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Foreign Military Sales: DOD Should Further Strengthen Financial Oversight of Transportation Fees

GAO-20-386 Published: May 06, 2020. Publicly Released: May 06, 2020.
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Fast Facts

Foreign partners buy billions of dollars of defense items and services annually through the U.S. Foreign Military Sales program. DOD collects a transportation fee from buyers to cover shipping costs and pay shipping expenses.

DOD’s financial oversight is supposed to ensure that money goes in and out of the transportation accounts appropriately. However, DOD’s oversight processes do not ensure that:

annual reviews are routinely overseen, which increases the risk that fees collected may be inaccurate

shipping expenses paid are accurate and allowable

Our recommendations are to improve DOD’s financial oversight of the transportation accounts

F-16 aircraft are among the items sold under the Foreign Military Sales program

Fighter jet

Fighter jet

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Highlights

What GAO Found

The Foreign Military Sales (FMS) program is one of the primary ways the U.S. government supports its foreign partners, by annually selling them billions of dollars of military equipment and services. However, gaps in the Defense Security Cooperation Agency's (DSCA) oversight of Department of Defense (DOD) components' activities increase the risk that fees collected into the FMS transportation accounts may be inaccurate. While DSCA requires components to perform annual reviews of FMS cases to verify the accuracy of transportation fees collected, DSCA does not routinely oversee these reviews. Additionally, DSCA lacks oversight of the timeliness of DOD components' reporting of deliveries, which should occur within 30 days. DSCA officials indicated that they are developing guidance and processes to help address these challenges, but had not completed them as of February 2020.

Gaps in Financial Oversight of the Foreign Military Sales (FMS) Transportation Fee

Gaps in Financial Oversight of the Foreign Military Sales (FMS) Transportation Fee

DSCA's financial oversight of expenditures from the FMS transportation accounts does not provide reasonable assurance that expenditures are allowable and paid from the correct account. In fiscal year 2016, DSCA established internal guidance for financial oversight of expenditures from the accounts. While that guidance includes a process to review expenditures on a monthly basis, DSCA has not established procedures for conducting that review, including how to analyze expenditure data, or identify and address discrepancies. As a result, DSCA may not review FMS transportation expenditures consistently or identify and address discrepancies. GAO found that approximately 19 percent of expenditures reported to DSCA over a 3-month period in fiscal year 2019 inconsistently identified the DOD component responsible for the transaction. For example, a transaction may indicate that both Navy and Air Force are responsible for the shipment. Further, DSCA has not documented how the Defense Finance and Accounting Service (DFAS) should generate the reports DSCA uses for its review, and DFAS's review of expenditures excludes some expenditures from two DOD components. Without a routine process to review expenditures and correct discrepancies, DSCA cannot provide reasonable assurance that all expenditures are allowable and paid from the correct account, raising the risk of misuse of funds. DSCA officials told GAO that they are developing guidance to help address these challenges, and expect to implement it in 2020.

Why GAO Did This Study

From fiscal years 2007 to 2018, DOD collected about $2.3 billion in fees into the FMS transportation accounts and expended about $1.9 billion from the accounts. Foreign partners can pay DOD a fee to cover the costs of DOD transporting items. Fees are collected into transportation accounts in the FMS Trust Fund, and expenditures for related transportation are paid from those accounts. DSCA is responsible for financial oversight of the accounts, and DFAS—a service provider to DSCA—also has some accounting responsibilities related to the accounts.

House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's management of FMS fees. This report examines (1) DSCA's oversight of DOD components' activities that affect fees collected into the FMS transportation accounts, and (2) DSCA's financial oversight of expenditures from the FMS transportation accounts. GAO reviewed DOD guidance, analyzed 3 months of DOD expenditure data, and interviewed DOD officials.

