Federal agencies, including DOD, are responsible for ensuring that they use appropriated funds only for purposes, and within the amounts, authorized by the Congress. DOD Directive 7200.1, May 4, 1995, states the policy that DOD organizations are to establish positive control of, and maintain adequate systems of accounting for, appropriations and other funds. The Directive also states that financial management systems are to provide a capability for DOD officials to be assured of the availability of funds before incurring an obligation or making a payment. To comply with legal and regulatory requirements, DOD organizations’ accounting and fund control systems must be able to accurately record disbursements as expenditures of appropriations and as reductions of previously recorded obligations. Proper matching of disbursements with related obligations ensures that the agency has reliable information on the amount of funds available for obligation and expenditure. Problem disbursements occur when (1) the wrong appropriation account or customer is charged when a payment is made, (2) information on an obligation, payment, or collection transaction is inaccurately or incompletely processed, or (3) a contractor is paid too much. In October 1994, we reported that DOD’s records included at least $24.8 billion of such problem disbursements as of June 30, 1994, and that long-standing systemic control weaknesses were keeping DOD from solving its disbursement process problems. We also pointed out that persistent management emphasis was essential to resolving the problem. Specifically, we recommended that DOD management undertake long-term efforts, such as correcting system weaknesses involving the contract payment and accounting systems, and pursue short-term efforts to improve the quality of information in its systems. These short-term actions could be as simple as complying with existing guidance and procedural requirements for (1) recording obligations prior to making contract payments, (2) detecting and correcting errors in the disbursement process, and (3) posting accurate and complete accounting information in systems that support the disbursement processes. We also previously reported that since we did not audit the $24.8 billion problem disbursement figure, DOD’s total problem disbursements could be greater. Acting on our recommendations, DOD subsequently determined that its records contained at least $37.8 billion of problem disbursements as of June 30, 1994. As of January 31, 1996, DOD reported that it had reduced the $37.8 billion of problem disbursement balances to $25.4 billion. Also concerned about DOD’s problem disbursements, the Congress passed section 8137 of Public Law 103-335, to improve accountability over DOD disbursements. The law directed the Secretary of Defense to require that each disbursement in excess of $5 million be matched to a particular obligation before the disbursement is made. This requirement had to be implemented by July 1, 1995. The legislation further required that the Secretary of Defense lower the dollar threshold for matching disbursements and obligations to $1 million no later than October 1, 1995. Subsequently, section 8102 of Public Law 104-61, the Department of Defense Appropriations Act, 1996, superseded the earlier legislation and eliminated the requirement that the threshold be lowered to $1 million. However, section 8102(d), like section 8137(e) of the earlier legislation, provided that the Secretary of Defense could establish a threshold lower than the statutory threshold. In addition, the legislation directed the Secretary to ensure that a disbursement in excess of the threshold amounts not be divided into multiple disbursements to avoid prematching requirements. It also required (1) DOD to develop and submit an implementation plan to the Congress and (2) the DOD Inspector General to review the plan and submit an independent assessment to the congressional defense committees. On February 28, 1995, DOD submitted its plan—which was a general overview plan describing processes and milestones for automating the prevalidation process and lowering the prevalidation threshold to $1 million—to the Congress, and the DOD IG provided the defense congressional committees with its independent assessment, which generally agreed with the plan and DOD’s overall approach for implementation. Our objectives were to (1) assess DOD’s progress in reducing problem disbursements and (2) review DOD’s implementation of the requirement in section 8137 of Public Law 103-335 and section 8102 of Public Law 104-61 that DOD match disbursements over $5 million with obligations in the official accounting records prior to making payments. This review was a joint effort between the DOD IG and GAO. The DOD IG was generally responsible for completing the field work at Army and Navy activities and supporting locations while GAO was generally responsible for completing the field work at Air Force and Marine Corps activities and supporting locations. We combined our efforts to complete work at other