More Effective Internal Controls Needed To Prevent Fraud and Waste in Military Exchanges

FPCD-81-19: Published: Dec 31, 1980. Publicly Released: Dec 31, 1980.

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The Department of Defense (DOD) reported that, during the first half of fiscal year 1980, military exchanges accounted for 58 percent of all potential fraud cases referred for investigation. A Department of Justice task force carried out investigations resulting in the conviction of six buyers, a deputy region chief, seven sales representatives and a vendor for kickbacks and other unlawful activities. GAO examined the efforts taken by the military exchange systems, the services, and DOD to prevent fraud and waste in exchange procurement.

GAO found that exchange managers were slow to take corrective action because they lacked information on the extent and nature of fraud in their operations. They did not enforce or monitor the enforcement of standards of conduct and were not aware of the extensive noncompliance with policies and procedures. Since the GAO study began, exchange officials have initiated numerous actions to combat fraud and waste in their operations including: (1) establishing a program to assess vulnerability to fraud and waste; (2) strengthening the internal audit function; (3) establishing a fraud, waste, and abuse hotline; and (4) instituting a registration system to increase visibility of sales representatives. More should be done to strengthen controls. Standards of conduct should be strictly and uniformly enforced. Managers should be held accountable for compliance with policies and procedures. The overseeing organizations of these exchanges have not been aggressive in exercising their oversight responsibilities.

Recommendations for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense should direct the Naval Supply Systems Command to exercise more active leadership to insure that the Navy Resale and Services Support Office (NAVRESSO) is taking prompt and effective actions to overcome problems identified in its operations.

    Agency Affected: Department of Defense

  2. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense, to strengthen the Office of the Secretary of Defense's (OSD) oversight and procurement policies, should (1) establish an exchange executive board or similar organization with OSD representation to set goals, evaluate performance, and provide guidance to the exchange systems; (2) require the use of formal advertising procedures for procurements with nonappropriated funds wherever practicable; and (3) provide for separate GAO access to contractor records for nonappropriated fund negotiated contracts.

    Agency Affected: Department of Defense

  3. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense should direct the Army and Air Force Exchange Service to (1) develop a management information system to provide data on the nature and extent of fraud, waste, and abuse in its programs; (2) develop a system of management controls to deter fraud and reduce the likelihood of waste; and (3) improve its management of procurement by establishing a results-oriented buying capability with detailed buy plans and buyer performance evaluations, clarifying criteria and identifying opportunities for increasing competitive procurement, enhancing buyer performance by providing procurement career paths and training programs, and requiring periodic audits of contracts for pricing compliance.

    Agency Affected: Department of Defense

  4. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense, to strengthen internal controls and to deter fraud and waste, should direct NAVRESSO to (1) develop a management information system to provide data on the nature and extent of fraud and waste in exchange systems; (2) develop a system of mangement controls to deter fraud and reduce the likelihood of waste; (3) overhaul the internal audit function by assigning a person to head the unit whose independence has not been impaired, staffing audits with more qualified auditors, and providing sufficient time to make audits properly and in accordance with GAO audit standards; and (4) comply with DOD policy to give the contracting officer or his representative access to contractor records and make audits for compliance with contract terms.

    Agency Affected: Department of Defense

 

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