Foreign Military Sales: Financial Oversight of the Use of Overhead Funds Needs Strengthening
GAO-18-553
Published: Jul 30, 2018. Publicly Released: Jul 30, 2018.
Fast Facts
The Department of Defense has a program to oversee U.S. military sales to foreign governments. DOD charges foreign government purchasers fees to help cover the cost of its military sales program.
We looked at DOD’s financial oversight of these fees. We found that DOD lacks reliable data on how it uses the fees to cover the program's operating expenses, including costs for paying program staff and for ensuring that contractors have complied with their contract requirements.
We made 11 recommendations to improve DOD’s financial oversight, such as to collect reliable data.
U.S. Army photo of a tank.
Highlights
What GAO Found
The Defense Security Cooperation Agency (DSCA) has established some policies and procedures for financial oversight of Department of Defense (DOD) components' use of Foreign Military Sales (FMS) administrative funds for costs related to processing FMS cases, but GAO found certain deficiencies in its oversight. As part of its oversight, DSCA has taken steps such as clarifying guidance on how administrative funds may be used, and developing procedures for reviewing business processes for the use of these funds. DSCA, however, lacks the reliable funding data it needs to ensure proper spending and to inform its budget decisions. DSCA has not conducted regular reconciliations of the data, with its financial service provider, to identify and correct data reliability issues, including gaps and inconsistencies in reported spending for the Army, the Navy, and the Air Force—the primary recipients of this funding. While DSCA conducts reviews of DOD components' business processes, providing an opportunity for sharing information about positive practices and identifying potential problems, it has not followed its annual minimum requirement for the number of reviews to conduct, or its requirement for tracking corrective action items. For example, DSCA was unable to provide an update on the status of action items from most of its reviews conducted since 2012. Moreover, DSCA does not conduct periodic, targeted financial reviews to verify components' obligations and disbursements of administrative funds, raising the risk of misuse of funds.
The Defense Security Cooperation Agency Has Overall Responsibility for Financial Oversight of Foreign Military Sales Overhead Funds
DSCA also has not developed adequate processes for financial oversight of the use of contract administration services (CAS) funds for costs such as contract management, in accordance with internal control standards. Specifically, DSCA lacks reliable data on DOD components' use of CAS funds. GAO identified inconsistencies in DSCA's data, including no, or low, reported disbursements in some years for three of the four DOD components that received CAS funds in fiscal years 2012 through 2016, which did not align with data that GAO obtained from the components. DSCA has not conducted regular reconciliations of the data, with its financial service provider, to identify and correct data reliability issues. In addition, DSCA does not conduct periodic, targeted financial reviews to verify components' CAS spending. For example, GAO found that at least $89 million in fiscal year 2016 CAS disbursements were incorrectly processed for the Defense Contract Management Agency— the primary recipient of these funds. DSCA periodically communicates with DOD components about problematic issues, but generally does not take steps to verify spending, including reviewing supporting documentation and any actions taken by components to address such issues. As a result, DSCA raises the risk of unallowable or unapproved payments that could lead to fraud, waste, or abuse of funds.
Why GAO Did This Study
The U.S. government sells defense equipment and services worth billions of dollars to foreign partners through the FMS program. DSCA has overall management responsibility for the program, and various other DOD components are responsible for implementing and supporting it. DSCA charges purchasers certain overhead fees for FMS operating costs, including the administrative fee and the CAS fee. Overall administrative expenditures were $879 million in fiscal year 2017. Overall CAS expenditures were $182 million in fiscal year 2015—the most recent year available with reliable total balance data. In past audits, GAO and the DOD Office of Inspector General raised questions about DOD's financial oversight of these funds.
House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's use of these funds. This report examines DSCA's financial oversight of DOD components' use of (1) administrative and (2) CAS funds. GAO assessed the reliability of DSCA data for fiscal years 2012 through 2016 (the most recent available) on DOD components' use of these funds. GAO reviewed documentation and conducted interviews with agency officials.
Recommendations
GAO is making 11 recommendations for DSCA to improve its financial oversight of administrative and CAS funds, such as by collecting reliable data on DOD components' use of these funds, and conducting periodic, targeted financial reviews. DOD concurred with GAO's 11 recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense |
Priority Rec.
