Department Of Defense Implications Of Financial Management Issues

T-AIMD/NSIAD-00-264 Department of Defense: Implications of Financial Management Issues

As an integral part of an effective budget execution system, an agency is responsible for determining and maintaining its available fund balance. Treasury also has information about activity in the agency's accounts, and Treasury's and the agency's records must be periodically reconciled to determine the actual amount of funds available. This is analogous to reconciling one's personal checking account with the monthly bank statement. DOD weaknesses in accounting for its funds include (1) the inability to reconcile its balances to Treasury's, (2) frequent adjustments of recorded payments from one appropriation to another appropriation account, including to canceled appropriations, (3) problem disbursements-disbursements that are not properly matched to specific obligations recorded in the department's records, and (4) obligated balances that are incorrect or unsupported. As a result of these weaknesses, auditors have been unable to verify DOD's Fund Balance With Treasury and its major components -obligate and unobligated balances. This means that DOD does not know with certainty the amount of funding that is available. This information is essential for DOD and the Congress to be able to determine the status of funds and if unobligated balances are available that could be used to reduce current funding requirements or that could be reprogrammed to meet other critical program needs.

Pursuant to a congressional request, GAO discussed financial management issues at the Department of Defense (DOD). GAO noted that: (1) to date no major part of DOD has yet been able to pass the test of an independent audit--auditors consistently have issued disclaimers of opinion because of pervasive weaknesses in DOD's financial management systems, operations, and controls; (2) such problems led GAO in 1995 to put DOD financial management on a list of high-risk areas vulnerable to waste, fraud, abuse, and mismanagement, a designation that continued in last year's update; (3) lacking such key controls and information not only hampers the department's ability to produce timely and accurate financial information, but also significantly impairs efforts to improve the economy and efficiency of its operations; (4) unreliable cost and budget information affects DOD's ability to effectively measure performance, reduce costs, and maintain adequate funds control, while ineffective asset accountability and control adversely affect DOD's visibility over weapons systems and inventory; (5) establishing an integrated financial management system--including both automated and manual processes--will be key to reforming DOD's financial management operations; (6) DOD has acknowledged that its present system has long-standing inadequacies and does not, for the most part, comply with the federal system standards; (7) DOD has set out an integrated financial management system goal; and (8) further, the department is now well-positioned to adapt the lessons learned from addressing the year 2000 issue and GAO's recently issued survey of the best practices of world-class financial management organizations and to use the information technology investment criteria included in the Clinger-Cohen Act of 1996.

The U.S. Department of Defense accounts for over half of federal government discretionary spending and over 3% of GDP. Half of all federal employees work for the Department. The annual budget for the military not only provides for those salaries, it covers the baseline and wartime operating expenses of the force, and hundreds of billions of dollars of investment in new capabilities and technologies. Given the materiality of the defense function and amount of resources it consumes, the processes for budgeting for defense and managing the funds is important to understand. This text provides a fully integrated view of defense budgeting. It takes the position that defense budgeting is a specific instance of public budgeting, and public budgeting is a specific instance of public policy. In order to fully understand how the nation budgets for defense, it first lays a theoretical and conceptual foundation for public policy and public budgeting. That is followed by an assessment of the political and policy context for defense, including the overarching federal budget process and role of Congress in setting defense policy. Only then does the text explore the specifics of defense budgeting: how, by whom, and why the budget is crafted. Beyond the topic of budgeting – formulating, requesting, and legitimating the request for funds – the book tackles financial management topics. Included are discussions of federal appropriations law, funds management, accounting requirements, intragovernmental business transactions, and contemporary topics of defense policy such as funding overseas contingency operations in an era of deficit control legislation. This book is an appropriate reference for both students and practitioners of defense budgeting and financial management. It would also be appropriate in a general public budgeting course. Most public budgeting texts focus on state and municipal governments and there are few that address the federal system. This book fills that gap and provides a specific example of federal budgeting.

Most of the literature on public sector budgeting ignores defense budgeting, even though aircraft, ships, tanks, smart weaponry, skilled crews, electronically boosted infantry, and other facets of national defense represent a large part of the federal government's discretionary spending. The budget