Financial Management:

Army Industrial Fund Did Not Recover Costs

AIMD-94-16: Published: Nov 26, 1993. Publicly Released: Nov 26, 1993.

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Pursuant to a congressional request, GAO reviewed the Army Industrial Fund's (AIF) maintenance operations, focusing on the: (1) reasons for AIF operating losses; (2) impact operating losses have on AIF working capital and actions taken to lessen that impact; and (3) reasonableness of the Army's projected cost savings from the competition initiative.

GAO found that: (1) various factors such as reduced billing rates, lower revenues, low maintenance cost estimates, lack of accounting controls, and a decrease in demand for AIF maintenance work have contributed to continuing losses on AIF maintenance operations; (2) losses on AIF maintenance operations resulted in a cumulative net operating loss of $233.7 million in fiscal year (FY) 1991; (3) after AIF became part of the Defense Business Operations Fund (DBOF), it reported a profit of $62.6 million in FY 1992 and $53.4 million in FY 1993, but projected a loss of $116 million for FY 1994; (4) the AIF net loss is projected to increase to 1991 levels by the end of FY 1994; (5) Congress has appropriated funds to AIF and authorized the transfer of funds to AIF from other Army fund accounts to restore AIF working capital and cash balances and sustain AIF operations; (6) AIF has implemented billing rates that are higher than the Department of Defense (DOD) initially approved; and (7) the Army will not realize projected savings from the competition initiative, since lower bids will not reduce overall Army depot maintenance costs.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD commented that because its policy already required the DOD Comptroller to set industrial fund prices on the basis of realistic estimates of all costs that would be incurred in providing goods and services, no additional action was necessary. DOD Comptroller officials informed GAO that they do not intend to address the issue of effective enforcement of the established DOD policy.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller to set AIF billing rates to recover realistic estimates of the costs that will be incurred in providing the goods and services to AIF customers.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD commented that because its policy already required that the DOD Comptroller adjust prices charged by industrial funds only by factors directly related to the costs expected to be incurred, no additional action was necessary. However, DOD officials informed GAO that they do not intend to take additional action to address the issue of effective enforcement of the established DOD policy.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller to adjust prices only by factors directly related to the costs expected to be incurred.

    Agency Affected: Department of Defense

  3. Status: Closed - Not Implemented

    Comments: DOD did not concur in the recommendation. DOD pointed out that it preferred to continue its policy of recouping losses through the rate structure. The House Committee on Appropriations report on the FY 1990 DOD Appropriations bill directed DOD to continue its policy of recovering losses through the rate structure. The FY 1993 Senate Appropriations and Appropriations Conference Committee report endorsed the approach of recouping losses through rates.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller to request congressional appropriations whenever accumulated prior year losses are adversely affecting the operation of AIF.

    Agency Affected: Department of Defense

 

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