DOD locations visited during the review. In conducting our review, we focused primarily on the DFAS Columbus Center because it is DOD’s largest contract paying activity. For example, during fiscal year 1995, DOD paid contractors and vendors $160 billion. Of this amount, $61 billion, or 38 percent, was paid by DFAS Columbus. We conducted our review between June 1995 and April 1996 in accordance with generally accepted government auditing standards. Appendix I contains further details of our scope and methodology. We requested comments from the Secretary of Defense or his designee. On May 23, 1996, officials of the Office of the Secretary of Defense (Comptroller) and DFAS, who are responsible for DOD disbursements, provided us with oral comments. Their comments have been incorporated where appropriate and are discussed in the “Agency Comments” section. Using the June 1994 problem disbursement balance of $37.8 billion as a baseline, DOD began to report reductions in problem disbursement balances, reaching a low in September 1995 of $23.1 billion. Between September 1995 and January 1996, DOD’s reported problem disbursement balances fluctuated between $23.1 billion and $26.1 billion as shown in table 1. According to the leader of the DOD team established to address problem disbursements, the problem disbursements have increased since September 1995 because the inflow of new problem balances continues to offset any gains made by correcting existing balances. As table 2 shows, the inflow of problem disbursements between October 1995 and January 1996 eclipsed the value of problem disbursements that were resolved by $2.3 billion. Although DOD did not have data readily available to show how much of the $21.8 billion of the new problem disbursements was caused by DFAS Columbus, DOD officials acknowledged that tens of thousands of transactions, totaling billions of dollars, were attributable to disbursements made by the Columbus Center. The team leader also told us that the inflow of new problem disbursements has not slowed down because the same long-standing weaknesses regarding system problems and failure to comply with basic accounting procedures, which we previously reported in 1994, generally still exist. For example, he stated that the lack of integrated accounting and disbursing systems was one of the primary causes of disbursement problems. The lack of integrated systems resulted in data entry errors because the same data had to be manually entered into two or more systems. The DOD IG also pointed out in an August 1995 report that Army and Air Force accounting personnel were not complying with accounting regulations and procedures for documenting, validating, reconciling, and reporting transactions that affect obligations. For example, the IG noted that (1) accounting personnel were arbitrarily posting payments to any available unliquidated contract obligation and (2) much of the disbursement information received from the DFAS Columbus Center was not accurate and did not include sufficient information to record payments. The IG noted that such failures to comply with accounting policies and procedures resulted in disbursement problems that, in turn, prevented auditors from rendering audit opinions, other than disclaimers, on the Army’s and Air Force’s financial statements. The DOD team leader also told us that DOD is starting to have difficulties in reducing the older problem disbursement balances already included in its accounting records. For example, between October 1995 and January 1996, DOD reports showed that problem disbursements over 180 days old had increased from $12.9 billion to $14.1 billion. According to the team leader, over time, DOD activities have selected the easier problem disbursement transactions for review. Consequently, the remaining older, unresolved problem disbursements balances represent some of the more difficult balances to reconcile. We are currently reviewing DOD problem disbursements to identify the specific root causes for problematic transactions. Fundamental accounting controls require that the proper funds available for a payment are identified before the payment is made. Prevalidating disbursements to obligations helps to ensure that this is done, but DOD has not followed this basic accounting procedure. To help ensure implementation of this control feature, the Congress has included in DOD’s appropriation acts for the past 2 fiscal years a requirement that DOD prematch disbursements exceeding $5 million with obligations in the official accounting records. The prevalidation process has demonstrated that it is a useful tool to help identify and prevent errors from being recorded in the official accounting records. However, as discussed earlier, to prevent errors from occurring in the first place, DOD must address short-term and long-term efforts targeted at improving the quality of information in its systems. The cornerstone of DOD’s long-term effort is its ongoing development of the Standard Procurement System (SPS) and the Defense Procurement Payment System (DPPS).