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Report to Congressional Committees: 

September 2005: 

Global War On Terrorism: 

DOD Needs to Improve the Reliability of Cost Data and Provide 
Additional Guidance to Control Costs: 

GAO-05-882: 

GAO Highlights: 

Highlights of GAO-05-882, a report to congressional committees: 

Why GAO Did This Study: 

Since the attacks of September 11, 2001, the Department of Defense 
(DOD) has reported spending $191 billion through May 2005 to conduct 
the Global War on Terrorism (GWOT). On an ongoing basis, DOD compiles 
and reports information on the incremental costs of the war, and uses 
these data in preparing future funding requests. To assist Congress in 
its oversight of war spending, GAO assessed (1) whether DODís reported 
war costs are based on reliable data, (2) the extent to which DODís 
existing financial management policy is applicable to war spending, and 
(3) whether DOD has implemented cost controls as operations mature. GAO 
focused primarily, but not exclusively, on fiscal year 2004 reported 
costsóthe latest full year of data available at the time of GAOís 
review. 

What GAO Found: 

GAO found numerous problems in DODís processes for recording and 
reporting costs for GWOT, raising significant concerns about the 
overall reliability of DODís reported cost data. As a result, neither 
DOD nor Congress can reliably know how much the war is costing and 
details on how appropriated funds are being spent, or have historical 
data useful in considering future funding needs. On the basis of GAOís 
work, DOD is taking steps to improve its cost reporting. Factors 
affecting the reliability of DODís reported costs include long-standing 
deficiencies in DODís financial systems, the lack of a systematic 
process to ensure that data are correctly entered into those systems, 
inaccurately reported costs, and difficulties in properly categorizing 
costs. In at least one case, reported costs may be materially 
overstated. Specifically, DODís reported obligations for mobilized Army 
reservists in fiscal year 2004 were based primarily on estimates rather 
than actual information and differed from related payroll information 
by as much as $2.1 billion, or 30 percent of the amount DOD reported in 
its cost report. In addition, GAO found inadvertent double counting in 
the Navyís and Marine Corpsí portion of DODís reported costs amounting 
to almost $1.8 billion from November 2004 through April 2005. Because 
it was not feasible to examine all reported costs and significant data 
reliability problems existed, GAO was not able to determine the extent 
that total costs were misstated. 

Further complicating the data reliability issue is the fact that DOD 
has not updated its policy to address GWOT spending. Instead, DOD is 
using its existing financial management regulation for funding 
contingency operations, although it was developed and structured to 
manage the costs of small-scale contingency operations. GAO has noted 
that specific provisions of the existing policy conflict with the needs 
of GWOT. One conflict concerns the use of supplemental funds for base 
support activities at home stations. DODís financial management 
regulation administratively precludes such use, but military service 
officials have spent billions of dollars in supplemental funds on these 
activities. Some of this spending appears to directly support the war, 
but some does not. DOD has updated its regulation on the basis of GAOís 
work. 

While individual commands have taken steps to control costs and DOD 
policy generally advises its officials of their financial management 
responsibilities to ensure the prudent use of contingency funding, DOD 
has not established guidelines that would require all commands involved 
in GWOT to take steps to control costs and to keep DOD informed of 
those steps and their success. For example, the commander of coalition 
forces in Iraq has unilaterally set a 10 percent cost reduction target 
for fiscal year 2005 but the details are not widely known outside the 
command. With the growth in GWOT costs, there is a need to ensure that 
all commands seek to control costs, including the need to review and 
rationalize related requirements. Until the department establishes 
guidelines on cost controls and is routinely informed about the types 
of controls and their impact on costs, it cannot be sure that all that 
can be done to control costs is being done. 

What GAO Recommends: 

GAO is making a number of recommendations to the Secretary of Defense 
to (1) undertake a series of steps to ensure that reported GWOT costs 
are reliable, (2) expand its financial management regulation for 
contingency operations to include contingencies as large as GWOT, and 
(3) establish guidelines to control costs. In commenting on a draft of 
this report, DOD agreed with all but one of GAOís recommendations and 
described steps it has taken to improve its cost reporting. 

www.gao.gov/cgi-bin/getrpt?GAO-05-882. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Sharon Pickup at 202-512-
9619 or pickups@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Reliability of DOD's Reported Costs Is Unknown: 

DOD Is Using Regulations to Guide GWOT Budgeting, Reporting, and 
Spending That Were Not Designed for Wartime Operations: 

Cost Controls Can Be Strengthened As Operations Mature: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Ineffective Reporting of Fiscal Year 2004 Army Military 
Personnel Global War on Terrorism Obligations: 

Appendix III: Comments from the Department of Defense: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Comparison of Reported DOD-Wide Imminent Danger Pay and 
Implied Number of Deployed Personnel, April 2004-April 2005: 

Table 2: DOD Military Personnel Obligations for GWOT Operations in 
Fiscal Years 2003 and 2004: 

Table 3: Army Military Personnel Obligations for GWOT Operations in 
Fiscal Years 2003 and 2004: 

Table 4: Army Obligation Plan and Reported Military Personnel 
Obligations for GWOT Operations in Fiscal Year 2004: 

Table 5: Army Obligation Plan and Reported Subsistence Obligations for 
GWOT Operations in Fiscal Year 2004: 

Table 6: Supplemental Budget Authority for Army GWOT Military Personnel 
in Fiscal Year 2004: 

Table 7: Estimated Army Obligations for "Reserve Components Called to 
Active Duty" and Related DOD Payroll Costs in Fiscal Year 2004: 

Figures: 

Figure 1: Locations of DOD's Fiscal Year 2004 Global War on Terrorism 
Operations: 

Figure 2: Growth in Reported and Projected GWOT Spending, Fiscal Years 
2002-5: 

Figure 3: Supplemental Funding of DOD Military Personnel for GWOT 
Operations in Fiscal Years 2003 and 2004: 

Figure 4: Army Military Personnel Obligations for GWOT Operations in 
Fiscal Year 2004: 

Letter September 21, 2005: 

Congressional Committees: 

Following the terrorists attacks of September 11, 2001, the United 
States began military operations to combat terrorism both in the United 
States and overseas. Military operations to defend the United States 
against further attacks are known as Operation Noble Eagle. Ongoing 
military operations in Afghanistan and Iraq are known as Operation 
Enduring Freedom and Operation Iraqi Freedom, respectively. Together, 
these three military operations are identified as the Global War on 
Terrorism (GWOT). Since the attacks, the Department of Defense (DOD) 
reports that it has obligated $191 billion through May 2005 for 
conducting the war. Congress has enacted a series of supplemental 
appropriation acts to fund the war beginning in September 2001. 

To assist Congress in its oversight role, we are continuing to 
undertake a series of reviews relating to the cost and funding of 
contingency operations in support of GWOT. In September 2003, we issued 
a report that discussed the funding outlook for fiscal year 
2003.[Footnote 1] We continued our analysis of fiscal year 2003 
obligations and funding, and in May 2004 we issued a summary report 
comparing full-fiscal-year 2003 GWOT cost and funding.[Footnote 2] In 
July 2004, we reported on the funding outlook for fiscal year 
2004.[Footnote 3] We are currently continuing our review series by 
examining full-fiscal-year 2004 GWOT obligations and the availability 
of funding to cover those expenses and the funding outlook for the 
fiscal year 2005 GWOT supplemental appropriations for the war. We will 
report our results on these subjects separately. 

This report contains our analyses of DOD's reporting on the costs of 
GWOT. On the basis of the authority of the Comptroller General, we 
assessed (1) whether DOD's reported war costs are based on reliable 
data, (2) the extent to which DOD's existing financial management 
policy is applicable to war spending, and (3) whether DOD has 
implemented cost controls as operations mature. We focused our analysis 
primarily on fiscal year 2004 obligations specifically for military 
personnel and operation and maintenance expenses, as they represent the 
largest amount of reported spending. Obligations are incurred by the 
Defense Department and the military services through actions such as 
orders placed, contracts awarded, services received, or similar 
transactions made during a given period that will require payments 
during the same or a future period.[Footnote 4]

To accomplish this review, we analyzed DOD's fiscal year 2004 monthly 
Consolidated DOD Terrorist Response Cost Report, which was renamed the 
Supplemental and Cost of War Execution Report in January 2005, to 
determine reported obligations by operation and by appropriation 
account for the military services. That report is the source document 
used by the department in discussing the cost of the war. It is not 
used in the department's funds or appropriations accounting. DOD's cost 
report does not include obligations incurred by the intelligence 
community; therefore, we did not review those obligations. To assess 
the reliability of DOD's data, we undertook a number of steps, 
including conducting limited testing on military personnel costs and 
operation and maintenance costs. At the unit level, we cross-checked 
data entries back to the reporting vehicle used to input the data into 
the GWOT cost report. We also conducted limited cross-checking of the 
U.S. Army Central Command's (ARCENT) document register numbers against 
documentation controlled by the Defense Finance and Accounting Service 
(DFAS), Rome, New York. We discussed with Army financial managers the 
processes used to ensure that GWOT obligation data provided from Army 
units were accurate and reliable. We also reviewed Army Audit Agency, 
Air Force Audit Agency, and Naval Audit Service reviews of their 
respective service's GWOT spending. To determine what guides GWOT 
spending, we focused our efforts on analyzing the fiscal year 2004 
Defense Appropriations Act,[Footnote 5] the fiscal year 2004 Emergency 
Supplemental Appropriations Act,[Footnote 6] and DOD's and the military 
services' specific policies and guidance. We also met with officials 
from the Office of the Under Secretary of Defense (Comptroller) and the 
Army, Navy, and Marine Corps to discuss the sufficiency of DOD's 
financial management policies and procedures for contingency 
operations, including their applicability to GWOT conditions. To 
determine controls over spending and when they could be strengthened, 
we identified current controls and held discussions with resource 
management officials from major commands and units that had deployed to 
Iraq and Afghanistan on what benchmarks might be used to ascertain when 
controls could be strengthened as operations mature and what steps DOD 
has directed or implemented to control costs. We did limited work at 
the Air Force because the Air Force Audit Agency was undertaking a 
concurrent review of Air Force GWOT spending; instead, we drew upon 
that work as appropriate. As discussed below, we found that the 
reported cost data are not reliable because of long-standing 
deficiencies in DOD's financial and accounting systems, the lack of a 
systematic process to ensure that data are properly entered into those 
accounting systems, the use of estimates rather than actual data for 
some of DOD's reported costs, and the incorrect categorization of some 
reported costs due to the large number of cost categories and limited 
training on how to apply them. 

We performed our work from August 2004 through August 2005 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

We found numerous problems with DOD's processes for recording and 
reporting costs for the Global War on Terrorism, raising significant 
concerns about the overall reliability of DOD's reported cost data. As 
a result, neither DOD nor Congress (1) can reliably know how much the 
war is costing and details on how appropriated funds are being spent or 
(2) have historical data useful in considering future funding needs. On 
the basis of our work, DOD is taking steps to improve its cost 
reporting. However, because it was not feasible to examine all reported 
costs and because significant data reliability problems existed, we 
were not able to determine the extent that total costs were misstated. 
Our examination of DOD's reported costs in support of GWOT found a 
number of problems affecting the accuracy of reported costs. These 
problems included long-standing deficiencies in DOD's financial 
management systems and business processes, reported military personnel 
obligations that did not match payroll records, incorrectly categorized 
operation and maintenance obligations, the use of estimates instead of 
actual information, and a lack of supporting documentation. Factors 
contributing to DOD's challenges in reporting reliable GWOT cost data 
include the previously cited long-standing deficiencies in DOD's 
financial management systems, the lack of a systematic process to 
ensure that data are correctly entered into those accounting systems, 
inaccurately reported costs, and difficulties in properly categorizing 
costs. In at least one case, the reported costs may be materially 
overstated. Specifically, reported obligations for mobilized Army 
reservists in fiscal year 2004 were based primarily on estimates rather 
than actual information and differed from related DOD payroll 
information by as much as $2.1 billion, or 30 percent of the amount DOD 
reported in its cost report. Initially, the Army could not support this 
difference or its reported GWOT military personnel obligations. Over 
the next several months, the Army and the Office of the Under Secretary 
of Defense (Comptroller) provided us with several possible, though 
sometimes inaccurate, explanations for this difference. Some 
explanations appeared valid while others did not and, taken together, 
they failed to fully account for the difference. Regarding DOD's 
accounting systems, over the years we and DOD have reported the 
following: 

* We have testified on several occasions, including in November 2004 
and June 2005, about long-standing weaknesses in DOD's financial 
management and related business processes and systems. 

* In September 2004, DOD acknowledged that systematic deficiencies in 
its financial management systems and business processes result in its 
inability to collect and provide financial and performance information 
that is accurate, reliable, and timely. 

* Still, DOD's Financial Management Regulation directs the services to 
capture contingency costs, which include GWOT costs, with their 
existing accounting systems and at the lowest possible level of 
organization. 

Because of these problems, we have identified DOD's financial 
management as a high risk area since 1995. Regarding ensuring that the 
military services are correctly entering GWOT data into their 
accounting systems, for the most part the services and the Office of 
the Under Secretary of Defense (Comptroller) do not have a systematic 
process to review reported GWOT costs to ensure that they are accurate 
or to test their reliability. In one instance, we found that the Marine 
Corps and Navy were inadvertently double counting their reported costs 
each month from November 2004 through April 2005, totaling almost $1.8 
billion. The two services are taking steps to provide correct 
information beginning with the May 2005 cost report. Regarding properly 
categorizing costs, in our transaction testing we found that improperly 
categorized costs ranged from 5 to 30 percent of the dollar value of 
transactions that we and other audit agencies reviewed. The large 
number of DOD cost categories--numbering in the thousands--and a lack 
of training for personnel coding the data contributed to incorrect 
categorizations. DOD has been responsive to recommendations that we and 
the Air Force Audit Agency have made in the past to improve cost 
reporting and has agreed to make a number of improvements. DOD has 
identified steps it plans to take to improve cost reporting on the 
basis of our current work. In discussing how the detailed cost data are 
used, the Office of the Under Secretary of Defense (Comptroller) told 
us that the detailed information is used for several purposes, 
including to make billion-dollar decisions in developing supplemental 
funding budget requests and to inform DOD leadership of detailed costs 
incurred for GWOT. However, as discussed above, as a result of the 
problems we identified in capturing and reporting GWOT costs, neither 
DOD nor Congress can (1) reliably know how much the war is costing and 
details on how appropriated funds are being spent or (2) have 
historical data useful in considering future funding needs. 

Further complicating the data reliability issue is the fact that DOD 
has not updated its financial management policy to address GWOT 
spending. DOD's existing contingency operations' Financial Management 
Regulation (vol. 12, ch. 23) was developed and structured to manage the 
costs of small-scale contingencies and specifically excludes its use 
for wartime activities. Nonetheless, department and service officials 
are using this regulation to guide GWOT budgeting, cost reporting, and 
spending. Beginning in 1995, DOD's Financial Management Regulation 
established policies and procedures for estimating and reporting 
contingency costs. Historically, the financial management regulation 
generally guided the military services' spending on contingency 
operations[Footnote 7] by defining what constituted the incremental 
costs of contingency operations and by providing examples of eligible 
incremental costs.[Footnote 8] DOD's regulation is broad and has been 
interpreted at all levels of DOD and the services in formulating 
budgets and determining what should be reported as GWOT obligations. 
Although this is the most currently available statement of DOD policy, 
we believe that some of its specific provisions conflict with the needs 
of GWOT. One conflict concerns limitations on the use of supplemental 
funds for base support activities at home stations. The services have 
spent billions of dollars in supplemental funds on these activities. In 
the case of the Army, its Installation Management Agency, which manages 
all Army installations, obligated $1.5 billion in fiscal year 2004 and 
has budgeted $2.1 billion in fiscal year 2005 expressly for GWOT- 
related "home station" base support activities. Although some home 
station costs appear to be directly related to the war, the provisions 
of chapter 23, as currently written, administratively limit such costs 
to be budgeted or reported as incremental costs. At the same time, we 
found a number of reported incremental base operations costs that 
appear, at best, tangential to the support of GWOT. The conflicting 
provisions in chapter 23 indicate confusion over what is the DOD policy 
that senior DOD officials and service resource managers or unit 
commanders should use to manage the costs of the war. Without an 
updated policy, the military services and other DOD agencies cannot 
make informed judgments on the appropriate use of GWOT funding 
authorities. In response to our work, DOD has updated its regulation to 
address GWOT spending. 

