DOD has designated four locations to process DCPS payroll transactions. Three of the locations—Denver, Colorado; Pensacola, Florida; and Charleston, South Carolina—were in operation at the time of our review. The fourth location in Omaha, Nebraska is scheduled to begin processing DCPS transactions in August 1995. DCPS was paying civilian employees from four DCPS databases in December 1993 and was scheduled to increase the number of databases to nine by August 1995. DOD designated the Financial Systems Activity at Pensacola, Florida, as the Central Design Activity responsible for maintaining and updating the payroll system. The Defense Civilian Personnel Data System (DCPDS)—DOD’s standard personnel system—provides DCPS with most essential personnel information needed to pay Navy civilian employees. DCPDS has an automated interface with the payroll system that is designed to automatically transfer personnel information such as employee name, social security number, job grade or step, and salary. The personnel data is entered into the personnel system by individual Navy Human Resource Offices throughout the country. These Human Resource Offices are the responsibility of the Navy’s Assistant Secretary for Manpower and Reserve Affairs. Generally, Navy civilian employee time and attendance data for actual hours worked is entered into DCPS separately by the timekeepers at the employee’s work location. To evaluate the propriety and accuracy of Navy civilian payroll payments, we performed computer analyses of pay records to (1) determine if payments were made only to authorized personnel and (2) identify any payments made in excess of authorized amounts. To determine if payments were being made to authorized personnel, we obtained and compared electronic copies of Navy civilian payroll and personnel records for the pay period ending December 25, 1993. At that time, DCPS was paying about 188,000 Navy civilian personnel. In addition, we reviewed the Uniform Financial Management System in Arlington, Virginia, and the Uniform Automated Data Processing System, in Honolulu, Hawaii, which paid about 28,000 and 9,000 Navy civilians, respectively, at that time. In total, we reviewed the propriety and accuracy of payroll payments made to about 80 percent of the 281,000 civilians employed by the Navy in 1993. To ensure that we had all and only the payroll data for that pay period, we matched the total payroll amounts for each payroll office with their corresponding payroll certification report. To identify potential improper payments or overpayments, we conducted various computer matches and searches to identify Navy civilians who received multiple DCPS payments; were paid without an active personnel record; were paid at a higher rate than authorized; had high annual leave balances and did not use annual leave, sick leave, or compensatory time in 1993; and were paid by both DCPS and other civilian pay systems. To determine if any payments in excess of authorized amounts existed within the universe of the potential overpayments identified through our tests discussed above, we provided DFAS with our test results and requested that DFAS contact Navy Personnel and jointly determine whether any payments were made in excess of authorized amounts. Because they had not yet responded after 4 months, we contacted about 60 Navy Human Resource Offices throughout the country and requested a copy of the official personnel record showing the authorized pay rate for each potentially overpaid Navy civilian. We compared this pay rate to the rate each potentially overpaid Navy civilian was paid to determine which Navy civilians were actually overpaid. To assess the vulnerability of DFAS’ and the Navy’s civilian payroll internal controls to loss of funds from fraud and abuse, we observed payroll processing, reviewed applicable DCPS documentation (including reports, policies, and regulations), and interviewed cognizant DFAS and Navy Personnel officials. We performed our work at the three active DCPS locations in Charleston, South Carolina; Pensacola, Florida; and Denver, Colorado. We also performed work at two payroll processing locations using other payroll systems at the time of our review—the Uniform Financial Management System in Arlington, Virginia, and the Uniform Automated Data Processing System, in Honolulu, Hawaii. In addition, we performed audit work at the DCPS Central Design Activity in Pensacola, Florida; the Navy Civilian Personnel Data System Center in San Antonio, Texas; and Navy Human Resource Offices in Charleston, South Carolina; Pensacola and Jacksonville, Florida; and San Diego, California. Our work was performed between August 1993 and February 1995 in accordance with generally accepted government auditing standards. We obtained oral comments on a draft of this report from cognizant DFAS and Navy Personnel officials. Their views have been incorporated where appropriate and are further discussed in the agency comments section of this report. Our matching tests of 225,000 payroll and associated personnel records to determine the propriety and accuracy of Navy civilian payroll payments disclosed overpayments to 134 Navy civilians, or less than one-tenth of 1 percent of the accounts tested. This is in contrast to the Army where we found improper payroll payments totaling