Navy Working Capital Fund:

Backlog of Funded Work at the Space and Naval Warfare Systems Command Was Consistently Understated

GAO-03-668: Published: Jul 1, 2003. Publicly Released: Jul 1, 2003.

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The Space and Naval Warfare Systems Command (SPAWAR) has hundreds of millions of dollars of funded work that its working capital fund activities did not complete before the end of the fiscal year. Reducing the amount of workload carryover at fiscal year-end is a key factor in the effective management of Department of Defense (DOD) resources and in minimizing the "banking" of funds for work to be performed in subsequent years. GAO was asked to analyze SPAWAR's carryover balances. GAO assessed the accuracy of the budgeted amounts, the accuracy of the reported actual carryover balance, and the reliability of underlying financial data on which reported actual carryover is based.

The budgeted and reported actual amounts of SPAWAR gross carryover were consistently understated, resulting in the Congress and DOD decision makers not having reliable information to decide on funding levels for working capital fund customers. First, GAO found that SPAWAR centers' budgeted gross carryover for fiscal years 1998 through 2002 was significantly less than the reported actual year-end gross carryover. Budgeted gross carryover was understated primarily due to problems with estimating the underlying customer order data. For example, for fiscal year 2002, SPAWAR's budgeted amount for customer orders was 88 percent less than the reported actual orders received. Second, SPAWAR's reported actual carryover balances were also unreliable and adjusted downward by hundreds of millions of dollars. These adjustments understated carryover and resulted in Navy reports to the Congress showing that SPAWAR carryover balances for fiscal years 1998 through 2002 did not exceed DOD's 3-month carryover standard. SPAWAR was able to report reduced carryover balances for the following reasons. As GAO previously reported, the DOD guidance for calculating the number of months of carryover allowed carryover to be adjusted and understated. DOD agreed with GAO's previous recommendation and in December 2002 changed its carryover guidance. SPAWAR centers used accounting entries to manipulate the amount of customer orders for the sole purpose of reducing reported carryover below the 3-month standard. For example, the centers did this for at least $50 million at the end of fiscal year 2001. SPAWAR officials issued guidance in September 2002 discontinuing this practice. Finally, SPAWAR had not taken key steps to verify the underlying financial data on which reported actual carryover is based. The SPAWAR centers had only recently begun conducting the required tri-annual reviews of such data, which DOD has required since 1996. However, the reviews were ineffective, including the exclusion of slightly less than half of their reported actual carryover from the review process.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. On August 4, 2003, the Navy issued guidance to working capital fund activities, including SPAWAR, concerning the manipulation of customer order data at fiscal year end to reduce reported carryover. The guidance states that if this practice is discovered at an activity, the practice is to be discontinued immediately.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to issue guidance to all Navy working capital fund activities, including SPAWAR, that prohibits them from deobligating reimbursable customer orders at fiscal year-end and reobligating them in the next fiscal yer for the sole purpose of reducing carryover balances that are ultimately reproted to Congress.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Under Secretary of Defense (Comptroller) issued a memorandum dated July 28, 2003, directing DOD components to conduct internal reviews of accounting procedures currently in use, to include year-end adjustments, and to ensure that the manipulation of customer orders to reduce reported carryover is not occurring. If it is discovered that an activity is employing any intentional manipulation of customer order balances in an attempt to reduce reported carryover levels, the memorandum stated that the practice is to be discontinued immediately. The memorandum was sent to the three services and six other working capital fund activities. By ending the practice of manipulating customer order data, Congress and DOD decision makers should have more reliable carryover information to make decisions regarding the level of funding to be provided to working capital fund customers.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to determine the extent to which working capital fund activities throughout DOD may be similarly manipulating customer order data at fiscal year-end to reduce reported carryover and, if necessary, issue DOD-wide guidance prohibiting this practice as needed.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and included revised carryover procedures in the June 2004 update to the DOD Financial Management Regulation.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to develop and issue written procedures to implement the December 2002 carryover policy.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. On May 16, 2003, Navy budget guidance stipulated the importance of accurate budget estimates for purchases, including those from activities of the Navy Working Capital Fund. This means that activities should develop accurate budgets on orders to be sent to working capital fund activities. GAO's analysis of the fiscal years 2004 and 2005 SPAWAR budgets show that the amount of budgeted orders to be received from customers is more realistic than in the past. GAO's June 2003 report stated that SPAWAR had understated customer orders by 88 percent in fiscal year 2002. SPAWAR's fiscal year 2005 budget estimate increased customer orders from $1.3 billion in fiscal year 2002 to $2.1 billion in fiscal year 2005.

    Recommendation: To provide reasonable assurance that the dollar amount of orders to be recieved from customers in developing annual budgets are based on more realistic estimates, the Secretary of the Navy should direct the Commander of the Space and Naval Warfare Systems Command to compare budgeted to actual orders received from customers and consider these trends in developing the following year's budget estimates on orders to be received from customers.

    Agency Affected: Department of Defense: Department of the Navy

  5. Status: Closed - Not Implemented

    Comments: DOD does not concur with this GAO recommendation.

    Recommendation: The Under Secretary of Defense (Comptroller) should revise the tri-annual review guidance in the DOD Financial Management Regulations so that working capital fund activities are required to expand the scope of their tri-annual reviews to include unobligated balances on customer orders.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  6. Status: Closed - Implemented

    Comments: On September 27, 2007, the Office of the Undersecretary of Defense issued a memorandum to the Assistant Secretary of the Navy (Financial Management and Comptroller) clarifying the tri-annual review guidance in the DOD Financial Management Regulation. The memorandum stated that the Working Capital Fund has two thresholds, one for operations and one for capital investment programs. The requirement for reviews of commitments and obligations is not based on source funding but on the appropriation cited on the commitment and obligation document.

