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entitled 'Navy Working Capital Fund: Management Action Needed to 
Improve Reliability of the Naval Air Warfare Center's Reported 
Carryover Amounts' which was released on June 26, 2007. 

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Report to the Subcommittee on Defense, Committee on Appropriations, 
House of Representatives: 

United States Government Accountability Office: 

GAO: 

June 2007: 

Navy Working Capital Fund: 

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

GAO-07-643: 

GAO Highlights: 

Highlights of GAO-07-643, a report to the Subcommittee on Defense, 
Committee on Appropriations, House of Representatives 

Why GAO Did This Study: 

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

What GAO Found: 

GAO’s analysis of NAWC reports determined that NAWC’s reported 
carryover information was not reliable. Since DOD changed its carryover 
policy in December 2002, NAWC reports showed that while under the 
ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens 
of millions of dollars from fiscal year 2003 through fiscal year 2005, 
as shown in the following table. To the extent that carryover is too 
high, Congress can redirect the customers’ funds for other priorities. 

Table: NAWC's Reported Carryover Amounts Over/Under Ceiling: 

Dollars in millions. 

Carryover amount; 
Fiscal year 2003: $1,146; 
Fiscal year 2004: $1,109; 
Fiscal year 2005: $1,046; 
Fiscal year 2006: $1,007. 

Carryover ceiling; 
Fiscal year 2003: 1,129; 
Fiscal year 2004: 1,052; 
Fiscal year 2005: 994; 
Fiscal year 2006: 1,034. 

Amount over or under ceiling; 
Fiscal year 2003: Over $16; 
Fiscal year 2004: Over $57; 
Fiscal year 2005: Over $51; 
Fiscal year 2006: Under $28. 

Source: Navy reports. 

Note: Figures may not add due to rounding. 

[End of table] 

GAO’s analysis of accounting information on customer orders and 
discussions with NAWC officials determined that its fiscal year 2003 
and 2004 carryover information was unreliable due to (1) NAWC 
converting to a new accounting system in fiscal year 2003 and (2) NAWC 
not performing reviews of obligations, including the required DOD 
triannual reviews. To better manage carryover and improve the 
reliability of carryover information, starting in fiscal year 2005, 
NAWC (1) issued guidance on the acceptance of orders at year end and 
(2) began reviewing orders to correct its old financial records. While 
the reliability of carryover information improved in fiscal years 2005 
and 2006, GAO determined that problems still exist. For example, GAO 
found that funds on some customer orders totaling $19.5 million were 
deobligated at fiscal year end and then reobligated at the beginning of 
the next fiscal year on these same orders. This artificially lowered 
reported NAWC carryover at fiscal year end. 

Further, even though DOD’s 1996 guidance required NAWC as well as other 
activities to conduct triannual reviews of its financial information, 
NAWC did not perform these reviews until fiscal year 2006. If 
implemented properly, these reviews would improve the reliability of 
reported carryover information and the underlying financial data. In 
addition, as of September 2006, the two NAWC divisions were still not 
fully complying with several of the 16 specific DOD tasks required as 
part of the triannual reviews. For example, because the two divisions 
were not always effectively reviewing some obligations, especially 
dormant obligations (obligations over 120 days old), their reported 
actual carryover was overstated. Also, effective triannual reviews 
would help NAWC validate its financial records before it implements a 
new system that is scheduled to be installed in October 2007. 

What GAO Recommends: 

GAO makes six recommendations to DOD that are aimed at improving the 
reliability of carryover information and the effectiveness of the 
triannual review process. DOD concurred with all of GAO’s 
recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-643]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact McCoy Williams at (202) 
512-9095 or williamsm1@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

NAWC's Reported Actual Carryover Information Was Unreliable: 

NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year 
2006: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Analysis of Dormant Obligations and Accrued Expenditures: 

Appendix III: Comments from the Department of Defense: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Table: 

Table 1: Dollar Amount of Reported Actual Carryover, Carryover Ceiling, 
and the Amount of Carryover that is Over or Under the Ceiling: 

United States Government Accountability Office: 
Washington, DC 20548: 

June 26, 2007: 

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

According to the Department of Defense's (DOD) fiscal year 2007 budget 
estimates, working capital fund activity groups (depot maintenance, 
ordnance, and research and development) will have about $6 billion of 
funded work that will be carried over from fiscal year 2007 into fiscal 
year 2008.[Footnote 1] The congressional defense committees recognize 
that these activity groups need some carryover to ensure a smooth flow 
of work during the transition from one fiscal year to the next. 
However, past congressional defense committee reports raised concerns 
that the level of carryover may be more than is needed. Excessive 
amounts of carryover financed with customer appropriations are subject 
to reductions by DOD and the congressional defense committees during 
the budget review process. To the extent that carryover is too high, 
Congress may redirect the funds gained from such reductions to pay for 
other priority initiatives. 

In May 2001, we reported[Footnote 2] that DOD did not have a sound 
analytical basis for its 3-month carryover standard, which it 
established in 1996. In December 2002, DOD revised its carryover policy 
to eliminate the 3-month across-the-board standard for allowable 
carryover. Under the new policy, the allowable amount of carryover 
(known as the carryover ceiling) is to be based on the outlay 
rate[Footnote 3] of the customers' appropriations financing the work. 
This means that in determining allowable carryover, the first year 
outlay rate of the customers' appropriations financing the work is used 
for new orders received in the current year (first year of the work 
order). However, we reported[Footnote 4] in June 2006 that the military 
services have not consistently implemented DOD's revised policy in 
calculating carryover. Instead, the military services used different 
methodologies for calculating reported actual and allowable amounts of 
carryover since DOD changed its carryover policy in December 2002. We 
also reported that the Naval Air Warfare Center (NAWC) exceeded the 
carryover ceiling for fiscal years 2003, 2004, and 2005 by millions of 
dollars each year. 

As requested by and agreed to with your office, this report assesses 
carryover related to NAWC. The objectives of this assignment were to 
determine if (1) NAWC's reported actual carryover was reliable for 
fiscal years 2003 through 2006 and (2) NAWC was utilizing the required 
triannual review process to improve the reliability of its carryover 
information and underlying financial data. Our review was performed 
from July 2006 through April 2007 in accordance with U.S. generally 
accepted government auditing standards. The carryover data used in this 
report were obtained from official Navy budget and accounting 
documents. To assess the reliability of the data, we (1) reviewed and 
analyzed the information used to calculate reported actual carryover, 
(2) analyzed the NAWC aircraft and weapons divisions' fiscal years 2003 
through 2006 financial statements, (3) interviewed officials 
knowledgeable about the carryover data, (4) reviewed NAWC's 
implementation of the required DOD triannual review process, and (5) 
reviewed selected orders to determine if the orders were adequately 
supported by documentation. Further details on our scope and 
methodology can be found in appendix I. We requested comments on a 
draft of this report from the Secretary of Defense or his designee. 
Written comments from the Under Secretary of Defense (Comptroller) are 
reprinted in appendix III. 

Results in Brief: 

Our analysis of accounting data that provide information on customer 
orders and discussions with NAWC officials determined that the reported 
carryover information was not reliable for fiscal years 2003 and 2004 
as a result of (1) NAWC's conversion to a new accounting system in 
fiscal year 2003 and (2) the divisions not performing reviews of 
obligations, including the required DOD triannual reviews. Reliable 
carryover information is essential for DOD and congressional defense 
committees during the budget review process since they may redirect 
excessive carryover amounts to pay for other priority initiatives. For 
fiscal years 2003, 2004, and 2005, NAWC reports showed that it exceeded 
its carryover ceiling by $16.3 million, $57.2 million, and $51.7 
million, respectively. During this 3-year period, our analysis of Navy 
reports showed that NAWC had carryover amounts of $1.1 billion, $1.1 
billion, and $1.0 billion, respectively, which represented over one- 
third of NAWC's annual workload. However, both the NAWC aircraft and 
weapons divisions' comptrollers did not certify to the accuracy of 
financial information reported in their fiscal year 2003 financial 
statements. To better manage carryover, improve the reliability of 
reported carryover information, and avoid exceeding the carryover 
ceiling, beginning in fiscal year 2005 and continuing into fiscal year 
2006, NAWC (1) issued guidance on the acceptance of orders at fiscal 
year end and (2) began reviewing orders to correct old financial 
records and reduce carryover. For fiscal year 2006, NAWC reported that 
its actual carryover was below the carryover ceiling. While the 
reliability of carryover information improved in fiscal years 2005 and 
2006, we determined that some data reliability problems still exist. 
For example, we found that funds on some customer orders totaling $19.5 
million were deobligated at the end of the fiscal year end and then 
reobligated at the beginning of the next fiscal year on these same 
orders. This artificially lowered carryover at the end of the fiscal 
year. 

Furthermore, NAWC did not perform the triannual reviews of its 
financial information until fiscal year 2006, even though DOD guidance 
has been in place for about 10 years requiring NAWC and all other fund 
holders[Footnote 5] to conduct these reviews of their financial data 
(outstanding commitments, obligations, and accrued expenditures). If 
implemented properly, these reviews would likely have improved the 
reliability of reported carryover information and related underlying 
financial data. DOD established its triannual review requirement in 
1996 in order to improve the timeliness and accuracy of its financial 
data. According to NAWC officials at the aircraft and weapons 
divisions, these reviews were not done prior to 2006 because they 
received guidance from the Naval Air Systems Command that stated NAWC 
was not required to conduct the triannual reviews. Further, as of 
September 2006, the two divisions were still not fully complying with 
several of the 16 specific DOD tasks that they were required to 
accomplish as part of the triannual reviews. Because the two divisions 
did not always effectively review some obligations, particularly 
dormant obligations (obligations over 120 days old), (1) their reported 
actual carryover was overstated and (2) they sometimes returned 
unneeded funds to customers after the funds had expired. Furthermore, 
if effectively implemented, the triannual reviews could help NAWC 
validate or correct any errors in its financial records before it 
implements a new system that is scheduled to be installed in October 
2007. 

We are making six recommendations to DOD to (1) reiterate guidance to 
NAWC that would prohibit it from deobligating reimbursable customer 
orders at fiscal year end and reobligating them in the next fiscal 
year, an action that artificially reduces carryover balances that are 
ultimately reported to Congress; and (2) improve the effectiveness of 
the triannual review process. DOD concurred with the six 
recommendations and identified corrective actions it is taking to 
address them. While we appreciate DOD's efforts, we are concerned with 
(1) the timing of the corrective action for one of the recommendations 
and (2) the completeness of DOD's planned actions related to the one 
recommendation with which it "concurred with comment." First, with 
regard to DOD's plans to complete its reviews and validations of 
dormant obligations and accrued expenditures by September 2008, we 
continue to believe that these reviews and validations should be 
completed prior to the planned implementation of a new accounting 
system, currently scheduled for October 2007. Second, in concurring 
with our recommendation for a clarification of the DOD Financial 
Management Regulation (FMR) guidance on the triannual reviews, DOD 
commented the FMR is clear as currently written but it would issue a 
letter directing the Navy to comply with the FMR. As noted in our draft 
report, we identified varying interpretations of the FMR guidance among 
the Navy officials we interviewed. Thus, while we continue to believe 
that a revision to the FMR would be the most efficient means to resolve 
this issue, a letter such as that proposed in DOD's response could 
suffice as long as it includes clarification of the FMR guidance, 
particularly with regard to the dollar thresholds for required reviews. 

