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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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Fast Facts

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.

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Highlights

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.

Recommendations

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.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense
Priority Rec.
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)
Open
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. As of July 2023, officials informed us that they continue to work toward implementation of these recommendations. We continue to monitor DOD's ongoing actions to implement this recommendation.
Department of Defense 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)
Open
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. As of July 2023, DSCA informed us that efforts to implement this recommendation are ongoing. As of October 2023, we continue to monitor DOD's actions to implement this recommendation .
Defense Security Cooperation Agency 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)
Closed – Implemented
In July 2018, GAO reported that the Defense Security Cooperation Agency (DSCA) had not fully complied with its requirement to conduct at least 2 annual reviews of selected military department organizations' business processes related to the use of Foreign Military Sales (FMS) administrative funds in 2012 through 2017. DSCA conducts these reviews in order to help ensure that funds are used correctly and in compliance with security assistance policies, according to DSCA guidance. GAO found that these reviews provide an opportunity for information-sharing about security assistance policies and requirements and positive practices. They can also identify potential internal control deficiencies, such as overlap or inefficiencies in staffing. GAO recommended that the Director of DSCA follow its requirement to conduct at least two annual reviews of military department business processes for administrative funds. DOD concurred with GAO's recommendation. In May 2019, DSCA provided updated policies and procedures for these reviews, which state that DSCA will conduct at least two reviews of military department organizations annually . In October 2019, DSCA informed us that it had conducted two business process reviews for military departments in 2019 . In September 2020, DSCA provided documentation from the 2019 reviews . DSCA also provided documentation showing that in February 2020, it initiated the process to select three military department organizations for reviews in 2020 , but the 2020 reviews were subsequently canceled due to the global pandemic . In December 2021, DSCA informed us that it conducted virtual reviews in 2021 , and it provided us with documentation from two 2021 reviews in April 2022 . By adhering to its annual requirement for these reviews, DSCA has implemented a key mechanism for providing guidance and oversight to military department organizations on their use of administrative funds, reducing the risk of the potential fraud, waste, or abuse of these funds .
Defense Security Cooperation Agency 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)
Closed – Implemented
In July 2018, GAO reported that from 2012 through 2017, the Defense Security Cooperation Agency (DSCA) did not conduct reviews of business processes related to the use of Foreign Military Sales (FMS) administrative funds for any DOD components other than military department organizations. According to DSCA guidance, DSCA may conduct reviews of DOD components other than the military departments that receive administrative funds, to help ensure that the other components use administrative funds correctly and in compliance with security assistance policies, as well as to identify any needed improvements in their use of these funds. GAO found that DSCA's business process reviews provide an opportunity for information-sharing about security assistance policies and requirements and positive practices. They can also identify potential internal control deficiencies, such as overlap or inefficiencies in staffing. GAO recommended that the Director of DSCA 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. DOD concurred with GAO's recommendation. In addition, in May 2019, DSCA officials informed us that DSCA had collaborated with other DOD components that receive FMS administrative funds to develop risk-based criteria for selecting components for periodic business process reviews. DSCA provided updated policies and procedures for these reviews, which state that DSCA will conduct at least one review for another DOD component annually. The policies and procedures state that a variety of factors will be considered in selecting components for review, such as whether the organization is new to FMS, consistent unobligated balances, increases in budget allocations, or audit findings. 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. DSCA subsequently provided documentation for the review that it conducted for this DOD component in November 2019. DSCA provided documentation showing that it had selected another DOC component for review in 2020, but that the 2020 review was canceled due to the global pandemic. In December 2021, DSCA informed us that it conducted a virtual review in 2021, and in April 2022, DSCA provided us with documentation for the review, which was conducted in August 2021. By conducting periodic reviews of other DSCA components' business processes, DSCA has implemented a key mechanism for providing guidance and oversight to DOD components on their use of administrative funds, reducing the risk of the potential fraud, waste, or abuse of these funds.
Defense Security Cooperation Agency 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)
Closed – Implemented
DSCA provided supporting documentation to show that, as part of its annual budget review cycle, in April 2019 it had required DOD components to provide a list of sub-components/organizations that receive FMS administrative funds. In October 2019 and September 2020, DSCA also provided lists of sub-components/organizations that DSCA maintained as of October 2019 and September 2020, which DSCA had obtained as part of its annual budget cycles in 2019 and 2020. This information will help ensure that DSCA is able to carry a risk-based approach to selecting military department organizations or offices for business process reviews, reducing the risk of the potential fraud, waste, or abuse of these funds .
Defense Security Cooperation Agency 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)
Closed – Implemented
In July 2018 , GAO reported that the Defense Security Cooperation Agency (DSCA) had not developed a risk-based approach for selecting military department organizations or offices for reviews of their business processes related to the use of Foreign Military Sales (FMS) administrative funds . DSCA conducts these reviews in order to help ensure that funds are used correctly and in compliance with security assistance policies, according to DSCA guidance . GAO found that these reviews provide an opportunity for information-sharing about security assistance policies and requirements and positive practices. They can also identify potential internal control deficiencies, such as overlap or inefficiencies in staffing . GAO recommended that the Director of DSCA 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 . DOD concurred with GAO's recommendation . In May 2021, DSCA officials informed us that they were conducting a feasibility study to determine the types of information and data that they could use to make an informed selection of sub-organizations for business process reviews based on a risk-based approach, such as information and data on military department sub-organizations' execution of administrative funds. In July 2023, DSCA informed us that they had completed the feasibility study and that they had updated standard operating procedures for selecting military department organizations for reviews of their business processes for administrative funds, based on a risk-based approach. The standard operating procedures, dated November 2022, state that DSCA will use an approach involving random selection of military department organizations for these reviews, based on factors such as allocations of FMS administrative funds. DSCA provided supporting documentation to us, including a random selection calculator (spreadsheet) that they are using to select organizations for review. By updating its policy for selecting military department organizations for business process reviews based on a risk-based approach, DSCA has implemented a key mechanism for providing guidance and oversight to DOD components on their use of administrative funds, reducing the risk of the potential fraud, waste, or abuse of these funds .
Defense Security Cooperation Agency 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)
Open
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. In October 2020, DSCA provided tracking spreadsheets that it created to track action items for the business process reviews that it conducted in 2019. In July 2023, DSCA provided some completed action trackers for the business process reviews that it conducted in 2019 and 2021, but the action tracker for one of its 2021 reviews was incomplete. DSCA still needs to provide support that it is following up on action items for each business process review every 30 days, in accordance with its policies and procedures. As of October 2023, we continue to monitor DSCA's ongoing actions to implement this recommendation.
Defense Security Cooperation Agency 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)
Open
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 as of July 2023. As of October 2023, we continue to monitor DSCA's ongoing efforts to implement this recommendation.
Department of Defense
Priority Rec.
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)
Open
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. As of July 2023, officials informed us that they continue to work toward implementation of these recommendations. As of October 2023, we continue to monitor DOD's ongoing actions to implement this recommendation.
Department of Defense 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)
Open
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. As of July 2023, DSCA informed us that efforts to implement this recommendation are ongoing. As of October 2023, we continue to monitor DOD's actions to implement this recommendation
Defense Security Cooperation Agency 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)
Open
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 July 2023, DSCA noted that these efforts were ongoing. As of October 2023, we continue to monitor DSCA's ongoing efforts to implement this recommendation.

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Budget decisionsContract administrationContract managementData reliabilityFederal spendingFinancial managementForeign military salesInternal controlsMilitary departmentsMilitary forcesOverhead costsPolicies and proceduresProgram managementUse of fundsCorrective actionGovernment owned equipment