Serious DOD Funds Control Challenges

For years, GAO and DOD IG have reported on DOD’s inability to provide  effective funds control and report reliable financial information, including  budgetary information. In 2008, we reported that DOD’s complex and  inefficient payment processes, nonintegrated business systems, and  weak internal controls impair its ability to maintain proper funds control,  putting DOD at risk of overobligating or overspending its appropriations. Specifically, DOD’s weak internal control environment has hindered its  ability to ensure that transactions are accurately recorded, sufficiently  supported, and properly executed by trained personnel subject to  effective supervision. Examples of reported weaknesses in DOD’s funds control  include:  Inadequately trained funds control personnel. DOD’s ineffective funds control has resulted in overobligations and  overexpenditures in violation of the Antideficiency Act (ADA). According to copies of ADA violation reports received by the Comptroller  General, and as shown in table 1, DOD reported 64 ADA violations from  fiscal year 2007 through September 15, 2011, with a total dollar amount  of $927.4 million. Problem disbursements  include unmatched disbursements (UMD) that represent disbursements  that have been paid by an accounting office but that have not been  matched to the correct obligation records. DOD’s Funds Control Weaknesses and Problem Disbursements Impair the Reliability of DOD’s Financial Information

As we and DOD’s auditors have reported, DOD’s funds control and  related internal control weaknesses and problem disbursements have  impaired its ability to produce reliable financial information for reporting,  especially the reliability of the department’s SBR, as well as its other  budgetary information. Risk of DOD Improper Payments

DOD, in its Agency Financial Report for Fiscal Year 2010, reported that it  made an estimated $1 billion in improper payments under five of its  programs. However, this estimate is incomplete because DOD did not  include estimates from its commercial payment programs, which account  for approximately one-third of the value of DOD payments. Further, both  we and the DOD IG have reported on weaknesses in DOD’s payment  controls, including weaknesses in its process for assessing the risk of  improper payments and reporting estimated amounts of them. In addition, the DOD IG recently  reported their assessment that DOD’s risk of making improper payments  is high. Our prior work and reports issued by DOD IG have highlighted the  department’s long-standing and significant problems with estimating and  preventing improper payments. Concluding Observations

Although DOD has dedicated significant resources under its FIAR Plan to  remediate its identified financial management weaknesses, it faces  significant challenges in addressing those persistent weaknesses. DOD has been  addressing its problem disbursements, but they are a contributing factor  to the department’s funds control issues. The department’s weak controls  over payments increase the risk of inaccurate cost information and  improper payments. Given DOD’s stated goal of achieving audit  readiness on its consolidated financial statements by the end of fiscal  year 2017, it will be critical that the department continue to ensure that  steady progress is being made. Moreover, for DOD to move forward, it  will be important for the department to resolve its problems with multiple,  disparate nonintegrated systems and to ensure that whatever systems  solutions are chosen will provide the underlying foundation for auditable  financial statements. Managers with responsibilities for determining entitlement, authorizing  and executing payments and collections shall  create, document, and maintain an organizational structure and  business processes that appropriately segregates assigned duties,  emphasizes adherence to policies and procedures, and employs  sound internal accounting and system access controls;  implement finance and accounting systems that comply with the  federal financial management systems requirements, keep  disbursement (entitlement), and accounting records accurate and in  balance from contract execution through closeout, and monitor the  causes of late payments and interest penalties incurred;    establish systematic controls that capture adequate audit trails to  allow the tracing from source documents of financial events to general  ledger account balances through successive levels of summarization  and financial reports/statements;    ensure data is processed using accurate coding and errors are    employ systems that ensure the authenticity of data that are  electronically transmitted, including the electronic signature and  ensure controls provide reasonable assurance that deliberate or  inadvertent manipulation, modification, or loss of data during  transmission is detected; and  validate cash management and payment performance quality and  effectiveness on an annual basis: and periodically test effectiveness  of internal controls, document results of testing, and take necessary  corrective actions. Financial Audit Guide: Auditing the Statement of Budgetary Resources.
Why GAO Did This Study

The Department of Defense (DOD) is required to design and implement effective internal controls, including controls over its use of public funds ("funds controls") and controls over its payment processes ("payment controls"). As a steward of the public's resources, DOD is responsible and accountable for (1) using public funds efficiently and effectively and for the purposes and within the time frames and amounts prescribed by law, (2) making payments to the right parties in the correct amount within allowable time frames and recouping any improper payments, and (3) accurately recording and reporting on its transactions and use of public funds. GAO's testimony focuses on (1) challenges DOD faces in its funds control, and their effect on the reliability of DOD's financial information, especially the budgetary information in DOD's Statement of Budgetary Resources and (2) weaknesses in DOD's payment controls that put the department at risk of making improper payments. This statement is based on our prior work and reports issued by the department's Inspector General (DOD IG). The panel requested that GAO provide its perspective on the status of DOD's process for identifying and reporting on improper payments, examples of Antideficiency Act violations within DOD along with the causes of these violations, and the effect of problem disbursements on DOD's ability to report reliable information on its financial statements.

What GAO Found

For years, GAO and DOD IG have reported on DOD's inability to provide effective funds control and report reliable financial information, including budgetary information. In 2008, GAO reported that DOD's complex and inefficient payment processes, nonintegrated business systems, and weak internal controls impair its ability to maintain proper funds control, putting DOD at risk of overobligating or overspending its appropriations. Specifically, DOD's weak internal control environment has hindered its ability to ensure that transactions are accurately recorded, sufficiently supported, and properly executed by trained personnel subject to effective supervision. Funds control weaknesses place DOD at risk of violating the Antideficiency Act (ADA), specifically through overobligations and overexpenditures. DOD reported ADA violations from fiscal year 2007 through September 15, 2011, with a total dollar amount of $927.4 million. DOD has identified payment transactions and related accounting steps as "problem disbursements." Problem disbursements include unmatched disbursements (UMD) that represent disbursements that have been paid by an accounting office but that have not been matched to the correct obligation records. DOD reports that it has reduced overaged UMDs from $666.5 million to $109.6 million between second quarter of fiscal year 2009 to the same time in fiscal year 2011. These and other weaknesses have prevented DOD from reporting reliable financial information, including budgetary information in an auditable Statement of Budgetary Resources. Although DOD has dedicated significant resources to remediate its identified weaknesses, it faces significant challenges to address those persistent weaknesses. DOD reported for fiscal year 2010 that it made an estimated $1 billion in improper payments. However, this estimate is incomplete because DOD did not include estimates from its commercial payment programs, which account for approximately one-third of the value of DOD payments. Further, both GAO and the DOD IG have reported on weaknesses in DOD's payment controls, including weaknesses in its process for assessing the risk of improper payments and reporting estimated amounts of them. DOD's problem disbursements continue to be a concern and are a contributing factor to the department's funds control issues. The department's weak controls over payments increase the risk of inaccurate cost information and improper payments. Given DOD's stated goal of achieving audit readiness on its consolidated financial statements by the end of fiscal year 2017, it will be critical that the department continue to ensure that steady progress is being made. Moreover, for DOD to move forward, it will be important that the department resolve its problems with multiple, disparate nonintegrated systems to ensure that whatever systems solutions are chosen will provide the underlying foundation for auditable financial statements.