While individual commands have taken steps to control costs and DOD 
policy advises its officials of their financial management 
responsibilities to ensure the prudent use of contingency funding, the 
Office of the Under Secretary of Defense (Comptroller) has not 
systematically called for all commands involved in GWOT to take steps 
to control costs, set general parameters to guide cost-control efforts, 
and keep the Office informed of those steps and their success. For 
example, the commander of coalition forces in Iraq has unilaterally set 
a 10 percent cost-reduction target for fiscal year 2005, but the 
details are not widely known outside the command. GWOT spending has 
risen steadily since the attacks of September 11, 2001, as operations 
have expanded. From fiscal year 2002 through fiscal year 2004, reported 
costs rose from $11 billion to $71 billion annually and on the basis of 
reported fiscal year 2005 costs through May 2005, we project that they 
could reach $71 billion again in fiscal year 2005. Current cost 
controls implemented by individual commands include acquisition review 
boards, command review of purchases, limits on some categories of 
spending, and a cost-reduction goal in Iraq. However, DOD's policy does 
not go beyond advising DOD officials of their financial management 
responsibilities to ensure the prudent use of contingency funding and 
provides no guidelines on steps that should be taken to control costs, 
particularly as operations mature, while ensuring mission 
accomplishment. Resource managers from a number of Army divisions that 
have deployed to Iraq or Afghanistan have told us that cost controls 
can be strengthened as operations mature. In discussing efforts to 
control costs with the Office of the Under Secretary of Defense 
(Comptroller), the view was expressed that, on the basis of varying 
combat situations, steps to control costs were best left to the 
individual commands. Currently, the Comptroller's office has no direct 
knowledge of the commands' cost-control efforts and has not asked to be 
kept informed of cost-control steps. We believe that more can be done 
and that absent a DOD-wide policy calling for systematic cost-control 
efforts, there is no assurance that successive commanders will 
emphasize cost control and that each commands' efforts will be equally 
comprehensive. 

We are making recommendations to DOD to (1) undertake a series of steps 
to ensure that reported GWOT costs are reliable, (2) expand its 
financial management regulation for contingency operations to include 
contingencies as large as the current Global War on Terrorism, and (3) 
establish guidelines to control costs. 

In official comments on a draft of this report, DOD agreed with all but 
one of our recommendations, stating that it generally agreed with the 
intent of the recommendations and outlined several immediate actions it 
has taken to improve procedures and strengthen the cost reports. DOD 
did not agree with our recommendation to have the Office of the Under 
Secretary of Defense (Comptroller) establish guidelines on cost 
controls, commenting that field commanders are the correct echelon to 
adopt and emphasize cost controls. We recognize that certain individual 
commands have done much to control costs and describe some of those 
efforts. However, other individual commands have done less to control 
costs. As a result, we continue to believe that more can be done and 
that absent DOD-wide guidelines on cost control efforts, there is no 
assurance that successive commanders will emphasize cost control and 
that each command's efforts will be equally comprehensive. Therefore we 
have retained the recommendation. The department's comments and our 
evaluation are discussed in detail in a later section of this report 
and the department's comments are printed in their entirety in appendix 
III. 

Background: 

Following the terrorist attacks of September 11, 2001, the United 
States began military operations to combat terrorism both in the United 
States and overseas. Operations to defend the United States from 
terrorist attacks are known as Operation Noble Eagle. Overseas 
operations to combat terrorism are known as Operation Enduring Freedom, 
which takes place principally in Afghanistan, and Operation Iraqi 
Freedom, which takes place in and around Iraq. Figure 1 shows the 
primary locations where U.S. forces conducted operations to support 
GWOT in fiscal year 2004. 

Figure 1: Locations of DOD's Fiscal Year 2004 Global War on Terrorism 
Operations: 

[See PDF for image] 

[End of figure] 

Since September 11, 2001, DOD reports that it obligated $191 billion 
through May 2005 to conduct GWOT. Factors that affect the cost of the 
war include the number of deployed personnel, the special pays and 
allowances that deployed personnel receive, the additional pay that 
mobilized reservists receive when on active duty, the pace of 
operations, the extent to which facilities have to be built to house 
and protect the deployed forces, and the distance to the theater. 
Congress has enacted a series of supplemental appropriation acts, 
beginning in September 2001, to fund the war. These supplemental 
appropriation acts have included funding authority for operations in 
Afghanistan and Iraq, homeland security, and other global 
counterterrorism military and intelligence operations. 

The costs of contingency operations are referred to as "incremental 
costs" and are directly attributable costs that would not have been 
incurred, were it not for the operation. Specifically, the costs are 
above and beyond baseline training, operations, and personnel costs. 
Incremental costs include the pay of mobilized reservists as well as 
the special pays and allowances of deployed personnel, such as imminent 
danger pay and foreign duty pay for those personnel serving in 
Operation Iraqi Freedom and Operation Enduring Freedom, the cost of 
transporting personnel and materiel to the theater of operation and 
supporting them upon arrival, and the operating cost of equipment, such 
as vehicles and aircraft, among many other costs. Costs that are 
incurred regardless of whether there is a contingency operation, such 
as the base pay of active duty military personnel, are not considered 
incremental. 

DOD tracks the obligations incurred to support GWOT and produces a 
monthly cost report, which is distributed throughout the department and 
used by senior DOD leadership in discussing the cost of the war. It is 
also used in formulating future budget requests to fund GWOT. The 
monthly report, which, as noted earlier, was titled the Terrorist 
Response Cost Report until January 2005, when it was renamed the 
Supplemental and Cost of War Execution Report, identifies the monthly 
and cumulative incremental GWOT obligations. DOD reports the costs by 
service, defense agency, contingency operation, and appropriation. On 
October 1, 1998, DOD implemented a standard contingency cost breakdown 
structure to improve contingency cost reporting consistency between 
multiple services and DOD agencies. Furthermore, this cost breakdown 
structure was also to facilitate future efforts to understand and 
interpret differences between estimated and actual costs. DOD Financial 
Management Regulation 7000.14-R, volume 12, chapter 23, generally 
establishes financial policy and procedures related to DOD contingency 
operations.[Footnote 9] The regulation incorporates the common cost 
categories and multiple subcategories, which were established in 1998 
and updated in January 2005, that are used to report DOD's monthly GWOT 
costs. 

We previously reported our concerns about the reliability of reported 
contingency operations cost data. Specifically, our 1996 report on the 
reliability of reported contingency operations costs found inaccuracies 
representing about 7 percent of the $4.1 billion in costs reported in 
fiscal years 1994 and 1995, which we believe was indicative of a 
material weakness in the accounting systems.[Footnote 10] These 
included the following: 

* $104 million in overstated costs, primarily due to the failure of the 
Air Force ($67 million) and the Navy ($3 million) to adjust reported 
flying hour costs to reflect the value of free fuel being received at 
that time. 

* The services' failure to adjust reported costs to reflect normal 
operating and training costs. For example, one Army command reported 
operating costs of $11 million that were not incurred because of 
deployments. 

* The services' failure to report or fully report $171 million in 
understated costs, including some military personnel costs such as 
imminent danger pay and family separation pay, munitions the Navy used, 
and Air Force mobility equipment and munitions. 

We further reported that it was not feasible to examine all reported 
costs and supporting data and that our results were not statistically 
projectable. Consequently, we were unable to conclude, on the whole, if 
reported costs were overstated or understated. At that time, we 
recommended that DOD clarify existing guidance for reporting costs, 
which DOD agreed to do. Over the years DOD and the services have 
adopted a number of our recommendations to improve their guidance for 
spending on contingency operations. 

Reliability of DOD's Reported Costs Is Unknown: 

We found numerous problems in DOD's processes for recording and 
reporting costs for the Global War on Terrorism, raising significant 
concerns about the overall reliability of DOD's reported cost data. As 
a result, neither DOD nor Congress (1) can reliably know how much the 
war is costing and details on how appropriated funds are being spent or 
(2) have historical data useful in considering future funding needs. On 
the basis of our work, DOD is taking steps to improve its cost 
reporting. However, as was the case in our 1996 report, because it was 
not feasible to examine all reported costs and significant data 
reliability problems existed, we were not able to determine the extent 
that total costs were misstated. DOD policy requires that controls, 
accounting systems, and procedures provide, in financial records, the 
proper identification and recording of costs incurred in supporting 
contingency operations. However, our examination of DOD's reported 
costs in support of GWOT found a number of problems affecting the 
accuracy of reported costs. These problems included long-standing 
deficiencies in DOD's financial management systems and business 
processes, reported military personnel obligations that do not match 
payroll records, incorrectly categorizing operation and maintenance 
obligations, the use of estimates instead of actual information, and a 
lack of supporting documentation. Problems contributing to DOD's 
challenges in reporting reliable GWOT cost data include the previously 
cited long-standing deficiencies in DOD's financial management systems, 
the lack of a systematic process to ensure that data are correct, the 
failure to use actual data when available, and a large number of cost 
categories and little training on how to apply them. 

DOD's Financial Management Regulation Addresses the Importance of 
Accurately Reporting Obligations: 

DOD's Financial Management Regulation (FMR) emphasizes the importance 
of accurate cost reporting. Volume 6A, chapter 2 (sec. 020201) of DOD's 
FMR establishes the general financial responsibilities for DOD 
components. Components are responsible for the following: 

* ensuring the accuracy, completeness, timeliness, and documentary 
support for all data generated by the customer and input into finance 
and accounting systems;

* or submitted to the Defense Finance and Accounting Service for input 
and/or recording in the finance and accounting systems and inclusion in 
financial reports;

* establishing appropriate internal controls to ensure the accuracy of 
data provided to the DFAS; and: 

* reviewing all reports provided by the DFAS to assess the accuracy of 
the financial information being reported. 

Chapter 2 further states in section 020202 that DOD components must 
establish appropriate internal controls to ensure that data provided to 
the DFAS that are recorded in the accounting system and subsequently 
used in financial reports are accurate, complete, and supportable. 
Among the requirements, the regulation states that before submitting 
transactions, DOD components must edit all transactions, hard copy and 
electronic, for accuracy, e.g., so that the transaction is identified 
correctly in terms of the type of transaction, reported quantity, 
dollar amount, and other data. 

In addition to volume 6A, chapter 2, volume 3, chapter 8 of the FMR has 
several provisions that require funds holders[Footnote 11] to take 
steps to ensure that transactions have been entered accurately. Section 
080401 requires that funds holders conduct a triannual review of 
commitments and obligations. During these reviews, officials are to 
review commitment and obligation transactions for timeliness, accuracy, 
and completeness. The requirement applies to all appropriations and 
funds of all DOD components. Section 080403 establishes the 
responsibility of conducting reviews of outstanding commitments and 
unliquidated obligations to funds holders. According to the FMR, this 
is true regardless of whether the funds holders or the accounting 
office actually records the commitments or obligations in the official 
accounting records. This responsibility is placed on the funds holders 
because the funds holder initiates those actions that result in 
commitments and obligations and, therefore, is in the best position to 
determine the accuracy and the status of such transactions. 

Finally, volume 12, chapter 23 of the FMR establishes policies and 
procedures for budgeting and cost reporting for contingency operations 
and states that DOD policy requires that controls, accounting systems, 
and procedures provide, in financial records, proper identification and 
recording of costs incurred in supporting contingency operations. 

Concerns Regarding the Reliability of Reported GWOT Costs Stem from a 
Variety of Factors: 

Our work has identified a number of concerns regarding the reliability 
of reported GWOT costs. These include deficiencies in DOD's financial 
management systems, discrepancies between some reported military 
personnel obligations and DOD payroll information, incorrectly 
categorized operation and maintenance costs, the use of estimates 
instead of actual information, and a lack of supporting documentation. 

DOD Uses Its Existing Financial Management Systems and Business 
Processes to Record GWOT Costs, but These Systems Have Long-standing 
Deficiencies: 

Because DOD's accounting systems cannot directly capture GWOT costs, 
the department's overall GWOT cost reporting is based on the military 
services' reports of obligations. Volume 12, chapter 23 of the FMR 
requires that the DOD components collect and report applicable costs 
related to contingency operations. Chapter 23 also requires that the 
services capture their obligations in their existing accounting systems 
and at the lowest possible level of organization. 

However, DOD has long-standing deficiencies in its existing financial 
management systems and business processes. As recently as September 
2004, DOD acknowledged that agencywide financial statements were not 
completely reliable as a result of inadequately designed systems. The 
department reported that systemic deficiencies in its financial 
management systems and business processes result in its inability to 
collect and report financial and performance information that is 
accurate, reliable, and timely. In March 2004, the Under Secretary of 
Defense (Comptroller) stated in a memo that DOD's fiscal year 2004 
agencywide financial statements would not substantially conform to 
generally accepted accounting principles. The department acknowledged 
that although it has made progress in its efforts to resolve financial 
management shortfalls, its financial management systems currently do 
not fully comply with the applicable requirements. 

For years we have reported on DOD's financial management deficiencies. 
In 1995 we first designated DOD financial management as an area of high 
risk. We concluded that DOD's financial management deficiencies 
adversely affect the department's ability to control costs, ensure 
basic accountability, anticipate future costs and claims on the budget, 
measure performance, maintain funds control, prevent fraud, and address 
pressing management issues.[Footnote 12] From 1995 through 2005, we 
continued to report on deficiencies in DOD's financial management 
processes. In November 2004, we testified that recent audits and 
investigations by our and DOD's auditors continue to confirm the 
existence of pervasive weaknesses in DOD's financial and related 
business processes and systems.[Footnote 13] We found that adverse 
conditions included discrepancies in military pay, logistical support 
such as duplicate supply requisitions, and data reliability needed by 
Congress and DOD to make sound sourcing decisions. Most recently, in 
June 2005 we testified that long-standing weaknesses in DOD's financial 
management and related business processes and systems have (1) resulted 
in a lack of reliable information needed to make sound decisions and 
report on the status of DOD activities, including the accountability of 
assets, through financial and other reports to Congress and DOD 
decision makers; (2) hindered its operational efficiency; (3) adversely 
affected mission performance; and (4) left the department vulnerable to 
fraud, waste, and abuse.[Footnote 14]

Some Reported Military Personnel Obligations Are Not Consistent with 
Related Payroll Information: 

The Army did not have a reasonable and reliable process to identify and 
report almost $12 billion of GWOT military personnel obligations in 
fiscal year 2004. Instead of using related DOD payroll information, the 
Army based the GWOT military personnel obligations used in the GWOT 
cost report primarily on its fiscal year 2004 obligation plan and, in 
the end, forced, or "plugged," obligations to match available 
supplemental budget authority. Effectively, the Army was reporting back 
to Congress exactly what it had appropriated. Army officials were 
unable to readily explain the process for identifying and reporting 
GWOT military personnel obligations. Specifically, the Army Budget 
Office lacked formal procedures to guide the monthly reporting of GWOT 
military personnel obligations to DOD and a process to ensure 
management's review of the reported amounts. Army Budget Office 
officials stated that these problems were exacerbated by staff losses 
in the September 11 terrorist attack on the Pentagon, personnel 
turnover, and hiring difficulties. 

Our analysis showed that obligations associated with Army military 
personnel in the monthly GWOT cost report were not consistent with 
related DOD payroll information, and the use of planned obligations 
instead of actual payroll information might have resulted in reported 
Army military personnel GWOT obligations being materially overstated. 
For fiscal year 2004, our analysis of the more than $7.1 billion in 
incremental military personnel obligations listed in the GWOT cost 
report category for mobilized Army reserve-component soldiers 
identified as much as $2.1 billion of reported obligations in excess of 
related DOD payroll information. Initially, the Army could not support 
this difference or its reported GWOT military personnel obligations. 
Over the next several months, the Army and the Office of the Under 
Secretary of Defense (Comptroller) provided us with several possible, 
though sometimes inaccurate, explanations for this difference. Some 
explanations appeared valid while others did not and, taken together, 
they failed to fully account for the difference. For example, the Army 
Budget Office stated that a portion of the difference was attributable 
to retirement pay and retirement health care accruals. We found that 
the retirement health care accrual did not result in incremental costs 
and, therefore, was not a valid explanation for the difference. 
However, mobilized reserve-component personnel receive an increase in 
retirement pay benefits over nonmobilized reservists and, therefore, 
DOD incurs incremental costs related to this benefit. According to the 
Army, the retirement pay accrual represents part of the difference, and 
it reported this amount at $824 million. This information was provided 
too late in our audit to assess its accuracy and completeness. Further 
details on our review of GWOT obligations for Army military personnel 
are included in appendix II. 

In addition to examining the obligations for mobilized Army reservists, 
we also examined reported imminent danger pay and found wide monthly 
swings and little correlation with the numbers of deployed personnel. 
Imminent danger pay relates directly to the number of military 
personnel deployed to eligible areas. Beginning on October 1, 2002, all 
military personnel--both Active and Reserve Component--in areas 
designated as eligible for imminent danger pay receive $225 per month 
for each month for which they qualify for such pay. Eligible areas 
include, but are not limited to, the countries of Iraq, Afghanistan, 
Kuwait, Qatar, Bahrain, and Saudi Arabia. The monthly amount is payable 
in full without being prorated or reduced, for each month, during any 
part of which a service member qualifies and regardless of the actual 
period of time served on active or inactive duty during that month. 

