Fast Facts

DOD uses accounting adjustments to record corrections or changes in its financial systems. Such adjustments should be accompanied by documentation showing why the change was needed. Some accounting adjustments that DOD frequently makes—including “forced-balance” adjustments to make its financial systems agree with Treasury balances—don’t have adequate supporting documentation.

We recommended that DOD reduce the use of accounting adjustments to ensure they have reliable and accurate financial information. The agency’s financial management has been on our High Risk list since 1995.

Accounting

Accounting

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Highlights

What GAO Found

While the use of accounting adjustments is a common practice, the Department of Defense's (DOD) reliance on a large volume of nonroutine adjustments to prepare its financial statements is primarily a result of deficient business processes and limitations in accounting systems that DOD components use to process financial information. For example, the Defense Finance and Accounting Service (DFAS) continues to rely on forced-balance adjustments to replace the financial information that DOD's components submit to force agreement with Department of the Treasury balances without reconciling and researching the cause of differences (see figure). The recording of these adjustments was identified as a material weakness in DOD's internal control over financial reporting in its fiscal year 2018 financial statement audit.

Forced-Balance Adjustment Process

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GAO found that DOD and DFAS policies and procedures for accounting adjustments are insufficient, outdated, and inconsistently implemented. For example, DOD's current policies do not define what constitutes adequate supporting documentation for system-generated adjustments, nor have DOD and DFAS established policies for identifying the cause of the adjustments, developing and implementing action plans to reduce the need for adjustments, and monitoring the effectiveness of those action plans. Because DOD and DFAS are not ensuring that their policies and procedures are up-to-date and consistently implemented, there is an increased risk that inaccurate, invalid, or unapproved adjustments will be recorded in DOD's core financial reporting system, resulting in a misstatement in DOD's consolidated financial statements.

DOD and DFAS have undertaken initiatives to address some of the issues that contribute to the need for adjustments. Both organizations have developed strategies to decrease adjustments; however, neither has developed specific outcomes or detailed procedures for achieving stated goals in the strategies. Without clear procedures on how to implement its initiatives and a complete understanding across DOD of the issues contributing to the need for accounting adjustments, there is an increased risk that management efforts to reduce adjustments at the DOD consolidated level will be inefficient and ineffective.

Why GAO Did This Study

DOD remains the only major federal agency that has been unable to obtain a financial statement audit opinion. One of the contributing factors is DOD's large volume of nonroutine accounting adjustments, which are used for recording corrections or adjustments in an accounting system. This report examines accounting adjustments and their effect on the reliability of DOD's financial information, the extent to which DOD has established and implemented policies and procedures for recording accounting adjustments, and the extent to which DOD has taken actions to reduce adjustments recorded at the consolidated level.

For this report, GAO reviewed DOD and DFAS's policies and procedures, interviewed DOD officials about the adjustment process, and reviewed initiatives to reduce the number of adjustments being recorded. GAO also selected a random sample of 242 adjustments recorded at the DOD consolidated level for the fourth quarter of fiscal year 2018 to determine whether the adjustments were recorded in accordance with established policies.

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Recommendations

GAO is making eight recommendations to DOD, which include updating and implementing policies and procedures on recording accounting adjustments and identifying steps to reduce the need for recording adjustments across the department. DOD agreed with all eight recommendations and cited actions to address them.

Recommendations for Executive Action

Agency Affected Recommendation Status
Defense Finance and Accounting Service The Director of DFAS should, in accordance with the FMR, implement procedures to help ensure that FBWT reconciliations are consistently performed and that all DFAS sites review and document research conducted on the causes of any differences arising from these reconciliations. (Recommendation 1)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller) should update the FMR to clearly define the required supporting documentation for system-generated accounting adjustments, including the required documentation of business rules driving the recording of these adjustments, such as documentation of the programming logic. (Recommendation 2)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller) should perform and document a comprehensive review of the FMR accounting adjustment category codes to determine their ongoing applicability or the need for additional codes to reflect the current financial reporting environment. (Recommendation 3)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller) should establish procedures to help ensure the consistent implementation of the requirements of DFAS Form 9339. (Recommendation 4)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller) should update policies and procedures to identify the causes of out-of-balance accounting adjustments and resolve the causes in a timely manner. (Recommendation 5)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller), in conjunction with the Director of DFAS, should develop and implement policies and procedures to help ensure that root cause analyses for accounting adjustments are consistently performed and documented across DOD. (Recommendation 6)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller), in conjunction with the Director of DFAS, should develop and implement policies and procedures to help ensure consistent development, implementation, monitoring, and documentation of action plans across DOD that address accounting adjustment causes that staff identified internally. (Recommendation 7)
Open

Recommendation status is Open.

When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Under Secretary of Defense (Comptroller) The Under Secretary of Defense (Comptroller), in conjunction with the Director of DFAS, should develop and implement procedures across DOD that include clearly defined outcomes focused on reducing accounting adjustments (supported and unsupported) with specific actionable steps and procedures for achieving stated goals. (Recommendation 8)
Open

Recommendation status is Open.

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

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