Background: 

A working capital fund relies on sales revenue rather than direct 
appropriations to finance its continuing operations. A working capital 
fund is intended to (1) generate sufficient resources to cover the full 
costs of its operations and (2) operate on a break-even basis over 
time--that is, neither make a gain nor incur a loss. Customers use 
appropriated funds to finance orders placed with the working capital 
fund. According to the Navy's fiscal year 2007 budget, the Navy Working 
Capital Fund will earn about $23.4 billion in revenue during fiscal 
year 2007. The Navy Working Capital Fund consists of the following five 
major activity groups: supply management, depot maintenance, 
transportation, base support, and research and development. The Navy's 
research and development working capital fund activity group is Navy's 
largest activity group in terms of expected revenue with $10.1 billion 
in fiscal year 2007. The activity group includes the following 
subactivity groups: (1) the Naval Surface Warfare Center, (2) the Space 
and Naval Warfare Systems Centers, (3) the Naval Undersea Warfare 
Center, (4) the Naval Research Laboratory, and (5) the Naval Air 
Warfare Center. 

The Naval Air Warfare Center consists of two divisions: (1) the 
aircraft division, which is located at Lakehurst, New Jersey, and 
Patuxent River, Maryland; and (2) the weapons division, which is 
located at China Lake, California, and Point Mugu, California. NAWC 
employs about 10,300 civilian and military personnel and is expected to 
have revenues of almost $3 billion in fiscal year 2007. The mission of 
NAWC's aircraft division is to operate the Navy's principal research, 
development, test, and evaluation; engineering; and fleet support 
activity for naval aircraft engines, avionics, and aircraft support 
systems, and ships, shore, air operations. The mission of NAWC's 
weapons division is to operate as the Navy's full-spectrum research, 
development, test, and evaluation in-service engineering center for air 
warfare weapons systems (except antisubmarine warfare systems), 
missiles and missile subsystems, aircraft weapons integration, and 
assigned airborne electronic warfare systems. The weapons division also 
operates one of the Navy's major range and test facility bases 
comprising a complex of air, land, and sea test ranges. 

What Is Carryover and Why Is It Important? 

Carryover is the dollar value of work that has been ordered and funded 
(obligated) by customers but not completed by working capital fund 
activities at the end of the fiscal year. Carryover consists of both 
the unfinished portion of work started but not completed, as well as 
requested work that has not yet begun. Some carryover is necessary at 
fiscal year end if working capital funds are to operate efficiently and 
effectively. For example, if customers do not receive new 
appropriations at the beginning of the fiscal year, carryover is 
necessary to ensure that the working capital fund activities have 
enough work to ensure a smooth transition between fiscal years. Too 
little carryover could result in some personnel not having work to 
perform at the beginning of the fiscal year. On the other hand, too 
much carryover could result in an activity group receiving funds from 
customers in one fiscal year but not performing the work until well 
into the next fiscal year or subsequent years. By optimizing the amount 
of carryover, DOD can use its resources in the most effective manner 
and minimize the "banking" of funds for work and programs to be 
performed in subsequent years. 

Decision makers, including the Office of the Under Secretary of Defense 
(Comptroller) and congressional defense committees, use reported 
carryover information to make decisions concerning whether working 
capital fund activities, such as NAWC, have too much carryover. If NAWC 
has too much carryover, the decision makers may reduce the customers' 
budgets and use these resources for other purposes. For example, during 
its review of the fiscal year 2003 budget, the Office of the Under 
Secretary of Defense (Comptroller) determined that the Navy research 
and development activities' carryover had been steadily increasing from 
about $2.2 billion in fiscal year 1997 to about $3.4 billion in fiscal 
year 2003. Since a significant portion of the carryover was related to 
work that was to be contracted out, the Office of the Under Secretary 
of Defense (Comptroller) reduced the customer funding by $161.1 
million, because these efforts could be funded in fiscal year 2004 with 
no impact on performance. 

DOD Revised Its Carryover Policy: 

In 1996, DOD established a 3-month carryover standard for working 
capital fund activities. In May 2001, we reported[Footnote 6] that DOD 
did not have a basis for its carryover standard and recommended that 
DOD determine the appropriate carryover standard for depot maintenance, 
ordnance, and research and development activity groups. According to 
Office of the Under Secretary of Defense (Comptroller) officials, DOD 
provided verbal guidance concerning its new carryover policy for 
working capital fund activities in December 2002. Subsequently, DOD 
included its revised carryover policy in its DOD Financial Management 
Regulation 7000.14-R, Volume 2B, Chapter 9, dated June 2004, which 
eliminated the 3-month standard for allowable carryover. Under the new 
policy, the allowable amount of carryover is to be based on the outlay 
rate[Footnote 7] of the customers' appropriations financing the work. 
This meant that in determining allowable carryover, the first year 
outlay rate of the customers' appropriations financing the work would 
be used for new orders received in the current year (first year of the 
work order). According to the DOD regulation, this new metric allows 
for an analytical-based approach that holds working capital fund 
activities to the same standard as general fund execution and allows 
for more meaningful budget execution analysis. 

To calculate the reported actual carryover for the Navy research and 
development activity group that includes NAWC, the Navy uses the 
summary-level formula shown below. 

Balance of customer orders beginning of year Plus: New orders received 
Equals: Total available orders Less: Revenue Less: Work-in-process 
Equals: Carryover: 

In accordance with DOD policy, the following orders and related work 
are excluded from this calculation: (1) nonfederal orders, (2) non-DOD 
orders, (3) foreign military sales, (4) work related to base 
realignment and closure, and (5) major range and test facility base 
work. The reported actual carryover is then compared to the amount of 
allowable carryover using the above-mentioned outlay rate method to 
determine if the reported actual amount was over or under the allowable 
amount. 

DOD Established Triannual Review Requirement in 1996: 

The May 1996 memorandum from the Under Secretary of Defense 
(Comptroller) that established DOD's triannual review requirement noted 
that the timely review of commitments and obligations to ensure the 
accuracy and timeliness of financial transactions is a vital phase of 
financial management. To illustrate the point, the Under Secretary 
stated that the accurate recording of commitments and obligations (1) 
forms the basis for formal financial reports issued by the department 
and (2) provides information for management to make informed decisions 
regarding resource allocation. 

Carryover-related budget decisions are examples of resource allocation 
decisions that require reliable obligation data. This is because there 
is a direct link between the (1) carryover data that working capital 
fund activities report to Congress and DOD decision makers and (2) 
obligation data contained in the accounting records of working capital 
fund activities and their customers. Specifically, 

* when working capital fund activities, such as NAWC, accept customer 
orders, obligations are created in the customers' accounting records, 
and the activities become the "fund holders"; and: 

* as work is performed and customers are billed, both the unliquidated 
obligation balances in the customers' accounting records and the 
working capital fund activities' reported carryover balances are 
reduced. 

DOD included the triannual review requirements in its Financial 
Management Regulation. DOD Financial Management Regulation 7000.14-R, 
Volume 3, Chapter 8, requires fund holders, such as NAWC, to provide 
written confirmation that they have completed 16 specific 
tasks[Footnote 8] during their reviews. For example, the regulation 
requires fund holders to confirm, among other things, that they have 
(1) traced the obligations and commitments that are recorded in their 
accounting systems back to source documentation and (2) conducted 
adequate follow-up on all dormant obligations and commitments over 120 
days old to determine if they are still valid.[Footnote 9] 
Additionally, the regulation requires fund holders to (1) identify the 
problems that were noted during their reviews; (2) advise management of 
whether, and to what extent, adjustments or corrections were taken to 
remedy noted problems; (3) summarize, by type, the actions or 
corrections remaining to be taken; (4) indicate when such actions/ 
corrections are expected to be completed; and (5) identify the actions 
that have been taken to preclude identified problems from recurring in 
the future. Thus, if properly implemented by the department, triannual 
reviews can provide a systematic process that can help fund holders not 
only improve the reliability of their financial data but also identify 
and correct the underlying causes of data problems. 

NAWC Implemented a New System in Fiscal Year 2003 and Plans to 
Implement a Different System in October 2007: 

In 1998, the Navy established four separate Enterprise Resource 
Planning (ERP) pilot programs to address the need for business 
operations reform within the Navy. We reported[Footnote 10] in 
September 2005 that (1) the Navy invested approximately $1 billion in 
its four pilot ERP efforts, without marked improvements in its day-to- 
day operations; (2) the lack of a coordinated effort among the pilots 
led to a duplication of efforts in implementing many business functions 
and resulted in ERP solutions that carry out similar functions in 
different ways from one another; and (3) the pilots resulted in four 
more stovepiped systems that did not enhance DOD's overall efficiency 
and resulted in $1 billion being largely wasted. 

One of these pilots was managed by the Naval Air Systems Command and 
called SIGMA. SIGMA was to improve program management including linkage 
among contract management, financial management, and workforce 
management. Prior to fiscal year 2003, NAWC used the Defense Industrial 
Financial Management System to account for its funds. In January 2003, 
NAWC began to implement SIGMA and completed implementation of this new 
system in March 2003. As discussed later in this report, NAWC 
encountered significant difficulties implementing SIGMA, which affected 
the reliability of the financial information for fiscal years 2003 and 
2004. The Navy now plans to implement one overall ERP system, referred 
to as Navy ERP, and discontinue using the four ERP systems. This 
overall ERP system is planned to be implemented at NAWC in October 
2007. 

NAWC's Reported Actual Carryover Information Was Unreliable: 

Our analysis of accounting data that provide information on customer 
orders and discussions with NAWC officials determined that the reported 
carryover information was not reliable for fiscal years 2003 and 2004 
as a result of (1) NAWC's conversion to a new accounting system in 
fiscal year 2003 and (2) the divisions not performing reviews of 
obligations including the required DOD triannual reviews--as discussed 
later in this report. Reliable carryover information is essential for 
DOD and congressional defense committees during the budget review 
process since they may redirect excessive carryover amounts to pay for 
other priority initiatives. Both the NAWC aircraft and weapons 
divisions' comptrollers did not certify to the accuracy of financial 
information reported in their respective fiscal year 2003 financial 
statements. To try to better manage carryover, improve the reliability 
of the carryover information, and avoid exceeding the ceiling, 
beginning in fiscal year 2005 and continuing into fiscal year 2006, 
NAWC (1) issued guidance on the acceptance of orders at year end and 
(2) started to review orders to correct its old financial records and 
reduce carryover. While the reliability of carryover information 
improved in fiscal years 2005 and 2006, we determined that data 
reliability problems still exist. For example, we found that funds on 
some customer orders totaling $19.5 million were deobligated at the end 
of the fiscal year and then reobligated at the beginning of the next 
fiscal year on these same orders. This artificially lowered carryover 
at the end of the fiscal year. 

