Canceled DOD Appropriations:

$615 Million of Illegal or Otherwise Improper Adjustments

GAO-01-697: Published: Jul 26, 2001. Publicly Released: Jul 26, 2001.

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This report reviews the Department of Defense's (DOD) handling of appropriated funds from expired appropriation accounts. In 1990, Congress changed the law governing the use of appropriation accounts because it concluded that controls over them were not working. Without adequate controls, Congress was concerned that agencies could disburse money in amounts and for purposes that it had not approved. GAO found that DOD improperly charged appropriation accounts after they were closed. GAO also found that DOD did not establish the requisite systems, controls, and managerial attention required to properly account for its disbursements consistent with the 1990 account closing law. As a result, DOD made at least $615 million of illegal or otherwise improper adjustments during fiscal year 2000 alone. DOD was aware of the limitations the account closing law placed on the availability of canceled appropriations and that the law was enacted because of previous abuses by DOD. DOD also knew that a major system used to control its use of appropriations allowed for disbursements to be charged in a way that was inconsistent with the law. However, DOD did nothing to fix the system, even though the cost to do so was minimal. The $615 million of adjustments GAO identified as illegal or otherwise improper must be immediately reversed. Also, at a minimum, DOD will need to change its systems, policies, and procedures, along with the weak control environment that fostered these practices, and served to perpetuate the problem. GAO summarized this report in testimony before Congress (GAO-01-994T).

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD reversed $598 million in illegal or otherwise improper adjustments, and determined that at least two Air Force contracts had insufficient balances in six appropriation accounts, totaling $106 million, to cover the adjustments. DOD immediately began two separate Antideficiency Act (ADA) investigations as required by 31 U.S.C. 1351, and implementing guidance. The investigations found that no ADA violations occurred; however, the Air Force determined that improvements were necessary, and made recommendations for enhancing internal controls, assignment responsibilities, and training in payment allocation processes.

    Recommendation: To the extent that the Defense Finance and Accounting Service Columbus is unable to make correcting adjustments because insufficient balances remain in the correct accounts, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to investigate and report on these adjustments as required by the Antideficiency Act, 31 U.S.C. 1351, and implementing guidance.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Defense Finance and Accounting Service (DFAS) implemented a monitoring program of closed account adjustments. For the closed account adjustments processed from October 2000 through May 2001, DFAS identified and reviewed 78 closed account adjustments that potentially violated appropriation law. For each reviewed adjustment, DFAS prepared a summary that included the reason for the adjustment, a description of the cause, the individuals responsible for any errors, and their corrective actions. As a result, DFAS reversed over $100 million in closed account adjustments. In addition, DFAS has established an ongoing monitoring program to identify potential violations of appropriation law for closed account adjustments. Since May 2001, DFAS, on a regular basis, identifies and researches all adjustments that potentially violate appropriation law for closed accounts. Furthermore, DFAS revised its position descriptions for supervisory and staff level accountants involved in the contract reconciliation process. DFAS supervisors and staff level accountants are responsible for ensuring that no unnecessary or improper adjustments are made. Since the monitoring program was implemented, the number of potential violations of the appropriation law for closed accounts has gone down significantly.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to establish a monitoring program for future adjustments to closed appropriation accounts and make clear to managers that they will be held accountable if abuses are identified.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: On December 6, 2001, the Defense Finance and Accounting Service (DFAS) issued updated guidance on (1) adjustments to cancelled funds, (2) netting of demands and refunds, (3) financing payments, and (4) retroactive modifications against cancelled appropriations. This new guidance addresses the criteria stated in GAO's report. For example, if an agency either did not record the disbursement when it was made or charged it to the wrong appropriation account at that time, this would be considered an error to the accounting records. DFAS' new guidance states that adjustments to cancelled appropriations can only be made to correct recording errors, such as recording a disbursement against a wrong line of accounting or a deposit into the wrong line of accounting.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to revise current policies and procedures pertaining to closed account adjustments to include specific detailed guidance to require that future adjustments to closed appropriation accounts satisfy the criteria discussed in this report.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: The Defense Finance and Accounting Service (DFAS) implemented two systems controls in DOD's Contract Reconciliation System (CRS) to prohibit charging disbursements against appropriation accounts improperly. In May 2001, DFAS implemented a control in CRS to prohibit charging disbursements against appropriation accounts that are closed. Four months later, it implemented an additional control in CRS to prohibit charging disbursements against appropriation accounts that have not yet been enacted at the time the disbursements are actually made. In order to determine whether these controls are properly included in CRS and operating effectively, GAO independently tested and analyzed contract adjustment data processed in CRS over a 3-month period. GAO found that both implemented CRS system controls were properly included and generally operating effectively for the tested 3-month period, provided that the underlying tested data was accurately recorded in CRS by the contract reconciliation technicians. As a result, adjustments that violated specific provisions of appropriation law, and were thus illegal, were nearly eliminated during the 3-month period.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to ensure that the requisite controls are properly included and operating effectively in DOD's Contract Reconciliation System so that it will prohibit charging disbursements against appropriation accounts that (1) are closed or (2) have not yet been enacted at the time the disbursements are actually made.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: In July 2004, the DFAS Columbus Center completed their review of the contracts containing the $615 million in illegal or improper adjustments to ensure that the transactions were properly accounted for and posted to the correct appropriation accounts. As a result, DOD can better ensure that the adjustments contained on these contracts are in compliance with the 1990 account closing law.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to determine the correct accounting for these adjustments after they have been reversed.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD agreed that inappropriate adjustments should be reversed. GAO reported that its review of $2.2 billion of fiscal year 2000 adjustments affecting closed appropriation accounts found that about $615 million of those adjustments were illegal or otherwise improper and should not have been made. This included $107.7 million of illegal adjustments that resulted in payments initially charged to current or expired appropriation accounts being moved to cancelled accounts. DOD acknowledged these adjustments were illegal and freed up current and expired appropriation balances for other purposes. DOD has reversed the $107.7 million of adjustments that had illegally freed up current and expired budget authority. Additionally, DOD has reversed another $490.3 million of adjustments (1) where payments had been charged to the correct appropriation in the first place and no adjustment was necessary, (2) that were not sufficiently documented to establish that they were proper, and (3) where payments were changed to charge appropriations that had not yet been enacted when the payments were initially made. Of the $615 million in adjustments GAO reported on, DOD has reversed a total of $598 million, and provided GAO additional documentation to support the remaining $17 million in adjustments.

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to immediately reverse adjustments to closed accounts identified in this report as illegal or otherwise improper.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: On October 1, 2001, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued policy guidance to the Secretaries of the Military Departments, Service Acquisition Executives on the "Improper Adjustments to Cancelled Department of Defense Appropriations." The guidance stated that contract modifications requiring adjustments to closed appropriation accounts must be supported with contract file documentation sufficient to establish that the adjustments are legal and proper, and that they received supervisory review. The new guidance also specified that the modifications must be approved in writing by the appropriate level comptroller or financial resource manager. The Under Secretary also requested the Secretaries to make certain that all contracting activities have procedures in place that ensure compliance with the requirements of the Department's financial management policies, which, if followed, would prohibit the improper adjustments identified by GAO. The Under Secretary also noted in his guidance that the instructions for charging and processing adjustments to closed appropriation accounts are included in Volume 3, Chapter 10 of the Department of Defense Financial Management Regulation (DOD 7000.14-R).

    Recommendation: The Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to issue a policy that prohibits the writing of contract modifications to change the payment terms of a contract if the change would result in illegal or otherwise improper adjustments, as defined in this report, affecting closed appropriation accounts.

    Agency Affected: Department of Defense

 

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