The primary goal of the current working capital fund financial structure is to focus the attention of all levels of management on the full costs of carrying out certain critical DOD business operations and the management of those costs. SMAG procures, manages, and sets the prices that customers will pay for these wholesale items. To evaluate the accuracy and consistency of SMAG’s accounting and budgetary reports, we (1) obtained and analyzed the Defense Working Capital Fund Accounting Report (1307), the Air Force Defense Business Operations Fund Chief Financial Officer Annual Financial Statement, and the Air Force’s Working Capital Fund budget justification report for fiscal years 1992 through 1996, (2) interviewed Air Force and Defense Finance and Accounting Service (DFAS) officials to determine why reports covering the same period provided widely different results, and (3) analyzed the DOD Working Capital Fund report, dated September 1997, that was prepared in response to the National Defense Authorization Act for Fiscal Year 1997, to determine the actions DOD is planning to improve the accuracy of the working capital fund’s accounting report. To evaluate the Air Force’s Working Capital Fund’s cash management practices, including its practice of advance billing customers, we (1) collected and analyzed financial information related to the cash balances, advance billings, collections, disbursements, accounts receivable, and accounts payable from fiscal year 1992 through fiscal year 1997, (2) obtained and analyzed DOD and Air Force guidance on managing cash, and (3) interviewed officials in the Office of the Under Secretary of Defense (Comptroller), Air Force Headquarters, and AFMC concerning the cash management practices and the Air Force’s continual need to advance bill customers to alleviate the cash shortage problem. The Department of Defense provided written comments on a draft of this report. Without reliable financial reports, DOD cannot be certain if SMAG’s prices will recover the costs of providing inventory to its customers. The cost of goods sold is an important factor used in arriving at the group’s annual net operating results (revenue less expenses, which include the cost of goods sold, equals net operating results). This information could then be summarized for reporting on the supply management activity groups’ financial operations in DOD’s monthly accounting reports. Two Separate Processes Used to Develop Customers’ Funding Levels and Prices for Individual Items

The two primary objectives of SMAG’s price-setting process are to ensure that (1) prices charged for individual items reflect the expected cost of providing these items to customers and (2) SMAG’s composite, or aggregate, price change is identified—so that it can be properly factored into customer budgets. As a result, although the Air Force has already adjusted customer funding levels once, these officials acknowledged that they will have to continue to monitor budget execution data and to make further adjustments if necessary. Since 1993, the working capital funds have advance billed customers because they have not been able to generate enough cash to pay their bills. The Air Force developed specific action items for the Depot Maintenance, Information Services, and Supply Management Activity Groups. AFMC officials acknowledged that they need better management tools for projecting cash outlays for all types of SMAG outlays. However, the activity groups have not generated sufficient cash to eliminate the practice of advance billing customers.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the financial operations of the Department of Defense (DOD) Working Capital Fund, focusing on the: (1) accuracy and consistency of the Air Force supply management activity group's (SMAG) accounting and budgetary reports; (2) group's price-setting process; and (3) Air Force Working Capital Fund's cash management practices.

What GAO Found

GAO noted that: (1) the Air Force has had difficulties producing reliable financial information on the supply management activity group's operations, setting prices for inventory the group sells to customers, and generating sufficient cash to help discontinue the Air Force Working Capital Fund's practice of advance billing its customers since 1993; (2) these weaknesses impair the Air Force's ability to: (a) ensure that customers can purchase inventory items when needed; and (b) achieve the goals of the working capital funds, which are to focus management attention on the full costs of carrying out operations and to manage those costs effectively; (3) at the core of many of the supply management activity group's financial management weaknesses is its inability to produce reliable information on its cost of goods sold and net operating results; (4) this financial information is critical since the activity group must set prices that reflect the expected costs of providing inventory items to customers; (5) if these data are inaccurate, the activity group's prices may not cover its full cost of operations or generate enough cash to pay its bills, which has been the case in recent years; (6) until the Air Force can: (a) develop accurate information on the supply management activity group's net operating results and cost of goods sold; (b) use this information to develop an effective price-setting process; and (c) acquire and use management tools for projecting cash outlays--its customers will remain susceptible to wide price fluctuations and a corresponding depletion of funds; (7) further, the Air Force Working Capital Fund will have to continue to advance bill customers so that it has enough cash to pay its bills; and (8) finally, senior managers and those responsible for providing oversight will continue to lack the information they need to make informed decisions on Air Force supply operations.