NAWC Reports Showed that It Exceeded Its Carryover Ceiling from Fiscal 
Year 2003 through Fiscal Year 2005: 

Since DOD changed its carryover policy in December 2002, NAWC exceeded 
its carryover ceiling by tens of millions of dollars from fiscal year 
2003 through fiscal year 2005. During this 3-year period, Navy reports 
showed that NAWC had carryover amounts of $1.1 billion, $1.1 billion, 
and $1.0 billion, respectively, which represented over one-third of 
NAWC's annual workload. Table 1 shows the dollar amount of the 
carryover ceiling, the dollar amount of the Navy-reported actual 
carryover for NAWC, and the dollar amount of carryover that was over or 
under the ceiling for fiscal years 2003 through 2006. 

Table 1: Dollar Amount of Reported Actual Carryover, Carryover Ceiling, 
and the Amount of Carryover that is Over or Under the Ceiling: 

Dollars in millions. 

Carryover amount; 
Fiscal year 2003: $1,146; 
Fiscal year 2004: $1,109; 
Fiscal year 2005: $1,046; 
Fiscal year 2006: $1,007. 

Carryover ceiling; 
Fiscal year 2003: 1,129; 
Fiscal year 2004: 1,052; 
Fiscal year 2005: 994; 
Fiscal year 2006: 1,034. 

Amount over or under ceiling; 
Fiscal year 2003: Over $16; 
Fiscal year 2004: Over $57; 
Fiscal year 2005: Over $51; 
Fiscal year 2006: Under $28. 

Source: Navy reports. 

Note: Figures may not add due to rounding. 

[End of table] 

Implementation of New System Affected Reliability of Carryover 
Information: 

NAWC reports showed that it exceeded the carryover ceiling in fiscal 
year 2003 by $16.3 million. NAWC reports showed that the weapons 
division exceeded the ceiling by $31 million, while the aircraft 
division was $14.7 million under the ceiling. NAWC aircraft and weapons 
division officials stated that their fiscal year 2003 carryover 
information was unreliable as a result of NAWC's conversion to SIGMA in 
fiscal year 2003. According to NAWC aircraft and weapons division 
officials, immediately after the conversion to SIGMA between January 
and March 2003, NAWC personnel began experiencing problems with the 
reliability of the data. This resulted from the lack of subject matter 
expertise and user training on the new system, and system configuration 
problems between the previous system, called the Defense Industrial 
Financial Management System, and SIGMA. Further, due to the system not 
operating for approximately 3 months and system-related problems, NAWC 
experienced significant backlogs in processing financial documents 
during fiscal year 2003. For example, NAWC weapons division officials 
noted that their personnel spent the first 2 months of fiscal year 2004 
processing fiscal year 2003 customer bills. Due to the delays in 
processing billing transactions, NAWC's work-in-process balances at the 
end of fiscal year 2003 (a key component in the carryover calculation) 
were about 10 times (aircraft) and 8 times (weapons) higher than its 
fiscal year 2002 reported amount. As a result of these system problems, 
both the NAWC aircraft and weapons divisions' comptrollers would not 
certify to the accuracy of financial information reported in their 
fiscal year 2003 financial statements. 

For fiscal year 2004, the aircraft and weapons divisions reported that 
their carryover exceeded the ceiling by $35.7 million and $21.5 
million, respectively, for a total of $57.2 million. According to NAWC 
aircraft and weapons division officials, several data fixes were made 
to SIGMA in fiscal year 2004 that improved its processing times and 
data integrity issues. However, some data reliability problems 
continued to exist. The NAWC aircraft and weapons divisions' 
comptrollers noted problems with the reliability of some of their 
financial information presented in the fiscal year 2004 financial 
statements. In fiscal year 2004, NAWC aircraft and weapons division 
officials stated that, at the request of the Naval Air Systems Command 
Comptroller, a team of consultants and analysts conducted a review of 
SIGMA's processes to address its multitude of data integrity issues and 
its inability to provide accurate financial statements. The team 
developed a detailed plan of action and milestones to fix these 
problems with timelines that extended into fiscal year 2006. Further, 
for most of fiscal year 2003 and 2004, NAWC aircraft and weapons 
division officials stated that SIGMA lacked carryover management 
reports that would allow NAWC program managers to monitor the status of 
each order (funding document) and make informed decisions to control 
its carryover. In the executive summary to the NAWC aircraft division's 
fiscal year 2004 financial statements, the division reported that the 
implementation of SIGMA resulted in the nonavailability of specific 
carryover reports necessary for managing carryover at the program 
level. NAWC aircraft and weapons division officials stated that while 
the reports became available late in fiscal year 2004, they were of 
limited utility because of continuing data integrity issues and NAWC's 
inability to review and validate both aged and current financial 
records. 

NAWC Took Steps to Better Manage Carryover and Improve the Reliability 
of Carryover Information: 

Beginning in fiscal year 2005 and continuing into fiscal year 2006, 
NAWC issued guidance on the acceptance of orders at fiscal year end in 
an attempt to better manage carryover and avoid exceeding its carryover 
ceiling for the third straight year. Specifically, in an August 2005 
memorandum that contained fiscal year 2005 NAWC carryover guidance, 
NAWC estimated that its year-end carryover balance would be $95 million 
over its authorized level. The memorandum placed strict controls over 
acceptance of year-end orders including (1) the rejection of 
noncritical new orders, (2) the acceptance of requests for reversion of 
funds back to customers, and (3) before the NAWC accepts any critical 
workload that would result in additional unexpended carryover, the 
division must obtain approval from the NAWC aircraft division or 
weapons division commander and offset the outstanding carryover amounts 
by reversions of funds to the customer of an equal or greater amount. 
Further, the NAWC comptrollers were directed to provide program 
managers with a list of projects or tasks that had 25 percent or less 
of authorized funding executed as a potential source for reversion or 
offsets. Finally, the NAWC weapons division provided its business 
financial management community with tools to give them the capability 
to better manage carryover. For example, one tool provided the business 
financial managers (BFM)[Footnote 11] with the capability to compare 
planned carryover data to actual carryover data for individual orders 
and at the summary level on a weekly basis to determine if actual 
carryover may exceed the carryover ceiling at year end. If actual 
carryover may exceed the ceiling at year end, the weapons division can 
use the tool to identify problems--such as a significant delay in a 
major program's start date--and begin working on solutions to mitigate 
them. Even with these stronger management controls over new orders and 
the increased efforts to validate old accounts, NAWC's reports showed 
that it still exceeded the carryover ceiling in fiscal year 2005 by 
$51.7 million. The aircraft division exceeded the ceiling by $52.4 
million while the weapons division was under the ceiling by $0.7 
million. 

For fiscal year 2006, NAWC's reported actual carryover amount was below 
the carryover ceiling for the first time since DOD revised its 
carryover policy in December 2002. The aircraft and weapons divisions 
were under the ceiling by about $10 million and $18 million, 
respectively. NAWC officials informed us that they continued to 
emphasize the management of carryover during fiscal year 2006 by 
reviewing orders and issuing additional guidance. Key elements of this 
guidance include the following. 

* The aircraft division issued additional carryover guidance in 
September 2006 to reiterate several requirements cited in fiscal year 
2005. Furthermore, an aircraft division official noted that the 
increased focus resulting from the prior GAO report recommending that 
the research and development subactivity groups report their carryover 
balances separately in the Navy's annual budget encouraged NAWC 
management to more closely monitor and manage its carryover. 

* The weapons division issued carryover guidance in August 2006, which 
continued to stress the reviews of customers' orders that are financed 
with appropriations that are canceling or expiring. The guidance states 
that such reviews would (1) improve the quality of the year-end 
carryover and (2) validate the records, which is an essential task for 
accomplishing a smooth financial conversion to the new Navy ERP system 
planned for October 2007. The guidance further provided that funds 
accepted during the remainder of the fourth quarter should not 
negatively impact the division's carryover position. Otherwise, the 
division should notify the customer that the order cannot be accepted 
and renegotiate, if possible, the amount of the order that can be 
accomplished using the DOD carryover guidance on outlay rates. 

Furthermore, starting primarily in fiscal year 2005, the aircraft and 
weapons divisions began reviewing certain types of orders to validate 
old financial records and reduce carryover. According to NAWC aircraft 
and weapons division officials, most of these reviews were not done in 
fiscal years 2003 and 2004 because of NAWC's conversion to SIGMA and 
the problems, mentioned earlier, it encountered with implementing the 
system and the reliability of the data in the system. Some of the 
reviews performed by the aircraft or weapons divisions include (1) 
reviews of funding documents (orders) citing appropriations that are 
canceling[Footnote 12] at the end of each fiscal year (such reviews 
have been done since the 1990s), (2) reviews of funding documents 
citing accounts that were to expire at the end of the fiscal year 
(these reviews started in fiscal year 2005), and (3) a fiscal year 2006 
review of unused funds with work completion dates of September 30, 
2005, and before. According to NAWC officials, these reviews resulted 
in correcting millions of dollars in unsupported or unneeded funds on 
orders, and greatly improved the reliability of the financial data. For 
example, according to a NAWC aircraft division official, as of August 
2005, this division had 14,353 orders that were still open on its books 
when it converted to SIGMA in fiscal year 2003. As a result of the 
aircraft division's review of these orders from August 2005 through 
November 2006, this number was reduced to 7,053 open orders--a 
reduction of about 50 percent--and $10 million of unneeded funds were 
removed from its books. 

Some Customer Orders Were Reduced at Year End, which Artificially 
Lowered Carryover: 

While we are encouraged by NAWC's actions to review and validate its 
financial records and better manage its carryover, we identified some 
cases where NAWC deobligated millions of dollars of funds at fiscal 
year end on orders for work it still planned to perform. NAWC then 
reobligated funds at the beginning of the next fiscal year to perform 
the work. This action artificially lowered NAWC's actual year-end 
carryover balances in fiscal years 2004 and 2005 that were reported to 
DOD and congressional decision makers. We analyzed fiscal years 2004 
and 2005 year-end orders where amendments or adjustments were made to 
deobligate funds on these orders at the end of the fiscal year. We 
found a total of $19.5 million was deobligated at the end of fiscal 
year 2004 or 2005 and reobligated at the beginning of the next fiscal 
year. These actions had the effect of reducing carryover even though 
the requirement for the funds still remained at the time the funds were 
returned to their customers. We reported[Footnote 13] on a similar 
problem in fiscal year 2003 on our review of the Space and Naval 
Warfare Systems Command. The following examples illustrate the orders 
that were deobligated at the end of fiscal year 2004 or 2005, which had 
the effect of reducing reported carryover even though the requirement 
for the funds still remained but the work could not be completed by the 
end of the fiscal year. 

* Aircraft division officials stated that they did not know why 
adjustments totaling $10.5 million on 14 orders were made to deobligate 
customer funds at the end of fiscal year 2004 or 2005 and why the funds 
were reobligated at the beginning of the next fiscal year on these same 
orders. They said that lack of documentation, turnover of personnel, 
and difficulties implementing SIGMA hindered their ability to determine 
why these year-end adjustments were made. For example, from December 1, 
2003, to September 23, 2004, the NAWC aircraft division accepted a work 
order and related amendments from the Naval Air Systems Command 
totaling approximately $2.1 million for engineering support for the CH- 
53E helicopter program. Accounting records showed that $404,435 was 
deobligated in September 2004--at the end of the fiscal year--and that 
this same amount was reobligated 1 month later in October 2004--at the 
beginning of the next fiscal year. According to an aircraft division 
official, "no documentation for reason of the deobligation has been 
located." 