Month-to-month changes in reported imminent danger pay obligations for 
GWOT should be consistent with the number of deployed forces in 
eligible areas. However, as shown in table 1, which depicts the amounts 
reported for DOD as a whole and the implied number of people who should 
be receiving the pay on the basis of dividing the amount per month-- 
$225--into the reported obligations, there are wide monthly swings in 
the number of deployed personnel, based on the amount of reported 
imminent danger pay, that do not seem to correlate to the actual 
numbers of deployed personnel. For example, the reported imminent 
danger pay suggests that 173,000 personnel were deployed to support 
GWOT in July 2004 and that the number of personnel rose to more than 1 
million in August 2004 and then declined to 264,000 in September 2004 
and 61,000 in October 2004. According to DOD, about 221,300 personnel 
from all the military services were deployed throughout the region in 
December 2004 to support Operation Enduring Freedom and Operation Iraqi 
Freedom, including deployed personnel in Iraq, Afghanistan, and Kuwait. 

Table 1: Comparison of Reported DOD-Wide Imminent Danger Pay and 
Implied Number of Deployed Personnel, April 2004-April 2005: 

Month: April 2004; 
Reported imminent danger pay: (dollars in thousands): $38,186; 
Implied number of deployed personnel (numbers in thousands): 170. 

Month: May 2004; 
Reported imminent danger pay: (dollars in thousands): 46,106; 
Implied number of deployed personnel (numbers in thousands): 205. 

Month: June 2004; 
Reported imminent danger pay: (dollars in thousands): 37,054; 
Implied number of deployed personnel (numbers in thousands): 165. 

Month: July 2004; 
Reported imminent danger pay: (dollars in thousands): 38,893; 
Implied number of deployed personnel (numbers in thousands): 173. 

Month: August 2004; 
Reported imminent danger pay: (dollars in thousands): 231,090; 
Implied number of deployed personnel (numbers in thousands): 1,027. 

Month: September 2004; 
Reported imminent danger pay: (dollars in thousands): 59,500; 
Implied number of deployed personnel (numbers in thousands): 264. 

Month: October 2004; 
Reported imminent danger pay: (dollars in thousands): 13,713; 
Implied number of deployed personnel (numbers in thousands): 61. 

Month: November 2004; 
Reported imminent danger pay: (dollars in thousands): 69,699; 
Implied number of deployed personnel (numbers in thousands): 310. 

Month: December 2004; 
Reported imminent danger pay: (dollars in thousands): 33,228; 
Implied number of deployed personnel (numbers in thousands): 148. 

Month: January 2005; 
Reported imminent danger pay: (dollars in thousands): 41,499; 
Implied number of deployed personnel (numbers in thousands): 184. 

Month: February 2005; 
Reported imminent danger pay: (dollars in thousands): 127,769; 
Implied number of deployed personnel (numbers in thousands): 568. 

Month: March 2005; 
Reported imminent danger pay: (dollars in thousands): 48,659; 
Implied number of deployed personnel (numbers in thousands): 216. 

Month: April 2005; 
Reported imminent danger pay: (dollars in thousands): (933); 
Implied number of deployed personnel (numbers in thousands): (4). 

Source: GAO's analysis of DOD's GWOT data. 

[End of table]

In continuing discussions of our analysis, Army Budget Office officials 
provided additional detail on the Army's reported imminent danger pay 
obligations, which comprise the bulk of DOD-wide reported imminent 
danger pay obligations. With respect to the August 2004 reported 
imminent danger pay, which was by far the largest reported amount from 
April 2004 through April 2005, Army Budget Office officials said that 
their reported portion--$217 million--of the DOD-wide $231 million was 
in error owing to a misplaced decimal and that the Army's August 2004 
imminent danger pay should have been reported as $21 million. These 
officials attributed the month-to-month fluctuations in reported 
imminent danger pay to the lack of timeliness and consistency in 
adjusting costs between those baseline and GWOT amounts. Beginning in 
June 2005, the Army said that it adopted a new process that uses 
accounting data, with the actual count of deployed forces as a 
validation checkpoint. 

Operation and Maintenance Obligations Are Not Always Properly 
Categorized: 

Obligations are the foundation of all GWOT cost reporting. Operation 
and maintenance obligations in support of GWOT represent tens of 
thousands, if not hundreds of thousands, of individual transactions 
ranging in value from 1 penny to millions of dollars. When obligations 
are incurred, the services enter them into their accounting systems 
using accounting codes. For example, an Army budget activity, such as 
an installation or unit, initially obligates funds for acquired goods 
and services by using the Standard Army Accounting Classification Code. 
An obligation entry includes information on the funding source; the 
operational mission, such as Operation Iraqi Freedom; and the category 
of cost. The cost categories are established by the services. In the 
Army, the cost category is called the element of resource (EOR). 

Because DOD's Financial Management Regulation volume 12, chapter 23 
requires that the services capture costs within their existing 
accounting systems and report them in a common cost format known as the 
cost-breakdown structure, the services must translate--or "cross- 
walk"--their obligations into 1 of 55 cost categories in the cost 
breakdown structure established by the Office of the Under Secretary of 
Defense (Comptroller) and used in the monthly GWOT cost reports. For 
the Army, this involves translating obligations recorded by EOR into 
the chapter 23 GWOT cost categories. To meet DOD's reporting 
requirements, each month Army resource management officials must cross- 
walk costs in the EOR categories into the GWOT cost categories, 
sometimes manually. For example, in fiscal year 2004, ARCENT resource 
management officials manually cross-walked 266 EORs into 14 GWOT cost 
categories. 

If obligations are not identified in the correct cost category in the 
services' accounting system, they can affect the overall reliability of 
DOD's GWOT cost reporting. In the Army, ARCENT resource management 
officials told us that on the basis of their reviews of GWOT 
obligations, they had confidence in the accuracy of the total dollar 
obligations as identified in the GWOT cost report but felt that 
obligations were being incorrectly categorized. At two Army divisions, 
we observed obligations being assigned to the wrong EOR. In our limited 
testing of transactions at one of the divisions, which deployed to Iraq 
as part of Operation Iraqi Freedom, we found errors in assigning costs 
to the correct EOR, which resulted in overstated costs in some 
categories and understated costs in others. We reviewed 31 transactions 
valued at $15 million and found coding errors in 11, or 35 percent of 
the transactions, valued at $770,134, or 5 percent of the amount we 
reviewed. One example of an error we found involved $383,147 in 
obligations for communications services, which was entered into the 
division's financial management systems under an EOR that corresponded 
with DOD's GWOT cost report's category of Other Services and 
Miscellaneous Contracts. A senior division resource management official 
stated that it would have been better to use an EOR that corresponded 
with the Facilities/Base Support category. As a result, the Other 
Services and Miscellaneous Contracts category was overstated by 
$383,147 while the Facilities/Base Support cost category was 
understated by the same amount. At the other Army division, which 
deployed to Afghanistan as part of Operation Enduring Freedom, we also 
found errors in assigning costs to the correct EOR that resulted in 
overstated costs in some categories and understated costs in others. We 
reviewed 146 of 237 transactions valued at more than $14 million and 
found coding errors in 32 transactions, or 22 percent of the 
transactions, valued at more than $4 million, or 30 percent of the 
amount we reviewed. For example, the division obligated $6,995 for a 
printer, which it originally coded with the EOR for automated data- 
processing equipment. However, once the purchase request reached the 
contracting office, it was recoded as general supplies and not as 
automated data-processing equipment. After reviewing this example and 
others, a senior resource management official at the division concurred 
with our assessment of these coding errors. 

In related reporting,[Footnote 15] we have raised concerns about 
reported equipment reconstitution costs.[Footnote 16] Reconstitution is 
one of the cost categories in DOD's GWOT cost report. We reported that 
DOD has not accurately tracked and reported its reconstitution costs 
because the services are unable to segregate equipment reconstitution 
from other maintenance requirements, as required. In the case of the 
Air Force, we reported that it does not break out its equipment 
reconstitution obligations from other GWOT obligations in the cost 
report and was reporting no reconstitution costs. In further 
discussions Air Force officials told us that their reconstitution costs 
were being captured in their flying hour (operating tempo) costs. 
Regarding the Army and the Navy, we reported that equipment 
reconstitution obligations reported by those two services are likely 
overstated because (1) the Army includes costs other than those 
required for reconstitution and (2) the Navy is unable to segregate 
regular maintenance from reconstitution maintenance for ship overhauls. 
We recommended and DOD agreed to direct the services to develop 
comprehensive and consistent methods for tracking and reporting 
equipment reconstitution obligations. In agreeing with our 
recommendation, the Office of the Under Secretary of Defense 
(Comptroller) said that the office had already revised its financial 
management regulation to improve the reporting of equipment 
reconstitution, but we observed that until additional actions are 
taken, such as improving the services' financial management systems' 
ability to track obligations, our recommendation will not be fully 
implemented. Beginning in October 2004, DOD revised its reconstitution 
cost category to include four subcategories, and the Air Force is 
reporting reconstitution obligations in two of those categories. 

In addition to the concerns with properly categorizing costs that we 
identified, officials from the Army Budget Office believe that the 
Army's operating support obligation data are reliable at the broad 
category levels (personnel support, operating support, and 
transportation), but distribution within categories is likely to 
contain errors.[Footnote 17] These officials said that the Army is 
taking two immediate actions. First, it has refined its EOR to cost 
breakdown structure code cross-walk. The Army has specifically 
identified approximately 135 EORs that directly associate with the cost 
breakdown structure. Additionally, Army officials said that they have 
added an additional data element (the Functional Cost Account code, 
which describes the programmatic function), which will provide one more 
reference point to validate entries. This revision was effective with 
the June 2005 reporting cycle. Second, Army officials said that the 
Army is developing a standard operating procedure with a follow-on 
"train the trainers" program for Army-wide distribution. It will 
prescribe the methodology for capturing GWOT execution data from the 
accounting systems and source documents. This is a longer-term solution 
that the Army believes should contribute materially to improved data 
entry at the originating organizational levels. 

The Air Force Audit Agency, in a June 2005 report on Air Force GWOT 
spending, also identified errors in properly categorizing GWOT 
costs.[Footnote 18] Specifically, the audit agency found that in fiscal 
year 2003, 159 of 923 transactions it reviewed, or about 17 percent of 
GWOT transactions valued at more than $163 million, were inaccurately 
recorded in the Air Force's accounting system. The report stated that 
this condition occurred because resource management officials were 
uncertain of which costs were GWOT related and because reported costs 
were not compared with documentation as required by DOD's financial 
management regulation. The audit agency concluded that inaccurate cost 
reporting may lead to questionable cost-of-war information, distorted 
command resource allocation and spending plans, and unreliable summary 
DOD financial reports. The audit agency made several recommendations, 
including one that cognizant Air Force officials review transaction 
data and notify accounting liaison office personnel of inaccurate 
entries monthly, and one that the liaison office personnel request data 
correction from appropriate accounting offices. The Air Force agreed 
with the recommendations and stated that it would make the recommended 
changes. In advance of the report's issuance, in a March 2, 2005, memo, 
the Assistant Secretary of the Air Force, Financial Management and 
Comptroller, addressed and agreed to revise guidance to emphasize 
increased management oversight over transaction approval, accuracy, and 
documentation completeness. 

Some GWOT Cost Data Are Based on Estimates: 

Because ships at sea incur the same types of costs whether in normal 
forward-deployed operations or in support of GWOT, the Navy allocates 
the costs between normal and GWOT operating costs. The Navy's major 
commands use a variety of approaches for allocating these costs. For 
example, we found that the Atlantic and Pacific surface commands, which 
are responsible for managing the Navy's surface ships, use two 
different approaches in order to allocate a portion of each ship's 
normal operating costs to GWOT for those ships that have been used to 
support GWOT missions. The Atlantic Fleet uses an approach whereby the 
portion of a ship's normal operating costs becomes GWOT costs when (1) 
the ship has been engaged in a GWOT mission during that month and (2) 
the ship exceeds its monthly baseline budget. Once the baseline budget 
has been exceeded, the additional cost above that baseline is 
considered incremental and is recorded as a GWOT cost. The Pacific 
Fleet uses a different approach, which utilizes a model that has 
evolved over many years. This model takes a number of factors into 
consideration in order to calculate how much of a ship's costs should 
be allocated to GWOT. These factors include a running 3-year average of 
the costs of operating each individual ship, the cost of maintaining 
that general class of ships, and whether the ship has performed GWOT 
missions. This model calculates an amount for each ship that should be 
recorded as a GWOT cost. 

Documentation Is Not Always Available: 

Documentation related to goods and services purchased in support of the 
Global War on Terrorism is not always available. Without documentation, 
one cannot attest to the reliability and applicability of reported 
costs to GWOT. At one of the Marine Expeditionary Forces, we were able 
to link reported costs to the supporting documentation for contractual 
purchases. However, when we compared a limited number of documents from 
the ARCENT document register with documentation controlled by DFAS- 
Rome, New York, we found instances where (1) document register 
descriptions did not match invoices maintained by DFAS and (2) invoices 
did not match dollar amounts associated with the ARCENT documentation 
number. For example, one item we identified was listed in the document 
register as a purchase of unit coins for $200,000. However, we found no 
evidence indicating that the $200,000 was actually obligated for the 
purchase of unit coins. The EOR listed in the document register 
indicated that the item was for furniture. When we reviewed the 
invoices, we found that the documentation supported the purchase of 
furniture for $18,959 but nothing for unit coins or for $200,000. In 
another example, a purchase was listed in the document register for 
$21,900 toward an operational fund. When we reviewed the invoice, we 
found that the documentation supported the purchase of translator 
services for $3,950. 

Several audit agencies also had mixed success with linking reported 
GWOT costs to supporting documentation. In many cases, documentation 
was not available or the available documentation was not sufficient 
enough to determine the applicability of costs, as shown in the 
following examples: 

* The Air Force Audit Agency, in its previously cited June 2005 report 
on Air Force GWOT funds management, reported that financial managers 
could not provide documentation to support approximately 14 percent of 
1,037 fiscal year 2003 transactions reviewed. The transactions had an 
absolute value of more than $16 million. The audit agency reported that 
the inability to provide documentation occurred for three primary 
reasons: (1) Air Force financial managers did not require funds holders 
and resource advisors to maintain supporting documents for a minimum of 
24 months, (2) comptrollers did not provide funds holders and resource 
managers with documentation requirements training, and (3) Air Force 
organizations did not always comply with records management guidance. 
The agency concluded that maintaining documentation provides an audit 
trail and assurance that Air Force personnel properly expended these 
funds. The agency made several recommendations to strengthen controls 
over documentation, which the Air Force agreed to implement. In the 
previously cited March 2, 2005, memo issued in advance of the issuance 
of the Air Force Audit Agency's report, the Assistant Secretary of the 
Air Force, Financial Management and Comptroller also addressed this 
finding and agreed to revise Air Force guidance to require funds 
holders and resource advisors to maintain supporting documentation for 
a minimum of 24 months for all financial transactions, modify the Web- 
based Resource Advisor Tutorial to highlight the need for funds holders 
and resource advisors to maintain documentation for financial 
transactions, and to require comptroller personnel to include 
documentation requirements in all funds holders' training and resource 
advisor training. 

* The Naval Audit Service reported that it could not find supporting 
documentation for 11 percent of the reported fiscal year 2002 Operation 
Enduring Freedom costs for the 14 units it reviewed.[Footnote 19] The 
Naval Audit Service found that more than half of these unsupported 
costs resulted from one unit's not retaining documentation over a 2- 
month period. This same unit's costs for other months reviewed were 
well documented; so, overall, the audit service was not overly 
concerned with the 2-month gap. For the other units reviewed, 
documentation was available, but the units could not always identify 
the portion of those items reported as being incremental costs of 
Operation Enduring Freedom. The Naval Audit Service concluded that 
internal controls were adequate and that an expanded review was not 
warranted at that time. It made no recommendations. 

* The U.S. Army Audit Agency found that 58, or about 2 percent, of the 
2,751 transactions it reviewed for fiscal year 2003 valued at $37.4 
million lacked supporting documentation.[Footnote 20] As a consequence, 
the agency was unable to determine if the transactions were valid. The 
Army Audit Agency also discovered documentation problems involving 
government purchase cards. These problems included a lack of 
documentation authorizing purchases and inadequate justification of 
purchases to ensure that they were related to contingency operations. 
The agency concluded that without adequate justifications and support 
to ensure that the transactions are related to contingency operations, 
these types of obligations appear questionable. The agency recommended 
that Army financial management leadership emphasize the consistent 
application of guidance for justifying and documenting contingency 
operations requirements, and the Army financial management leadership 
said that it would emphasize the need to fully justify and document 
expenditures as related contingency operations and that it had already 
completed or will complete action through the distribution of 
additional guidance by December 2005. 

Several Factors Contribute to Data Reliability Concerns: 

Data reliability is affected by the previously discussed long-standing 
deficiencies in DOD's financial management systems, which affect the 
ability to capture costs in a completely systematic manner. This is 
compounded by the lack of a systematic process for ensuring that the 
data in the GWOT cost reports are accurate, less-than-adequate 
management oversight on the preparation and accuracy of the reports, 
the failure to use actual data when available, and a large number of 
cost categories and little training on how to apply them. 