The Secretary of Defense should ensure that the Director of DSCA takes steps to work with Defense Finance and Accounting Service (DFAS)--DSCA's financial service provider--and other DOD components, as appropriate, to improve the reliability of the data the DSCA obtains on all DOD components' use of FMS administrative funds, including actual execution data, at an appropriate level of detail, such as by object class. (Recommendation 1) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) lacked reliable data on DOD components' use of Foreign Military Sales (FMS) administrative funds . GAO reported that DSCA's oversight responsibilities include monitoring components' actual FMS administrative spending and internal controls over the use of these funds, in accordance with DOD's Financial Management Regulation. GAO also reported that DSCA needs reliable funding data to ensure proper spending and inform its budget decisions. GAO recommended that the Director of DSCA take steps to improve the reliability of the funding data that it obtains on all DOD components' use of FMS administrative funds, including actual execution data. DOD concurred with GAO's recommendation. In September 2024, DSCA notified us that it had implemented the corrective actions to address this recommendation. In November 2024, DSCA provided supporting documentation for steps that it took to implement an automatic interface with DOD components' accounting systems that provides daily information on those components' expenditures of FMS administrative funds . This documentation included a spreadsheet compiled from DSCA's interface system showing components' actual FMS administrative spending data, by object class, as of October 2024. DSCA also provided supporting documentation for the department's plans to implement Advana, which will have DOD-wide capability for receiving automatic feeds of components' financial transactions data, including FMS administrative data. The documentation included DOD's Financial Management Regulation, dated November 2020, which established Advana as an official DOD repository of common enterprise data, including transaction-level data; a July 2023 data sharing agreement for Advana; and a March 2024 briefing on the department's implementation of Advana. Based on our review of the supporting documentation and discussion with DSCA officials, we determined that the actions DSCA took met the intent of this recommendation. By taking steps to improve the reliability of data on components' use of FMS administrative funds, DSCA diminished the risk of unallowable or unapproved payments that could lead to fraud, waste, and abuse of funds.
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| Department of Defense | The Secretary of Defense should ensure that the Director of DSCA works with DFAS to conduct regular reconciliations of the data that DSCA collects on DOD components' use of administrative funds, to help ensure that the data are reliable. (Recommendation 2) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) lacked reliable data on DOD components' use of Foreign Military Sales (FMS) administrative and contract administration services (CAS) funds. GAO reported that DSCA's oversight responsibilities include monitoring components' actual FMS administrative and CAS spending and internal controls over the use of these funds, in accordance with DOD's Financial Management Regulation. In May 2019, DSCA noted that it was undertaking an initiative to incorporate reconciliation capabilities into its oversight of components' use of FMS administrative and CAS funds; DSCA informed us that its efforts were ongoing as of March 2024. In October 2024, DSCA officials informed us that DSCA no longer plans to work with DFAS to conduct reconciliations of administrative and CAS funds because DOD plans to implement a department-wide process to conduct monthly reconciliations as part of DOD's implementation of Advana. DSCA provided supporting documentation for the department's plans to implement Advana, which will have DOD-wide capability for receiving automatic feeds of components' financial transactions data, including FMS administrative and CAS data. The documentation included DOD's Financial Management Regulation, dated November 2020, which established Advana as an official DOD repository of common enterprise data, including transaction-level data; a July 2023 data sharing agreement for Advana; and a March 2024 briefing on the department's implementation of Advana. Because responsibility for conducting reconciliations of Advana data will be departmental and not within DSCA, we have determined that recommendations 2 and 10 are overtaken by events and no longer applicable to DSCA.
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| Defense Security Cooperation Agency | The Director of DSCA should follow its requirement to conduct at least two annual reviews of military department business processes for administrative funds. (Recommendation 3) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) had not fully complied with its requirement to conduct at least 2 annual reviews of selected military department organizations' business processes related to the use of Foreign Military Sales (FMS) administrative funds in 2012 through 2017. DSCA conducts these reviews in order to help ensure that funds are used correctly and in compliance with security assistance policies, according to DSCA guidance. GAO found that these reviews provide an opportunity for information-sharing about security assistance policies and requirements and positive practices. They can also identify potential internal control deficiencies, such as overlap or inefficiencies in staffing. GAO recommended that the Director of DSCA follow its requirement to conduct at least two annual reviews of military department business processes for administrative funds. DOD concurred with GAO's recommendation. In May 2019, DSCA provided updated policies and procedures for these reviews, which state that DSCA will conduct at least two reviews of military department organizations annually . In October 2019, DSCA informed us that it had conducted two business process reviews for military departments in 2019 . In September 2020, DSCA provided documentation from the 2019 reviews . DSCA also provided documentation showing that in February 2020, it initiated the process to select three military department organizations for reviews in 2020 , but the 2020 reviews were subsequently canceled due to the global pandemic . In December 2021, DSCA informed us that it conducted virtual reviews in 2021 , and it provided us with documentation from two 2021 reviews in April 2022 . By adhering to its annual requirement for these reviews, DSCA has implemented a key mechanism for providing guidance and oversight to military department organizations on their use of administrative funds, reducing the risk of the potential fraud, waste, or abuse of these funds .
