Army Industrial Operations provides services for a variety of customers, including the Army, the Navy, the Air Force, non-DOD agencies, and foreign countries. The majority of the work is for the Army. Industrial Operations relies on sales revenue from customers to finance its continuing operations. Operating under the working capital fund concept, Industrial Operations is intended to (1) generate sufficient resources to cover the full costs of its operations and (2) operate on a break-even basis over time—that is, neither make a gain nor incur a loss. Customers, such as the Army, use appropriated funds (including operation and maintenance or procurement appropriations) to finance orders placed with Industrial Operations. Industrial Operations provides the Army an in- house industrial capability to (1) conduct depot-level maintenance, repair, and upgrade; (2) produce munitions and large-caliber weapons; and (3) store, maintain, and demilitarize material for DOD. Industrial Operations comprises 13 government-owned and operated installation activities, each with unique core competencies. These include five maintenance depots (Anniston, Alabama; Corpus Christi, Texas; Letterkenny, Pennsylvania; Red River, Texas; and Tobyhanna, Pennsylvania), three arsenals (Pine Bluff, Arkansas; Rock Island, Illinois; and Watervliet, New York), two munitions production facilities (Crane, Indiana, and McAlester, Oklahoma), and three storage sites (Blue Grass, Kentucky; Sierra, California; and Tooele, Utah). The preponderance of the workload performed by Industrial Operations relates to depot-level maintenance. Army Materiel Command (AMC) serves as the management command for Industrial Operations. Industrial Operations activities report under the direct command and control of the Army’s Life Cycle Management Commands (LCMC), each aligned in accordance with the nature of its mission. For example, the work performed at Anniston and Red River is aligned with the Army’s Tank, Automotive and Armaments Command LCMC mission of developing, acquiring, fielding, and sustaining ground systems, such as the HMMWV and Abrams tank, whereas the work performed at Letterkenny and Corpus Christi is aligned with the Army’s Aviation and Missile Command LCMC mission of developing, acquiring, fielding, and sustaining aviation, missile, and unmanned vehicle systems, such as the Patriot missile and Black Hawk helicopter. Carryover consists of both the unfinished portion of Army Industrial Operations work started but not completed and work that was accepted but has not yet begun. Some carryover is appropriate at the end of the fiscal year in order for working capital funds such as Industrial Operations to operate efficiently and effectively. For example, if customers do not receive new appropriations at the beginning of the fiscal year, carryover is necessary to ensure that Industrial Operations’ activities (1) have enough work to continue operations in the new fiscal year and (2) retain the appropriate number of personnel with sufficient skill sets to perform depot maintenance work. Too little carryover could result in some personnel not having work to perform at the beginning of the fiscal year. On the other hand, too much carryover could result in an activity group receiving funds from customers in one fiscal year but not performing the work until well into the next fiscal year. By limiting the amount of carryover, DOD can use its resources in the most efficient and effective manner and minimize the backlog of work and “banking” of related funding for subsequent years. DOD’s Financial Management Regulation 7000.14-R, volume 2B, chapter 9, provides that the allowable amount of carryover each year is to be based on the amount of new orders received that year and the outlay rate of the customers’ appropriations financing the work. The DOD carryover policy further provides that the work on the current fiscal year’s orders is expected to be completed by the end of the following fiscal year. DOD’s Financial Management Regulation also provides that (1) nonfederal orders, non-DOD orders, foreign military sales, work related to base realignment and closure, and work-in-progress are to be excluded from the carryover calculation and (2) the reported actual carryover, net of exclusions (adjusted carryover), is then compared to the amount of allowable carryover using the above-described outlay rate method to determine whether the actual carryover amount is over or under the allowable carryover amount. To the extent that adjusted carryover exceeded the allowable carryover, DOD and the congressional defense committees may reduce future budgets. According to DOD Financial Management Regulation, this carryover policy allows for an analytical- based approach that holds working capital fund activities to the same outlay standard as the general fund and allows for meaningful budget execution analysis. Requests for exceptions to the carryover policy (i.e., waivers) must be submitted to the Director for Revolving Funds, OUSD (Comptroller) separate from the budget documents. OUSD (Comptroller) officials informed us that they review