    Recommendation: The Under Secretary of Defense (Comptroller) should review and clarify the tri-annual review guidance for the January and May reviews in the DOD Financial Management Regulation as it pertains to the dollar threshold for reviewing outstanding commitments and obligations for the capital budget and operating portion of the working capital fund.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  7. Status: Closed - Implemented

    Comments: In response to this recommendation, the Space and Naval Warfare Systems Center issued two instructions dated August 2003 and June 2004 to ensure the accuracy, timeliness, and completeness of transactions in the Charleston and San Diego Space and Naval Warfare Command systems center financial systems. The instructions provide the policies and procedures for compliance with the DOD tri-annual review guidance.

    Recommendation: The Commander of the Space and Naval Warfare Systems Command should establish internal control procedures and accountability mechanisms that provide assurance that the systems centers are complying with DOD's tri-annual review guidance.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  8. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued two instructions dated August 2003 and June 2004 to ensure the accuracy, timeliness, and completeness of transactions in the Charleston and San Diego Space and Naval Warfare Command Systems Center financial systems. The instructions provide the policies and procedures for compliance with DOD tri-annual review guidance and require the department heads to ensure that fund holders retain annotated documentation for a period of two years for audit purposes, including documentation to support who performed the review.

    Recommendation: The Commander of the Space and Naval Warfare Systems Command should direct the Commanders of the Charleston and San Diego SPAWAR Systems Centers to maintain documentation that shows who conducted the tri-annual reviews so that these individuals can be held accountable for the reviews.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  9. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued two instructions dated August 2003 and June 2004 to ensure the accuracy, timeliness, and completeness of transactions in the Charleston and San Diego Space and Naval Warfare Command Systems Center financial systems. The instructions provide the policies and procedures for compliance with DOD tri-annual review guidance and require the department heads to ensure that fund holders retain annotated documentation for a period of two years for audit purposes, including documentation to support corrective actions taken and who is responsible for taking action.

    Recommendation: The Commander of the Space and Naval Warfare Systems Command should direct the Commanders of the Charleston and San Diego SPAWAR Systems Centers to maintain documentation that identifies (1) any additional research or corrective action that is required as a result of the tri-annual reviews and (2) who is responsible for taking the action.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  10. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued two instructions dated August 2003 and June 2004 to ensure the accuracy, timeliness, and completeness of transactions in the Charleston and San Diego Space and Naval Warfare Command Systems Center financial systems. The instructions provide the policies and procedures for compliance with DOD tri-annual review guidance and require the department heads to sign a statement certifying that the tri-annual review was completed and that all actions were taken to preclude identified problems from recurring in the future to the maximum extent possible. Further, the department heads are required to forward the signed certification statement to the comptroller within designated timeframes.

    Recommendation: The Commander of the Space and Naval Warfare Systems Command should direct the Commanders of the Charleston and San Diego SPAWAR Systems Centers to require cognizant managers, such as department heads, to confirm in writing that they have (1) performed the required tri-annual reviews and (2) completed the related follow-up actions by signing a starement, such as the draft certification staqtement developed by the Charlestonn Systems Center Comptroller, that describes the specific tasks that were accomplished and provide this statement to the systems centers' comptrollers.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  11. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued two instructions dated August 2003 and June 2004 to ensure the accuracy, timeliness, and completeness of commitments, obligations, and accrued expenditures at the Charleston and San Diego center. The instruction requires the centers to confirm that all commitments, obligations, and accrued expenditures be validated to source documentation and to certify that all corrective actions to resolve erroneous entries have been taken.

    Recommendation: The Commander of the Space and Naval Warfare Systems Command should direct the Commanders of the Charleston and San Diego SPAWAR Systems Center to develop and implement internal control procedures to provide assurance that tri-annual reviews of individual commitment, obligation, and accrued expenditure balances are adequate.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  12. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued two instructions dated August 2003 and June 2004 to ensure the accuracy, timeliness, and completeness of commitments, obligations, and accrued expenditures at the Charleston and San Diego centers. The instructions require the centers to maintain documentation to support their efforts to certify commitments, obligations, and accrued expenditures amounts are valid and accurate and to document any action taken to correct these amounts for a period of two years.

    Recommendation: The Commander of the Space and Naval Warfare Systems Command should direct the Commanders of the Charleston and San Diego SPAWAR Systems Centers to develop policies and procedures to capture the information on tri-annual review results, such as the amount of obligations reviewed, confirmed, and revised, that they are required to report to SPAWAR headquarters, in turn, is required to report to Navy headquarters.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  13. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued an instruction in June 2004 to ensure the accuracy, timeliness, and completeness of transactions in the San Diego financial systems. The instruction provides the policies and procedures for identifying and analyzing accrued expenditure balances, including confirming all dormant accrued expenditures over 120 days old to determine if a disbursement or collection requires recording or matching.

    Recommendation: The Commander, San Diego SPAWAR Systems Center should direct the Center Comptroller to develop and implement a methodology for identifying and analyzing accrued expenditure balances.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

  14. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Space and Naval Warfare Systems Center issued an instruction in June 2004 that requires the fundholders to review dormant commitments, obligations, and accrued expenditures. To assist the fundholders with the review of outstanding financial transactions, the tri-annual review reports are generated from Business Warehouse. This system generates reports that contain only those transactions required for review for that period. For example, in the January and May tri-annual reviews, the fundholders reports will only contain transactions that are high dollar or over 120 days old.

    Recommendation: The Commander, San Diego SPAWAR Systems Center should direct the Center Comptroller to identify dormant commitments, obligations, and accrued expenditures in the tri-annual review computer lists that ae provided to the technical departments.

    Agency Affected: Department of Defense: Department of the Navy: Space and Naval Warfare Systems Command

 

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