Army Working Capital Fund:

Army Faces Challenges in Managing Working Capital Fund Cash Balance during Wartime Environment

GAO-10-480: Published: Jun 22, 2010. Publicly Released: Jun 22, 2010.

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The Army Working Capital Fund (AWCF) collected over $16 billion for goods and services provided to customers in fiscal year 2009. Cash generated from sales is used by AWCF to cover its expenses such as paying employees. In light of the Army's changing role in the Middle East, GAO was asked to determine whether (1) AWCF's monthly cash balances fell within the Department of Defense's (DOD) cash requirements for fiscal years 2000 through 2009, (2) the cash transfers resulted in AWCF's monthly cash balances falling below the minimum amount required by DOD, and (3) the AWCF's projected monthly cash balances are expected to fall below DOD's minimum cash requirement for fiscal years 2010 and 2011 and actions the Army can take to manage those balances. To address these objectives, GAO (1) reviewed relevant DOD guidance, (2) obtained and analyzed AWCF budget and accounting reports containing cash information, and (3) interviewed DOD and Army officials.

GAO analysis showed that the AWCF monthly cash balance fluctuated significantly between fiscal years 2000 and 2009 and exceeded the maximum cash requirement prescribed by DOD regulation for 94 out of 120 months. The fluctuations were due to differences between receipts and disbursements, including the (1) receipt of collections from AWCF operations, (2) appropriations received in support of the wars, (3) disbursements made to pay for AWCF expenses, and (4) transfers made to fund other Army requirements. The Army transferred $4.8 billion out of AWCF from fiscal years 2004 through 2009. Most of the transfers funded requirements of Operation Iraqi Freedom, Operation Enduring Freedom, or military personnel costs. These transfers helped to reduce the cash balance, but also resulted in the AWCF cash falling below the minimum cash requirement for a 6-month period in fiscal year 2006. GAO analysis of the AWCF fiscal year 2011 budget and cash plan showed that the projected monthly cash balances for fiscal years 2010 and 2011 would exceed DOD's minimum cash requirement for 22 out of 24 months. While the Army does not expect a cash shortfall due primarily to an increase in military build-up activities in Afghanistan, a cash shortfall may occur if certain Army actions are not implemented and monitored effectively. These actions include (1) reducing AWCF obligations to less than the amount of inventory sold, (2) collecting funds from Defense Logistics Agency (DLA) for inventory items transferred from AWCF to DLA, and (3) reducing the amount of inventory at industrial operations activities. Further, the relevant DOD Financial Management Regulation lacks sufficient clarity to determine the appropriate level of inventory to be held at these activities.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Secretary of the Army to evaluate periodically the unit cost ratio (obligations to sales) and take action to adjust the ratio as necessary, to support the war effort in Iraq and Afghanistan and the eventual drawdown of troops.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In response to our recommendation, the Army evaluated and adjusted the unit cost as necessary to support contingency operations and set its unit cost ratio at 0.903, 0.913, 0.921, and 0.914 for fiscal years 2010, 2011, 2012, and 2013, respectively. To the extent the Army continues such monitoring and adjustments to its unit cost ratios, the Army should be better able to make more informed decisions on the war effort in Iraq and Afghanistan.

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Secretary of the Army to take action if the industrial operations activities do not reduce their inventory levels to the specified amount in the fiscal year 2011 budget.

    Agency Affected: Department of Defense

    Status: Closed - Not Implemented

    Comments: The Army did not reduce their inventory levels to the specified amounts in the fiscal year 2011 budget. Inventory levels have actually increased significantly since 2009. Army officials attributed the increase to the implementation of a new logistics and accounting system referred to as the Logistics Modernization Program (LMP) at ten Army Industrial Operations activities since 2009. The implementation of LMP changed the business rules for recognizing inventory valuations. Under the prior system, Industrial Operations activities immediately expensed inventory upon receipt. Thus, the inventory on hand at the Industrial Operations activities had no value. Under LMP, inventory is not expensed until used in the overhaul or repair of weapon systems. Therefore, the inventory on hand at the Industrial Operations activities retains its value until used in the repair process. This change in the business rules significantly increased Industrial Operations inventory valuation.

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to clarify the term normal business operations in the DOD Financial Management Regulation as it pertains to the amount of inventory items to be held for use by the industrial operations activities.

    Agency Affected: Department of Defense

    Status: Closed - Not Implemented

    Comments: While the Under Secretary of Defense (Comptroller) committed to coordinating with the Under Secretary of Defense (Acquisition Technology and Logistics) to define the term "normal business operation" contained in the DOD Financial Management Regulation in response to our June 2010 audit recommendation, in April 2014, an official from the Under Secretary of Defense (Comptroller) told us that the Defense Department has not defined the term in the regulation.

    Recommendation: To (1) improve the management of the AWCF's cash balances, and (2) clarify the DOD Financial Management Regulation that contains guidance on inventory levels to be maintained by the industrial operations activities, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) to oversee Army and DLA efforts to reach agreement on the amount that DLA will reimburse AWCF for the consumable items transferred to DLA and ensure that DLA reimburses AWCF for the items transferred in a timely manner.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In June 2010, GAO reported that the Base Realignment and Closure 2005 initiatives directed the Army to transfer the management of about 26,000 different consumable items to the Defense Logistics Agency (DLA). At the time, the Army expected to complete the transfer of the consumable items in August 2010. DLA planned to reimburse the Army for these items and, as a result, the Army included hundreds of million of dollars in the fiscal years 2010 and 2011 Army Working Capital Fund (AWCF) projected cash balances. GAO reported that a delay in the cash transfers could lower the AWCF cash balance by hundreds of million of dollars for fiscal years 2010 and 2011 compared to the AWCF cash plan. GAO recommended that the Under Secretary of Defense (Comptroller) oversee Army and DLA efforts to reach agreement on the amount that DLA will reimburse AWCF for the consumable items transferred to DLA and ensure that DLA reimburses AWCF for the items tranferred. DOD concurred with the recommendation and stated that the Under Secretary of Defense (Comptroller) provided guidance to the Army and DLA in Volume 11B, Chapter 2, Section 0205 of the Financial Management Regulation and will continue to monitor the funding associated with the transfer of consumable items. In fiscal year 2013, DLA transferred $154 million to the AWCF for reimbursement of the consumable items transferred from the Army to DLA. Without the transfer of funds, the AWCF's fiscal year 2013 year end cash balance would have been below the AWCF's lower operational requirement.

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