There Is No Systematic Process to Ensure That GWOT Data Are Accurately 
Recorded and Ensure Adequate Management Oversight: 

For the most part, DOD does not have a systematic process to review 
reported GWOT costs to ensure that they are accurate. To ensure the 
accuracy of DOD's GWOT cost reports, the military services and the 
Office of the Under Secretary of Defense (Comptroller) compare each new 
month's cost report with previous months' reports to ascertain if there 
are large variances from previous reports and, if so, determine what 
caused them and make revisions as appropriate. For GWOT cost reporting, 
individual obligation data that are coded as being in support of GWOT 
are aggregated at successively higher command levels and sent through 
the services' chain of command. At each command level, financial 
management officials review costs for large anomalies. The services 
take different approaches to ensure that GWOT obligation data are 
correctly recorded. For example, the Army gains assurance that reported 
obligations are accurate by reviewing the monthly obligation data 
provided by units. However, the Army does not follow specific 
guidelines to determine the extent to which obligations are accurately 
reported. For example, U.S. Army Forces Command and ARCENT financial 
management officials ensure that reported obligations are correct by 
using historical knowledge of cost trends to review obligation reports 
for large anomalies. If a large anomaly is identified, it is further 
investigated to determine the cause and resolve any differences. 
However, the two commands do not have specific criteria to determine 
how large an anomaly has to be before it is investigated. As a result, 
financial management officials at the commands use their judgment to 
determine which anomalies to investigate. The Navy also reviews GWOT 
cost data for anomalies but lacks a systematic method for gaining 
assurance that the data are reliable. According to the Financial 
Management and Budget official who manages the process, there is no 
systematic approach for reviewing the submissions received from each of 
the claimants. 

The Marine Corps has adopted additional measures to gain further 
assurance that its GWOT obligations are accurately reported. For 
example, resource management officials at one Marine Expeditionary 
Force told us that they periodically visit subordinate units to 
reaffirm that these units are following Marine Corps standard operating 
procedures for entering and recording obligation data. During these 
visits, officials use a checklist that highlights areas that the 
visiting officials should emphasize. These areas include assessing the 
unit's knowledge of Marine Corps policies and procedures, reviewing 
purchases made by the unit, and checking to ensure that the unit 
correctly entered obligations into the Marine Corps' accounting system. 
Marine Expeditionary Force resource management officials told us that 
this process plays an important role in ensuring that GWOT obligation 
data are reliable. 

Once the services complete their review of GWOT obligations they submit 
their obligation reports to DFAS,[Footnote 21] which aggregates the 
individual submissions into the monthly GWOT cost report. The Office of 
the Under Secretary of Defense (Comptroller) gains assurance that the 
services' reported obligations are reliable by reviewing the monthly 
DFAS cost reports for anomalies. If a discrepancy is identified, the 
Comptroller's office contacts the responsible DOD component, attempts 
to determine reasons for the discrepancy, and directs that necessary 
corrections be made before distributing the cost report within DOD. 

Despite the efforts to review reported costs, there is less-than- 
adequate management oversight on the preparation and accuracy of the 
reports. We found instances where the services did not identify wide 
swings in monthly costs, such as the swings discussed earlier in 
imminent danger pay in the GWOT cost reports for DOD as a whole, as 
well as errors in the overall GWOT cost reports that amounted to 
hundreds of millions of dollars monthly. Specifically, in reviewing the 
Navy's and Marine Corps' fiscal year 2005 operation and maintenance and 
investment GWOT obligations as part of a separate effort, we found that 
the obligations reported in DOD's summary GWOT cost report were 
inadvertently being overstated by hundreds of millions of dollars 
monthly between the November 2004 and the April 2005 cost reports. In 
total, we found that the two services overstated their obligations 
during that period by almost $1.8 billion--$1.5 billion in the case of 
the Marine Corps and $300 million in the case of the Navy. Each month 
DOD prepares a separate report for each of the appropriations acts that 
are used to provide funding authority to support GWOT and an overall 
summary cost report. In discussions with Marine Corps and Navy budget 
officials, it was determined that operation and maintenance and 
investment obligations associated with funding authority provided 
through title IX of the fiscal year 2005 Defense Appropriations Act 
were inadvertently being double counted in the GWOT cost report: once 
in the title IX report and once again in the report on funding 
authority provided in other fiscal year 2005 appropriations acts, 
resulting in inflated figures in the summary report. These reporting 
problems were present in all of the GWOT cost reports from November 
2004 through April 2005. Once this matter came to light, Navy and 
Marine Corps officials took action to reflect the accurate obligations 
for the title IX and other fiscal year 2005 appropriations reports. The 
May 2005 report reflects the corrected cumulative obligations through 
May 2005. 

Volume 3, chapter 8 of DOD's Financial Management Regulation requires 
that steps be taken to verify that transactions are correctly entered 
into the services' accounting systems by comparing financial 
transactions with supporting documents. However, as discussed earlier, 
in a detailed review of fiscal year 2003 GWOT obligations, the Air 
Force Audit Agency found that in addition to not properly categorizing 
costs, officials at 16 of 29 locations visited failed to verify that 
159 of 923 transactions, or 17 percent of the transactions the agency 
reviewed, were accurately entered into the Air Force's financial 
accounting system. The audit agency said that this condition occurred 
because funds holders were uncertain of which costs should be coded as 
GWOT expenditures and did not compare financial transactions with 
supporting documents as required by DOD's financial management 
regulation. The audit agency concluded that as a result, financial 
managers may inadvertently provide questionable "cost of war" 
information when data are inaccurately processed in the system. 
Furthermore, command resource allocation and spending plans may be 
distorted by faulty data. Finally, summary DOD financial reports may be 
unreliable. The audit agency made recommendations to the Air Force to 
review transaction data; correct inaccurate data; and develop, publish, 
and implement guidelines on the appropriate use of GWOT cost codes, 
which the Air Force agreed to do. 

Estimated Obligations Are Used Instead of Actual Payroll Information: 

As previously discussed, in reviewing the Army's military personnel 
GWOT obligations for fiscal year 2004, we found that the reported 
amounts for mobilized Army reservists were inconsistent with related 
DOD payroll information. We found that the Army's military personnel 
GWOT obligations reported in the GWOT cost report were based primarily 
on monthly estimates in the Army obligation plan rather than actual 
payroll information. 

The practice of using estimates in reporting military personnel costs 
related to contingency operations rather than payroll data has been 
ongoing for almost a decade. In our previously cited 1996 report on the 
reliability of contingency operations costs, we reported that the 
services used estimates rather than actual data to derive incremental 
personnel costs for reservists called to active duty in contingency 
operations. We also reported that the services used estimates in 
reporting the special pays and allowances, such as imminent danger pay, 
which all military personnel become eligible for during deployments, 
and that they did not reconcile those costs to actual payroll data. At 
that time, we reported that DOD had plans under way to link its payroll 
and personnel systems, which would allow the extraction of actual cost 
data. Until the two systems were linked, we reported that it would not 
be possible to test the accuracy of estimated costs. As of June 2005, 
more than 9 years after our earlier report, at least one service, the 
Army, was still not using actual payroll information to report its GWOT 
military personnel obligations. Army officials advised us in July 2005 
that, on the basis of our findings on reported military personnel 
obligations, they will now use related DOD payroll information where 
applicable. 

Assigning Correct EORs Are Complicated by a Number of Factors: 

As also discussed earlier, if obligations are not categorized in the 
correct cost categories in the services' accounting system, it can 
affect the overall reliability of DOD's GWOT cost reporting. The large 
number of EORs used by Army units to assign costs to categories, 
literally in the thousands, complicates properly categorizing GWOT 
obligations. We found that the large number of EORs encourages Army 
units to adopt shortcuts to simplify categorization, which can result 
in incorrectly categorizing obligations. For example, a resource 
management official in one Army division indicated that the division 
used one particular EOR as a catch-all category. This EOR corresponded 
with DOD's GWOT cost-reporting category of "Other Services and 
Miscellaneous Contracts." Placing costs in this category inflates this 
cost category. At another Army division, resource management officials 
reviewed the EOR list in order to streamline the number of EORs that 
the division used. After reviewing about 3,700 EORs, resource 
management officials concluded that about 15 were most appropriate for 
the purpose of categorizing its GWOT obligations. 

The use of a single standardized EOR to categorize obligations for 
varying types of goods and services also affects proper cost 
categorization. For example, there is one EOR for all purchases made 
with a Government Purchase Card (GPC), regardless of the item or 
service purchased. In another example, resource management officials at 
one Army division told us that while deployed to Afghanistan, cash 
purchases made by its field ordering officers were always coded to the 
EOR for general supplies, no matter what item or service was obtained. 
Finally, ARCENT resource management officials told us that the command 
identified contracts that should have been allocated to several EORs 
but were consolidated under one EOR. These contracts inflated the costs 
for that EOR category. 

When coding errors are made, they are not always corrected. Resource 
management officials at one Army division told us that it was too time- 
consuming to fix miscoded EORs, as it involves having to coordinate 
with customers and make changes in the Army's financial accounting 
system. As a result, inaccurate information remains in the accounting 
system. This division's Comptroller acknowledged that better attention 
should be paid to coding purchase requests at the comptroller level and 
that oversight should be a higher concern. 

People responsible for categorizing purchases by the EOR are not always 
properly trained, which further complicates correct categorization. 
Resource management officials at an Army command we visited told us 
that there were training concerns with staff in the Comptroller's 
office, particularly given the frequent rotation in and out of the 
office that is typical of military staff. These officials told us that, 
often, the person responsible for entering EORs into the system has not 
been trained to do so. Obligations are often entered by lower-ranked 
enlisted soldiers who have been assigned to the position because they 
have downtime and are computer literate. These soldiers may not have 
any experience with entering obligation data and might have received 
little or no training on how to do so. According to the officials, 
inexperience is not a major issue with more straightforward obligation 
categories such as transportation; however, when applied to more 
complicated categories, such as supplies, many errors can occur. 

Like the Army, the Marine Corps also captures GWOT obligations using 
cost categories, known in the Marine Corps as cost account codes. 
However, because the Marine Corps uses fewer categories, converting 
data into the contingency cost categories is simpler than for the other 
services. For example, Marine Corps Forces Pacific resource management 
officials established 31 cost account codes that translate into 25 of 
the 55 GWOT cost report categories. Resource management officials at 
one Marine Expeditionary Force told us that utilizing a simple system 
helps to improve the accuracy of their obligation data. 

Processes for Recording GWOT Costs Can Lead to Errors: 

Processes used to enter and monitor operation and maintenance 
obligations may also contribute to unreliable cost data. For example, 
in the Army, resource management officials from two divisions that had 
deployed to Iraq and one division that had deployed to Afghanistan 
reported that, when deployed, the divisions were junior users of the 
Army's database Commitment Accounting System and did not have access to 
the Army's principal accounting system, the Standard Army Financial 
System. As a result, the three divisions had to submit their document 
registers to ARCENT to record obligations and commit funds. Resource 
management officials at two of the three divisions stated that the 
amounts recorded in ARCENT's ledger could not be relied upon because of 
manipulations and adjustments made to the data by ARCENT. One official 
stated that obligations or commitments would sometimes be doubled or 
eliminated entirely from the ledger. For example, one division had to 
reenter $40 million in obligations that ARCENT dropped from the ledger 
during the fiscal year 2003 closeout. This official also told us that 
the system that the Army uses to track commitments was antiquated and 
did not support the data needed to accurately track and analyze costs. 

The Use of Existing GWOT Cost Data Affects Multiple DOD Financial 
Processes: 

Notwithstanding concerns about data reliability, according to the 
Office of the Under Secretary of Defense (Comptroller), which develops 
GWOT budget requests in concert with the military services and other 
DOD components, a metric is needed and the GWOT cost reports are the 
only available data. In discussing the implications of improperly 
categorizing GWOT obligations, the Comptroller's office told us that it 
adversely affects decision making and the ability to use the data for 
analysis. In discussing how the detailed cost data are used, a 
Comptroller representative told us that he uses the detailed 
information presented in the cost breakdown structure categories in the 
report for several purposes, as follows: 

* to make billion-dollar decisions in developing supplemental funding 
budget requests;

* to cross-check the cost data as presented in the cost breakdown 
structure with the estimates developed by the Contingency Operations 
Support Tool (COST) model; and: 

* as a management tool to adjust the cost factors in the COST model and 
revise the model, prepare supplemental funding budget requests, and 
inform DOD leadership of detailed costs incurred for GWOT. 

DOD Is Using Regulations to Guide GWOT Budgeting, Reporting, and 
Spending That Were Not Designed for Wartime Operations: 

Office of the Under Secretary of Defense (Comptroller) and military 
service officials are using DOD's existing financial management 
regulation that addresses contingency operation funding for guiding 
budget submissions, cost reporting, and spending for GWOT. However, 
DOD's Financial Management Regulation,[Footnote 22] which contains 
these policies and procedures, was designed for small-scale contingency 
operations and has language expressly stating that it is not intended 
to address wartime activities such as those that DOD is confronted with 
in the current war.[Footnote 23] Furthermore, specific provisions in 
this regulation conflict with the GWOT funding procedures and, in some 
cases, the needs of the war. Without an updated policy on GWOT 
budgeting, cost reporting, and spending, the military services and 
other DOD agencies cannot make informed judgments on the appropriate 
use of GWOT funding authorities. In response to our work, the Office of 
the Under Secretary of Defense (Comptroller) has updated its regulation 
to address GWOT spending. 

Current Spending Policy Was Developed for Smaller-Scale Operations: 

DOD's current regulation was designed for small-scale contingency 
operations and is not intended to address wartime activities. In 
February 1995, DOD added a chapter to its financial management 
regulation to establish policies and procedures for estimating the 
budget and reporting the costs of contingency operations (vol. 12, ch. 
23--Contingency Operations). In 1998 the Office of the Under Secretary 
of Defense (Comptroller) implemented a standard cost breakdown 
structure for standard contingency operations to improve the budgeting 
and reporting of these costs. This structure was incorporated in the 
2001 version of chapter 23 and has been expanded in the latest January 
2005 version. The Office of the Under Secretary of Defense 
(Comptroller) has also supplemented its regulation through messages 
regarding cost reporting and formulating specific fiscal year budget 
requests. Since its publication in 1995, Comptroller officials have 
used chapter 23 and later the cost breakdown structure in particular, 
to budget, capture the costs, and fund or seek supplemental funding for 
contingency operations. Comptroller officials have also directed the 
services to prepare budget estimates and report the costs of 
contingency operations (to include the various missions that support 
the Global War on Terrorism), according to chapter 23's provisions. 
During our visits to the military commands and installations that have 
been involved in supporting GWOT contingency operations, service 
financial managers indicated that they use chapter 23 as a primary 
source to guide all war-related spending. 

Although Office of the Under Secretary of Defense (Comptroller) and 
service financial management officials are continuing to use the 
provisions in chapter 23 to guide their GWOT budget submissions, cost 
reporting, and spending, it is not clear to what extent these 
provisions should apply, especially given that, on its face, chapter 23 
states that its policies and procedures do not address wartime 
activities or circumstances that require U.S. military forces to be 
placed on a wartime footing.[Footnote 24] Moreover, numerous specific 
provisions in chapter 23 conflict with the GWOT funding procedures and, 
in some cases, the needs of the war. 

In addition to the express language that states that chapter 23 does 
not apply to wartime activities, the overall structure of chapter 23 
and many of its specific provisions are not intended to address the 
types of costs incurred or funding authorities provided to support 
GWOT. For example, although the fiscal year 2004 GWOT budget estimates 
and cost reporting contained significant amounts of investment costs, 
chapter 23, given that it was designed to address small-scale 
contingency operations, which usually would not involve such costs, did 
not include policies and procedures to guide the budgeting or reporting 
of these costs.[Footnote 25] Moreover, another specific provision in 
chapter 23 states that these costs should not be considered as 
incremental costs of a contingency operation.[Footnote 26] Recognizing 
that large-scale contingency operations lasting as long as GWOT and 
affecting a large portion of U.S. military units may necessarily incur 
investment costs, these provisions illustrate an inconsistency between 
the needs to support the war and the current DOD policies and 
procedures used to guide the preparation of GWOT budgets, cost 
reporting, and spending. This lack of clarity could lead to uncertainty 
at all levels within DOD over what policies actually are intended to 
guide the funding for the war. 

