We determined whether the Army properly recorded foreign currency payments, exchange transactions, and related gains and losses. We also performed internal control reviews, including testing the accuracy of foreign currency payments.
The Army conducts operations overseas, where it is sometimes necessary to make payments using the currency of the host nation instead of the U.S. dollar. Currency exchange rates constantly fluctuate, affecting the U.S. dollar value when making foreign currency payments. The Army records these fluctuations in its disbursing and accounting systems when processing foreign payments. U.S. Army Financial Management Command (USAFMCOM) provides financial oversight to the disbursing offices.
The Army did not properly record foreign currency payments, fluctuations from exchange transactions, and related gains and losses for four of the five disbursing offices we reviewed. We project that the Army incorrectly recorded 11,173 of 52,632 (21 percent) fluctuation transactions. The projected 11,173 incorrectly recorded transactions had an absolute value of $30 million. Army management did not have procedures in place over their local national employee payroll, disbursing, and vendor pay processes to prevent or identify the inaccuracies. Disbursing offices use a vendor pay process to determine the amount due to a contractor or vendor for all contract or purchase orders.
The Army did not properly record foreign currency payments and fluctuation because personnel did not update the General Fund Enterprise Business System (GFEBS) in 2016 to comply with revised DoD policy to record gains and losses from foreign currency exchange rate fluctuations. As a result, the Army incorrectly recorded a projected absolute value of $30 million to the foreign currency fluctuation accounts in FY 2016 and first quarter FY 2017. Also, the disbursing offices did not have adequate procedures in place to ensure proper recording of future foreign currency transactions, because Army management did not establish thorough oversight of operations within the vendor pay, disbursing, and local national employee payroll functions. Although we did not find instances of fraud, the Army is at risk for potential losses and reporting of additional financial inaccuracies from undetected errors and fraud, increased interest payments, and payments made for incorrect amounts, as a result of incorrect exchange rates.
The Army disbursing officers did not effectively manage the 10 Limited Depositary Checking Accounts (LDAs) used to hold foreign currency that we reviewed. Of the 10 LDAs, 8 maintained balances that were $126.5 million higher than the approved cash holding authority limit, and 6 of those 10 held a total of $112.1 million more than the 7-day supply of funds limit. Additionally, Disbursing Office personnel from the Army 176th Financial Management Support Unit (FMSU) did not protect sensitive financial information of Korean Nationals when processing payments through the LDA. Because of ineffective management of the LDAs, the disbursing offices held cash in excess of immediate needs. In addition, the Army recorded additional gains and losses on the value of the excess funds, and the DoD is at risk of future losses due to unfavorable fluctuations in the value of the excess foreign currency. Furthermore, 176th FMSU personnel placed bank accounts for affected Korean National personnel and contractors at risk to unauthorized access.
We recommend the Commander, 176th FMSU, U.S. Army Garrison Yongsan, South Korea, revise the standard operating procedures for the disbursing process; develop and implement an approval process for all currency exchanges; develop and implement procedures to safeguard sensitive financial information; and ensure the disbursing office has taken all possible actions to transmit payment files securely.
We recommend that the Director, Army Finance and Accounting Service – Korea, ensure the vendor pay office fully implements new procedures to track invoices received and verify funds are available for payment.
We recommend that the Under Secretary of Defense (Comptroller), Office of the Deputy Chief Financial Officer (ODCFO) issue guidance on DoD standard general ledger transactions for Components. Once issued, we recommend that the Deputy Assistant Secretary of the Army (Financial Operations) (DASA[FO]) update the Army accounting systems as required by the DoD Financial Management Regulation (FMR).
We recommend that the Director, 266th Financial Management Support Center (FMSC), develop guidance to require periodic reviews of system accesses for finance office personnel and ensure adequate separation of duties; develop procedures to maintain alternate certifying officials for each payment system; implement controls to ensure the Italy Finance Office maintains proper separation of duties; ensure senior management is directly involved in oversight of the payroll process; develop a plan to replace the current Italian Local National Payroll System with a system that meets Federal requirements.
We recommend that the ODCFO revise the DoD FMR to clarify the requirements for managing foreign government contributions (burden sharing funds). Once revised, we recommend that the Commander, 176th FMSU, U.S. Army Garrison Yongsan, South Korea; Director, Defense Finance and Accounting Service (DFAS)-Japan; and Director, U.S. Army Corps of Engineers (USACE) Finance Center develop local procedures to comply with the DoD FMR.
We recommend that the Commander, 176th FMSU, U.S. Army Garrison Yongsan, South Korea; Director, USACE Finance Center; and Director, 266th FMSC adjust the cash holding authorities or reduce the balances of the LDAs to comply with the current cash holding authorities.
We recommend that the Director, Army Financial Services, U.S. Army Finance Command (USAFMCOM) verify that quarterly cash verifications determine and report on whether the disbursing officer’s cash balance held at personal risk comply with the cash holding authority letter as required by the DoD FMR.
Management Comments and Our Response:
The DASA(FO); Commanding General, USAFMCOM; Director, USACE Finance Center; Director, DFAS-Japan; Commander, 176th, FMSU; Director, Army Finance and Accounting Service – Korea; and Director, 266th FMSC, concurred or agreed to take actions that addressed the intent of all of the recommendations. The ODCFO generally agreed with our recommendations; however, the Deputy’s response to B.1.d did not meet the intent of the recommendation. Therefore, we request that the ODCFO provide additional comments to the report no later than April 30, 2018.
This report is a result of Project No. D2017-D000FL-0075.000.