* In April 2005, the NAWC weapons division accepted two orders from the 
U.S. Army Space and Missile Defense Command totaling $5.5 million for 
range instrumentation services and missile flight safety support for 
two separate tests of the Missile Defense Agency Target 
Intercontinental Ballistic Missiles. The tests were originally 
scheduled to be completed in fiscal year 2005, but were delayed into 
fiscal year 2006 due to weather and instrumentation problems. Due to 
program delays and expenditure rates that were 25 percent or less of 
authorized funding on the orders, NAWC identified these orders as 
potential funds that could be returned to the customer. According to a 
BFM, the NAWC weapons division needed to have these funds "off the 
books" to relieve the carryover problem. The NAWC weapons division's 
comptroller officials stated that the return of funds to customers is 
appropriate when mission support requirements slip from one fiscal year 
to the next and the tasking to be accomplished is severable, as in this 
case. On September 23, 2005, the U.S. Army Space and Missile Defense 
Command issued an amendment to each order deobligating a total of $4.85 
million. Approximately 1 month later, the command issued amendments on 
the orders returning the $4.85 million--the exact amount that was 
deobligated in September 2005. The two tests were performed in fiscal 
year 2006. 

* In January 2005, the NAWC aircraft division accepted an order from 
the Naval Air Systems Command totaling $100,000 for the research and 
development of a low-cost, automated fiber optic cable. In September 
2005--8 months later--the Naval Air Systems Command issued an amendment 
to the order deobligating the entire amount. In October 2005-- 
approximately 1 month later--the command issued another amendment to 
the order returning funds to the program totaling $110,000. Work on the 
order began in November 2005 and was completed in September 2006. 
According to a BFM, delays in completing work in fiscal years 2003 and 
2004 on other jobs delayed the start of fiscal year 2005 work. NAWC 
aircraft division accounting officials said, and we agree, that work 
should have been started within a reasonable amount of time after 
accepting the order in January 2005--within 90 days. Otherwise, the 
funds should have been deobligated when the delays caused the work to 
commence beyond a reasonable amount of time as specified in the DOD 
financial management regulation. 

NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year 
2006: 

NAWC did not perform the triannual reviews of its financial information 
until fiscal year 2006, even though DOD guidance had long required NAWC 
and all other fund holders[Footnote 14] to conduct these reviews of 
their financial data (outstanding commitments, obligations, and accrued 
expenditures). These reviews would likely have improved the reliability 
of carryover information and the underlying financial data. DOD 
established its triannual review requirement in 1996 in order to 
improve the timeliness and accuracy of its financial data. However, the 
aircraft and weapons divisions did not conduct their first reviews 
until January 2006--about 10 years later. Further, as of September 
2006, the two divisions were still not fully complying with several of 
the 16 specific DOD tasks that they were required to accomplish during 
their reviews. Because the two divisions did not always effectively 
review some obligations, particularly dormant obligations (i.e., those 
over 120 days old), (1) their reported actual carryover was overstated 
and (2) they sometimes returned unneeded funds to customers after the 
funds had expired. Further details on dormant obligations and accrued 
expenditures are included in appendix II. Furthermore, if effectively 
implemented, the triannual reviews could help NAWC validate its 
financial records before it implements a new system that is scheduled 
to be installed in October 2007. 

NAWC Did Not Properly Implement DOD's Triannual Review Guidance: 

NAWC did not properly implement DOD's triannual review guidance cited 
in DOD Financial Management Regulation 7000.14-R, Volume 3, Chapter 8. 
Specifically, (1) NAWC did not perform the required triannual reviews 
prior to fiscal year 2006 although these reviews were required in a May 
1996 memorandum from the Under Secretary of Defense (Comptroller) and 
in the November 2000 DOD Financial Management Regulation and (2) NAWC 
did not review all obligations at least once during fiscal year 2006 as 
required by the November 2000 DOD regulation. In addition, the November 
2000 DOD regulation (triannual guidance) on the dollar threshold for 
reviewing obligations was unclear. 

NAWC Did Not Perform Required Triannual Reviews Prior to Fiscal Year 
2006: 

Prior to fiscal year 2006, NAWC did not perform triannual reviews, even 
though these reviews were required by the DOD Financial Management 
Regulation. According to NAWC officials at the aircraft and weapons 
divisions, these reviews were not done because they received e-mail 
guidance from the Naval Air Systems Command that stated the NAWC 
divisions were not required to submit the triannual review confirmation 
report because this requirement was only for general funds. In October 
2005, the Naval Air Systems Command provided guidance to the NAWC 
aircraft and weapons divisions that they were now required to perform 
the triannual reviews and complete the confirmation statements. 
Officials from the NAWC aircraft and weapons divisions stated that the 
first time they completed a triannual review and confirmation statement 
was for the period ending January 31, 2006. 

NAWC Did Not Review All Obligations in Fiscal Year 2006 as Required by 
DOD Regulation: 

Although the DOD regulation requires that all obligations be reviewed 
at least annually in order to substantiate year-end triannual review 
requirements, the NAWC aircraft and weapons divisions only reviewed 
obligations, including dormant obligations, over a certain dollar 
threshold--$50,000 or $200,000. The weapons division did not review all 
the obligations because guidance received from the Naval Air Systems 
Command dated June 2, 2006, and September 28, 2006, and guidance issued 
by NAWC weapons divisions dated September 29, 2006, did not require a 
review of all of them. Officials from Naval Air Systems Command and the 
NAWC weapons division informed us that they did not require the review 
of all obligations at least once a year because they did not realize 
that the DOD regulation required such a review. NAWC aircraft division 
officials told us that although the DOD regulation required such 
reviews, they did not have the time or resources to perform the 
reviews. If effectively implemented, the triannual reviews could help 
NAWC validate its financial records before it implements a new system 
that is scheduled to be installed in October 2007. 

DOD Triannual Review Guidance on Dollar Threshold for Reviewing 
Obligations Is Unclear: 

We also found that DOD's triannual review guidance regarding the dollar 
threshold for reviewing outstanding obligations was unclear. The DOD 
Financial Management Regulation 7000.14-R, Volume 3, Chapter 8, 
guidance states that during the January and May reviews, obligations of 
(1) $200,000 or more for investment appropriations (e.g., procurement 
and the capital budget of the working capital funds) should be reviewed 
and (2) $50,000 or more for operating appropriations (e.g., operation 
and maintenance funds and the operating portion of the working capital 
funds) should be reviewed. However, the Naval Air Systems Command and 
the NAWC weapons division interpreted the guidance to mean that 
customer orders--which are the operating portion of the working capital 
fund--financed with investment funds fell into the $200,000 threshold 
category for review purposes, rather than the $50,000 category. The 
NAWC weapons division conducted its triannual reviews accordingly. In 
discussing this issue with accounting and budgeting officials from the 
Office of the Under Secretary of Defense (Comptroller), they stated 
that customer orders received by working capital fund activities are 
part of the operating portion of the working capital fund regardless of 
the appropriation financing the order. Thus, the January and May 
triannual reviews should have included all obligations over $50,000. 

NAWC Continues to Refine Its Triannual Review Process: 

Our review of the process that the NAWC aircraft and weapons divisions 
used to conduct their triannual reviews identified several areas that 
need improvements. The aircraft and weapons divisions developed their 
own separate processes for performing the triannual reviews. For fiscal 
year 2006, the weapons division used a decentralized process that 
relied on both the accounting department and the BFMs to conduct its 
reviews, while the aircraft division used a centralized process that 
relied on the accounting department to conduct its reviews. During our 
review, we identified problems with the two divisions' triannual 
reviews of obligation and accrued expenditure balances. Based on the 
results of our review and discussions with NAWC officials, the aircraft 
and weapons divisions issued written guidance on performing the 
triannual reviews and are now including the BFMs in the process. If the 
process is implemented properly, the aircraft and weapons divisions' 
decision to include the BFMs in its triannual review process should 
result in better reviews and more reliable financial information, 
including carryover information, in the future. 

NAWC Weapons Division Improved Its Decentralized Review Process 
throughout 2006: 

The NAWC weapons division accomplished its triannual reviews on a 
decentralized basis. During the first step of the process, the Office 
of the Comptroller for the NAWC weapons division, which has overall 
responsibility for the reviews, developed computer lists that contain 
information on the division's outstanding commitments, obligations, and 
accrued expenditures. The Comptroller's office then placed these lists 
on the Business Financial Management Community shared server so that 
the BFMs could access the data and conduct their triannual reviews. 
When the BFMs finished their reviews, the competency[Footnote 15] heads 
certified that their reviews had been completed and then forwarded 
their certifications to the Comptroller's office. On the basis of the 
technical department's certifications, the Comptroller then certified 
that the division has completed its review. 

We found problems with the weapons division's implementation of the 
triannual review process. The NAWC weapons division performed its first 
triannual review for the period ending January 31, 2006. The review was 
performed on a limited basis by the Comptroller's office since no 
formal triannual review procedures had been developed by the weapons 
division. For the second triannual review performed for the period 
ending May 31, 2006, the Comptroller's office modified its process to 
place primary responsibility for reviewing its division's commitments, 
obligations, and accrued expenditures on the BFMs within the division's 
technical departments. NAWC weapons division officials stated that the 
BFMs had information that was not immediately available to the 
Comptroller's office on whether work was performed on its orders. 
Consequently, they were in the best position to determine whether 
outstanding obligations and accrued expenditures were valid and whether 
the funds were still needed to perform the work. 

While the May 2006 process was better than the one used for the weapons 
division's January 2006 review, our analysis and discussions with 
technical department and Comptroller's office officials found that (1) 
no written procedures had been developed by the weapons division, (2) 
not all BFMs that were responsible for reviewing the transactions 
participated in the training offered by the Comptroller's office, (3) 
the Comptroller's office did not specifically identify which 
transactions the technical departments were required to review, (4) the 
weapons division did not have a standard methodology for reporting the 
results of its technical departments' reviews to the Comptroller's 
office in order to ensure that all required transactions were 
certified, (5) not all BFMs that reviewed transactions were maintaining 
documentation for 24 months on their reviews as required by the DOD 
Financial Management Regulation, and (6) the division did not have a 
procedure in place to ensure the technical departments were performing 
the triannual reviews properly. For example, many of the technical 
departments' BFMs that we interviewed stated that the lists provided by 
the Comptroller's office contained hundreds of commitment, obligation, 
and accrued expenditure transactions for review, but the lists did not 
contain enough information to identify the specific transactions that 
the BFMs were responsible for reviewing. As a result, some BFMs did not 
perform the May 2006 triannual review at all because they could not 
identify the transactions that they were responsible for reviewing. 
Further, several of the BFMs that did perform reviews stated that they 
did not report their results to the Comptroller's office because a 
clearly defined procedure for reporting the results did not exist. 