millions of dollars, including payments to “ghost” soldiers and deserters. As shown in table 1, we confirmed overpayments of $62,500 were made to Navy civilians. However, we also found that total overpayments were actually higher than those we confirmed because some erroneous payments continued for nearly a year. For example, one Navy civilian was paid by DCPS at a rate of $52,217 for 1993, instead of the authorized rate of $47,209. Thus, although the overpayment for the pay period we reviewed was about $190, the total amount overpaid on an annual basis was about $5,000. Because DCPS only keeps payroll records on-line for a 6-month period, and because of the significant amount of resources required to research each overpayment on microfiche, we did not determine the full extent of overpayments associated with the 134 cases we identified. However, the total overpayment amounts are undoubtedly far greater than the amounts shown in table 1. These overpayments were caused, at least in part, because (1) DFAS and Navy Personnel did not reconcile discrepancies between personnel and payroll records and (2) DFAS staff did not compare payments from the various payroll databases to detect unauthorized payments to a single civilian employee. Nonetheless, our examination of payroll records showed that many of the overpayments were identified by DFAS within 6 months of their occurrence. When DFAS detected overpayments, it processed retroactive transactions to change the pay records and to initiate DFAS’ recovery or resolution process. We noted such retroactive adjustments, totaling $50,374, for 45 of the 134 overpaid Navy civilians identified in table 1. As noted previously, we did not determine the extent to which the conditions permitting the specific overpayments we identified resulted in overpayments in other pay periods, nor did we ascertain how DFAS learned of the overpayments for which it initiated retroactive transactions. Instead, in November 1994, we met with cognizant DFAS and Navy Personnel officials and provided them with a comprehensive list of all the overpayments we identified. We requested that they jointly follow up to determine the full extent of overpayments and that DFAS recover these amounts. As of March 1995, DFAS and Navy had not completed their determination of the full extent of overpayments, and as a result had not yet completed necessary recovery actions. Comparisons between the payroll and personnel systems and reconciliations of discrepancies were not routinely done. Specifically, Navy and DFAS compared Navy civilian payroll and personnel files only four times between May 1992 and August 1994. More importantly, discrepancies identified from these comparisons were not resolved because Navy and DFAS had not established procedures for systematic follow-up and correction of identified discrepancies. Had more frequent payroll and personnel comparisons taken place, and any discrepancies systematically researched and their resolution documented, DFAS could have promptly detected and corrected the overpayments we identified. For example, as shown in table 1, we found that DFAS paid 84 civilian employees at a higher pay rate than authorized in their personnel records. These overpayments totaled $5,251 for the one pay period we tested. In addition, table 1 shows that DFAS paid about $7,700 to another 14 individuals who did not have active personnel records. DFAS and Navy Personnel acknowledged that they infrequently reconciled payroll and personnel data. DFAS officials told us that payroll and personnel data reconciliations do occur as part of the conversion process of payroll accounts to DCPS. However, these officials acknowledged that not all discrepancies identified during these reconciliations are researched and resolved prior to the conversion of the payroll account to DCPS. As a result, erroneous information, such as an incorrect pay rates, may be passed from the closing payroll offices to the cognizant receiving DCPS payroll center. The DCPDS/DCPS Payroll Handbook calls for conducting payroll/personnel reconciliations about every 4 months to ensure the accuracy and completeness of the payroll and personnel records. However, DFAS and Navy Personnel officials stated that they had not consistently reconciled differences between payroll and personnel records and pointed out that they did not have procedures to systematically resolve and document the disposition of the discrepancies found during their reconciliations of payroll and personnel records. With the continued rapid consolidation of payroll accounts into the DCPS system, which is discussed later in this report, it is critical that payroll and personnel reconciliations be routinely conducted and that all discrepancies be systematically followed up and resolved. In commenting on this report, DFAS officials told us that they believe the recent addition of edit checks to the electronic interface between DOD’s standard personnel system and DCPS decreased the need for data reconciliation. While not detailing the extent of these changes, DFAS officials told us that DCPS was enhanced to automatically reject and return proposed personnel actions affecting pay if they did not pass recently initiated DCPS edit checks and that this enhancement permitted faster identification of erroneous data.