6 months during fiscal year 2001. In May 2001, DOD began implementing CRS controls to identify and prevent illegal backward adjustments. This control compares the actual disbursement date with the appropriation involved in the adjustment to ensure that the adjustment does not result in moving disbursement charges back to an appropriation that had been canceled before the actual disbursement was made. In September 2001, DFAS upgraded CRS to identify and prevent illegal adjustments from moving disbursement charges forward to an appropriation that had not yet been enacted at the time the initial disbursement was made. In addition to upgrading CRS to identify and prevent illegal closed account adjustments, DOD also changed the CRS default reallocation of adjusting payments from oldest funds first to proration.