Industrial Funds:

Weaknesses Remain in the Department of Defense's Capital Equipment Program

NSIAD-91-175: Published: Apr 17, 1991. Publicly Released: Apr 17, 1991.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) management of its Asset Capitalization Program (ACP) to determine: (1) DOD plans to request that Congress transfer funding for industrial and depot maintenance equipment back to the industrial funds; (2) the extent to which DOD industrial fund accounting allowed it to use unexpended ACP funds to pay for losses in the industrial funds; and (3) whether DOD appropriately computed unliquidated ACP obligations as liabilities in its reporting of net budgetary resources for its industrial funds.

GAO found that: (1) DOD plans to fund capital equipment at industrial fund activities, through the Defense Business Operations Fund (DBOF), did not adequately alleviate some of the ACP accounting and reporting weaknesses GAO previously reported and did not eliminate the need for better policies and guidance for the capital equipment program; (2) inappropriate DOD decisions to refund unexpended ACP revenue to customers and to fund operational losses contributed to inadequate industrial fund accounting and reporting procedures; (3) the industrial fund activities accumulated about $1.6 billion in operating losses as a result of customer refunds and operational losses sustained from fiscal year (FY) 1987 through FY 1989; (4) the lack of ACP reserves and low cash balances in the industrial funds precluded the industrial fund activities from making about $519.3 million in depreciation-related revenues to customers in FY 1990; (5) DOD reported inaccurate information on ACP cash requirements and insufficient information on the status of ACP revenues, disbursements, and obligations to Congress; and (6) comptroller officials did not find any violations of the Anti-Deficiency Act in the five DOD industrial funds, but were unable to document that unliquidated ACP obligations were included in the computations of the industrial funds' budgetary resources.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The conference report approving capital budgeting for DBOF requires a separate account to fund capital purchases. DOD has complied with this requirement.

    Matter: If Congress approves the DOD proposal to fund capital equipment through DBOF, Congress may wish to consider requiring DOD to reserve unexpended equipment funds to pay for future disbursements associated with unobligated balances and unliquidated obligations.

  2. Status: Closed - Implemented

    Comments: The conference report approving capital budgeting for DBOF requires DOD to submit quarterly reports on capital purchase obligations and expenditures.

    Matter: If Congress approves the DOD proposal to fund capital equipment through DBOF, Congress may wish to consider requiring DOD to establish appropriate accounting and reporting procedures for the capital equipment included in DBOF.

  3. Status: Closed - Not Implemented

    Comments: Subject data elements are not required by Congress in its legislative approval of DBOF. DOD largely complied for the 1992 budget, but it includes only disbursements and cash balance of the separate account for 1993. DOD cites congressional desire for just these two items.

    Matter: If Congress approves the DOD proposal to fund capital equipment through DBOF, Congress may wish to consider requiring DOD to include in the DOD annual budget submission to Congress a financial summary identifying the status of the capital equipment program. This financial summary should provide all appropriate data elements needed to facilitate congressional oversight, including: (1) unobligated balances and unliquidated obligations at the beginning and end of the fiscal year; (2) equipment obligations during the fiscal year; (3) disbursements for capital equipment during the fiscal year; and (4) amount of the total cash balance in DBOF that should be placed in a reserve account to fund future disbursements associated with unobligated balances and unliquidated obligations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD considers the final DBOF policy statement as completely meeting this recommendation. The GAO follow-on review will address this issue.

    Recommendation: The Secretary of Defense should revise the policies and guidance for the capital equipment program, regardless of how it is funded, to address the ACP weaknesses GAO reported in August 1989 by establishing clear guidance to ensure that: (1) capital investments are consistent with strategic plans; (2) project planning addresses timely installation and operation of equipment upon receipt at industrial fund activities; and (3) adequate internal control procedures are followed.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The DBOF policy statement addresses most of the recommendation. DOD is drafting more detailed guidance to implement the policy. The GAO follow-on review will monitor progress. Close monitoring is under a separate assignment.

    Recommendation: The Secretary of Defense should revise the policies and guidance for the capital equipment program, regardless of how it is funded, to address the ACP weaknesses GAO reported in August 1989 by requiring post-investment analyses or other measures to determine if anticipated benefits are realized and if changes in program management are needed.

    Agency Affected: Department of Defense

 

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