Financial Management:

Navy Industrial Fund Has Not Recovered Costs

AFMD-93-18: Published: Mar 23, 1993. Publicly Released: Mar 23, 1993.

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Pursuant to a congressional request, GAO reviewed the Navy Industrial Fund's operating losses and the appropriateness of fiscal year (FY) 1993 practices.

GAO found that: (1) naval aviation depots and shipyards reported losses of $294 million and $591 million, respectively, for FY 1989 through FY 1991; (2) fluctuations in the volume and composition of work had an adverse impact on the Industrial Fund's financial results, since the Navy charged customers for goods and services based on projected workload; (3) the actual direct labor hours charged to work orders for the aviation depots and shipyards were less than the budgeted hours; (4) the prices the Fund charged for various services were not sufficient to recover its estimated costs; (5) defense pricing policies have affected the activities' ability to recover the costs incurred; (6) outdated work standards contributed to the Industrial Fund's inability to generate sufficient revenue to cover its costs; (7) $71 million of unreported incurred costs at the end of FY 1991 were applicable to FY 1991 and prior years; (8) the Department of Defense (DOD) directed Navy Industrial Fund activities to increase FY 1993 prices to eliminate accumulated operating losses by the end of FY 1993; and (9) DOD has recognized the need for a cash management policy for the Defense Business Operations Fund (DBOF) but, as of December 1992, the policy had not been finalized.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: GAO has continually stated that increasing prices to recover prior year losses is inconsistent with a basic intent of the Fund--that prices should reflect the actual cost incurred in providing goods and services. DOD does not agreed with this recommendation and currently recoups losses through increasing prices it will charge Fund customers. As a result, in our March 1995 report, Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79), March 1, 1995, we recommend that the Congress enact legislations to prohibit DOD from including amounts in the Fund's prices for recovering prior year losses.

    Recommendation: The Secretary of Defense should direct the Defense Comptroller to: (1) set prices based on realistic estimates of the costs that will be incurred in providing the goods and services to Navy Industrial Fund customers; and (2) adjust prices only by factors directly related to the costs expected to be incurred.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In commenting on the report, Defense concurred with the recommendation. A Naval Air Systems Command Instruction requires the Naval Aviation Depots to submit quarterly process and productivity enhancement status reports which contain a section for reporting variance analysis efforts and results. Adherence to the instruction is audited by the Naval Air Systems Command as part of Naval Air Systems Command Inspector General inspections. All variances from previously approved workload standards must be justified before they are approved.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy to review and update work standards in accordance with the Variance Improvement Program for Expenditure Reconciliation.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: The National Defense Authorization Act for Fiscal Year 1994 directed the Secretary of Defense not to include the costs of military construction projects in the prices charged Defense Business Operations Fund customers. An accomplishment was approved by the Director for Planning and Reporting on June 28, 1994 (A-AIMD-94-16).

    Recommendation: The Secretary of Defense should direct the Comptroller of Defense to implement a policy stating that the prices charged by the Defense Business Operations Fund are not to include depreciation expense for military construction facilities, which are financed by appropriated funds.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: In October 1994, the Deputy Comptroller approved a cash management policy for the Fund. The policy (1) specifies a minimum and maximum amount of cash needed to support the Fund, (2) requires the development of cash plans, and (3) provides that deviations from the plan will be examined monthly to emphasize timely submission and collection of bills and disbursement of funds. An accomplishment report (A-AIMD-95-4), was approved by the Director for Planning and Reporting on March 2, 1995.

    Recommendation: The Secretary of Defense should direct the Comptroller of Defense to develop a cash management policy that prescribes the minimum and maximum amount of cash the Defense Business Operations Fund needs to operate.

    Agency Affected: Department of Defense

 

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