In August 2006, we met with weapons division officials to discuss the 
division's triannual review process. Based on those discussions, we 
pointed out internal control weaknesses we identified in the May 2006 
process. The officials agreed that the weapons division's triannual 
review process could be improved and the division needed to document 
its triannual review procedures. Shortly after our meeting, the 
division established a team to develop guidance on its triannual review 
procedures. The team decided to use a phased approach to achieve 
compliance with the DOD triannual review regulation. On September 29, 
2006, the weapons division issued interim guidance containing the 
triannual review procedures for reporting on the period ending 
September 30, 2006. The weapons division made a number of improvements 
to the May 2006 process. The weapons division (1) modified the process 
to clearly identify which technical departments were responsible for 
the transactions, (2) directed the department heads who were 
responsible for the transactions assigned to their departments to 
certify that these transactions were reviewed, and (3) established a 
procedure for reporting results to the Comptroller's office. 

Our discussions with several weapons division technical departments' 
BFMs found that these officials thought the September 2006 triannual 
review process was a significant improvement over the May 2006 review 
process because the computer lists provided by the Comptroller's office 
contained sufficient information to identify the technical department 
and BFM responsible for reviewing the September 2006 transactions. 
Further, the interim guidance contained clear instructions for 
reporting their results to the Comptroller's office through their 
technical department managers. Our analysis showed that while the 
guidance for the September 2006 triannual reviews was an improvement, 
the guidance (1) did not comply with all the requirements of the DOD 
Financial Management Regulation to review all outstanding commitments, 
obligations, and accrued expenditures at least once annually; (2) did 
not require training for all the technical departments' BFMs involved 
in the review; (3) did not require all BFMs that were responsible for 
performing triannual reviews to maintain documentation for 24 months on 
their reviews; and (4) did not establish a procedure for ensuring that 
the technical departments are completing their reviews in compliance 
with the September 2006 interim guidance. 

On December 21, 2006--about 3 months later--the NAWC weapons division 
issued additional guidance containing instructions for performing all 
future triannual reviews beginning with the review period ending 
January 31, 2007. The guidance stated that the triannual reviews are a 
critical factor in the NAWC weapons division efforts to eliminate 
problem disbursements, reduce potential violations of the Anti- 
Deficiency Act, and improve obligation and expenditure rates. The 
guidance requires all commitments and obligations to be reviewed at 
least annually in compliance with the DOD Financial Management 
Regulation and requires the technical departments' BFMs to attend 
mandatory annual triannual review training. While the new guidance 
addresses many of our concerns, it still does not establish procedures 
for ensuring that the technical departments are completing their 
reviews in compliance with the new guidance. Without these procedures, 
the Comptroller's office does not have a sound basis for providing 
written confirmation that the NAWC weapons division's transactions are 
complete and accurate. 

NAWC Aircraft Division Did Not Generally Involve BFMs in Its Triannual 
Reviews: 

Unlike the weapons division, the NAWC aircraft division accomplished 
its triannual reviews on a centralized basis within the accounting 
department and the BFMs were generally not included in the process. 
During the first step of the aircraft division process, the accounting 
department generated computer lists that contained information on the 
division's outstanding commitments, obligations, and accrued 
expenditures. The accounting department then forwarded these lists to 
the various team leaders within the accounting department to conduct 
the needed research to ensure that the outstanding obligations, 
accruals, or commitments are still valid. For example, the accounting 
department reconciled the disbursements recorded in SIGMA to the 
disbursements recorded in the DOD payment system called the 
Mechanization of Contract Administration Services (MOCAS). In 
performing the triannual reviews, the accounting department involved 
the BFMs on an as-needed basis. When the accounting department team 
leaders finished their reviews, they sent the completed lists back to 
the cost accounting supervisor, who then coordinated with the 
accounting officer to certify that the reviews were completed and 
forwarded these certifications to the Comptroller's office. On the 
basis of these certifications, the Comptroller certified that the 
division had completed its review and the transactions reviewed were 
accurate. 

NAWC aircraft division did not complete its first triannual review 
until January 2006. Our analysis and discussions with NAWC aircraft 
division officials determined that the aircraft division had not (1) 
developed and implemented written procedures for performing the 
triannual reviews and (2) developed or provided training to the BFMs on 
how to conduct the triannual reviews since they have not been 
specifically involved in performing these reviews. The accounting 
officer stated that they were unable to review all outstanding 
obligations, as required by the DOD regulation at least annually, due 
to time and resource constraints. 

In addition to the triannual reviews, the accounting officer stated 
that the aircraft division accounting department reviews commitments, 
obligations, and accrued expenditures as part of its routine 
operations. Specifically, the accounting department is to take the 
following actions. 

* Identify outstanding orders funded with appropriations that are 
canceling at the end of the fiscal year and perform detailed analyses 
to resolve these transactions in order to get them off the books prior 
to the end of the fiscal year. 

* Forward information to the budget department, which coordinates with 
the BFMs to review outstanding commitments over 90 days old on a 
monthly basis and respond back to the accounting department as to 
whether the commitments on the list are valid or invalid. 

* Perform research on outstanding accrued expenditures. The first 
accrued expenditure data file was produced as of the end of fiscal year 
2005. According to a NAWC aircraft division official, throughout fiscal 
year 2006, the accrued expenditure information improved. The aircraft 
division now compares the information in this file to information 
received from MOCAS. The accounting department had not provided the 
accrued expenditure file to the BFMs for review prior to January 2007. 
However, beginning in January 2007, the Comptroller's office began 
generating files that identified which accrued expenditure records 
belonged to which BFMs. In addition, one of the data elements 
identifies the person in the accounting department who performed the 
initial research and what research had been performed to date to 
alleviate the duplication of efforts between accounting and BFM 
personnel. This will enable the accounting department to begin using 
the BFMs in researching the accrued expenditures. 

Even though the procedures provide for some BFM involvement, our review 
of 21 dormant obligations involving 17 different BFMs disclosed that 
they had not reviewed the specific transactions in our sample prior to 
our visit. This is an indication that the aircraft division's routine 
reviews of obligations were not always effective. Additionally, our 
analyses identified that the aircraft division's current process did 
not provide an adequate review of its obligations and accrued 
expenditures. We found that: 

* As of September 30, 2006, $43 million (or 23 percent) of the NAWC 
aircraft division's obligations were over 120 days old and $20 million 
(or 11 percent) were over 1 year old. The accounting officer stated 
that they were unable to review all the obligations as required by the 
DOD regulation at least annually, due to time and resource constraints. 
Accordingly, this item was not certified on the September 30, 2006, 
triannual review confirmation checklist. 

* As of June 30, 2006, $70 million (or 62 percent) of the NAWC aircraft 
division's accrued expenditures were over 120 days old and $35 million 
(or 31 percent) were over 1 year old. The accounting officer stated 
that accrued expenditures were only reviewed within the accounting 
department and that they had not developed policies or procedures for 
reviewing the accrued expenditures. 

In February 2007, NAWC aircraft division officials stated that they 
were developing a new draft instruction for conducting their triannual 
reviews. These officials added that they started with the December 2006 
NAWC weapons division guidance and are revising it to better reflect 
the aircraft division's operations. A month later, on March 20, 2007, 
the NAWC aircraft division issued written procedures that (1) require 
the division to review all outstanding obligations and accrued 
expenditures at least annually in order to substantiate the year-end 
certification process, (2) clearly delineate the responsibilities of 
the individuals performing the review, (3) require the BFMs to 
participate in performing the triannual reviews, (4) clearly describe 
the process for reporting the triannual review results to the 
division's Comptroller office, and (5) require the division to maintain 
all documentation related to the transactions reviewed for a period of 
24 months following the review to ensure that independent 
organizations, such as the Office of Inspector General, can verify that 
the reviews were accomplished as required. While we agree with the 
aircraft division's issuance of written triannual review procedures 
that increase the involvement of the BFMs in the triannual review 
process, we note that the division had not yet developed and 
implemented training that provides detailed instructions to the BFMs on 
performing the triannual reviews. Although this may require a short- 
term increase in resources to provide this training, the long-term 
benefit will be a more complete review of obligations, commitments, and 
accrued expenditures. This, in turn, should improve the reliability of 
the aircraft division's financial information, including carryover. 

Conclusions: 

Reliable carryover information is essential for Congress and DOD to 
perform their oversight responsibilities, including reviewing and 
making well-informed decisions on DOD's budget. Moreover, by improving 
the reliability of the underlying data used to calculate carryover, 
NAWC's financial data, such as obligation and accrued expenditure 
balances, will also be more reliable. Management accountability at the 
divisions for the accuracy of reported carryover and the timely 
identification of unneeded funds will be a key factor in improving 
these data. This includes increased management attention to help assure 
that the divisions are effectively conducting their triannual reviews, 
including reviewing funded orders. Further, in light of NAWC's planned 
conversion to a new Navy accounting system in October 2007, it is 
especially important for NAWC to review and correct any errors in 
recorded obligations and accrued expenditures, particularly dormant 
ones. If not corrected prior to conversion, any such errors could cause 
additional resource-intensive research to fully resolve them and these 
problem transactions could potentially remain unresolved for years. 

Recommendations for Executive Action: 

In order to improve the reliability of carryover information at NAWC, 
we are making the following six recommendations to the Secretary of 
Defense. 

We recommend that the Secretary of Defense direct the Secretary of the 
Navy to take the following actions. 

* Reiterate its guidance that clearly prohibits Navy working capital 
fund activities from deobligating reimbursable customer orders at 
fiscal year end and immediately reobligating them in the next fiscal 
year, a process that results in artificially reducing the carryover 
balances that are ultimately reported to Congress. 

* Develop and implement procedures for the Naval Air Warfare Center's 
aircraft and weapons divisions to provide assurance that triannual 
reviews of obligation and accrued expenditure balances are performed in 
accordance with the DOD Financial Management Regulation. 

* Develop and implement a required training course for BFMs that 
provides instructions on performing the triannual review requirements 
for the Naval Air Warfare Center's aircraft division. 

* Require individuals, including BFMs responsible for performing the 
reviews at the Naval Air Warfare Center's aircraft division, to attend 
the training to ensure that they are aware of the triannual review 
requirements. 

* Review and validate the accuracy of NAWC's aircraft and weapons 
divisions' reported outstanding obligations and accrued expenditures, 
especially those that have remained outstanding since the conversion to 
SIGMA, prior to its conversion to a new accounting system in October 
2007. 

We recommend that the Secretary of Defense direct the Under Secretary 
of Defense (Comptroller) to clarify the triannual review guidance for 
the January and May reviews in the DOD Financial Management Regulation 
as it pertains to the dollar threshold for reviewing outstanding 
commitments and obligations for the capital budget and operating 
portion of the working capital fund. 

Agency Comments and Our Evaluation: 

DOD provided written comments on a draft of this report. DOD concurred 
with our six recommendations and plans to complete actions on five of 
the six recommendations by the end of fiscal year 2007. We appreciate 
DOD's efforts and find them generally responsive to our 
recommendations. For example, DOD stated that it would complete the 
following actions. 

* Direct the Navy to reiterate its policy on handling reimbursable 
customer orders in its fiscal year end closing guidance. 

* Direct the Navy to develop and implement procedures that provide 
assurance that the required triannual reviews are properly performed. 

* Direct the Navy to develop and implement a training course or courses 
for all Naval Air Warfare Center employees involved with the triannual 
reviews and require these employees, including the business financial 
managers, to attend the training. 