Use of GWOT Funds for Home Station Operations Is Most Affected by the 
Lack of Updated Policy: 

There is confusion over DOD's policies and procedures for guiding the 
preparation of GWOT budgets, cost reporting, and the spending of 
billions of dollars in GWOT funding for base operation activities at 
the home stations of the military units that are preparing to deploy or 
have deployed on GWOT missions. Chapter 23 expressly states that costs 
associated with facilities/base support activities may be budgeted and 
reported only if the activities occur away from a unit's home 
station.[Footnote 27] Despite this administrative limitation, many 
installations have been budgeting and recognizing as GWOT-related costs 
base support costs for home station activities. For example, in fiscal 
year 2003 the Navy spent $42.5 million for wharf repairs at Pearl 
Harbor, Hawaii. In fiscal years 2003 and 2004, the Air Force spent a 
total of more than $117 million at Anderson Air Force base in Guam for 
a variety of installation-related costs (e.g., support facilities for 
bomber aircraft and storm damage repair). The Army's Installation and 
Management Agency, which manages all Army installations, obligated 
$1.52 billion in fiscal year 2004 and has budgeted about $2.07 billion 
in fiscal year 2005 expressly for GWOT-related "home station" base 
support activities. All of these costs conflict with the home station 
spending limitation in chapter 23. 

Notwithstanding chapter 23's administrative limitation on budgeting and 
reporting costs for home station facilities/base support activities, 
some of these reported costs appear to meet the definition of 
"incremental costs," which guides all GWOT spending. DOD policy states 
that costs associated with contingency operations are limited to the 
incremental costs of the operations, that is, costs that are above and 
beyond baseline training, operations, and personnel costs or costs that 
would not have been incurred had the contingency operation not been 
supported[Footnote 28] (i.e., costs that are directly attributable to 
the operation). During our review, we noted a number of instances in 
which GWOT costs were recorded relating to home station base operation 
activities that appear to be directly attributable to the war. At one 
Army installation--an installation that helped prepare reserve military 
personnel for deployments in support of GWOT--we found reported GWOT 
costs for the renovation of barracks, dining facilities, and latrines 
to accommodate increased numbers of reserve personnel using those 
facilities. However, we also found some home station costs that did not 
appear to support the war or only to tangentially support it. For 
example, at this same installation we found that it also reported GWOT 
costs for renovating unneeded vehicles for redistribution within the 
Army even though they were not used in any contingency operation and 
had been declared excess to the unit before it deployed. At another 
Army installation, we found GWOT costs to improve the readiness 
condition of equipment not deployed for contingency operations. In 
addition, we found that one Navy Command reported GWOT costs for 
improving the condition of floating docks that were not properly stored 
while the unit responsible for their upkeep was deployed on a GWOT 
mission. The docks were seriously corroded as a result of not being 
stored properly and left in salt water for more than a year. Navy 
officials said that nearly $6 million in GWOT funding had been used in 
fiscal year 2003 to pay for these repairs. Navy officials disagreed 
with our view that these costs were at best tangential to the support 
of the war and noted that the justification for the repairs was that 
these docks were a requirement and would likely be needed in the future 
to support GWOT. However, we believe that GWOT costs are limited by the 
provisions of chapter 23 to those costs that are in direct support of 
the war. 

In response to our concerns about the inconsistencies contained in 
chapter 23, in August 2005, the Office of the Under Secretary of 
Defense (Comptroller) officials approved a revision to chapter 23 to 
clarify the policy on both base operations and investment costs for 
contingency operations. This clarification should assist the military 
services and other DOD agencies in making informed judgments on the 
appropriate use of GWOT funding authorities. 

Cost Controls Can Be Strengthened As Operations Mature: 

DOD and Office of Management and Budget policies emphasize the need to 
spend funds prudently. Individual commands and commanders have 
implemented a variety of cost controls for GWOT spending. Current cost 
controls include acquisition review boards, command review of 
purchases, limits on some categories of spending, and a cost reduction 
goal in Iraq. However, DOD's policies and guidance do not go beyond 
advising DOD officials of their financial management responsibilities 
with regard to the prudent use of contingency funding authorities and 
provide no guidelines on steps that should be taken to control costs, 
particularly as operations mature, while ensuring mission 
accomplishment. Resource managers from a number of Army divisions that 
have deployed to Iraq or Afghanistan have told us that cost controls 
can be strengthened as operations mature. 

Policy Emphasizes the Need for Prudent Spending: 

OMB circular A-123 requires all mangers of federal funds to ensure that 
cost-effective controls be implemented for the expenditure of 
appropriated funds. Section 230108 of DOD's financial management 
regulation for contingency operations, which was added in January 2005, 
advises DOD officials of their financial management responsibilities to 
ensure the prudent use of contingency funding authorities. The section 
emphasizes that it is vital for civilian and military personnel 
authorized to obligate and expend funds in support of contingency 
operations to employ a fiduciary approach to ensure that funds are used 
in a prudent manner. 

GWOT spending has risen steadily since the attacks of September 11, 
2001, as operations have expanded. As shown in figure 2, from fiscal 
year 2002 through fiscal year 2004, reported costs rose from $11 
billion to $71 billion annually and, from our projection of reported 
fiscal year 2005 obligations through May 2005, could reach about $71.5 
billion again in fiscal year 2005. The large amount of spending and its 
growth underscore the need for cost controls. 

Figure 2: Growth in Reported and Projected GWOT Spending, Fiscal Years 
2002-5: 

[See PDF for image] 

[A] GAO projected the fiscal year 2005 GWOT cost on the basis of 
reported obligations through May 2005. 

[End of figure] 

Individual Commands Have Developed a Variety of Cost Controls for GWOT 
Spending, but There Is No Systematic DOD Effort to Ensure That All 
Commands Pursue Cost Controls: 

Some commands have taken steps to seek economy and efficiency in 
performing tasks by reviewing existing requirements and seeking more 
efficient methods to perform required tasks. Over the years, we have 
reported that when the government seeks opportunities to control costs, 
savings are usually realized. For example, in July 2004 we reported 
that savings are generally realized when the customer reviews logistics 
support contractors' work for economy and efficiency but that these 
reviews have not been routinely conducted at all work 
locations.[Footnote 29] We reported that U.S. Army Europe saved $200 
million dollars, or 10 percent of the contract ceiling price, on its 
Balkans Support Contract; Third Army would save $31 million annually in 
Kuwait, or 43 percent by changing food service contractors; and the 
Marine Corps saved $8.6 million, or 18 percent, from an estimated $48 
million in work in Djibouti, which is one of the Operation Enduring 
Freedom locations. 

Military commands and individual commanders involved in GWOT as well as 
in earlier operations have put in place a variety of controls on their 
own initiative designed to control costs. Some examples are as follows: 

* Acquisition review boards are being used in Iraq, Afghanistan, and 
Kuwait to assess if requirements are valid and, if so, decide how best 
to satisfy them. In addition, in an August 2004 order, the commander of 
Multinational Forces-Iraq established a stewardship council intended to 
reinforce fiscal discipline in order to ensure that limited financial 
resources are effectively and efficiently employed to accomplish the 
command's strategic objectives. 

* Individual Army divisions have taken steps to control costs. One Army 
division we visited has restricted the use of its Government Purchase 
Cards for GWOT reconstitution obligations until the card holders 
complete a training class detailing the appropriate use of the cards. 
The division Comptroller stated that this action was taken to limit 
spending and ensure that purchases made in support of GWOT were 
appropriate. Another Army division implemented a Program Budget 
Advisory Committee to review its GWOT predeployment requirements. One 
example of economies directed by the committee was to consolidate 
requirements for medical supplies, batteries, and ballistic blankets 
into a single division purchase. The committee was reestablished upon 
the division's return from Afghanistan for the review and approval of 
GWOT reconstitution requirements. 

* Third Army, which obligated almost $17 billion in fiscal year 2004 to 
support GWOT, has taken a number of steps to control costs. Among other 
things, it reviews requisitions of items obtained through the stock 
fund that are not reviewed by the review boards in Iraq, Afghanistan, 
and Kuwait--specifically, items that have a high dollar value, involve 
large quantities, are pilferable, or are personal items. In a March 
2005 message to the Vice Chief of Staff of the Army, the Third Army 
commander also described cost control measures implemented by 
organizations funded by Third Army. These included management controls 
placed on requests to expand the use of LOGCAP, reducing the cost of 
transporting cargo into the theater, and reducing demurrage charges 
associated with commercial containers by identifying and returning 
excess containers. 

The Army has also set limits on certain kinds of spending. For example, 
the Army set a $6.5 billion limit on LOGCAP spending in fiscal year 
2004 on the basis of the estimated cost of required work and a $6.6 
billion limit for fiscal year 2005. On a much smaller scale, in July 
2004, Third Army issued a policy memorandum setting forth procedures 
for purchasing and awarding unit coins[Footnote 30] to limit coins 
purchased with contingency operations funds. The policy recommends a 
funding ceiling for coin purchases from operating funds of $1,000 per 
battalion and $3,000 per brigade. 

One command has also set spending reduction targets to constrain 
spending. The commander of coalition forces in Iraq has set a 10 
percent cost reduction target in Iraq. According to the Deputy Chief of 
Staff for Resource Management for Multinational Forces-Iraq, the cost- 
reduction goal was intended as a direction to take the command rather 
than as a hard target. While realizing that many factors driving costs 
were outside his control, the commanding general wanted the command to 
manage those areas that the command could affect. The cost-reduction 
plan was broken down into three lines of operation--stock fund, LOGCAP, 
and nonstock fund. As a result the command reports the following: 

* Efforts to control stock fund costs have met with mixed results. The 
command has encountered difficulties in controlling stock fund costs in 
part because units can order items directly from the supplying command, 
bypassing the command in Iraq. However, some control procedures have 
been established, which reduced direct orders from approximately $50 
million per month to $5 million in April 2005. 

* The command reports that it has been working to control LOGCAP costs, 
but additional requirements were subsequently identified that were 
expected to drive up LOGCAP costs beyond the initial $4.3 billion goal. 
The commanding general has asked the Army Audit Agency to help evaluate 
the use of the LOGCAP program in Iraq and provide recommendations for 
cost savings and improved processes. 

* The command reports that it is well on its way to achieving its goal 
of $2.25 billion for nonstock fund spending. As of April 30, 2005, the 
command reported that it had obligated only about $1 billion in 
nonstock funds and was well on its way to come in under the initial 
savings goal. 

ARCENT, the Army command responsible for funding the command in Iraq, 
was aware of the initiative but not its details and was not aware of 
whether there were similar efforts in other countries, specifically in 
Afghanistan and Kuwait. 

While DOD policy emphasizes commanders' fiduciary responsibility to 
spend funds prudently, it has not directed any systematic effort for 
the services and combatant commands to seek opportunities to reduce 
costs or provided guidelines for doing so. In discussions with resource 
management personnel in Army units that were deployed to Iraq and/or 
Afghanistan, there was a consensus that cost controls can be 
strengthened as an operation matures. For example, resource managers at 
one Army division that deployed to Iraq told us that the division's 
experience is that spending can be managed at all stages of a 
contingency operation, even under high-operating-tempo combat 
operations. Another Army division resource manager who deployed to Iraq 
told us that he could have operated under a budget after his third 
month of deployment to Iraq. He preferred to operate under a budget 
where he knew the amount of funding that was available and could tell 
commanders that they had to prioritize their requirements. A third Army 
division resource manager, who deployed to Afghanistan, told us that as 
an operation matures, cost controls can be strengthened. 

In discussing efforts to control costs with the Office of the Under 
Secretary of Defense (Comptroller), the view was expressed that on the 
basis of the varying combat situations, steps to control costs were 
best left to the individual commands. As described above, individual 
commands have done much to control costs, but efforts vary by command, 
and there is limited knowledge of such efforts outside each command. 
The Comptroller's office has no direct knowledge of the commands' cost 
control efforts and has not asked to be kept informed of cost control 
steps. We believe that more can be done and that absent DOD-wide 
guidelines on cost control efforts, there is no assurance that 
successive commanders will emphasize cost control and that each 
command's efforts will be equally comprehensive. 

Conclusions: 

We found numerous problems with DOD's processes for recording and 
reporting costs for the Global War on Terrorism, raising significant 
concerns about the overall reliability of DOD's reported cost data. 
Because of these problems, neither DOD nor Congress can reliably know 
how much the war is costing and details on how appropriated funds are 
being spent, or have historical data useful in considering future 
funding needs. In response to our work, DOD has identified a number of 
steps it said it is taking to improve the accuracy and reliability of 
its cost reporting. Until DOD fully implements those steps, gives 
improving its GWOT cost reporting high priority, and undertakes an 
exhaustive effort to ensure that the data in its GWOT cost reports are 
reliable, there can be no assurance that the cost of the war is 
accurate and whether funding is adequate. 

DOD is generally using its existing contingency operations financial 
management regulation to guide GWOT budgeting, cost reporting, and 
spending, although this regulation was developed and structured to 
manage the costs of small-scale contingency operations. Specific 
provisions of the regulation conflict with the needs of GWOT. One such 
conflict concerns administrative limitations on the use of supplemental 
funds for base support activities at home stations. In addition, the 
regulation includes conflicting policies and procedures to guide the 
budgeting or reporting of investment costs of the war. Without an 
updated policy, the military services and other DOD agencies cannot 
make informed judgments on the appropriate use of GWOT funding 
authorities. In response to our work, DOD revised its Financial 
Management Regulation. 

While certain individual commands have taken steps to control costs and 
DOD policy generally advises its officials of their financial 
management responsibilities with regard to the prudent use of 
contingency funding, the Office of the Under Secretary of Defense 
(Comptroller) has not systematically called for all commands involved 
in GWOT to take steps to control costs and to keep the office informed 
of those steps and their success. With the growth in GWOT costs, there 
is a need to ensure that all commands seek to control costs. Until the 
department establishes guidelines on cost controls and is routinely 
informed about the types of controls and their impact on costs, it 
cannot be sure that all that can be done to control costs is being 
done. 

Recommendations for Executive Action: 

To ensure that Congress and the Department of Defense can reliably know 
how much the war is costing, we recommend that the Secretary of Defense 
take the following three steps: 

1. Direct the Secretaries of the military services to undertake a 
series of steps to ensure that reported GWOT costs are accurate and 
reliable, to include: 

* developing a systematic process to review reported obligations;

* developing and monitoring procedures to ensure that obligations are 
categorized correctly;

* using actual data whenever possible and, when not possible, to take 
steps to allow the development of actual data; and: 

* ensuring that actions previously agreed to in response to audits have 
been implemented effectively. 

2. Direct the Office of the Under Secretary of Defense (Comptroller) to 
oversee the above service efforts as well as to develop a systematic 
process to review and test the reliability of the overall GWOT cost 
reports. 

3. Direct the Secretary of the Army to take the following steps: 

* develop and implement formal procedures to guide the monthly 
reporting of GWOT military personnel costs;

* formalize the Army's management review of military personnel cost 
information submitted for the GWOT cost report;

* use information from the DOD payroll system, where applicable, to 
identify and report GWOT military personnel cost information; and: 

* review and simplify the numbers of elements of resource currently 
used to identify, categorize, and record contingency costs. 

To ensure that the military services and other DOD agencies make 
informed judgments on the appropriate use of GWOT funding authorities 
that are consistent with DOD guidance and meet the needs of GWOT, we 
recommend that the Secretary of Defense expand DOD's financial 
management regulation for contingency operations to include 
contingencies as large as the current GWOT. At a minimum, the updated 
policy should address the budgeting, cost reporting, and spending 
associated with investment and base operation and support costs at the 
home stations of units that support GWOT. 

To ensure that GWOT mission needs are being met while applying 
appropriate cost controls we recommend that the Secretary of Defense 
direct the Office of the Under Secretary of Defense (Comptroller) to 
take the following two steps: 

1. establish guidelines on cost controls, including identifying what 
types of cost controls are available to the services, and: 

2. require that the services routinely keep the Comptroller's office 
informed about the types of controls and their impact on costs, and 
share information on cost control efforts. 

Agency Comments and Our Evaluation: 

DOD provided written comments on a draft of this report. Its comments 
are discussed below and are reprinted in appendix III. 

DOD agreed with all but one of our recommendations, stating that it 
generally agreed with the intent of the recommendations and has 
carefully reviewed its guidance and procedures for reporting cost data. 
DOD further commented that on the basis of its review and consistent 
with our recommendations it has taken several immediate actions to 
improve procedures and strengthen the cost reports. These include 
issuing additional direction and guidance to strengthen, clarify, 
standardize, and simplify procedures for collecting, reporting, and 
auditing cost of war information and issuing supplemental guidance to 
its Financial Management Regulation to address large-scale contingency 
operations. 

Regarding our recommendations on improving the accuracy and reliability 
of reported costs of the Global War on Terrorism and to have the Office 
of the Under Secretary of Defense (Comptroller) play a role in 
overseeing the efforts as well as to develop a systematic process to 
review and test the reliability of the overall GWOT cost reports, DOD 
stated that it has completed implementation of this recommendation 
through the execution of new guidance and procedures for collecting and 
reporting cost of war information and is actively overseeing the 
preparation of GWOT cost reports. DOD further stated that the Army has 
changed its data collection and reporting process and among other 
things is now using a Standard Operating Procedure which prescribes a 
clear methodology for capturing contingency operations cost data from 
the accounting systems and a formal management review process to 
prepare military cost information associated with GWOT. 

