Foreign Military Sales:

Financial Oversight of the Use of Overhead Funds Needs Strengthening

GAO-18-553: Published: Jul 30, 2018. Publicly Released: Jul 30, 2018.

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The Department of Defense has a program to oversee U.S. military sales to foreign governments. DOD charges foreign government purchasers fees to help cover the cost of its military sales program.

We looked at DOD’s financial oversight of these fees. We found that DOD lacks reliable data on how it uses the fees to cover the program's operating expenses, including costs for paying program staff and for ensuring that contractors have complied with their contract requirements.

We made 11 recommendations to improve DOD’s financial oversight, such as to collect reliable data.

 

U.S. Army photo of a tank.

U.S. Army photo of a tank.

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 Defense Security Cooperation Agency (DSCA) has established some policies and procedures for financial oversight of Department of Defense (DOD) components' use of Foreign Military Sales (FMS) administrative funds for costs related to processing FMS cases, but GAO found certain deficiencies in its oversight. As part of its oversight, DSCA has taken steps such as clarifying guidance on how administrative funds may be used, and developing procedures for reviewing business processes for the use of these funds. DSCA, however, lacks the reliable funding data it needs to ensure proper spending and to inform its budget decisions. DSCA has not conducted regular reconciliations of the data, with its financial service provider, to identify and correct data reliability issues, including gaps and inconsistencies in reported spending for the Army, the Navy, and the Air Force—the primary recipients of this funding. While DSCA conducts reviews of DOD components' business processes, providing an opportunity for sharing information about positive practices and identifying potential problems, it has not followed its annual minimum requirement for the number of reviews to conduct, or its requirement for tracking corrective action items. For example, DSCA was unable to provide an update on the status of action items from most of its reviews conducted since 2012. Moreover, DSCA does not conduct periodic, targeted financial reviews to verify components' obligations and disbursements of administrative funds, raising the risk of misuse of funds.

The Defense Security Cooperation Agency Has Overall Responsibility for Financial Oversight of Foreign Military Sales Overhead Funds

The Defense Security Cooperation Agency Has Overall Responsibility for Financial Oversight of Foreign Military Sales Overhead Funds

DSCA also has not developed adequate processes for financial oversight of the use of contract administration services (CAS) funds for costs such as contract management, in accordance with internal control standards. Specifically, DSCA lacks reliable data on DOD components' use of CAS funds. GAO identified inconsistencies in DSCA's data, including no, or low, reported disbursements in some years for three of the four DOD components that received CAS funds in fiscal years 2012 through 2016, which did not align with data that GAO obtained from the components. DSCA has not conducted regular reconciliations of the data, with its financial service provider, to identify and correct data reliability issues. In addition, DSCA does not conduct periodic, targeted financial reviews to verify components' CAS spending. For example, GAO found that at least $89 million in fiscal year 2016 CAS disbursements were incorrectly processed for the Defense Contract Management Agency— the primary recipient of these funds. DSCA periodically communicates with DOD components about problematic issues, but generally does not take steps to verify spending, including reviewing supporting documentation and any actions taken by components to address such issues. As a result, DSCA raises the risk of unallowable or unapproved payments that could lead to fraud, waste, or abuse of funds.

Why GAO Did This Study

The U.S. government sells defense equipment and services worth billions of dollars to foreign partners through the FMS program. DSCA has overall management responsibility for the program, and various other DOD components are responsible for implementing and supporting it. DSCA charges purchasers certain overhead fees for FMS operating costs, including the administrative fee and the CAS fee. Overall administrative expenditures were $879 million in fiscal year 2017. Overall CAS expenditures were $182 million in fiscal year 2015—the most recent year available with reliable total balance data. In past audits, GAO and the DOD Office of Inspector General raised questions about DOD's financial oversight of these funds.

House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's use of these funds. This report examines DSCA's financial oversight of DOD components' use of (1) administrative and (2) CAS funds. GAO assessed the reliability of DSCA data for fiscal years 2012 through 2016 (the most recent available) on DOD components' use of these funds. GAO reviewed documentation and conducted interviews with agency officials.

What GAO Recommends

GAO is making 11 recommendations for DSCA to improve its financial oversight of administrative and CAS funds, such as by collecting reliable data on DOD components' use of these funds, and conducting periodic, targeted financial reviews. DOD concurred with GAO's 11 recommendations.

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

Recommendations for Executive Action

  1. Status: Open

    Priority recommendation

    Comments: In February and May 2019, DSCA informed us that it had taken some steps to implement this recommendation, including establishing an automatic interface with certain DOD components' accounting systems to provide DSCA with daily information and data on those components' actual spending of FMS administrative funds. DSCA noted that it is working toward establishing automatic interfaces for the other components that receive these funds. In October 2019, DSCA informed us that implementation is ongoing. As of March 2020, we continue to monitor DOD's ongoing actions to implement this recommendation .

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA takes steps to work with Defense Finance and Accounting Service (DFAS)--DSCA's financial service provider--and other DOD components, as appropriate, to improve the reliability of the data the DSCA obtains on all DOD components' use of FMS administrative funds, including actual execution data, at an appropriate level of detail, such as by object class. (Recommendation 1)

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: In May 2019, DSCA noted that it is undertaking an initiative to incorporate reconciliation capabilities into its oversight of components' use of FMS administrative funds. In October 2019, DSCA informed us that efforts to implement this recommendation are ongoing. We continue to monitor DOD's actions to implement this recommendation .

