According to the  Navy’s fiscal year 2007 budget, the Navy Working Capital Fund will earn  about $23.4 billion in revenue during fiscal year 2007. What Is Carryover and Why Is It Important? NAWC’s Reported Actual Carryover Information Was Unreliable

Our analysis of accounting data that provide information on customer  orders and discussions with NAWC officials determined that the reported  carryover information was not reliable for fiscal years 2003 and 2004 as a  result of (1) NAWC’s conversion to a new accounting system in fiscal year  2003 and (2) the divisions not performing reviews of obligations including  the required DOD triannual reviews—as discussed later in this report. To try to better manage carryover,  improve the reliability of the carryover information, and avoid exceeding  the ceiling, beginning in fiscal year 2005 and continuing into fiscal year  2006, NAWC (1) issued guidance on the acceptance of orders at year end  and (2) started to review orders to correct its old financial records and  reduce carryover. While the reliability of carryover information improved  in fiscal years 2005 and 2006, we determined that data reliability problems  still exist. For example, we found that funds on some customer orders  totaling $19.5 million were deobligated at the end of the fiscal year and  then reobligated at the beginning of the next fiscal year on these same  orders. This artificially lowered carryover at the end of the fiscal year. NAWC Reports Showed that It Exceeded Its Carryover Ceiling from Fiscal Year 2003 through Fiscal Year 2005

Since DOD changed its carryover policy in December 2002, NAWC  exceeded its carryover ceiling by tens of millions of dollars from fiscal  year 2003 through fiscal year 2005. NAWC Did Not Perform the Required Triannual Reviews Until Fiscal Year 2006

NAWC did not perform the triannual reviews of its financial information  until fiscal year 2006, even though DOD guidance had long required NAWC  and all other fund holders to conduct these reviews of their financial data  (outstanding commitments, obligations, and accrued expenditures). These  reviews would likely have improved the reliability of carryover  information and the underlying financial data. Further, as of September 2006, the two divisions were still not  fully complying with several of the 16 specific DOD tasks that they were  required to accomplish during their reviews. Because the two divisions did  not always effectively review some obligations, particularly dormant  obligations (i.e., those over 120 days old), (1) their reported actual  carryover was overstated and (2) they sometimes returned unneeded  funds to customers after the funds had expired. If  effectively implemented, the triannual reviews could help NAWC validate  its financial records before it implements a new system that is scheduled  to be installed in October 2007. To determine if NAWC was utilizing the required triannual review process  to improve the reliability of its carryover information and underlying  financial data, we reviewed the policies and procedures the Naval Air  Systems Command and NAWC used to implement the Department of  Defense’s (DOD) triannual review guidance.
Why GAO Did This Study

According to the Department of Defense's (DOD) fiscal year 2007 budget estimates, working capital fund activity groups (depot maintenance, ordnance, and research and development) will have about $6 billion of funded work that will be carried over from fiscal year 2007 into fiscal year 2008. The congressional defense committees recognize that these groups need some carryover to ensure a smooth work flow from one fiscal year to the next. However, the committees have previously raised concern that the amount of carryover may be more than is needed. GAO was asked to determine if (1) the Naval Air Warfare Center's (NAWC) reported actual carryover was reliable for fiscal years 2003 through 2006 and (2) NAWC was utilizing the required triannual review process to improve the reliability of its carryover information and underlying financial data.

What GAO Found

GAO's analysis of NAWC reports determined that NAWC's reported carryover information was not reliable. Since DOD changed its carryover policy in December 2002, NAWC reports showed that while under the ceiling for fiscal year 2006, it exceeded its carryover ceiling by tens of millions of dollars from fiscal year 2003 through fiscal year 2005, as shown in the following table. To the extent that carryover is too high, Congress can redirect the customers' funds for other priorities. GAO's analysis of accounting information on customer orders and discussions with NAWC officials determined that its fiscal year 2003 and 2004 carryover information was unreliable due to (1) NAWC converting to a new accounting system in fiscal year 2003 and (2) NAWC not performing reviews of obligations, including the required DOD triannual reviews. To better manage carryover and improve the reliability of carryover information, starting in fiscal year 2005, NAWC (1) issued guidance on the acceptance of orders at year end and (2) began reviewing orders to correct its old financial records. While the reliability of carryover information improved in fiscal years 2005 and 2006, GAO determined that problems still exist. For example, GAO found that funds on some customer orders totaling $19.5 million were deobligated at fiscal year end and then reobligated at the beginning of the next fiscal year on these same orders. This artificially lowered reported NAWC carryover at fiscal year end. Further, even though DOD's 1996 guidance required NAWC as well as other activities to conduct triannual reviews of its financial information, NAWC did not perform these reviews until fiscal year 2006. If implemented properly, these reviews would improve the reliability of reported carryover information and the underlying financial data. In addition, as of September 2006, the two NAWC divisions were still not fully complying with several of the 16 specific DOD tasks required as part of the triannual reviews. For example, because the two divisions were not always effectively reviewing some obligations, especially dormant obligations (obligations over 120 days old), their reported actual carryover was overstated. Also, effective triannual reviews would help NAWC validate its financial records before it implements a new system that is scheduled to be installed in October 2007.