Regarding our recommendation to expand DOD's Financial Management 
Regulation for contingency operations to include contingencies as large 
as the current Global War on Terrorism, DOD agreed and stated that it 
has published supplemental guidance to volume 12, chapter 23 of its 
Financial Management Regulation to address large scale contingencies. 
While we agree that many of the revisions address problems we 
highlighted in our report, we are concerned with one provision that 
inappropriately expands the definition of incremental costs, stating 
that: 

"Additionally, because of the scale of operations, including intense 
combat or long term stability or anti-insurgency operations, expenses 
beyond only direct incremental costs may be appropriate on a case by 
case basis in written coordination with the Office of the Under 
Secretary of Defense (Comptroller)."

Although the revised guidance states that such costs require 
coordination with the Office of the Under Secretary of Defense 
(Comptroller), we believe that this expanded definition of incremental 
costs suggests that the costs of large-scale contingency operations can 
be beyond those defined elsewhere in DOD's guidance as incremental 
costs--i.e., those additional costs to the DOD Component appropriations 
that would not have been incurred had the contingency operations not 
been supported. We further believe that costs incurred beyond what was 
reasonably necessary to support a contingency operation cannot be 
deemed incremental expenses, since such costs are not directly 
attributable to support of the operation. In addition, we believe that 
expanding allowable costs of contingency operations beyond those 
directly attributable to support of the operation is problematic 
because it provides no guidance on what costs beyond those that are 
attributable to the operation are now allowed to be reported. We 
therefore do not believe that this provision meets the intent of our 
recommendation. The Under Secretary of Defense (Comptroller) should 
reconsider this provision in light of our evaluation of its potential 
consequences. 

DOD did not agree with our recommendation to have the Office of the 
Under Secretary of Defense (Comptroller) establish guidelines on cost 
controls. In commenting on our recommendation, DOD stated that field 
commanders are the correct echelon to adopt and emphasize cost controls 
during a contingency; that it relies on the judgment of the combatant 
commander in the theater of operations to manage resources at their 
disposal to effectively safeguard personnel and perform the mission; 
and that implementing administrative funding controls could have a 
detrimental effect on the commanders' ability to make critical 
decisions in the theater. DOD further stated that the Office of the 
Under Secretary of Defense (Comptroller) has included a section in the 
Financial Management Regulation that emphasizes that the DOD components 
are responsible to employ a fiduciary approach to ensure that the funds 
are used in a prudent manner and that as operations mature, steps 
should be taken to evaluate and establish spending constraints. We 
recognize that certain individual commands have done much to control 
costs and describe some of those efforts, but we further note in our 
discussion of cost controls that efforts vary by command and that there 
is limited knowledge of such efforts outside each command. We do not 
believe, as DOD suggests, that our recommendation would have a 
detrimental effect on the commanders' ability to make critical 
decisions in the theater. We are simply recommending that DOD provide 
guidance that increases awareness of the need for reasonable cost 
controls and requires that the Office of the Under Secretary of Defense 
(Comptroller) be kept informed of the types of controls and their 
impact on costs and share information within DOD on cost control 
efforts. We continue to believe that more can be done and that absent 
DOD-wide guidelines on cost control efforts, there is no assurance that 
successive commanders will emphasize cost control and that each 
command's efforts will be equally comprehensive. Therefore, we have 
retained the recommendation. 

In commenting on the report's content, DOD disagreed with GAO's 
position on the overstatement of the reported costs for mobilized Army 
reservists in fiscal year 2004. DOD commented that our report was 
incomplete because we did not consider military retirement pay and 
other costs, which DOD stated accounted for almost $1.3 billion of the 
$2.1 billion difference cited in our report. We disagree. As discussed 
in our draft report, initially, the Army could not support its reported 
costs for mobilized Army reservists or explain the $2.1 billion 
difference that we noted between its payroll system and its reported 
cost for mobilized Army reservists. During our audit, the Army and the 
Office of the Under Secretary of Defense (Comptroller) provided us with 
several possible, although sometimes inaccurate, explanations for the 
$2.1 billion difference. After several months, DOD provided information 
showing that it could account for about $1.6 billion of the $2.1 
billion difference. While making it clear that the information was 
received too late for us to assess its accuracy and completeness as 
part of our audit, we did include the information in our draft report. 
We stated that some of the explanations appeared valid, while others 
did not and, taken together, they failed to fully account for the 
difference. The fact that DOD's comment letter reduces the $1.6 billion 
to $1.3 billion further confirms the concerns we have expressed 
throughout this report over the accuracy of DOD's past reported costs. 
Finally, we believe that DOD's reference in its comment letter to the 
$2.1 billion difference as an anomaly is a mischaracterization-- 
particularly when viewed in the context of its explanation that "the 
Department's use of estimates led to a difference." As clearly stated 
in this report, we found that the reported cost data are not reliable, 
in part because of long-standing deficiencies in DOD's financial and 
accounting systems, a lack of systematic processes to ensure that data 
are properly entered into those accounting systems, and the use of 
estimates rather than actual information. We understand that DOD is 
planning corrective action to address issues related to cost reporting 
for military personnel supporting GWOT operations. 

We are sending copies of this report to other interested congressional 
committees; the Secretary of Defense; the Under Secretary of Defense 
(Comptroller); the Secretaries of the military services; and the 
Director, Office of Management and Budget. Copies of this report will 
also be made available to others upon request. In addition, this report 
will be available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff has any questions regarding this report, please 
contact Sharon Pickup at 202-512-9619 or by e-mail at [Hyperlink, 
pickups@gao.gov] or Greg Kutz at 202-512-9095 or [Hyperlink, 
kutzg@gao.gov]. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff that made major contributions to this report are 
included in appendix IV. 

Signed by: 

Sharon L. Pickup: 
Director, Defense Capabilities and Management: 

Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigations: 

List of Congressional Committees: 

The Honorable Ted Stevens: 
Chairman:
The Honorable Daniel Inouye: 
Ranking Minority Member:
Subcommittee on Defense: 
Committee on Appropriations:
United States Senate: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable C. W. Bill Young: 
Chairman: 
The Honorable John P. Murtha: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

The Honorable Duncan Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

To accomplish this review, we obtained and analyzed copies of all 12 
months of the Department of Defense's (DOD) fiscal year 2004 monthly 
Consolidated DOD Terrorist Response Cost Report from the Office of the 
Under Secretary of Defense (Comptroller), which was renamed the 
Supplemental and Cost of War Execution Report in January 2005, to 
identify reported obligations by operation and by appropriation account 
for the military services. We did not review the obligations reported 
by the intelligence community or the other defense agencies, but we do 
mention the amount appropriated and obligated because the amount 
appropriated was part of the total DOD appropriation. We focused our 
analysis primarily, but not exclusively, on reported costs for fiscal 
year 2004--the latest full year of data available at the time of our 
review--and specifically the military personnel and operation and 
maintenance accounts as they represent the largest amount of spending. 
We also did not conduct site visits to Air Force units because their 
audit agency was conducting a similar review. 

To determine the reliability of DOD's data, we reviewed previous GAO 
reports and reports from other audit agencies that identified long- 
standing material weaknesses in DOD's accounting systems. We conducted 
limited testing on operation and maintenance obligations using Global 
War on Terrorism (GWOT) funding because DOD's financial management 
systems and business processes have been reported to contain 
significant deficiencies. At the Army-and Marine Corps-unit levels, we 
judgmentally selected obligation data entries and traced them back to a 
computerized database or paper documents to determine whether the data 
were properly entered into the accounting system. At the Army's Central 
Command Headquarters, we judgmentally selected document numbers and 
item descriptions for obligations made in Iraq and Afghanistan. We 
traced the document register numbers against paper documentation 
controlled by the Defense Finance and Accounting Service (DFAS), Rome, 
New York. We also provided a written data reliability assessment 
checklist for Navy officials to report how they ensured that their data 
were accurate and reliable. Finally, we discussed the processes used to 
ensure that GWOT obligation data provided were accurate and reliable 
with service financial managers. We found that the reported cost data 
were not reliable because of long-standing deficiencies in DOD's 
financial and accounting systems, the lack of a systematic process to 
ensure that data were properly entered into those accounting systems, 
the use of estimates rather than actual data for some of DOD's reported 
costs, and the incorrect categorization of some reported costs due to 
the large number of cost categories and limited training on how to 
apply them. However, because it was not feasible to examine all 
reported costs and significant data reliability problems existed, we 
were not able to determine the extent that total costs were misstated. 

To identify unusual fluctuations in the reported Army military 
personnel GWOT obligations, we analyzed the fiscal year 2004 GWOT cost 
reports and discussed our work with the Army Budget Office and DFAS. We 
also obtained and reviewed cost-reporting for military personnel 
information, budget estimates, supplemental appropriation information, 
budget reprogramming documents, and other supporting documentation from 
the Army Budget Office. To determine if reported obligations were based 
primarily on estimates, we compared reported GWOT amounts for Army 
military personnel with Army obligation plans. We obtained monthly 
extracts of fiscal year 2004 military pay records for Army Reserve and 
National Guard soldiers supporting GWOT operations from the DOD payroll 
system at DFAS, Indianapolis. To identify GWOT obligations for Army 
military personnel based on actual DOD payroll information, we 
summarized payroll record extracts by pay component and aligned these 
amounts with the cost category structure of the GWOT cost report. For 
cost category "Reserve Components Called to Active Duty," we compared 
actual DOD payroll information with the estimated Army military 
personnel amounts in the GWOT cost report, calculated the difference, 
and discussed our work with the Army Budget Office. In July 2005, we 
obtained information from the Army and DOD on this difference. 

To assess the extent to which DOD's existing financial management 
policy is applicable to war spending, we focused our efforts on 
analyzing guidance provided by the fiscal year 2004 Defense 
Appropriation Act and DOD's and the military services' specific policy 
and procedures. We reviewed previous GAO reports regarding guidance and 
oversight of contingency operations costs. We also reviewed DOD 
Financial Management Regulation volume 12 chapter 23, which establishes 
DOD policy and procedures for developing contingency budget estimates 
and cost reporting. We analyzed DOD's emergency supplemental budget 
requests for fiscal year 2003 and fiscal year 2004, and service 
contingency operation financial management policies and procedures. 
Lastly, we spoke with Office of the Under Secretary of Defense 
(Comptroller) and service financial management officials about GWOT 
budget estimations, cost reporting activities, and whether the current 
policy is sufficient or needs to be modified to reflect GWOT 
conditions. 

To determine controls over costs, we reviewed reports on GWOT spending 
and contract management from other audit agencies as well as command 
guidance and held discussions with resource management officials from 
major commands and units that had returned from Iraq and Afghanistan 
regarding their experiences. We also discussed what steps DOD has 
directed or implemented to strengthen cost controls and what actions it 
has implemented. Furthermore, we discussed cost controls implemented by 
Army divisions while deployed or upon the units' return to their home 
station. 

We visited the following locations during our review: 

* Office of the Under Secretary of Defense (Comptroller), Washington, 
D.C. 

* Headquarters, Defense Finance and Accounting Service, Arlington, 
Virginia. 

* Headquarters, Department of the Army, Washington, D.C. 

* U.S. Army Installation Management Agency, Washington, D.C. 

* U.S. Army Installation Management Agency, Southeast Region, Fort 
McPherson, Georgia. 

* Headquarters, U.S. Army Forces Command and Headquarters, Third Army 
(Army Central Command), Fort McPherson, Georgia. 

* Headquarters, U.S. Army Pacific, Fort Shafter, Hawaii. 

* Headquarters, 25TH Infantry Division, Schofield Barracks, Hawaii. 

* Headquarters, U.S. Army Europe, Heidelberg, Germany. 

* Headquarters, 1ST Armored Division, Wiesbaden, Germany. 

* Headquarters, III Corps and 1ST Cavalry Division, Fort Hood, Texas. 

* Headquarters, 3RD Armored Cavalry Regiment, Fort Carson, Colorado. 

* Headquarters, U.S. Marine Corps Forces Pacific, Camp H.M. Smith, 
Hawaii. 

* Headquarters, 1ST Marine Expeditionary Force, Camp Pendleton, 
California. 

* Defense Finance and Accounting Service Center, Denver, Colorado. 

* Defense Finance and Accounting Service Center, Indianapolis, Indiana. 

* Defense Finance and Accounting Service-Rome, Rome, New York. 

* Assistant Secretary of the Navy, Financial Management and 
Comptroller, Washington, D.C. 

* Commander, Naval Installations Command, Washington, D.C. 

* U.S. Fleet Forces Command, U.S. Atlantic Fleet, Norfolk, Virginia. 

* Commander, U.S. Pacific Fleet, Pearl Harbor, Hawaii. 

* Commander, Naval Air Force, San Diego, California. 

* Commander, Naval Surface Force, San Diego, California. 

* Commander, Submarine Force, Pearl Harbor, Hawaii. 

* U.S. Air Force Audit Agency, March Air Reserve Base, California. 

* U.S. Air Forces Pacific, Hickam Air Force Base, Hawaii. 

We performed our work from August 2004 through August 2005 in 
accordance with generally accepted government auditing standards. 

[End of section]

Appendix II: Ineffective Reporting of Fiscal Year 2004 Army Military 
Personnel Global War on Terrorism Obligations: 

As part of our work on cost reporting for the Global War on Terrorism 
(GWOT), we undertook a detailed review of obligations for Army military 
personnel supporting GWOT operations. The results of that review 
follow. 

Background: 

In fiscal year 2004, the Department of Defense (DOD) asked for funds in 
a supplemental budget request to provide pay, allowances, subsistence, 
and other personnel costs for active-and reserve-component military 
personnel activated for duty in support of GWOT. This request included 
certain special pays that active-duty military personnel received for 
deployment, as well as the base pay, special pays, and allowances for 
reserve personnel mobilized to participate in or directly support GWOT 
operations. In addition, the estimate also included the costs to pay 
active-component personnel affected by military stop-loss programs and 
additional military personnel maintained on active duty above the 
normal end-strength levels to sustain the readiness of deploying units. 
As shown in figure 3, Congress provided about $17.8 billion in funding 
for DOD military personnel in the fiscal year 2004 supplemental 
appropriation,[Footnote 31] including almost $12.9 billion provided for 
the Army. This was an increase from the about $13.4 billion in funding 
for DOD military personnel, including about $7.8 billion for Army 
military personnel in the fiscal year 2003 supplemental 
appropriation.[Footnote 32]

Figure 3: Supplemental Funding of DOD Military Personnel for GWOT 
Operations in Fiscal Years 2003 and 2004: 

[See PDF for image] 

[End of figure] 

In the September 2004 GWOT cost report, DOD military personnel 
obligations totaled over $17 billion of the reported $71.2 billion in 
total GWOT obligations for fiscal year 2004. Of this $17 billion, Army 
military personnel obligations reported by DOD totaled almost $12 
billion, or about 71 percent, of military personnel obligations for 
GWOT operations. As shown in table 2, Army military personnel 
obligations for GWOT operations increased from fiscal year 2003 through 
fiscal year 2004, while obligations reported by other DOD organizations 
decreased. 

Table 2: DOD Military Personnel Obligations for GWOT Operations in 
Fiscal Years 2003 and 2004: 

Dollars in millions. 

Army; 
Dollars: Fiscal year 2003: $8,730; 
Dollars: Fiscal year 2004: $11,972. 

Air Force; 
Dollars: Fiscal year 2003: $3,409; 
Dollars: Fiscal year 2004: $3,272. 

Navy; 
Dollars: Fiscal year 2003: $1,934; 
Dollars: Fiscal year 2004: $857. 

Marine Corps; 
Dollars: Fiscal year 2003: $1,482; 
Dollars: Fiscal year 2004: $918. 

DOD & defense agencies; 
Dollars: Fiscal year 2003: $11; 
Dollars: Fiscal year 2004: $0. 

Total; 
Dollars: Fiscal year 2003: $15,566; 
Dollars: Fiscal year 2004: $17,019. 

Source: September 2003 and 2004 GWOT cost reports. 

[End of table]

The Army Budget Office controls the Military Personnel, Army, 
appropriation account and is also responsible for identifying and 
reporting the incremental costs of Army military personnel in support 
of GWOT operations. Incremental military personnel costs are to include 
pay, special pay, and entitlements above normal monthly payroll costs 
for active-and reserve-component personnel. 

In fiscal year 2004, the monthly GWOT cost report included the 
following six primary cost categories for military personnel as 
designated in the DOD Financial Management Regulation:[Footnote 33]

* "Reserve Components Called to Active Duty" includes basic military 
pay for Reserve and National Guard personnel either as part of the 
operation or as backfill. 

* "Imminent Danger or Hostile Fire Pay," when authorized, provides a 
monthly special pay for active-and reserve-component personnel. 

* "Family Separation Allowance" is a monthly special allowance paid to 
active-and reserve-component personnel who are separated from their 
families for 30 days or more. 

