Objectives, Scope, and Methodology

The objectives of this report were to (1) analyze the extent to which financial deficiencies detailed in the auditors’ reports may adversely impact the ability of Navy and DOD managers and congressional officials to make informed programmatic and budgetary decisions, (2) provide examples of other issues of interest to budget and program decisionmakers that can be identified by reviewing the financial statements, and (3) describe the additional financial data that, if complete and accurate, could be used to support future decision-making when the Navy implements accounting standards that are effective beginning with fiscal years 1997 and 1998. Budget Development Is Undermined by Lack of Accurate Inventory Data

The Naval Audit Service report on the results of its financial audit of the Navy’s fiscal year 1996 financial statements disclosed numerous problems with inventory data reported by the Navy, including the following. However, the auditors found that information on $7.8 billion in inventories, including those on board ships was not included in the Navy’s year-end financial statements. “Defense Finance and Accounting Service Operating Locations processed 110 duplicate or erroneous vendor payments for the Department of the Navy. These financial deficiencies adversely affect not only the Navy’s DBOF financial reporting but also its ability to achieve the goal of operating on a break-even basis. As a result of the failure to collect reimbursement, the Department of Navy used Operation and Maintenance, Navy funds to support the Army requirements. Therefore, this $5,793,496 represents potential funds that can be put to better use.” This means that the Navy’s operation and maintenance appropriation requirements are less than previously recognized because the Navy will not be required to pay these “invalid liabilities.”

	Implications of Financial Statement Disclosures

Despite the shortcomings in the Navy’s financial statements, we were able to identify several financial issues that may be of interest to budget and program managers. Specifically, even with the acknowledged deficiencies in the Navy’s financial data, some areas raise questions about whether future budget resources may be needed or whether there may be opportunities to reduce resource requirements. While information on the status of the Navy’s use of its resources is currently available, it has not been audited.
Why GAO Did This Study

Pursuant to a congressional request, GAO reported on the programmatic and budgetary implications of the financial data deficiencies enumerated by auditors' examination of the Department of the Navy's fiscal year 1996 financial statements.

What GAO Found

GAO noted that: (1) the extent and nature of the Navy's financial deficiencies identified by auditors, including those that relate to supporting management systems, increase the risk of waste, fraud, and misappropriation of Navy funds and can drain resources needed for defense mission priorities; (2) critical weaknesses identified include the following: (a) information on $7.8 billion in inventories on-board ships was not included in Navy's year-end financial statements; (b) failure to follow prescribed procedures for controlling Navy's cash account with Treasury contributes to continuing disbursement accounting problems; (c) until duplicate and erroneous vendor payments were identified and collected as a result of financial audit, the Navy not only paid too much for goods and services but, more importantly, was unable to use these funds to meet other critical programmatic needs; and (d) breakdowns in the controls relied on to prevent or detect material financial errors mean that the Navy cannot tell if its business-type support operations are operating on a break-even basis as intended; (3) although the Navy's 1996 financial statements--its first effort to prepare comprehensive financial statements--did not include all required information and were not verifiable, they still provided data GAO could use to identify several financial issues that may be of interest to budget and program managers; (4) for example, footnote disclosures on the Navy's accounts receivable and unexpended appropriations raise questions about whether future budget resources may be needed or whether there may be opportunities to reduce resource requirements; (5) when the findings presented in the auditors' reports are corrected, the financial statements themselves and related notes can become an excellent source of information on the financial condition and operations of the Navy; and (6) also, if properly implemented, new accounting standards that require information such as data on asset disposal costs and deferred maintenance will provide the Navy and the Defense Finance and Accounting Service with an opportunity to improve the extent and usefulness of information that is currently available to support program decision-making and accountability in these areas.