Foreign Military Sales:

Controls Should Be Strengthened to Address Substantial Growth in Overhead Account Balances

GAO-18-401: Published: May 10, 2018. Publicly Released: May 10, 2018.

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MelitoT@gao.gov

 

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U.S. foreign partners buy billions of dollars of defense equipment and services each year through the U.S. Foreign Military Sales program. The program charges fees to purchasers to cover the U.S. government's cost of operating the program.

As the value of these sales has increased, the balances in the 2 main fee accounts have grown in excess of 950% and now top $5 billion. We found that the substantial growth in these accounts was due to insufficient management controls.

We made 6 recommendations to DOD to help improve controls, and suggest that Congress consider allowing the FMS program to use these funds to pay for more program expenses.

 

This is a photograph of a military jet aircraft flying over the coast line.

This is a photograph of a military jet aircraft flying over the coast line.

Additional Materials:

Contact:

Thomas Melito
(202) 512-9601
MelitoT@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

The Foreign Military Sales (FMS) administrative account balance grew by over 950 percent from fiscal years 2007 to 2017—from $391 million to $4.1 billion—due in part to insufficient management controls, including the lack of timely rate reviews. The Defense Security Cooperation Agency (DSCA) has some controls to manage the account balance. For example, DSCA has established a method for calculating a minimum desired balance to ensure it has sufficient funds to complete FMS cases despite uncertain future sales. At the end of fiscal year 2017, the account balance was $2.7 billion above this minimum. DSCA, however, has completed rate reviews less frequently than directed by its policy. Moreover, DSCA has not adopted the best practice of setting an upper bound for the account that would, along with the minimum level, provide a target range for the account balance. By not performing timely rate reviews or setting an upper bound, DSCA has limited its ability to prevent excessive balance growth. GAO modeling indicates that, even with a planned fee rate reduction to 3.2 percent, the account balance would likely remain above its minimum level through fiscal year 2024, including if annual expenditures increased by 15 percent more than expected. As such, the account has the potential to pay for additional expenses. These could include expenses first excluded by statute in 1989 at a time when the account balance was negative and which have since been paid from other appropriated funds. DOD told GAO it is willing to revisit these exclusions.

Administrative Account Balance Growth, Fiscal Years 2007 to 2017

Administrative Account Balance Growth, Fiscal Years 2007 to 2017

The FMS contract administration services (CAS) account grew from fiscal years 2007 to 2015 from $69 million to $981 million, due in part to insufficient management controls, including not setting an upper bound. The balances for fiscal years 2016 and 2017 overstated the amount of funds available due to a systems issue and limited related oversight. Since 2014, DSCA has implemented some controls for the CAS account, such as regular reviews of the account balance, but weaknesses remain. In particular, DSCA does not plan to follow its internal guidance to conduct the next CAS fee rate review within 5 years. DSCA also has inconsistently calculated the desired minimum level for the account. Finally, DSCA has not set an upper bound for the account to help officials follow internal guidance that directs them to determine when the balance is excessive and a fee rate reduction should be considered. As a result, DSCA is limited in its ability to make timely, appropriate decisions on the fee rate.

Why GAO Did This Study

The FMS program is one of the primary ways the U.S. government supports its foreign partners, by providing them with defense equipment and services. The program charges FMS customers overhead fees to cover the U.S. government's operating costs. They include the administrative fee for costs such as civilian employee salaries and facilities, and the CAS fee for the cost of contract quality assurance, management, and audits. In 1989, Congress excluded from administrative expenses certain costs associated with military personnel who work on the FMS program as well as unfunded civilian retirement and other benefits. As of May 2018, the administrative fee rate is 3.5 percent, and the CAS fee rate is 1.2 percent.

House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's collection and management of these fees. This report examines, for fiscal years 2007 to 2017, the balance of and controls over (1) the administrative account and (2) the CAS account. GAO analyzed Department of Defense (DOD) data and documents, modeled projections for the administrative account, and interviewed DOD officials.

What GAO Recommends

Congress should consider redefining what it considers an allowable expense to be charged from the administrative account. GAO is making six recommendations to help DSCA improve its controls over both accounts, including completing more timely reviews and establishing a desired range for balance levels. DOD generally concurred.

For more information, contact Thomas Melito at (202) 512-9601 or MelitoT@gao.gov.

Matter for Congressional Consideration

  1. Status: Open

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should consider redefining what can be considered an allowable expense to be charged from the administrative account. (Matter for Consideration 1)

Recommendations for Executive Action

  1. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of DSCA should take steps to ensure that comprehensive reviews of the administrative fee rate are completed at least every 5 years. (Recommendation 1)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of DSCA should define a method for calculating an upper bound of a target range for the administrative account that could be used to guide the agency's reviews of administrative account balances and decision making in setting the fee rate. (Recommendation 2)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  3. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of DSCA should direct the Defense Contract Management Agency (DCMA) and the Defense Finance and Accounting Service to work together to ensure timely correction of the fiscal years 2016 and 2017 DCMA contract administration services (CAS) reimbursement issues. (Recommendation 3)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  4. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of DSCA should take steps to ensure that comprehensive reviews of the CAS fee rate are completed at least every 5 years. (Recommendation 4)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  5. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of DSCA should clarify internal guidance to ensure consistency in the calculation of the CAS account's minimum (safety) level. (Recommendation 5)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  6. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of DSCA should define a method for calculating an upper bound of a target range for the CAS account that could be used to guide the agency's reviews of CAS account balances and decision making in setting the fee rate. (Recommendation 6)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

 

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