By minimizing the amount of the carryover, DOD can use its  resources most effectively and minimize the “banking” of funds for work  and programs to be performed in subsequent years. Gross Carryover Budget Estimates Were Consistently and Substantially Understated

For fiscal years 1998 through 2002, SPAWAR systems centers’ budgeted  gross carryover was significantly less than reported actual gross carryover,  thereby providing decision makers, including the Office of the Under  Secretary of Defense (Comptroller) and congressional defense committees,  misleading carryover information. The Navy’s budget requests consistently underestimated SPAWAR systems  centers’ gross carryover, in part, because the Navy consistently  underestimated the amount of orders to be received from customers by  hundreds of millions of dollars. Reported Actual Carryover Balances Were Consistently Understated

In addition to understating budgeted gross carryover, SPAWAR systems  centers also consistently understated their reported actual carryover. Navy reports show that  the systems centers’ fiscal year-end carryover balances for fiscal years 1998  through 2002 did not exceed DOD’s 3-month carryover standard. However,  we found that the systems centers’ reported carryover balances were  understated because (1) DOD’s guidance for calculating the number of  months of carryover allowed this to happen and (2) the systems centers  used accounting entries to manipulate customer work orders at year-end to  help reduce reported carryover below the 3-month standard. As table 3 shows, these  adjustments have allowed the systems centers to significantly reduce  actual reported gross carryover by hundreds of millions of dollars,  resulting in reported carryover below the 3-month standard. However, as discussed  below, until recently DOD had not changed its policy for calculating  carryover. Reported Actual Carryover Is Based on Unreliable Underlying Financial Data

In addition to understating budgeted and reported actual carryover  information, the two SPAWAR systems centers’ actual carryover data that  were reported to the Congress as part of the President’s budget were based  on some unreliable underlying financial data. Although, as noted previously, the Comptroller has overall responsibility  for the center’s tri-annual reviews, his office has not assessed the  adequacy of the reviews that are being conducted by the technical  departments. Recommendations for Executive Action

We recommend that the Secretary of Defense  direct the Secretary of the Navy to issue guidance to all Navy working  capital fund activities, including SPAWAR, that prohibits them from  deobligating reimbursable customer orders at fiscal year-end and  reobligating them in the next fiscal year for the sole purpose of reducing  carryover balances that are ultimately reported to the Congress;  direct the Under Secretary of Defense (Comptroller) to determine the  extent to which working capital fund activities throughout DOD may be  similarly manipulating customer order data at fiscal year-end to reduce  reported carryover and, if necessary, issue DOD-wide guidance  prohibiting this practice as needed; and  direct the Under Secretary of Defense (Comptroller) to develop and  issue written procedures to implement the December 2002 carryover  policy. We also obtained data on the status of  unfilled orders and carryover at the end of fiscal year 2001. We did not independently verify this  information.
Why GAO Did This Study

The Space and Naval Warfare Systems Command (SPAWAR) has hundreds of millions of dollars of funded work that its working capital fund activities did not complete before the end of the fiscal year. Reducing the amount of workload carryover at fiscal year-end is a key factor in the effective management of Department of Defense (DOD) resources and in minimizing the "banking" of funds for work to be performed in subsequent years. GAO was asked to analyze SPAWAR's carryover balances. GAO assessed the accuracy of the budgeted amounts, the accuracy of the reported actual carryover balance, and the reliability of underlying financial data on which reported actual carryover is based.

What GAO Found

The budgeted and reported actual amounts of SPAWAR gross carryover were consistently understated, resulting in the Congress and DOD decision makers not having reliable information to decide on funding levels for working capital fund customers. First, GAO found that SPAWAR centers' budgeted gross carryover for fiscal years 1998 through 2002 was significantly less than the reported actual year-end gross carryover. Budgeted gross carryover was understated primarily due to problems with estimating the underlying customer order data. For example, for fiscal year 2002, SPAWAR's budgeted amount for customer orders was 88 percent less than the reported actual orders received. Second, SPAWAR's reported actual carryover balances were also unreliable and adjusted downward by hundreds of millions of dollars. These adjustments understated carryover and resulted in Navy reports to the Congress showing that SPAWAR carryover balances for fiscal years 1998 through 2002 did not exceed DOD's 3-month carryover standard. SPAWAR was able to report reduced carryover balances for the following reasons. As GAO previously reported, the DOD guidance for calculating the number of months of carryover allowed carryover to be adjusted and understated. DOD agreed with GAO's previous recommendation and in December 2002 changed its carryover guidance. SPAWAR centers used accounting entries to manipulate the amount of customer orders for the sole purpose of reducing reported carryover below the 3-month standard. For example, the centers did this for at least $50 million at the end of fiscal year 2001. SPAWAR officials issued guidance in September 2002 discontinuing this practice. Finally, SPAWAR had not taken key steps to verify the underlying financial data on which reported actual carryover is based. The SPAWAR centers had only recently begun conducting the required tri-annual reviews of such data, which DOD has required since 1996. However, the reviews were ineffective, including the exclusion of slightly less than half of their reported actual carryover from the review process.