However, we are concerned with the timing of the corrective action for 
one of the recommendations and also with the completeness of DOD's 
planned actions related to the one recommendation with which it 
"concurred with comment." Specifically, in its written comments, DOD 
stated that the Navy would emphasize reviewing and validating 
outstanding obligations and accrued expenditures that have remained 
outstanding since the conversion to SIGMA and estimated that this 
action would be completed by September 2008. As noted in our draft 
report, we believe that it is critical that such reviews and 
validations be completed prior to the planned conversion to a new 
accounting system in October 2007. While we appreciate that the Navy 
has already started these reviews, validating these transactions prior 
to the system conversion is a best practice that would help avoid some 
of the problems that were encountered when NAWC implemented its current 
accounting system in 2003. 

Further, in response to our recommendation that the triannual review 
guidance in the FMR be clarified, DOD "concurred with comment" and 
stated that a letter would be issued directing the Navy to comply with 
the FMR concerning the dollar thresholds for performing the triannual 
review. DOD commented that the FMR was clear as currently written. As 
noted in our draft report, officials from the Naval Air Systems 
Command, the NAWC weapons division, and the NAWC aircraft division had 
varying interpretations of the FMR requirements. Thus, while we 
continue to believe that a revision to the FMR would be the most 
efficient means to resolve this issue, a letter such as that proposed 
in DOD's response could suffice as long as it includes clarification of 
the FMR guidance, particularly with regard to the dollar thresholds for 
reviewing outstanding commitments and obligations for the capital 
budget and operating portion of the working capital fund. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Armed Services; the 
Subcommittee on Readiness and Management Support, Senate Committee on 
Armed Services; the Subcommittee on Defense, Senate Committee on 
Appropriations; the House Committee on Armed Services; and the 
Subcommittee on Readiness, House Committee on Armed Services. We are 
also sending copies to the Secretary of Defense, the Secretary of the 
Navy, and other interested parties. Copies will be made available to 
others upon request. 

Should you or your staff have any questions concerning this report, 
please contact McCoy Williams, Director, at (202) 512-9095 or 
williamsm1@gao.gov, or William M. Solis, Director, at (202) 512-8365 or 
solisw@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Key contributors to this report are listed in appendix IV. 

Signed by: 

McCoy Williams: 
Director, Financial Management and Assurance: 

Signed by: 

William M. Solis: 
Director, Defense Capabilities and Management: 

[End of section] 

Appendix I: Scope and Methodology: 

To determine if the Naval Air Warfare Center's (NAWC) reported actual 
carryover was reliable for fiscal years 2003 through 2006, we obtained 
budget and accounting documents that provided information on reported 
actual carryover and the carryover ceiling for fiscal years 2003 
through 2006. We analyzed the carryover information to determine if the 
NAWC aircraft or weapons divisions' reported actual carryover exceeded 
the ceiling for fiscal years 2003 through 2006. We (1) discussed with 
NAWC officials the reliability of the carryover information, (2) 
obtained and analyzed the NAWC aircraft and weapons divisions' 
financial statements for fiscal year 2003 through 2006 to determine if 
NAWC certified to the reliability of the information, and (3) discussed 
with NAWC officials actions they were taking to improve the reliability 
of the carryover information. We also reviewed year-end transactions 
that reduced the dollar amount of reported actual carryover. For these 
transactions, we obtained data on orders from August through December 
for 2004 and 2005. We identified orders that showed deobligated amounts 
in August or September and matched them to the same orders that showed 
obligated amounts in October through December. We analyzed the orders 
and any amendments to the orders and met with officials from the NAWC 
aircraft and weapons divisions to determine why these transactions 
occurred at the end of the fiscal year. We also discussed with NAWC 
aircraft division and weapons division officials actions they were 
taking or have taken to help ensure that the reported actual carryover 
amount stays below the ceiling. 

To determine if NAWC was utilizing the required triannual review 
process to improve the reliability of its carryover information and 
underlying financial data, we reviewed the policies and procedures the 
Naval Air Systems Command and NAWC used to implement the Department of 
Defense's (DOD) triannual review guidance. Specifically, we (1) 
reviewed the DOD, Navy, Naval Air Systems Command, and NAWC triannual 
review guidance and discussed it with cognizant individuals; (2) 
requested the triannual review confirmation statements that NAWC 
submitted since fiscal year 2003, and discussed these statements with 
cognizant individuals; (3) discussed NAWC's triannual review procedures 
with cognizant individuals, including those who completed the reviews; 
and (4) reviewed documentation on the results of the review. We also 
reviewed obligations and accrued expenditures to identify problems and 
actions that could be taken to fix these problems if NAWC had performed 
the triannual reviews. 

* We obtained data on the status of obligations related to carryover 
(contracts between NAWC and contractors) at the end of fiscal year 
2006. From these data, we selected and analyzed 41 obligations that had 
outstanding carryover balances at the end of fiscal year 2006 to 
determine if the carryover balances accurately reflected the amount of 
work that remained to be performed. We selected obligations that were 
old (over 120 days) and did not have any recent financial activity (no 
activity for at least 1 year) since these obligations were more likely 
to have unneeded funds and because a review of these obligations was, 
therefore, more likely to identify problems with the triannual review 
procedures. 

* We obtained data on accrued expenditures related to carryover at the 
end of fiscal year 2005 and June 2006. From these data, we selected and 
analyzed 17 accrued expenditures to determine if the accrued 
expenditure balances were correct. Accrued expenditures are critical in 
the computation of carryover since NAWC recognizes revenue and bills 
customers based on the accrued expenditures, which in turn, reduces its 
amount of carryover. We selected accrued expenditures that were over 1 
year old and showed no financial activity for at least 1 year since 
these accrued expenditures were more likely to have unneeded funds and 
because a review of these orders was, therefore, more likely to 
identify problems with the triannual review procedures. 

We performed our work at or obtained information from headquarters 
offices of the Under Secretary of Defense (Comptroller) and the 
Assistant Secretary of the Navy (Financial Management and Comptroller), 
Washington, D.C; the Naval Air Systems Command, Patuxent River, 
Maryland; the Naval Air Warfare Center, Aircraft Division, Patuxent 
River, Maryland and Lakehurst, New Jersey; and the Naval Air Warfare 
Center, Weapons Division, China Lake and Point Mugu, California. To 
assess the reliability of the data used in this report, we (1) reviewed 
and analyzed the factors used in calculating carryover, (2) analyzed 
the NAWC aircraft and weapons divisions' fiscal years 2003 through 2006 
financial statements, (3) analyzed the NAWC aircraft and weapons 
divisions' fiscal year 2006 triannual review confirmation statements, 
(4) interviewed NAWC officials knowledgeable about the carryover data, 
and (5) reviewed obligations and accrued expenditures to determine if 
they were adequately supported by documentation. 

The carryover information in this report was obtained from official 
Navy budget and accounting documents. We conducted our work from July 
2006 through April 2007 in accordance with U.S. generally accepted 
government auditing standards. We requested comments on a draft of this 
report from the Secretary of Defense or his designee. The Under 
Secretary of Defense (Comptroller) provided written comments, which are 
presented in the Agency Comments and Our Evaluation section of this 
report and are reprinted in appendix III. 

[End of section] 

Appendix II: Analysis of Dormant Obligations and Accrued Expenditures: 

Our analysis of the Naval Air Warfare Center (NAWC) aircraft and 
weapons divisions' fiscal year 2006 dormant obligations and accrued 
expenditures showed the two divisions had tens of millions of dollars 
of obligations and accrued expenditures that went unresolved for more 
than 1 year. For the transactions we reviewed, we determined that the 
two divisions did not perform adequate reviews on some of their dormant 
obligation and accrued expenditures. If the aircraft and weapons 
divisions had performed adequate triannual reviews as required, NAWC 
could have significantly improved the reliability of the carryover 
balances reported to the Department of Defense (DOD) and congressional 
defense committees. 

More Effective Reviews of Dormant Obligations Could Result in Better 
Use of Customer Funds and Reduce Reported Carryover: 

A key element of the triannual reviews is the requirement to follow up 
on all obligations that have been dormant for more than 120 days to 
determine if unused funds are still needed. The task is one of the 16 
DOD triannual review requirements and is important because it will 
facilitate the (1) identification and recording of work performed on 
these orders, thereby reducing NAWC's reported carryover and, in turn, 
the likelihood of customers' budget cuts; and (2) identification and 
return of unneeded funds to customers so that the customers can reuse 
the funds for other purposes if they are returned before they expire. 
Furthermore, this task is especially important for NAWC as it is 
scheduled to convert to a new system--Navy Enterprise Resource Planning 
(ERP)--in October 2007, and reviewing and validating its records to 
help ensure they are accurate before converting to the new system would 
help ensure a smooth transition. 

The task of validating obligations to determine if they are still 
needed is especially important for NAWC's aircraft and weapons 
divisions. NAWC's September 30, 2006, report on obligations related to 
carryover showed that $252 million was associated with orders received 
from customers. Our analysis of the obligation report showed that about 
$59 million of the $252 million, or 23 percent, was over 120 days old 
as of September 30, 2006, and $27 million of the $252 million, or about 
11 percent, was over 1 year old. 

As previously discussed, NAWC's aircraft and weapons divisions did not 
perform the required triannual reviews of obligations to determine 
their validity prior to fiscal year 2006. Even though the two divisions 
did not begin reviewing dormant obligations until fiscal year 2006, 
both divisions certified that adequate follow-up was conducted on all 
dormant obligations over 120 days old in the January and May 2006 
reports. However, after we began our review, the two divisions did not 
provide written confirmation that adequate follow-up reviews of dormant 
obligations over 120 days old to determine if they were valid were 
conducted in their respective September 2006 reports. 

To identify problems and actions that could be taken to fix these 
problems if the NAWC had performed the triannual reviews, we selected 
and reviewed 41 outstanding obligations totaling about $4.1 million 
that were more than 120 days old and had not had any recent financial 
activity (sometimes no activity for years). For the obligations we 
reviewed, we determined that the aircraft and weapons divisions did not 
perform adequate reviews on some of their obligations. In addition, 
obligations were overstated, which means that the year-end carryover 
for this work was also overstated by varying amounts for several years. 
In reviewing the 41 obligations, we found that 14 obligations totaling 
about $3 million were valid, and 27 obligations[Footnote 16] totaling 
about $1.1 million overstated carryover. The following provides a 
breakout of the obligations that overstated carryover. 

* Eight obligations totaling $467,786 were for work that had been 
performed but (1) no payments had been made to liquidate the 
obligations and (2) no accrued expenditures were recorded for the work 
that was performed. 

* Eleven obligations totaling $273,628 had no work completed on them or 
NAWC was in the process of deobligating the funds. 

* Ten obligations totaling $312,727 were for work that had been 
performed and paid for but (1) the payment had either not been 
correctly recorded or matched to the obligations in order to liquidate 
the obligations and (2) no accrued expenditures were recorded for the 
work performed. 

The following are some examples of the problems we identified with the 
dormant obligations that we reviewed. 