Recommendations

GAO is making five recommendations to DOD to strengthen financial oversight of the FMS transportation accounts, including two recommendations to strengthen DSCA's oversight of fees collected into the accounts, and three recommendations to strengthen DSCA's and DFAS's oversight of expenditures from the transportation accounts. DOD concurred with all of the recommendations and identified actions it plans to take to address them.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Defense The Secretary of Defense should ensure that the Director of DSCA implements the planned initiative to routinely examine annual case reviews performed by DOD components to help ensure that fees collected into the FMS transportation accounts are accurate. (Recommendation 1)
Closed – Implemented
In May 2020, GAO reported that the Defense Security Cooperation Agency (DSCA) lacked routine oversight of Department of Defense (DOD) components' annual case reviews, which are used to verify the accuracy of data related to the collection of the Foreign Military Sales transportation fee. The lack of oversight resulted in the risk components may not complete annual case reviews consistent with DSCA's guidance, which in turn increased the risk that the fees collected may not be accurate. During the course of our audit, DSCA told us that they were working on an initiative to examine a sample of annual case reviews on a routine basis, and GAO recommended that DSCA should implement that planned guidance. DSCA concurred with this recommendation. In April 2021, DSCA issued internal guidance on the oversight of components' annual case reviews. The guidance established a process for DSCA to determine a sample of component annual case reviews for DSCA examination, including quarterly and yearly targets for the number of cases to examine, a methodology to select cases based on their age, and procedures for requesting cases from components. DSCA also developed a scorecard to guide its oversight of annual case reviews, communicated its new process to components, and updated the Security Assistance Management Manual to reflect the new process. According to DSCA officials, DSCA examines component annual case reviews to determine whether the components conducted and documented their reviews in line with requirements outlined in DSCA guidance. As of fiscal year 2023, DSCA began conducting its oversight of component annual case reviews, including selecting a sample of annual case reviews to examine and identifying corrective actions required from the components. Effectively implementing this guidance should reduce the risk that fees collected into the FMS transportation accounts may be inaccurate.
Department of Defense The Secretary of Defense should ensure that the Director of DSCA works with DFAS and DOD components to establish a written process to monitor the timeliness of components' delivery reporting to help ensure that fees collected into the FMS transportation accounts are accurate. (Recommendation 2)
Closed – Implemented
DSCA concurred with this recommendation and implemented corrective actions to address it. In response to GAO's recommendation, in December 2020, DSCA issued internal guidance and guidance to DFAS and DOD components on the oversight of delivery reporting. The guidance established a process for DFAS to generate monthly reports on components' delivery reporting, and provide those reports to DSCA and the components, while DSCA, DFAS, and components are responsible for reviewing the data and implementing corrective actions.
Department of Defense The Secretary of Defense should ensure that the Director of DSCA finalizes and implements internal guidance on how to conduct and document DSCA's monthly review of expenditures from the FMS transportation accounts, including what information should be reviewed and how to identify and follow up on discrepancies. (Recommendation 3)
Closed – Implemented
In DSCA's letter responding to this report, DSCA concurred with this recommendation and identified that they were in the process of finalizing internal guidance and procedures for the monthly review. In December 2020, DSCA updated its internal guidance for the review of expenditures from the FMS transportation accounts. The updated internal guidance identifies the information to be reviewed, how to identify and follow up on discrepancies, and that appropriate documentation should be generated. DSCA also developed a report to track the status of discrepancies, and performed an analysis of the effectiveness of its new internal guidance, which indicated that their new guidance reduced the number of discrepancies. In May 2023, DSCA further updated their internal guidance to identify how to generate appropriate documentation of the monthly review. Effectively implementing this guidance should reduce the risk that transportation expenditures may not be paid from the correct account.
Department of Defense The Secretary of Defense should ensure that the Director of DSCA works with DFAS to finalize written guidance to DFAS on how to generate the reports needed for DSCA's monthly review of expenditures from the FMS transportation accounts, including the type of analysis needed. (Recommendation 4)
Closed – Implemented
DSCA concurred with this recommendation and implemented corrective actions to address it. In response to GAO's recommendation, in December 2020, DSCA updated its internal guidance and guidance to DFAS for the review of expenditures from the FMS transportation accounts. The internal guidance provides consistent procedures for DSCA to retrieve and analyze transactions, and the guidance to DFAS provides details on how to generate the reports provided to DSCA.
Department of Defense The Secretary of Defense should ensure that the Director of DSCA works with DFAS and other DOD components to finalize the planned guidance to DFAS for the review and realignment of expenditures from the FMS transportation accounts to ensure reviews are consistent and include all expenditures. (Recommendation 5)
Closed – Implemented
DSCA concurred with this recommendation and implemented corrective actions to address it. In response to GAO's recommendation, in December 2020, DSCA updated its internal guidance and guidance to DFAS for the review of expenditures from the FMS transportation accounts. The internal guidance provides consistent procedures for reviewing expenditures, and the guidance to DFAS provides details on how to generate the reports provided to DSCA to help ensure all expenditures are included. The guidance includes a list of transportation account codes used to query expenditures, and DSCA officials told us that they review the list quarterly to address new transportation account codes.

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Topics

Allowable costsCompliance oversightFeesFinancial managementForeign military salesRegulatory oversightTransportationTransportation costsTransportation servicesFederal spending