requests for exceptions to the carryover policy on a case-by-case basis. Depending on the request, they may ask for additional information to evaluate the request. The Army implemented the Logistics Modernization Program (LMP) at two Army Industrial Operations activities in fiscal year 2009 and 10 Army Industrial Operations activities in fiscal year 2011. According to the Army’s budget, LMP provides the Army a modernized logistics and finance system that delivers a fully integrated suite of software and business processes, providing streamlined data on maintenance, repair and overhaul, finance, acquisition, spare parts, and materiel. LMP changed the point in time when Industrial Operations activities recognized revenue. The point in time when revenue is recognized is important because when an Industrial Operations activity performs work it earns revenue and the carryover is reduced. Prior to the implementation of LMP, the Army activities recognized revenue on parts and material when the activities received the items and assigned them to orders. This procedure led, in some cases, to Industrial Operations activities buying material or spare parts and recognizing revenue and reducing carryover before the parts and material were actually used in repairing weapon systems. Under LMP, revenue is recognized when the material and parts are brought to the assembly area for installation on the weapon systems—much later in the repair process for weapon systems that have long repair cycle times. From fiscal years 2006 through 2012, the Army reported that Industrial Operations’ actual carryover, adjusted for waivers/exclusions (adjusted carryover), was under the allowable amounts in 5 of the 7 fiscal years. From fiscal years 2006 through 2012, Industrial Operations’ total actual carryover increased from $2.3 billion to $5 billion, reaching a high of $5.8 billion—12.7 months of work—at the end of fiscal year 2011.1 shows the Army Industrial Operations actual adjusted carryover, allowable carryover, and the amount over (or under) the allowable carryover for fiscal years 2006 through 2012. The Army’s budget estimates for its Industrial Operations carryover were consistently less than the actual carryover amounts each year from fiscal years 2006 through 2012. For the 7-year period, the Industrial Operations actual carryover exceeded budgeted carryover by at least $1.1 billion each year. This was primarily because (1) the Army underestimated its Industrial Operations new orders received from customers for each of the 7 years and (2) for fiscal year 2011, Industrial Operations performed over $1 billion less work than budgeted. Reliable budget information on carryover is critical because decision makers use this information when reviewing Industrial Operations budgets. Table 2 compares the dollar amounts of the Army’s budgeted and actual Industrial Operations carryover and the difference between these amounts for fiscal years 2006 through 2012. One factor we found that contributed to actual carryover exceeding budgeted carryover by over $1 billion annually over the 7-year period was that the Army significantly underestimated the amount of new orders to be received from its Industrial Operations customers. As shown in table 3, from fiscal years 2006 through 2012, Army Industrial Operations budgeted to receive about $35.6 billion in new orders, but Industrial Operations reports showed that it actually received about $45.7 billion in new orders. As a result, Industrial Operations underestimated new orders received from customers by about $10.1 billion over the 7-year period. We analyzed the appropriations funding new orders to determine which appropriation had the largest variance. The Army’s total budgeted new order amounts for the 7-year period were within 15 percent of the total actual new order amounts for the operation and maintenance and other appropriations categories. The largest differences for these two appropriation categories occurred in fiscal years 2006 and 2007, when Industrial Operations budget assumptions in support of the Global War on Terrorism underestimated the amount of orders actually received.However, over the same period, our analysis of budgeted and actual orders showed that actual new orders funded by the procurement appropriation category exceeded budgeted new orders by about $5.8 billion, or 118 percent. Actual amounts funded by the procurement appropriation category exceeded budgeted amounts by over 50 percent in all but one year, with actual amounts exceeding budgeted amounts by more than 100 percent in 4 of the 7 years. Table 4 shows Army Industrial Operations’ budgeted new orders compared to actual new orders by appropriation category funding the orders for fiscal years 2006 through 2012. Army headquarters and AMC officials stated that they recognized that Army Industrial Operations had difficulty in accurately budgeting for new orders, particularly for procurement-funded orders and carryover. In discussing this matter with Army headquarters officials, the officials stated that Industrial Operations develops its budgets based on information from customers.