* In March 2004, the NAWC aircraft division obligated $172,552 for the 
inspection of flight test propellers. Since May 2004, no financial 
activity occurred for this obligation (such as payments made or accrued 
expenditures recorded for work performed). According to NAWC aircraft 
division officials, the accounting department reviewed this obligation 
prior to our visit and confirmed that this appeared to be a valid 
outstanding obligation since they had not received a bill for this 
work. As part of our review, we requested that the business financial 
manager (BFM) review the status of the dormant obligation. Further 
research performed by the BFM disclosed that while the work had been 
completed by July 15, 2004, the vendor had not submitted a bill. At the 
time we performed our work, the NAWC aircraft division was in the 
process of paying the contractor and liquidating the obligation. If the 
triannual review had been effectively performed, this problem could 
have been identified years earlier and NAWC could have reduced its year-
end obligations and carryover by $172,552 for fiscal years 2004, 2005, 
and 2006. 

* In February 2004, the NAWC aircraft division obligated $25,000 for 
ship installation drawings for an aircraft carrier. Since that time, no 
financial activity had occurred. Due to a schedule change regarding the 
availability of the aircraft carrier, the shipyard was unable to gain 
access to the ship in order to develop the technical drawings. 
Consequently, the NAWC aircraft division was unable to perform the work 
and use the funds. NAWC officials agreed that this obligation should 
have been closed out several years ago and the funds returned to the 
customer. According to these officials, they did not review this 
obligation as part of the division's triannual review because they 
lacked the time and resources to review all transactions below $50,000. 
As a result of not deobligating the funds from the records, the NAWC 
aircraft division overstated its reported year-end obligations and 
carryover by $25,000 for fiscal years 2004, 2005, and 2006. 

* In fiscal year 2002, the NAWC weapons division obligated $30,000 for 
updating electronic software in EP-3 planes. As of September 2006, the 
weapons division's accounting records showed that $22,798 of the 
obligation remained on the accounting records. As part of our review of 
NAWC carryover, we requested that the BFM review the status of this 
dormant obligation. The BFM found that (1) the work was completed in 
2002, (2) the contractor processed about $18,986 in invoices but only 
$7,305 in invoices were recorded as being paid, and (3) about $11,014 
of the original $30,000 was not used by the contractor. The BFM agreed 
that the accounting records were in error and, as a result of our 
inquiry, NAWC weapons division officials are researching the invoice 
difference of $11,681 ($18,986 less $7,305) and plan to return the 
remaining unused amount of $11,014 to the customer. As a result of this 
failure to match invoices with the obligation and revert unused funds 
back to the customer in a timely manner, the NAWC weapons division 
overstated reported year-end obligations and carryover by $22,798 in 
fiscal years 2003, 2004, 2005, and 2006 while also precluding the 
customer from using some of these funds for some other purpose because 
the funds had expired. 

More Effective Reviews of Dormant Accrued Expenditures Could Improve 
Reliability of Reported Carryover: 

At the conclusion of their triannual reviews, fund holders are required 
to provide written confirmation that they have conducted adequate 
research on all accrued expenditures[Footnote 17] that are more than 
120 days old to determine if they are valid. This task is important 
because: 

* large accrued expenditures balances in general, and large dormant 
accrued expenditure balances in particular, can indicate either serious 
accounting problems or ineffective procedures for developing accrued 
expenditure schedules; and: 

* accrued expenditures reduce reported carryover balances, and overly 
optimistic accrued expenditures can, therefore, cause reported 
carryover to be understated. 

The task of validating accrued expenditures is especially important for 
the aircraft and weapons divisions because NAWC's report on accrued 
expenditures related to carryover showed that it had about $138 million 
of accrued expenditures as of June 30, 2006, that were associated with 
orders received from customers over the years. Accurately accounting 
for accrued expenditures is important from a carryover standpoint since 
NAWC recognizes revenue and bills customers based on accrued 
expenditures. The Office of the Under Secretary of Defense 
(Comptroller) has also recognized the importance of accrued 
expenditures in its review of Navy working capital fund activities. 
During its review of the Navy's working capital fund research and 
development fiscal year 2008 budget, the Comptroller's Office 
questioned the large amount of recorded accrued expenditures. As a 
result, the Office of the Under Secretary of Defense (Comptroller) 
reduced the Navy's working capital fund research and development fiscal 
year 2008 budget for three research and development subactivity groups, 
including NAWC, by $214.7 million. 

Our analysis of NAWC's accrued expenditures report showed that about 
$85 million of the $138 million of accrued expenditures, or 62 percent, 
were over 120 days old as of June 30, 2006. Further, $45 million of the 
$138 million, or about one-third of the reported accrued expenditures, 
were over 1 year old. NAWC officials informed us that when NAWC 
implemented SIGMA in fiscal year 2003, the system did not produce an 
accrued expenditure report.[Footnote 18] Since the new system did not 
produce a report, the NAWC aircraft division designed and developed its 
own accrued expenditure report. The first report was issued in 
September 2005--over 2 years after the implementation of the new 
system. As a result, comprehensive reviews of accrued expenditures were 
not performed for fiscal years 2003, 2004, and 2005. The two divisions 
began performing reviews of accrued expenditures during fiscal year 
2006 but they did not have any written procedures for such reviews. The 
following summarizes the fiscal year 2006 results. 

* The aircraft division provided written confirmation that adequate 
follow-up was conducted on all dormant accrued expenditures over 120 
days old in its January, May, and September 2006 triannual review 
reports. Our analysis of the aircraft division's accrued expenditure 
report as of June 2006 showed that $70 million of the $113 million of 
the accrued expenditures--or 62 percent--were over 120 days old and 
about $35 million of the $113 million, or 31 percent, were over 1 year 
old. 

* The weapons division provided written confirmation that adequate 
follow-up was performed in its January and May 2006 reports but it did 
not provide written confirmation that adequate follow-up reviews were 
done of dormant accrued expenditures over 120 days old in its September 
2006 report. Our analysis of the weapons division's accrued expenditure 
report as of June 2006 showed that $14.7 million of the $24.5 million 
of the accrued expenditures--or 60 percent--were over 120 days old and 
$10.6 million of the $24.5 million, or 43 percent, were over 1 year 
old. 

To identify problems and actions that could be taken to fix these 
problems if the NAWC had performed the triannual reviews, we selected 
and reviewed 17 accrued expenditures totaling about $4.4 
million[Footnote 19] that were over 1 year old as of June 30, 2006, and 
did not have any recent financial activity (sometimes no activity for 
years). Since accrued expenditures represent the amount of paid and 
unpaid expenditures for services performed by employees or contractors, 
accrued expenditures that remain outstanding for long periods of time 
are an indication of a potential problem with the accuracy of recorded 
accrued expenditure data because the work should have already been 
performed and payment made. In most of the cases we reviewed, we 
determined that the aircraft and weapons divisions did not perform 
adequate reviews of their accrued expenditures. Specifically, we found 
that: 

* no work was performed on 10 accrued expenditures totaling about $2.2 
million (about half the dollar amount reviewed); 

* work was performed for 4 accrued expenditures totaling about $1 
million and while the contractor had billed NAWC, the payment was not 
correctly recorded in the accounting system to liquidate the accrued 
expenditure; 

* for 4 accrued expenditures totaling about $1 million, the accrued 
expenditures were so old that neither we nor NAWC officials could 
determine their status; and: 

* documentation for 2 accrued expenditures totaling about $100,000 
showed they were correctly recorded. 

The following are examples of the problems we identified with the 
accrued expenditures that we reviewed including their impact on 
reported NAWC carryover balances. 

* On July 7, 2003, the NAWC weapons division obligated $232,318 on a 
contract with Northrop Grumman Field Support Services to provide 
engineering services in support of the F-14 Weapons System Support 
Activity. On September 29, 2003, the weapons division recorded an 
accrued expenditure in its system totaling $201,651--the balance 
remaining unpaid to the contractor that was obligated in fiscal year 
2003. As part of the weapons division's May 2006 triannual review, the 
BFM that had responsibility for this contract determined that the 
accrued expenditure recorded in fiscal year 2003 was unsupported. NAWC 
weapons division officials stated that the final invoice for this 
contract was processed on September 20, 2006. In October 2006, the 
administrative contracting officer issued an amendment to the contract 
that deobligated these funds which had expired. One month later, the 
weapons division reversed the accrued expenditure and returned the 
funds to its customer. As a result of the erroneous accrued 
expenditure, our analysis showed that the weapons division understated 
its carryover in fiscal years 2003, 2004, 2005, and 2006 by $201,651 
and billed its customer for work that was not performed. 

* As of March 2002, the NAWC aircraft division obligated $226,901 on an 
order with Northrop Grumman to provide engineering design data 
services. In fiscal year 2003, the contractor billed and received 
payment of $5,626, leaving a remaining balance of $221,275. Our 
analysis of the aircraft division's June 2006 accrued expenditure 
report indicated that the aircraft division recorded accrued 
expenditures in its accounting system for $221,275--the outstanding 
balance--over 3˝ years ago. Although no further work was performed on 
this order, the accrued expenditure of $221,275 remained outstanding 
until August 2006. In August 2006, NAWC reversed the remaining accrued 
expenditure of $221,275 and deobligated the funds because the customer 
appropriation financing the order was canceling at the end of the 
fiscal year. By not performing the triannual reviews prior to fiscal 
year 2006 which would have identified this problem, the aircraft 
division recognized revenue and billed its customer $221,275 for work 
that was not performed and understated its carryover by this amount in 
fiscal years 2003, 2004, and 2005. 

* In March 1996, the NAWC weapons division issued an order to the 
Electronic Proving Ground totaling $333,000 to provide funding for 
Global Positioning System test support. On September 18, 1996, the NAWC 
weapons division recorded an accrued expenditure for the full amount of 
the obligation in its financial management system. In February 1997, a 
payment totaling $123,195 was processed against these funds. The 
remaining accrued expenditure amount ($209,805) has been outstanding 
since it was recorded in 1996. These transactions were recorded in a 
financial management system that has been replaced twice. Many details 
associated with these transactions are no longer available. Because of 
the limited data available, we could not determine the validity of the 
accrued expenditure amount. However, if the weapons division had 
performed the triannual reviews as required by DOD regulation, the 
records may have been available to either reverse the outstanding 
accrued expenditure amount or liquidate the accrued expenditure amount 
against vendor payments. 

* In July 2003, the NAWC aircraft division increased funding on a task 
order by $126,477 to provide software support services for the Navy's 
HE-2K aircraft tactical systems program. In July 2004, the NAWC 
aircraft division recorded an accrued expenditure in its accounting 
system totaling $126,477--the entire balance for the software support 
services to be performed. According to a BFM, the work for the software 
support services was never performed. In January 2006, an amendment to 
this task order decreased excess funds for the entire $126,477 that was 
previously obligated for the additional software support services. 
However, the NAWC aircraft division did not reverse the accrued 
expenditure until August 2006--about 2 years after it had recorded the 
accrued expenditure. As a result, we determined that the NAWC aircraft 
division recognized revenue and billed its customers $126,477 for work 
that was not performed and understated its carryover by this amount in 
fiscal years 2003, 2004, and 2005. 