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA works with DFAS to conduct regular reconciliations of the data that DSCA collects on DOD components' use of administrative funds, to help ensure that the data are reliable. (Recommendation 2)

    Agency Affected: Department of Defense

  3. Status: Open

    Comments: In October 2019, DSCA informed us that it had conducted two business process reviews for military departments in 2019. As of March 2020, we continue to monitor DSCA's ongoing actions to implement this recommendation.

    Recommendation: The Director of DSCA should follow its requirement to conduct at least two annual reviews of military department business processes for administrative funds. (Recommendation 3)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  4. Status: Open

    Comments: In October 2019, DSCA informed us that it planned to conduct one review for another DOD component (e.g., other than a military department) in fall 2019. In January 2019, it collaborated with other DOD components that receive FMS administrative funds to develop risk-based criteria for selecting components for periodic business process reviews . DSCA also provided updated policies and procedures for these reviews, which state that DSCA will conduct at least one review for another DOD component annually. We continue to monitor DSCA's ongoing actions to implement this recommendation.

    Recommendation: The Director of DSCA should conduct periodic (e.g., annual or biennial) reviews of other DOD components' (e.g., other than military departments) business processes for administrative funds, based on a risk-based approach. Such an approach could include consideration of whether an entity has received a prior review or representative sampling over time, as well as consideration of factors such as the results of prior audits or other identified risks. (Recommendation 4)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  5. Status: Open

    Comments: In May 2019, DSCA provided supporting documentation to show that, as part of its annual budget review cycle, it had required DOD components to provide a list of sub-components/organizations that receive FMS administrative funds. In October 2019, DSCA provided a list of sub-components/organizations that DSCA obtained as part of the 2019 annual budget cycle. We continue to monitor DSCA's actions to implement this recommendation.

    Recommendation: The Director of DSCA should create and maintain a complete list of military department organizations or offices that receive administrative funds and are subject to DSCA's business process reviews. (Recommendation 5)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  6. Status: Open

    Comments: In May 2019, DSCA provided updated standard operating procedures for selecting military department organizations for reviews of their business processes for administrative funds. As of March 2020, we are reviewing the documentation provided and following up with DSCA to determine the extent to which the new procedures reflect a risk-based approach.

    Recommendation: The Director of DSCA should update DSCA's policy for selecting military department organizations for reviews of their business processes for administrative funds, to better ensure that it reflects a risk-based approach. (Recommendation 6)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  7. Status: Open

    Comments: In February 2019, DSCA noted that it had updated its policies and procedures to reflect that it will track action items from business process reviews every 30 days, until the action items area completed. DSCA needs to providing supporting documentation for its efforts to track action items. As of March 2020, we continue to monitor DSCA's ongoing actions to implement this recommendation .

    Recommendation: The Director of DSCA should clarify guidance to ensure that the DSCA officials conducting reviews of business processes for administrative funds periodically track action items until they are completed. (Recommendation 7)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  8. Status: Open

    Comments: In February 2019, DSCA noted that it was in the process of conducting "mock" audits of DOD components' use of FMS administrative funds, and that it was undergoing efforts to ensure that a process is in place for the financial review of components' actual spending of these funds. DSCA noted that these efforts were ongoing in October 2019. We continue to monitor DSCA's ongoing efforts to implement this recommendation.

    Recommendation: The Director of DSCA should develop a process for conducting periodic (e.g., quarterly or annual), targeted reviews of DOD components' use of administrative funds, including transactions testing, to verify that actual costs incurred are allowable and approved. (Recommendation 8)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

  9. Status: Open

    Priority recommendation

    Comments: In February and May 2019, DSCA informed us that it had taken some steps to implement this recommendation, including establishing an automatic interface with certain DOD components' accounting systems to provide DSCA with daily information and data on those components' actual spending of FMS CAS funds. DSCA noted that it is working toward establishing automatic interfaces for the other components that receive these funds. In October 2019, DSCA informed us that implementation is ongoing. As of March 2020, we continue to monitor DOD's ongoing actions to implement this recommendation.

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA takes steps to work with DFAS and other DOD components, as appropriate, to improve the reliability of the data that DSCA obtains on all DOD components' use of CAS funds, including actual execution data, at an appropriate level of detail, such as by object class. (Recommendation 9)

    Agency Affected: Department of Defense

  10. Status: Open

    Comments: In May 2019, DSCA noted that it is undertaking an initiative to incorporate reconciliation capabilities into its oversight of components' use of FMS CAS funds. In October 2019, DSCA informed us that efforts to implement this recommendation are ongoing. We continue to monitor DOD's actions to implement this recommendation

    Recommendation: The Secretary of Defense should ensure that the Director of DSCA works with DFAS to conduct regular reconciliations of the data that DSCA collects on DOD components' use of CAS funds, to help ensure that the data are reliable. (Recommendation 10)

    Agency Affected: Department of Defense

  11. Status: Open

    Comments: In February 2019, DSCA noted that it was in the process of conducting "mock" audits of DOD components' use of FMS CAS funds, and that it was undergoing efforts to ensure that a process is in place for the financial review of components' actual spending of these funds. As of October 2019, DSCA noted that these efforts were ongoing. We continue to monitor DSCA's ongoing efforts to implement this recommendation.

    Recommendation: The Director of DSCA should develop a process for conducting periodic (e.g., quarterly or annual), targeted reviews of DOD components' use of CAS funds, including transactions testing, to verify that actual costs incurred are allowable and approved. (Recommendation 11)

    Agency Affected: Department of Defense: Defense Security Cooperation Agency

 

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