Navy Working Capital Fund:

Management Action Needed to Improve Reliability of the Naval Air Warfare Center's Reported Carryover Amounts

GAO-07-643: Published: Jun 26, 2007. Publicly Released: Jun 26, 2007.

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According to the Department of Defense's (DOD) fiscal year 2007 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6 billion of funded work that will be carried over from fiscal year 2007 into fiscal year 2008. The congressional defense committees recognize that these groups need some carryover to ensure a smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine if (1) the Naval Air Warfare Center's (NAWC) reported actual carryover was reliable for fiscal years 2003 through 2006 and (2) NAWC was utilizing the required triannual review process to improve the reliability of its carryover information and underlying financial data.

GAO's analysis of NAWC reports determined that NAWC's reported carryover information was not reliable. Since DOD changed its carryover policy in December 2002, NAWC reports showed that while under the ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens of millions of dollars from fiscal year 2003 through fiscal year 2005, as shown in the following table. To the extent that carryover is too high, Congress can redirect the customers' funds for other priorities. GAO's analysis of accounting information on customer orders and discussions with NAWC officials determined that its fiscal year 2003 and 2004 carryover information was unreliable due to (1) NAWC converting to a new accounting system in fiscal year 2003 and (2) NAWC not performing reviews of obligations, including the required DOD triannual reviews. To better manage carryover and improve the reliability of carryover information, starting in fiscal year 2005, NAWC (1) issued guidance on the acceptance of orders at year end and (2) began reviewing orders to correct its old financial records. While the reliability of carryover information improved in fiscal years 2005 and 2006, GAO determined that problems still exist. For example, GAO found that funds on some customer orders totaling $19.5 million were deobligated at fiscal year end and then reobligated at the beginning of the next fiscal year on these same orders. This artificially lowered reported NAWC carryover at fiscal year end. Further, even though DOD's 1996 guidance required NAWC as well as other activities to conduct triannual reviews of its financial information, NAWC did not perform these reviews until fiscal year 2006. If implemented properly, these reviews would improve the reliability of reported carryover information and the underlying financial data. In addition, as of September 2006, the two NAWC divisions were still not fully complying with several of the 16 specific DOD tasks required as part of the triannual reviews. For example, because the two divisions were not always effectively reviewing some obligations, especially dormant obligations (obligations over 120 days old), their reported actual carryover was overstated. Also, effective triannual reviews would help NAWC validate its financial records before it implements a new system that is scheduled to be installed in October 2007.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and directed the Navy to review and validate the accuracy of NAWC's outstanding obligations and accrued expenditure, and report the results to the Office of the Under Secretary of Defense (Comptroller). According to Office of the Secretary of Defense (Comptroller), the Navy has demonstrated major progress in reviewing and validating outstanding obligations and accrued expenditures. For example, the Naval Air Warfare Center weapons division reduced their dormant obligations and accrued expenditures between fiscal year 2006 and 2007 by about $4 million and $12 million, respectively.

    Recommendation: In order to improve the reliability of carryover information at NAWC, the Secretary of Defense should direct the Secretary of the Navy to review and validate the accuracy of NAWC's aircraft and weapons divisions' reported outstanding obligations and accrued expenditures, especially those that have remained outstanding since the conversion to SIGMA, prior to its conversion to a new accounting system in October 2007.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In July 2009, the Navy's Office of the Assistant Secretary (Financial Management and Comptroller) directed the Navy's fund control personnel, including NAWC aircraft division's BFMs, to attend training on triannual reviews to ensure that they are aware of the triannual review requirements. The Navy requires employees, including BFMS responsible for performing the reviews at the Naval Air Warfare Center's aircraft division, to attend the training.

    Recommendation: In order to improve the reliability of carryover information at NAWC, the Secretary of Defense should direct the Secretary of the Navy to require individuals, including BFMs responsible for performing the reviews at the Naval Air Warfare Center's aircraft division, to attend the training to ensure that they are aware of the triannual review requirements.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: In fiscal year 2009, the Navy developed a training course to ensure triannual reviews are completed by BFMs as instructed by DOD guidance. The course is required for all BFMs including those employees performing the triannual review requirementsat at the Naval Air Warfare Center's aircraft division.

    Recommendation: In order to improve the reliability of carryover information at NAWC, the Secretary of Defense should direct the Secretary of the Navy to develop and implement a required training course for business financial managers (BFM) that provides instructions on performing the triannual review requirements for the Naval Air Warfare Center's aircraft division.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: In response to our recommendation, NAWC aircraft and weapons division developed and implemented procedures to ensure the accuracy, timeliness and completeness of transactions in their financial system. Further, in June 2008, the Assistant Secretary of the Navy (Financial Management and Comptroller) updated the triannual review confirmation statement to specifically include Defense Working Capital Funds, and added an item to the statement concerning contract closeout and accrued expenditures.

    Recommendation: In order to improve the reliability of carryover information at NAWC, the Secretary of Defense should direct the Secretary of the Navy to develop and implement procedures for the Naval Air Warfare Center's aircraft and weapons divisions to provide assurance that triannual reviews of obligation and accrued expenditure balances are performed in accordance with the DOD Financial Management Regulation.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation and on August 6, 2008, issued a memorandum reiterating the Department's current policy prohibiting the manipulation of customer order balances in an attempt to reduce reported carryover levels to the Navy as well as the other services. Further DOD directed the components to conduct internal reviews of accounting procedures currently in use, to include year end adjustments, to ensure that this type of manipulation of carryover levels is not occurring as stipulated in DOD Instruction 5010.40, dated January 4, 2006. The memorandum reported that if it is discovered that an activity is employing any intentional manipulation of customer order balances in an attempt to reduce reported carryover levels, the practice is to be discontinued immediately. DOD will evaluate any future violations and take appropriate actions as warranted.

    Recommendation: In order to improve the reliability of carryover information at NAWC, the Secretary of Defense should direct the Secretary of the Navy to reiterate its guidance that clearly prohibits Navy working capital fund activities from deobligating reimbursable customer orders at fiscal year end and immediately reobligating them in the next fiscal year, a process that results in artificially reducing the carryover balances that are ultimately reported to Congress.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: In response to our recommendation, the Office of the Under Secretary of Defense (Comptroller) issued a memorandum dated September 27, 2007 to the Assistant Secretary of the Navy (Financial Management and Comptroller) clarifying the triannual review guidance in the DOD Financial Management Regulations. The memorandum specified that the working capital fund has two thresholds, one for operations and one for capital investment programs. The requirement for reviews of commitments and obligations is not based on source funding but on the appropriation cited on the commitment and obligation document.

    Recommendation: In order to improve the reliability of carryover information at NAWC, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to clarify the triannual review guidance for the January and May reviews in the DOD Financial Management Regulation as it pertains to the dollar threshold for reviewing outstanding commitments and obligations for the capital budget and operating portion of the working capital fund.

    Agency Affected: Department of Defense

 

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