* "Foreign Duty Pay" is a monthly special pay for active-and reserve- 
component personnel who are at a designated location outside of the 
continental United States. 

* "Subsistence" includes the costs of food, water, ice, and other 
subsistence items that are purchased expressly to support personnel 
engaged in or supporting the operation. 

* "Other Military Personnel" includes other allowances or special pay 
for active-and reserve-component personnel that are not included in 
another cost category. In fiscal year 2004, this category included the 
costs to pay active-component soldiers affected by military stop-loss 
programs and additional soldiers maintained on active duty above the 
normal end-strength levels. 

Table 3 shows the Army military personnel obligations for GWOT 
operations reported in fiscal years 2003 and 2004. 

Table 3: Army Military Personnel Obligations for GWOT Operations in 
Fiscal Years 2003 and 2004: 

Dollars in millions. 

Reserve components called to active duty; 
Dollars: Fiscal year 2003: $5,988; 
Dollars: Fiscal year 2004: $7,123. 

Imminent danger or hostile fire pay; 
Dollars: Fiscal year 2003: $248; 
Dollars: Fiscal year 2004: $499. 

Family separation allowance; 
Dollars: Fiscal year 2003: $146; 
Dollars: Fiscal year 2004: $105. 

Foreign duty pay; 
Dollars: Fiscal year 2003: $87; 
Dollars: Fiscal year 2004: $128. 

Subsistence; 
Dollars: Fiscal year 2003: $996; 
Dollars: Fiscal year 2004: $2,308. 

Other military personnel; 
Dollars: Fiscal year 2003: $1,265; 
Dollars: Fiscal year 2004: $1,809. 

Total; 
Dollars: Fiscal year 2003: $8,730; 
Dollars: Fiscal year 2004: $11,972. 

Source: September 2003 and 2004 GWOT cost reports. 

[End of table]

Army Lacked a Reasonable and Reliable Process to Report GWOT Military 
Personnel Obligations: 

The Army did not have a reasonable and reliable process to identify and 
report almost $12 billion of GWOT military personnel obligations in 
fiscal year 2004. Instead of using actual information, the Army based 
the GWOT military personnel obligations used in the GWOT cost report 
primarily on estimates in its fiscal year 2004 obligation plan and, in 
the end, forced, or "plugged," obligations to match available 
supplemental budget authority. Army officials were unable to readily 
explain the process for identifying and reporting GWOT military 
personnel obligations owing to the lack of both formalized reporting 
procedures and management review of reported obligations, problems 
which were exacerbated by staff losses in the September 11 terrorist 
attack on the Pentagon, personnel turnover, and hiring difficulties. 

Our analysis showed that obligations associated with Army military 
personnel in the monthly GWOT cost report were not consistent with 
related DOD payroll information, and the use of planned obligations 
instead of related DOD payroll information might have resulted in 
reported GWOT military personnel obligations being materially 
overstated. For fiscal year 2004, our analysis of the more than $7.1 
billion in incremental military personnel costs listed in the cost 
category "Reserve Components Called to Active Duty" identified as much 
as $2.1 billion of reported obligations in excess of related DOD 
payroll information. Army Budget Office officials were unable to 
explain the entire difference. 

Army GWOT Reporting Process Used Estimated Obligations: 

In 2003, the Army developed a monthly obligation plan for estimated 
GWOT military personnel obligations in fiscal year 2004 on the basis of 
anticipated funding of $12.5 billion from the fiscal year 2004 DOD 
supplemental appropriation request. In October 2003, the Army began 
incurring military personnel obligations for fiscal year 2004 GWOT 
operations before passage of a supplemental appropriation. However, 
instead of using actual information, the Army based the military 
personnel obligations used in the monthly GWOT cost report primarily on 
estimates in its fiscal year 2004 obligation plan, and "plugged" to 
available supplemental budget authority. Effectively, the Army was 
reporting back to Congress exactly what it had appropriated. 

Through much of fiscal year 2004, the Army Budget Office based military 
personnel obligations for GWOT operations primarily on its monthly 
obligation plan. As illustrated in table 4, this resulted in the 
cumulative GWOT military personnel obligations tracking closely to and, 
in two cases equaling, the estimated amounts from the fiscal year 2004 
obligation plan. 

Table 4: Army Obligation Plan and Reported Military Personnel 
Obligations for GWOT Operations in Fiscal Year 2004: 

Dollars in millions. 

October 2003; 
Cumulative dollars: Obligation plan: $956; 
Cumulative dollars: GWOT cost report: $811. 

November 2003; 
Cumulative dollars: Obligation plan: $2,018; 
Cumulative dollars: GWOT cost report: $2,018. 

December 2003; 
Cumulative dollars: Obligation plan: $3,122; 
Cumulative dollars: GWOT cost report: $2,819. 

January 2004; 
Cumulative dollars: Obligation plan: $4,366; 
Cumulative dollars: GWOT cost report: $3,818. 

February 2004; 
Cumulative dollars: Obligation plan: $5,320; 
Cumulative dollars: GWOT cost report: $4,886. 

March 2004; 
Cumulative dollars: Obligation plan: $6,528; 
Cumulative dollars: GWOT cost report: $6,528. 

April 2004; 
Cumulative dollars: Obligation plan: $7,650; 
Cumulative dollars: GWOT cost report: $7,686. 

May 2004; 
Cumulative dollars: Obligation plan: $8,669; 
Cumulative dollars: GWOT cost report: $8,535. 

June 2004; 
Cumulative dollars: Obligation plan: $9,657; 
Cumulative dollars: GWOT cost report: $9,421. 

July 2004; 
Cumulative dollars: Obligation plan: $10,621; 
Cumulative dollars: GWOT cost report: $10,324. 

August 2004; 
Cumulative dollars: Obligation plan: $11,577; 
Cumulative dollars: GWOT cost report: $11,219. 

September 2004; 
Cumulative dollars: Obligation plan: $12,530; 
Cumulative dollars: GWOT cost report: $11,972. 

Source: Army Budget Office and fiscal year 2004 GWOT cost reports. 

[End of table]

One example of military personnel obligations reported directly from 
the Army obligation plan is evident with the cost category for 
"Subsistence" described earlier. The Army obligation plan for 
"Subsistence" showed an estimated obligation amount of about $130 
million monthly in most of fiscal year 2004 and, except for a large 
increase[Footnote 34] in September 2004, was largely identical to the 
monthly GWOT cost report amounts as shown in table 5. Subsistence costs 
at the end of fiscal year 2004 were a major factor in the need to 
"plug" reported military personnel obligations in the GWOT report's 
cost category "Reserve Components Called to Active Duty" as discussed 
later. 

Table 5: Army Obligation Plan and Reported Subsistence Obligations for 
GWOT Operations in Fiscal Year 2004: 

Dollars in millions. 

October 2003; 
Dollars per month: Obligation plan: $100; 
Dollars per month: GWOT cost report: $130. 

November 2003; 
Dollars per month: Obligation plan: $160; 
Dollars per month: GWOT cost report: $130. 

December 2003; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

January 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

February 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $148. 

March 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

April 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

May 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

June 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

July 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

August 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $130. 

September 2004; 
Dollars per month: Obligation plan: $130; 
Dollars per month: GWOT cost report: $860. 

Total; 
Dollars per month: Obligation plan: $1,560; 
Dollars per month: GWOT cost report: $2,308. 

Source: Army Budget Office and fiscal year 2004 GWOT cost reports. 

[End of table]

Budget authority for Army military personnel supporting GWOT operations 
provided in the fiscal year 2004 emergency supplemental appropriation 
was reduced late in the fiscal year. As detailed in table 6, 
reprogrammings and additional reductions lowered the supplemental 
budget authority available from the supplemental appropriation to about 
$12 billion for Army GWOT military personnel in fiscal year 2004. 

Table 6: Supplemental Budget Authority for Army GWOT Military Personnel 
in Fiscal Year 2004: 

Dollars in millions. 

Fiscal year 2004 emergency supplemental appropriation; 
Dollars: $12,859. 

August 2004 omnibus reprogramming; 
Dollars: $(801). 

September 2004 additional reductions; 
Dollars: $(86). 

Available supplemental budget authority; 
Dollars: $11,972. 

Source: Pub. L. No. 108-106, DOD, and GAO's analysis of Army Budget 
Office information. 

[End of table]

The Army Budget Office reported negative obligations of more than $439 
million in the cost category "Reserve Components Called to Active Duty" 
for September 2004 so that GWOT military personnel obligations would 
equal available supplemental budget authority of about $12 billion. 
This was necessary (1) because the fiscal year 2004 Army obligation 
plan was originally developed for about $12.5 billion in GWOT military 
personnel spending and the available supplemental budget authority was 
reduced late in the fiscal year and (2) because of the unexpected need 
to obligate a large amount for the "Subsistence" cost category in 
September 2004. As shown in figure 4, the reporting of a negative 
amount effectively resulted in the Army's use of "plugging," or 
reporting back to Congress exactly the amount of available budget 
authority, as adjusted, remaining from the fiscal year 2004 emergency 
supplemental appropriation. 

Figure 4: Army Military Personnel Obligations for GWOT Operations in 
Fiscal Year 2004: 

[See PDF for image] 

[End of figure] 

Army's Reporting Process Hampered by Lack of Formal Procedures and 
Management Review: 

The process used in fiscal year 2004 to determine the Army's military 
personnel obligations for the monthly GWOT cost report was not clearly 
understood by Army Budget Office management, and we found that Army 
management was not familiar with the process used to force, or "plug," 
the reported fiscal year 2004 GWOT military personnel obligations to 
match available supplemental budget authority. 

According to Army Budget Office officials, they did not have formal 
procedures for developing and reporting GWOT military personnel 
obligations. These officials explained that, in the absence of written 
procedures, the process used to develop the monthly obligation 
information reported to the Defense Finance and Accounting Service 
(DFAS) was entirely dependent on the staff person assigned to this 
task. A DOD Financial Management Regulation includes general guidance 
on developing and reporting incremental costs related to contingency 
operations. For example, the guidance requires that controls, 
accounting systems, and procedures provide, in financial records, a 
proper identification and recording of the costs incurred for DOD 
contingency operations. However, this general guidance is not a 
substitute for detailed, written implementing procedures at the service 
level. 

Furthermore, the Army Budget Office did not establish a formal 
management review process for the GWOT military personnel obligations 
reported monthly to DFAS. The Army could not provide documentation to 
show that management-level officials reviewed its GWOT military 
personnel obligations in fiscal year 2004 that were sent to DFAS for 
inclusion in the monthly GWOT report. Army Budget Office officials also 
told us that these problems were exacerbated by staff lost in the 
September 11 terrorist attack on the Pentagon, personnel turnover, and 
hiring difficulties. Specifically, the Army Budget Office-Military 
Personnel Division is authorized 10 civilian positions and had not been 
fully staffed in over 2 years. The position of Chief for the Military 
Personnel Division was held by three different individuals in the last 
2 years. We were told that only one staff member had been with the 
division longer than 2 years. As of May 2005, Army Budget Office 
officials told us that 2 of the 10 positions were staffed by interns 
and 3 positions were not filled. 

High staff turnover and new staff training make it increasingly 
important that detailed, documented procedures be developed for 
identifying and reporting incremental GWOT military personnel 
obligations. Formal procedures would help ensure that the monthly 
amounts are reported consistently and accurately, using the best 
available information. Lacking such procedures, Army Budget Office 
management provided two different explanations for the process for 
identifying and reporting GWOT military personnel obligations. When 
asked, Army management initially explained that reported GWOT military 
personnel obligations for fiscal year 2004 were based largely on 
payroll expenditures. However, our analysis of reported obligations 
revealed a significant, unexpected monthly fluctuation in two GWOT 
military personnel cost categories, raising doubts about the 
reasonableness of management's explanation and the reliability of the 
Army's estimation process. For example, as previously noted, a large 
negative obligation amount was reported in the "Reserve Components 
Called to Active Duty" cost category in September 2004 even though the 
associated Army National Guard and Reserve soldier strength remained 
relatively constant during the period. 

In December 2004, Army Budget Office management provided a different 
explanation and stated that GWOT military personnel obligations were 
estimates based principally on a calculation that considered the number 
of soldiers (e.g., mobilized, deployed) and a monthly composite pay 
rate or special pay/allowance amount. The Army Budget Office provided a 
schedule in January 2005 supporting this description of the estimating 
process for its GWOT military personnel obligations in fiscal year 
2004. Using this description, our analysis of these obligations, 
however, indicated that the Army's estimation process was not reliable. 
For example, our analysis showed that the estimated obligations 
reported were not reasonable owing to both inconsistencies with the 
number of soldiers and the high composite pay rate (i.e., officer-grade 
equivalent). 

After further discussion with us about the reasonableness of their 
earlier explanations, an Army Budget Office official agreed with our 
determination in February 2005 that the reported amounts were based on 
planned obligations and later agreed that the year-end amount was 
matched, or "plugged," to available supplemental budget authority. Army 
and DOD officials stated that efforts were being undertaken to improve 
GWOT cost reporting by using, where applicable, DOD payroll information 
instead of estimated amounts. 

Reported GWOT Obligations for Mobilized Army Soldiers Were 
Significantly Higher Than Related DOD Payroll Information: 

GWOT military personnel obligations reported in fiscal year 2004 were 
not consistent with the DOD payroll information we reviewed. Army 
management expressed a belief that pay and allowance information could 
not be obtained from the DOD payroll system and used for the monthly 
GWOT cost report. However, we obtained fiscal year 2004 payroll 
information from DFAS for reserve-component soldiers mobilized for GWOT 
operations and demonstrated that actual DOD payroll information, where 
applicable, could be used to identify incremental military personnel 
obligations for mobilized Army National Guard and Reserve soldiers. 
Although we previously reported that several system issues were 
significant factors impeding accurate and timely payroll payments to 
mobilized reserve-component soldiers,[Footnote 35] we believe that 
payroll information represents the best information available and 
should be used, where applicable, to prepare the GWOT cost report. 

For fiscal year 2004, we evaluated the Army obligation plan estimates 
and military personnel cost category titled "Reserve Components Called 
to Active Duty." Army officials explained that this estimate included a 
soldier's basic pay, Federal Insurance Contribution Act contributions 
(i.e., Social Security and Medicare), allowances for housing and 
subsistence, and accrual amounts for retirement pay and retirement 
health care. From the DOD payroll system, we identified the payroll 
information for Army soldiers mobilized to support GWOT operations in 
fiscal year 2004 and analyzed payroll information for the related pay 
components used to estimate Army military personnel GWOT obligations. 
As shown in table 7, military personnel costs identified from the DOD 
payroll system were as much as $2.1 billion less than the estimated 
Army obligations reported in the monthly GWOT cost report. 

Table 7: Estimated Army Obligations for "Reserve Components Called to 
Active Duty" and Related DOD Payroll Costs in Fiscal Year 2004: 

Dollars in millions. 

Estimated obligations in GWOT cost report; 
Dollars: $7,123. 

Related DOD payroll costs: Basic pay; 
Dollars: $3,472. 

Related DOD payroll costs: FICA; 
Dollars: $266. 

Related DOD payroll costs: Allowance for housing; 
Dollars: $1,204. 

Related DOD payroll costs: Allowance for subsistence (officer); 
Dollars: $30. 

DOD payroll total; 
Dollars: $4,972. 

Difference; 
Dollars: $2,151. 

Source: September 2004 GWOT cost report and GAO's analysis of DOD 
payroll data. 

[End of table]

Initially, the Army could not support this difference or its reported 
GWOT military personnel obligations. Over the next several months, the 
Army and the Office of the Under Secretary of Defense (Comptroller) 
provided us with several possible, though sometimes inaccurate, 
explanations for this difference. Some explanations appeared valid 
while others did not and, taken together, they failed to fully account 
for the difference. For example, when asked to explain the difference 
in military personnel obligations between the GWOT cost report and 
related DOD payroll information, Army Budget Office officials stated in 
March 2005 that a portion of the difference was attributable to 
retirement pay and retirement health care accruals. We found that the 
retirement health care accrual did not result in incremental costs and, 
therefore, was not a valid explanation for the difference. In July 
2005, DOD agreed that mobilized reservists do not receive an increase 
in retirement health care benefits over benefits for nonmobilized 
reservists and, therefore, DOD does not incur incremental costs related 
to this benefit. However, mobilized reservists receive an increase in 
retirement pay benefits over benefits for nonmobilized reservists and, 
therefore, DOD incurs incremental costs related to this benefit. In 
July 2005, Army and Office of the Under Secretary of Defense 
(Comptroller) officials reported to us that $824 million of the 
difference was attributable to the inclusion of the retirement pay 
accruals and provided other potential reconciling cost information 
totaling $732 million as additional explanations for the difference. 
This information was provided too late in our audit to assess its 
accuracy and completeness. 