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| Defense Security Cooperation Agency | The Director of DSCA should conduct periodic (e.g., annual or biennial) reviews of other DOD components' (e.g., other than military departments) business processes for administrative funds, based on a risk-based approach. Such an approach could include consideration of whether an entity has received a prior review or representative sampling over time, as well as consideration of factors such as the results of prior audits or other identified risks. (Recommendation 4) |
In July 2018, GAO reported that from 2012 through 2017, the Defense Security Cooperation Agency (DSCA) did not conduct reviews of business processes related to the use of Foreign Military Sales (FMS) administrative funds for any DOD components other than military department organizations. According to DSCA guidance, DSCA may conduct reviews of DOD components other than the military departments that receive administrative funds, to help ensure that the other components use administrative funds correctly and in compliance with security assistance policies, as well as to identify any needed improvements in their use of these funds. GAO found that DSCA's business process reviews provide an opportunity for information-sharing about security assistance policies and requirements and positive practices. They can also identify potential internal control deficiencies, such as overlap or inefficiencies in staffing. GAO recommended that the Director of DSCA conduct periodic (e.g., annual or biennial) reviews of other DOD components' (e.g., other than military departments) business processes for administrative funds, based on a risk-based approach. DOD concurred with GAO's recommendation. In addition, in May 2019, DSCA officials informed us that DSCA had collaborated with other DOD components that receive FMS administrative funds to develop risk-based criteria for selecting components for periodic business process reviews. DSCA provided updated policies and procedures for these reviews, which state that DSCA will conduct at least one review for another DOD component annually. The policies and procedures state that a variety of factors will be considered in selecting components for review, such as whether the organization is new to FMS, consistent unobligated balances, increases in budget allocations, or audit findings. In October 2019, DSCA informed us that it planned to conduct one review for another DOD component (e.g., other than a military department) in fall 2019. DSCA subsequently provided documentation for the review that it conducted for this DOD component in November 2019. DSCA provided documentation showing that it had selected another DOC component for review in 2020, but that the 2020 review was canceled due to the global pandemic. In December 2021, DSCA informed us that it conducted a virtual review in 2021, and in April 2022, DSCA provided us with documentation for the review, which was conducted in August 2021. By conducting periodic reviews of other DSCA components' business processes, DSCA has implemented a key mechanism for providing guidance and oversight to DOD components on their use of administrative funds, reducing the risk of the potential fraud, waste, or abuse of these funds.
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| Defense Security Cooperation Agency | The Director of DSCA should create and maintain a complete list of military department organizations or offices that receive administrative funds and are subject to DSCA's business process reviews. (Recommendation 5) |
DSCA provided supporting documentation to show that, as part of its annual budget review cycle, in April 2019 it had required DOD components to provide a list of sub-components/organizations that receive FMS administrative funds. In October 2019 and September 2020, DSCA also provided lists of sub-components/organizations that DSCA maintained as of October 2019 and September 2020, which DSCA had obtained as part of its annual budget cycles in 2019 and 2020. This information will help ensure that DSCA is able to carry a risk-based approach to selecting military department organizations or offices for business process reviews, reducing the risk of the potential fraud, waste, or abuse of these funds .
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| Defense Security Cooperation Agency | The Director of DSCA should update DSCA's policy for selecting military department organizations for reviews of their business processes for administrative funds, to better ensure that it reflects a risk-based approach. (Recommendation 6) |
In July 2018 , GAO reported that the Defense Security Cooperation Agency (DSCA) had not developed a risk-based approach for selecting military department organizations or offices for reviews of their business processes related to the use of Foreign Military Sales (FMS) administrative funds . DSCA conducts these reviews in order to help ensure that funds are used correctly and in compliance with security assistance policies, according to DSCA guidance . GAO found that these reviews provide an opportunity for information-sharing about security assistance policies and requirements and positive practices. They can also identify potential internal control deficiencies, such as overlap or inefficiencies in staffing . GAO recommended that the Director of DSCA update DSCA's policy for selecting military department organizations for reviews of their business processes for administrative funds, to better ensure that it reflects a risk-based approach . DOD concurred with GAO's recommendation . In May 2021, DSCA officials informed us that they were conducting a feasibility study to determine the types of information and data that they could use to make an informed selection of sub-organizations for business process reviews based on a risk-based approach, such as information and data on military department sub-organizations' execution of administrative funds. In July 2023, DSCA informed us that they had completed the feasibility study and that they had updated standard operating procedures for selecting military department organizations for reviews of their business processes for administrative funds, based on a risk-based approach. The standard operating procedures, dated November 2022, state that DSCA will use an approach involving random selection of military department organizations for these reviews, based on factors such as allocations of FMS administrative funds. DSCA provided supporting documentation to us, including a random selection calculator (spreadsheet) that they are using to select organizations for review. By updating its policy for selecting military department organizations for business process reviews based on a risk-based approach, DSCA has implemented a key mechanism for providing guidance and oversight to DOD components on their use of administrative funds, reducing the risk of the potential fraud, waste, or abuse of these funds .
