Defense Business Operations Fund:

Improved Pricing Practices and Financial Reports Are Needed to Set Accurate Prices

AIMD-94-132: Published: Jun 22, 1994. Publicly Released: Jun 22, 1994.

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Pursuant to a legislative requirement, GAO provided information on the Department of Defense's process for developing the prices the Defense Business Operations Fund will charge its customers, focusing on: (1) the reasons the Fund's prices have increased; (2) the reasons the Fund continues to experience annual losses; and (3) whether the Fund's financial reports are sufficiently accurate to assist it in developing reasonable prices.

GAO found that: (1) the Fund's primary goal is to oversee the management of funds needed to carry out critical DOD business operations and establish prices that recover the total costs of providing goods and services to its customers; (2) since the Fund's inception in 1992, its prices have increased significantly because of DOD efforts to charge customers for the Fund's total operating costs and policies that require the Fund to recover prior-year losses by increasing subsequent-year prices; (3) the Fund plans to recover about $1.7 billion in 1995 and has had three consecutive operating losses; (4) the DOD practice of increasing prices to cover prior-year losses is inappropriate because it distorts the annual net operating results and diminishes the incentive for the Fund to operate efficiently; (5) continued annual losses indicate there may be a systemic problem in the Fund's financial management; (6) Fund losses are a result of unrealized productivity increases, varying and carried over workloads, and ongoing depot closures; (7) although the Fund's net operating results are fundamental in developing prices, its financial reports on Fund operations are inaccurate and cannot be relied upon to develop Fund prices; and (8) two of the Fund's reported fiscal year 1993 net operating results reports differed by $5.9 billion.

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