[End of section]

Appendix III: Comments from the Department of Defense: 

UNDER SECRETARY OF DEFENSE
COMPTROLLER:
1100 DEFENSE PENTAGON: 
WASHINGTON DC 20301-1100: 

SEP 2 2005: 

Mr. David Walker Comptroller General: 
U.S. Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Walker: 

This is the Department of Defense (DoD) response to the Government 
Accountability Office (GAO) Draft Report, GLOBAL WAR ON TERRORISM: DoD 
Needs to Improve the Reliability of Cost Data and Provide Additional 
Guidance to Control Costs," dated September 2005. The Department 
appreciates the opportunity to review the draft report and provide 
comments. 

The Department agrees generally with the intent of the recommendations 
and has carefully reviewed its guidance and procedures for reporting 
cost data. On the basis of our review and consistent with GAO's 
recommendations, the Department has taken the following immediate 
action to improve procedures and strengthen the cost reports: 

* Office of the Under Secretary of Defense (Comptroller) issued 
additional direction and guidance to strengthen, clarify, standardize, 
and simplify procedures for collecting, reporting, and auditing cost of 
war information. 

* The Services strengthened their monthly analysis on cost of war 
information to account for, and document, variances from established 
criteria. 

* The Army implemented a formal management review process to ensure the 
capture of GWOT cost data directly from the accounting systems and to 
incorporate recommended corrections to the accounting for the costs of 
military personnel. The June 2005 GWOT report was prepared using this 
new process. 

* Office of the Under Secretary of Defense (Comptroller) issued 
supplemental guidance to the DoD Financial Management Regulation (FMR) 
to address Large Scale Contingency Operations. 

The Department does not concur with the recommendation regarding the 
establishment of guidelines and cost controls for commanders in a 
theater. The DoD Financial Management Regulations (FMR) includes 
guidance on the fiduciary responsibilities of DoD components. Combatant 
Commanders are the correct echelon to adopt and emphasize cost controls 
during a contingency operation. The Department must rely on the 
judgment of these commanders in the theater of operations to 
effectively manage resources, to safeguard personnel and to perform 
their missions. Combatant Commanders understand their fiscal 
responsibility. Implementing administrative funding controls at the 
Department Headquarters level could have a detrimental effect on the 
commanders' ability to make critical decisions in theater. 

Finally, the GAO states that the Department had a $2.1 billion 
overstatement in reporting the costs for mobilized Army reservists in 
fiscal year 2004. The Department disagrees and believes that GAO's 
assessment of the actual costs is incomplete. The Department has 
provided GAO with additional documentation to justify that at least 
$1.3 billion of the $2.1 billion was not overstated. However, no 
attempt was made to reconcile this additional information in the draft 
final report. 

Thank you again for the opportunity to provide the Department's 
response to the GAO's recommendations. The Department appreciates GAO's 
recommendations and will ensure that corrective actions are effectively 
implemented. We are taking aggressive action to improve our financial 
management practices and we look forward to your continued support in 
this regard. 

Sincerely,

Signed by: 

Tina W. Jonas: 

Enclosures: As stated: 

Department of Defense Comments GAO-05-882 (GAO Codes 350589 & 192148): 

SUBJECT: GAO Draft Report, August 3, 2005, titled "GLOBAL WAR ON 
TERRORISM: DOD Needs to Improve the Reliability of Cost Data and 
Provide Additional Guidance to Control Costs"

DISCUSSION: 

* The GAO report outlined five recommendations. The Department of 
Defense concurs with comment on four of the five recommendations. 

* A restatement of the recommendation and the Department's comments 
follow: 

RECOMMENDATION 1: The Secretary of Defense direct the Secretaries of 
the military services to undertake a series of steps to assure that 
reported Global War on Terrorism (GWOT) costs are accurate and 
reliable, to include: 

* Developing a systematic process to review reported obligations. 

* Developing and monitoring procedures to assure that obligations are 
categorized correctly: 

* Using actual data whenever possible and, when not possible, to take 
steps to allow the development of actual data. 

* Assuring that actions previously agreed to in response to audits have 
been implemented effectively. 

DoD COMMENT TO RECOMMENDATION 1: Concur. The Department has completed 
the implementation of this recommendation through the execution of new 
guidance and procedures for collecting and reporting cost of war 
information. We are now: 

* Performing systematic reviews of the reported obligations along with 
documented explanations where established reasonableness tests have not 
been met. 

* Categorizing obligations through more simplified methods and 
requiring thorough analysis to provide reasonable assurance that costs 
are reported correctly. 

* Using data captured in the official accounting systems or subsidiary 
accounting systems (such as entitlement systems) for reporting, where 
possible and, documentation and methodologies for circumstances where 
data is not available in the accounting systems. 

* Monitoring implementation and follow up of previous audit findings. 

RECOMMENDATION 2: The Secretary of Defense direct the Office of the 
Under Secretary of Defense (Comptroller) to oversee the above Service 
efforts, as well as to develop a systematic process to review and test 
the reliability of the overall GWOT cost reports. 

DoD COMMENT TO RECOMMENDATION 2: Concur. The Office of the Under 
Secretary of Defense (Comptroller) is actively overseeing the 
preparation of GWOT cost reports. Services are now required to: 

* Perform monthly analysis of the cost data based on specific variance 
criteria for each cost category. 

* Provide footnote explanations where variances exceed the established 
criteria. 

* Use data captured in the official accounting systems or subsidiary 
accounting systems (such as entitlement systems), for reporting costs. 

* Provide documentation for circumstances where data is not available 
in the accounting systems. 

Additionally, the Director of the Defense Finance and Accounting 
Services has been assigned responsibility for the application of test 
criteria to review the reliability of GWOT cost reports. 

RECOMMENDATION 3. The Secretary of Defense direct the Secretary of the 
Army to take the following steps: 

* Develop and implement formal procedures to guide the monthly 
reporting of GWOT military personnel costs. 

* Formalize its management review of military personnel cost 
information submitted for the GWOT cost report. 

* Use information from the DOD payroll system, where applicable, to 
identify and report GWOT military personnel cost information. 

* Review and simplify the numbers of Elements of Resource currently 
used to identify, categorize, and record contingency costs. 

DoD COMMENT TO RECOMMENDATION 3: Concur. The Army has changed its data 
collection and reporting process and is now using: 

* A Standard Operating Procedure which prescribes a clear methodology 
for capturing Contingency Operations cost data from the accounting 
systems. 

* A formal management review process to prepare military cost 
information associated with GWOT. 

* The DoD payroll system, where applicable, to help calculate military 
personnel cost information, and is reconciling reporting problems from 
previous reports. 
* Simplified categories to identify, categorize and record contingency 
costs. 

RECOMMENDATION 4. The Secretary of Defense direct the Office of the 
Under Secretary of Defense (Comptroller) to expand DoD's financial 
management regulation for contingency operations to include 
contingencies as large as the current Global War on Terrorism. 

DoD COMMENT TO RECOMMENDATION 4: Concur. The Department has published 
supplemental guidance to the "DoD Financial Management Regulation FMR " 
Volume 12, Chapter 23 (Tab C) to address Large Scale Contingencies. 

RECOMMENDATION 5. The Secretary of Defense direct the Office of the 
Under Secretary of Defense (Comptroller) to: 

* Establish guidelines on cost controls, including identifying what 
types of cost controls are available to the services, and: 

* Require that the services routinely keep the Comptroller's office 
informed about the types of controls and their impact on costs, and 
share information on cost control efforts. 

DoD COMMENT TO RECOMMENDATION 5: Non-concur. The DoD Financial 
Management Regulations (FMR) include guidance on the fiduciary 
responsibilities of DoD components. The field commanders are the 
correct echelon to adopt and emphasize cost controls during a 
contingency. The Department relies on the judgment of the Combatant 
Commander in the theater of operations to manage resources at their 
disposal to effectively safeguard personnel and perform the mission. 
OUSD(C) has included a section in the FMR that emphasizes that the DoD 
Components are responsible to employ a fiduciary approach to ensure 
that the funds are used in a prudent manner. As operations mature, 
steps should be taken to evaluate and establish spending constraints. 

DISCUSSION: 

* The Department maintains that the following portion of the GAO report 
is inaccurate: "In at least one case, the reported costs may be 
materially overstated. Specifically, reported obligations for mobilized 
Army reservists in Fiscal Year 2004 were based primarily on estimates 
rather than actual information, and differed from related DoD payroll 
information by as much as $2.1 billion or 30 percent of the amount DoD 
reported in its cost report."

* Although the Department's use of estimates led to a difference 
between the reported amount and the actual amount incurred, this error 
is less then the $2.1 billion identified by GAO. The Department of 
Defense does not concur with the stated amount for the following 
reasons: 

- The GAO finding was incomplete because it only reflected costs from 
the Defense Joint Military Pay System (DJMS)-Reserve Component (RC) 
system, but other valid costs associated with Mobilized National Guard 
Active Guard and Reserve (AGR) Soldiers paid off the DJMS-Active 
Component (AC) system were omitted. 

- GAO did not consider costs for Retired Pay Accrual (RPA) for 
mobilized reservists which DFAS calculates and manually posts to the 
accounting system. 

- The following is the Department of Defense Reconciliation of GAO FY04 
MILPERS Audit: 

GAO Difference: $2,150,874: 

Less: 

RPA not included in DJMS-RC extract: (Calculated accrual done outside 
of RC pay system): ($824,001): 

National Guard AGR pay not in DJMS-RC (Allowances were paid off in the 
DJMS-AC system)[NOTE 1]: ($160,494)

RC Basic Allowance for Subsistence not reported on mobilized RC pay 
line: ($301,961): 

Balance of GAO Difference[NOTE 2]: $864,418. 

Notes: 

[1] Amount is an estimate, since NGPA managers can not isolate exact 
amounts of IDP, FSA and HDIP included in DFAS reported amount of pay 
and allowances. 

[2] Remaining balance could be reduced further by pay and allowances of 
CO-TTAD and CO-EAD soldiers; however, DFAS can't currently isolate 
those costs, so they are not included in the reconciliation. 

[End of table]

GAO is aware that action has been implemented to prevent this anomaly 
from reoccurring. GAO does not mention this corrective action in the 
report. 

* The Army implemented new accounting procedures for the Military Pay 
Appropriation in FY 2004. 

* The Army's accounting system, (STANFINS) became the system of 
original entry in FY2004, wherein obligations are estimated prior to 
the disbursement phase. 

* A systematic process has been implemented to review reported amounts. 

* All disbursements are recorded in the general account with GWOT 
disbursements, then transferred to appropriate GWOT account. 

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Sharon Pickup (202) 512-9619; 
Greg Kutz (202) 512-9095: 

Acknowledgments: 

In addition to the contacts named above, Steve Sternlieb, Mark 
Connelly, Leo Sullivan, Vince Balloon, Kurt Burgeson, Laura Czohara, 
Dave Mayfield, Francine Delvecchio, Abe Dymond, K. Eric Essig, Jason 
Kelly, John Ledford, and Wayne Turowski made key contributions to this 
report. 

(350589/192148): 

FOOTNOTES

[1] GAO, Military Operations: Fiscal Year 2003 Obligations Are 
Substantial, but May Result in Less Obligations Than Expected, GAO-03- 
1088 (Washington, D.C.: Sept. 17, 2003). 

[2] GAO, Military Operations: DOD's Fiscal Year 2003 Funding and 
Reported Obligations in Support of the Global War on Terrorism, GAO-04- 
668 (Washington, D.C.: May 13, 2004). 

[3] GAO, Military Operations: Fiscal Year 2004 Costs for the Global War 
on Terrorism Will Exceed Supplemental, Requiring DOD to Shift Funds 
from Other Uses, GAO-04-915 (Washington, D.C.: July 21, 2004). 

[4] 31 U.S.C. sec. 1501; See Department of Defense Financial Management 
Regulations, 7000.14-R, vol. 1, Definitions, xvii. 

[5] Pub. L. No. 108-87, 117 Stat. 1054 (Sept. 30, 2003). 

[6] Pub. L. No. 108-106, 117 Stat. 1209 (Nov. 6, 2003). 

[7] Volume 12, chapter 23 of DOD's Financial Management Regulation 
describes contingency operations as including, but not limited to, 
support for peace operations, major humanitarian assistance efforts, 
noncombatant evacuation operations, and international disaster relief 
efforts. DOD also refers to the operations in support of GWOT as 
contingency operations although, as discussed above, the regulation was 
developed and structured to manage the costs of small-scale 
contingencies and specifically excludes its use for wartime activities. 

[8] The term "incremental costs" means those directly attributable 
costs that would not have been incurred if it were not for the 
operation. Sections 230406 and 230902 of DOD's Financial Management 
Regulation 7000.14-R, vol. 12, ch. 23, Contingency Operations (January 
2005) provide additional information on incremental costs. 

[9] As discussed later in this report, chapter 23 states that it does 
not address wartime activities or the unique circumstances that require 
U.S. military forces to be placed on a wartime footing. Despite this 
express limitation, DOD and service officials are using chapter 23 to 
guide GWOT budgeting, cost reporting, and spending in the absence of 
other guidance. 

[10] GAO, Contingency Operations: DOD's Reported Costs Contain 
Significant Inaccuracies, GAO/NSIAD-96-115 (Washington, D.C.: May 17, 
1996). 

[11] Funds holders are DOD officials who receive a documented 
administrative subdivision of funds through their funding chain of 
command or other government departments. 

[12] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005). 

[13] GAO, Department of Defense: Further Actions Are Needed to 
Effectively Address Business Management Problems and Overcome Key 
Business Transformation Challenges, GAO-05-140T (Washington, D.C.: Nov. 
18, 2004). 

[14] GAO, DOD Business Transformation: Sustained Leadership Needed to 
Address Long-standing Financial and Business Management Problems, GAO- 
05-723T (Washington, D.C.: June 2005). 

[15] GAO, Defense Management: Processes to Estimate and Track Equipment 
Reconstitution Costs Can Be Improved, GAO-05-293 (Washington, D.C.: May 
5, 2005). 

[16] Reconstitution is the process of returning equipment after a 
deployment is completed to a condition that enables the unit to perform 
required missions and achieved required readiness levels. 

[17] Personnel support, operating support, and transportation costs are 
subcategories in the DOD GWOT cost reports. 

[18] Air Force Audit Agency, Global War on Terrorism Funds Management, 
F2005-0011-FB1000 (June 20, 2005). 

[19] Department of the Navy, Naval Audit Service, Purchase 
Justifications at Department of the Navy Shore Activities (Washington 
Navy Yard, D.C.: 2003). 

[20] U.S. Army Audit Agency, FY 03 Supplemental Funds and Cash Flow 
(Alexandria, Va.: 2004). 

[21] DFAS is responsible for consolidating all DOD contingency costs 
and for the billing and reimbursement distribution functions in support 
of contingency operations. 

[22] Department of Defense Financial Management Regulation 7000.14R, 
vol. 12, ch. 23, Contingency Operations (January 2005). 

[23] Ch. 23, sec. 230101 and 230105. 

[24] Ch. 23, sec. 230105. 

[25] Chapter 23 was revised in January 2005 to include these cost 
categories and provide descriptions of these types of costs. 

[26] Ch. 23, sec. 230902. 

[27] Ch. 23, sec. 230406, Cost Category 3.4, Facilities/Base Support. 
Examples of activities away from home station would include those in 
Iraq. 

[28] Ch. 23, sec. 230406 and 230902. 

[29] GAO, Military Operations: DOD's Extensive Use of Logistics Support 
Contracts Requires Strengthened Oversight, GAO-04-854 (Washington, 
D.C.: July 19, 2004). 

[30] Unit coins are custom-minted and emblazoned coins or similar 
items, typically with unit insignia on the obverse (front) side and an 
inscription on the reverse side, presented by or on behalf of the 
commander as an on-the-spot award to show recognition for 
accomplishment to U.S. military members or civilians. 

[31] Emergency Wartime Supplemental Appropriations Act for Defense and 
for the Reconstruction of Iraq and Afghanistan, Pub. L. No. 108-106, 
117 Stat. 1209 (Nov. 6, 2003). 

[32] Emergency Wartime Supplemental Appropriations Act, Pub. L. No. 108-
11, 117 Stat. 559 (Apr. 16, 2003). 

[33] DOD Financial Management Regulation 7000.14-R, vol. 12, ch. 23 
(February 2001). A 2005 change to the FMR calls for eight cost 
categories related to military personnel obligations. 

[34] Army budget officials attributed this large, year-end increase to 
additional water contracts, transfers due to incorrect funding of the 
logistics civilian augmentation program, and anticipated carryover of 
fiscal year 2004 subsistence costs. 

[35] GAO, Military Pay: Army Reserve Soldiers Mobilized to Active Duty 
Experienced Significant Pay Problems, GAO-04-911 (Washington, D.C.: 
Aug. 20, 2004), and Military Pay: Army National Guard Personnel 
Mobilized to Active Duty Experienced Significant Pay Problems, GAO-04- 
89 (Washington, D.C.: Nov. 13, 2003). 

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