* Between March 1997 and April 1998, the NAWC weapons division issued 
an order and three amendments totaling $505,000 to the 46th test group 
at Holloman Air Force Base for work on the radar cross section of the 
QF-4E range targets. Between September 1997 and August 2001, the NAWC 
weapons division recorded accrued expenditure amounts totaling $505,000 
in its financial management system--the full amount obligated on the 
order. In the late 1990s, Holloman Air Force Base and the Defense 
Finance and Accounting Service Denver paid the 46th test group the full 
amount obligated on the order. However, the NAWC weapons division 
records showed that only $151,074 was recorded in the financial 
management system as paid. Thus, an accrued expenditure totaling 
approximately $353,926 remains outstanding. If the NAWC weapons 
division had performed its triannual review as required by DOD 
regulation, the weapons division could have reduced its end of fiscal 
year outstanding accrued expenditures by $353,926 for fiscal years 2001 
through 2006. NAWC weapons division officials stated that in this case, 
the carryover amount was accurately reported but the accrued 
expenditure amount was distorted by $353,926. 

[End of section] 

Appendix III: Comments from the Department of Defense: 

Under Secretary Of Defense: 
1100 Defense Pentagon: 
Washington, DC 20301-1 100: 
Comptroller: 

Jun 12 2007: 

Mr. McCoy Williams: 
Director: 
Financial Management and Assurance: 
Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Williams: 

This is the Department of Defense response to the Government 
Accountability Office draft report 07-643, "Navy Working Capital Fund: 
Management Action Needed to Improve Reliability of the Naval Air 
Warfare Center's Reported Carryover Amounts," dated April 26, 2007, 
(GAO Code 195095). We have received and reviewed the draft report. 
Specific comments on the draft report are enclosed. 

The Department appreciates the GAO pointing out that the reliability of 
the Navy's Warfare Centers FY 2005 - FY 2006 carryover reporting has 
improved. Further improvement will result as these recommendations are 
implemented. 

Sincerely, 

Signed by: 

Tina W. Jonas: 

Enclosure: 
As stated: 

GAO Draft Report Dated April 26, 2007 GAO-07-643 (GAO Code 195095): 

"Navy Working Capital Fund: Management Action Needed To Improve 
Reliability Of The Naval Air Warfare Center's Reported Carryover 
Amounts" 

Department Of Defense Comments To The GAO Recommendations: 

Recommendation 1: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to reiterate its guidance that clearly 
prohibits Navy working capital fund activities from de-obligating 
reimbursable customer orders at fiscal year-end and immediately re- 
obligating them in the next fiscal year, a process that results in 
artificially reducing the carryover balances that are ultimately 
reported to Congress. (p. 35/GAO Draft Report): 

DOD Response: Concur. The Department will direct the Secretary of the 
Navy to reiterate its guidance on handling reimbursable customer orders 
in its fiscal year end closing guidance. Although Navy's actions 
artificially reduced the FY 2006 carryover balances, there is no 
evidence to suggest that the Navy deliberately intended to underreport 
its carryover balance. Estimated Completion Date: July 2007: 

Recommendation 2: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to develop and implement procedures 
for the Naval Air Warfare Center's aircraft and weapons divisions to 
provide assurance that the triannual reviews of obligation and accrued 
expenditure balances are performed in accordance with the DoD Financial 
Management Regulation. (p. 35/GAO Draft Report): 

DOD Response: Concur. The Navy currently issues specific guidance to 
its Budget Submitting Offices directing the triannual reviews be 
performed in accordance with the Department's Financial Regulations. 
Beginning with the FY 2007 review, the Department will direct the Navy 
to develop and implement procedures that provide assurance that the 
required reviews are properly performed. Estimated Completion Date: 
July 2007: 

Recommendation 3: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to develop and implement a required 
training course for business financial managers that provides 
instructions on performing the triannual review requirements for the 
Naval Air Warfare Center's aircraft division. (p. 35/GAO Draft Report): 

DOD Response: Concur. The Secretary of Defense will direct the Navy to 
develop and implement a required training course or courses for all 
Naval Air Warfare Center employees that are involved in the management, 
oversight and execution of the triannual review requirements. 
Estimated Completion Date: July 2007: 

Recommendation 4: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to require individuals including 
business financial managers responsible for performing the reviews at 
the Naval Air Warfare Center's aircraft division to attend the training 
to ensure that they are aware of the triannual review requirements. (p. 
18/GAO Draft Report): 

DOD Response: Concur. The Secretary of Defense will direct the Navy to 
make its triannual review training course mandatory for all Naval Air 
Warfare Center employees that are involved in the management, oversight 
and execution of the triannual review requirements, including its 
business financial managers. Estimated Completion Date: July 2007: 

Recommendation 5: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to review and validate the accuracy of 
Naval Air Warfare Center's aircraft and weapons divisions' reported 
outstanding obligations and accrued expenditures, especially those that 
have remained outstanding since the conversion to SIGMA, prior to its 
conversion to a new accounting system in October 2007. (p. 36/GAO Draft 
Report): 

DOD Response: Concur. The Navy has already been directed to review and 
validate the accuracy of Naval Air Warfare Center's outstanding 
obligations and accrued expenditures, and report to the results to the 
Office of the Under Secretary of Defense (Comptroller). The first of 
these reviews took place in April 2007. The Department will direct the 
Navy to place special emphasis on those outstanding obligations and 
accrued expenditures that have remained outstanding since converting to 
the new accounting system. 
Estimated Completion Date: September 2008: 

Recommendation 6: The GAO recommends that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) to clarify the 
triannual review guidance for the January and May reviews in the DoD 
Financial Management Regulation (DoDFMR) as it pertains to the dollar 
threshold for reviewing outstanding commitments and obligations for the 
capital budget and operating portion of the working capital fund. (p. 
36/GAO Draft Report): 

DOD Response: Concur with comment. The Under Secretary of Defense 
(Comptroller) will issue a letter directing the Navy to comply with the 
DoDFMR. The DoDFMR is clear as currently written. The FMR provides 
guidance to the Defense Working Capital Fund (DWCF) fund holder as to 
the dollar threshold for performing the triannual review in January and 
May. The DWCF has two thresholds, one for operations and one for its 
capital program. Commitments and obligations in support of the DWCF 
capital program are segregated and the threshold is defined. For all 
other commitments and obligations, when a DWCF activity enters into an 
agreement, whether it is in support of a funded project or activity 
overhead, it is categorized as DWCF operations and that threshold 
applies. On the other hand, the fund holder for the general fund 
activities is responsible for validating their own commitments and 
obligations. 
Estimated Completion Date: September 2007: 

[End of section] 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

McCoy Williams, (202) 512-9095 William M. Solis, (202) 512-8365: 

Acknowledgments: 

Staff who made key contributions to this report were Richard Cambosos, 
Francine DelVecchio, Steve Donahue, Mary Jo LaCasse, Keith McDaniel, 
Greg Pugnetti, Chris Rice, and Hal Santarelli. 

FOOTNOTES 

[1] The carryover amount includes both work for which obligations have 
been made by requesting organizations but that has not yet started and 
the cost to complete work that has been started. 

[2] GAO, Defense Working Capital Fund: Improvements Needed for Managing 
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 
2001). 

[3] The amount of allowable carryover using the outlay rate follows. 
For example, customers order $100 of work, which is financed with a 
specific appropriation. If the outlay rate for this appropriation at 
the appropriation level is 60 percent, then this would result in the 
working capital fund activity group being allowed to carry over $40 
($100 - $60 [$100 x 60 percent] = $40). 

[4] GAO, Defense Working Capital Fund: Military Services Did Not 
Calculate and Report Carryover Amounts Correctly, GAO-06-530 
(Washington, D.C.: June 27, 2006). 

[5] The fund holder is the organization on whose accounting records a 
commitment, obligation, and/or accrued expenditure is recorded. 

[6] GAO, Defense Working Capital Fund: Improvements Needed for Managing 
the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 
2001). 

[7] The amount of allowable carryover using the outlay rate follows. 
For example, customers order $100 of work, which is financed with a 
specific appropriation. If the outlay rate for this appropriation at 
the appropriation level is 60 percent, then this would result in the 
working capital fund activity group being allowed to carry over $40 
($100 - $60 [$100 x 60 percent] = $40). 

[8] In June 2006, the Navy added 2 additional tasks, resulting in Navy 
activities being required to perform 18 specific tasks in their 
triannual reviews and to certify that they have completed them. 

[9] All obligations and commitment balances are required to be reviewed 
at least annually in order to substantiate year-end certification 
requirements. However, for those balances that are greater than a 
certain amount, these transactions are required to be reviewed during 
each of the 4-month periods ending January 31, May 31, and September 30 
of each fiscal year (e.g., for customer-order-related obligations and 
commitments, the amount is $50,000). 

[10] GAO, DOD Business Systems Modernization: Navy ERP Adherence to 
Best Business Practices Critical to Avoid Past Failures, GAO-05-858 
(Washington, D.C.: Sept. 29, 2005). 

[11] BFMs are responsible for pre-and postcontract functions and 
contract management, including resource management, manpower 
management, and material management. 

[12] An appropriation enacted for a fixed period of time is available 
for incurring and recording new obligations during such fixed period of 
time after which the appropriation account expires. The expired 
appropriation account remains available for the period of 5 years to 
record adjustments to obligations properly incurred prior to its 
expiration and to liquidate such obligations. At the end of the 5-year 
expired account period, the appropriation balance is canceled and the 
account is closed. Once closed, the expired appropriation account 
ceases to be available to adjust or liquidate obligations. 

31 U.S.C. §§ 1552(a), 1553(a), 1553(b) (1). For further discussion see 
GAO, Principles of Federal Appropriations Law, vol. 1, 3rd ed., GAO-04-
261SP, pp. 5-71 through 5-75 (Washington, D.C.: January 2004) and 
Principles of Federal Appropriations Law: Annual Update of Third 
Edition, GAO-06-534SP, pp. 5-3 and 5-4 (Washington, D.C.: April 2006). 

[13] GAO, Navy Working Capital Fund: Backlog of Funded Work at the 
Space and Naval Warfare Systems Command Was Consistently Understated, 
GAO-03-668 (Washington, D.C.: July 1, 2003). 

[14] The fund holder is the organization on whose accounting records a 
commitment, obligation, and/or accrued expenditure is recorded. 

[15] Competencies represent different departments aligned to perform 
specific functions such as engineering, contracting, and financial 
management. Throughout the rest of this report, we will refer to the 
competencies as technical departments. 

[16] Portions of two obligation amounts were included in two different 
categories. 

[17] According to DOD's Financial Management Regulation 7000.14-R, 
Volume 1, accrued expenditures represent the amount of paid and unpaid 
expenditures for (1) services performed by employees, contractors, etc; 
(2) goods and tangible property received; and (3) items such as 
annuities and insurance claims for which no current service or 
performance is required. 

[18] In our report entitled DOD Business Systems Modernization: Navy 
ERP Adherence to Best Business Practices Critical to Avoid Past 
Failures, GAO-05-858 (Washington, D.C.: Sept. 29, 2005), we reported 
that because the pilots were stovepiped, limited within the scope of 
their respective commands, and not interoperable, they did not 
transform the Navy's business operations. As a result, under the 
leadership of a central office, the Navy decided to start over and 
undertake the development and implementation of a single ERP system. 

[19] The dollar amount for the four categories may not total due to 
rounding. Further, portions of three accrued expenditures are included 
in two categories. 

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