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| Defense Security Cooperation Agency | The Director of DSCA should clarify guidance to ensure that the DSCA officials conducting reviews of business processes for administrative funds periodically track action items until they are completed. (Recommendation 7) |
In February 2019, DSCA noted that it had updated its policies and procedures to reflect that it will track action items from business process reviews every 30 days, until the action items area completed. In October 2020, DSCA provided tracking spreadsheets that it created to track action items for the business process reviews that it conducted in 2019. In July 2023, DSCA provided some completed action trackers for the business process reviews that it conducted in 2019 and 2021, but the action tracker for one of its 2021 reviews was incomplete. DSCA still needs to provide support that it is following up on action items for each business process review every 30 days, in accordance with its policies and procedures. As of January 2025, we continue to monitor DSCA's ongoing actions to implement this recommendation.
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| Defense Security Cooperation Agency | The Director of DSCA should develop a process for conducting periodic (e.g., quarterly or annual), targeted reviews of DOD components' use of administrative funds, including transactions testing, to verify that actual costs incurred are allowable and approved. (Recommendation 8) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) had not developed a process for conducting targeted financial reviews to verify components' actual spending of Foreign Military Sales (FMS) administrative funds. GAO reported that DSCA's oversight responsibilities include monitoring components' actual administrative spending and internal controls over the use of these funds, in accordance with DOD's Financial Management Regulation. Targeted financial reviews can be used to help identify potential gaps and areas for improvement in internal controls, and provide a reliable picture of liabilities and spending. GAO recommended that the Director of DSCA develop a process for conducting periodic (e.g., quarterly or annual), targeted reviews of DOD components' use of administrative funds, including transactions testing, to verify that actual costs incurred are allowable and approved. DOD concurred with GAO's recommendation. In February 2019, DSCA noted that it was in the process of conducting "mock" audits of DOD components' use of FMS administrative funds, and that it was undergoing efforts to ensure that a process is in place for the financial review of components' actual spending of these funds. In July 2023, DSCA provided a corrective action plan that included milestones for DSCA to include FMS administrative funds in its annual transactions testing, including verification that costs incurred are allowable and approved. In October 2024, DSCA notified us that it had implemented the corrective actions to address this recommendation, and DSCA provided related supporting documentation. This documentation included DSCA's Standard Operating Procedures for internal testing, dated June 2023, which state that annual testing will include FMS administrative commitments, obligations, and outlays. DSCA also provided a financial audits presentation that included guidance for the initiation of the internal testing, including on appropriate supporting documentation. In addition, DSCA provided documentation of the results of its 2023 testing of FMS administrative transactions. By developing and implementing a process for conducting targeted financial reviews of components' use of FMS administrative funds, DSCA is better able to ensure that the use of these funds is allowable and approved, reducing the risk of the potential fraud, waste, and abuse of funds.
|
| Department of Defense |
Priority Rec.
The Secretary of Defense should ensure that the Director of DSCA takes steps to work with DFAS and other DOD components, as appropriate, to improve the reliability of the data that DSCA obtains on all DOD components' use of CAS funds, including actual execution data, at an appropriate level of detail, such as by object class. (Recommendation 9) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) lacked reliable data on DOD components' use of Foreign Military Sales (FMS) contract administration services (CAS) funds. GAO reported that DSCA's oversight responsibilities include monitoring components' actual CAS spending and internal controls over the use of these funds, in accordance with DOD's Financial Management Regulation. GAO also reported that DSCA needs reliable funding data to ensure proper spending and inform its budget decisions. GAO recommended that the Director of DSCA take steps to improve the reliability of the funding data that it obtains on all DOD components' use of CAS funds, including actual execution data. DOD concurred with GAO's recommendation. In September 2024, DSCA notified us that it had implemented the corrective actions to address this recommendation. In November 2024, DSCA provided supporting documentation for steps that it took to implement an automatic interface with DOD components' accounting systems that provides daily information on those components' expenditures of CAS funds. This documentation included a spreadsheet compiled from DSCA's interface system showing components' actual CAS spending data, by object class, as of October 2024. DSCA also provided supporting documentation for the department's plans to implement Advana, which will have DOD-wide capability for receiving automatic feeds of components' financial transactions data, including CAS data. The documentation included DOD's Financial Management Regulation, dated November 2020, which established Advana as an official DOD repository of common enterprise data, including transaction-level data; a July 2023 data sharing agreement for Advana; and a March 2024 briefing on the department's implementation of Advana. Based on our review of the supporting documentation and discussion with DSCA officials, we determined that the actions DSCA took met the intent of this recommendation. By taking steps to improve the reliability of data on components' use of CAS funds, DSCA diminished the risk of unallowable or unapproved payments that could lead to fraud, waste, and abuse of funds.
|
| Department of Defense | The Secretary of Defense should ensure that the Director of DSCA works with DFAS to conduct regular reconciliations of the data that DSCA collects on DOD components' use of CAS funds, to help ensure that the data are reliable. (Recommendation 10) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) lacked reliable data on DOD components' use of Foreign Military Sales (FMS) administrative and contract administration services (CAS) funds. GAO reported that DSCA's oversight responsibilities include monitoring components' actual FMS administrative and CAS spending and internal controls over the use of these funds, in accordance with DOD's Financial Management Regulation. In May 2019, DSCA noted that it was undertaking an initiative to incorporate reconciliation capabilities into its oversight of components' use of FMS administrative and CAS funds; DSCA informed us that its efforts were ongoing as of March 2024. In October 2024, DSCA officials informed us that DSCA no longer plans to work with DFAS to conduct reconciliations of administrative and CAS funds because DOD plans to implement a department-wide process to conduct monthly reconciliations as part of DOD's implementation of Advana. DSCA provided supporting documentation for the department's plans to implement Advana, which will have DOD-wide capability for receiving automatic feeds of components' financial transactions data, including FMS administrative and CAS data. The documentation included DOD's Financial Management Regulation, dated November 2020, which established Advana as an official DOD repository of common enterprise data, including transaction-level data; a July 2023 data sharing agreement for Advana; and a March 2024 briefing on the department's implementation of Advana. Because responsibility for conducting reconciliations of Advana data will be departmental and not within DSCA, we have determined that recommendations 2 and 10 are overtaken by events and no longer applicable to DSCA.
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| Defense Security Cooperation Agency | The Director of DSCA should develop a process for conducting periodic (e.g., quarterly or annual), targeted reviews of DOD components' use of CAS funds, including transactions testing, to verify that actual costs incurred are allowable and approved. (Recommendation 11) |
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) had not developed a process for conducting targeted financial reviews to verify components' actual spending of Foreign Military Sales (FMS) contract administration services (CAS) funds. GAO reported that DSCA's oversight responsibilities include monitoring components' actual CAS spending and internal controls over the use of these funds, in accordance with DOD's Financial Management Regulation. Targeted financial reviews can be used to help identify potential gaps and areas for improvement in internal controls, and provide a reliable picture of liabilities and spending. GAO recommended that the Director of DSCA develop a process for conducting periodic (e.g., quarterly or annual), targeted reviews of DOD components' use of CAS funds, including transactions testing, to verify that actual costs incurred are allowable and approved. DOD concurred with GAO's recommendation. In February 2019, DSCA noted that it was in the process of conducting "mock" audits of DOD components' use of CAS funds, and that it was undergoing efforts to ensure that a process is in place for the financial review of components' actual spending of these funds. In July 2023, DSCA provided a corrective action plan that included milestones for DSCA to include CAS funds in its annual transactions testing, including verification that costs incurred are allowable and approved. In October 2024, DSCA notified us that it had implemented the corrective actions to address this recommendation, and DSCA provided related supporting documentation. This documentation included DSCA's Standard Operating Procedures for internal testing, dated June 2023, which state that annual testing will include CAS commitments, obligations, and outlays. DSCA also provided a financial audits presentation that included guidance for the initiation of the internal testing, including on appropriate supporting documentation. In addition, DSCA provided documentation of the results of its 2022 testing of CAS transactions. By developing and implementing a process for conducting targeted financial reviews of components' use of CAS funds, DSCA is better able to ensure that the use of these funds is allowable and approved, reducing the risk of the potential fraud, waste, and abuse of funds.
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