We determined whether the Defense Security Cooperation Agency (DSCA)—Security Assistance Accounts (SAA) September 30, 2017, balance sheet was accurate and whether the DSCA and Defense Finance and Accounting Service (DFAS) implemented effective controls over financial reporting for the SAAs.
The DSCA‑SAA financial statements are unaudited and were included in Appendix A of the FY 2017 DoD Agency Financial Report. The SAAs are a group of Treasury accounts the DoD uses to execute the security assistance programs for which the DoD has responsibility. These programs include the Foreign Military Sales Trust Fund and the Special Defense Acquisition Fund (SDAF). Foreign Military Sales is a process through which eligible foreign customers purchase defense articles and services from the U.S. Government. The SDAF is used to acquire defense articles and services in anticipation of their sale through the Foreign Military Sales process. The Foreign Military Sales Trust Fund and SDAF FY 2017 Fund Balance With Treasury ending balances were $33.1 billion and $739.8 million, respectively.
We determined that the DSCA and DFAS‑Indianapolis misstated assets and liabilities on the September 30, 2017, DSCA‑SAA balance sheet. Specifically, DSCA and DFAS‑Indianapolis personnel did not:
- report up to $410.7 million in SDAF inventory;
- transfer up to $745.5 million in available collections received in DoD Miscellaneous Receipt accounts to the SDAF; and
- report Accrued Unfunded Annual Leave balances for Army, Air Force, and Other Defense Organization personnel who support the security assistance programs.
Additionally, DSCA and DFAS‑Indianapolis personnel overstated the Navy Accrued Unfunded Annual Leave balance by $1.3 million.
These conditions occurred because DSCA personnel did not maintain complete and accurate inventory accounting records and DFAS‑Indianapolis did not design the Defense Departmental and Reporting System to collect and report SDAF inventory accounting records. In addition, DSCA personnel did not provide detailed guidance to the implementing organizations or enforce requirements for recording and reporting SDAF collections. Furthermore, DSCA and DFAS‑Indianapolis personnel did not design internal controls so that all transactions, such as Accrued Unfunded Annual Leave, were recorded completely and accurately.
The DoD needs complete and accurate accounting records to determine whether it is effectively executing the mission of each security assistance program. Without reliable accounting records, the DoD cannot be sure that SDAF inventory is readily available for its foreign customers so the foreign customer can develop military capabilities that are consistent with U.S. strategy, priorities, and defense objectives. The SDAF also reduces the need to divert equipment and material from U.S. inventory when foreign partners have urgent requirements that cannot otherwise be satisfied. Without its full level of funding, the SDAF may not achieve these objectives. We consider the $745.5 million in available collections that the DSCA and DFAS‑Indianapolis did not transfer to the SDAF to represent a potential monetary benefit to the DoD.
Furthermore, without reliable data for Accrued Unfunded Annual Leave, the DSCA will not be able to determine the amount the DoD should be reimbursed by foreign customers to recoup the DoD’s security assistance personnel costs.
We also determined that DSCA and DFAS‑Indianapolis personnel did not have effective controls over financial reporting f or the S AAs. Specifically, DSCA and DFAS‑Indianapolis personnel did not:
- perform Fund Balance With Treasury reconciliations of the SAA accounting records;
- document the complete consolidation, reconciliation, and reporting processes for all SAA financial activity in standard operating procedures, process narratives, or process maps; or
- comply with the mission work agreement established between them.
These conditions occurred because DSCA personnel did not exercise prudent financial management over the SAAs. Specifically, the DSCA delegated financial management tasks to DFAS‑Indianapolis, such as documenting financial processes and performing reconciliations. However, the DSCA did not establish a process for monitoring DFAS‑Indianapolis personnel who performed the financial management tasks. Additionally, DSCA and DFAS‑Indianapolis personnel did not perform Fund Balance With Treasury reconciliations because DFAS‑Indianapolis personnel did not design the Defense Departmental and Reporting System to collect, reconcile, and report the SAA accounting records.
The DSCA and DFAS‑Indianapolis need effective controls over financial reporting for the SAAs in order to produce accurate accounting records. The DoD relies on accurate accounting records to prepare budget requests and calculate overhead fees to recover the DoD’s operating costs associated with executing the SAAs. Without effective internal controls, the DoD will be unable to determine whether it is incurring a gain or loss on individual cases on its business transactions with its foreign customers, which may result in DoD appropriations being spent on SAA operations.
Among other recommendations, we recommend that the DSCA Director:
- provide the implementing organizations with detailed accounting and reporting guidance for the SDAF inventory that complies with accounting standards;
- update the Security Assistance Management Manual to require the implementing organizations to report the value and location of SDAF inventory quarterly;
- work with the Directors of the implementing organizations to develop and implement a comprehensive end‑to‑end accounting and reporting process for SDAF inventory
- perform annual inspections of DoD and contractor facilities to determine the location, identification numbers, quantities, and values of the inventory on hand;
- establish definitions for all SDAF collection sources and issue detailed accounting and reporting guidance to the implementing organizations for the transactions;
- review and provide written approval for each reconciliation performed by DFAS‑Indianapolis to the SAAs;
- review and provide written approval for each adjustment made by DFAS‑Indianapolis to the SAAs; and
- develop and implement detailed standard operating procedures, process narratives, and process maps for each of the SAAs.
Management Comments and Our Response
The DSCA Director agreed with 25 of the 26 recommendations, stating that the DSCA, in coordination with the Office of the Under Secretary of Defense (Comptroller) and the implementing organizations, has developed corrective action plans to address the recommendations. The Director plans to implement all of the corrective action plans by September 30, 2020. Therefore, the recommendations are resolved but will remain open. We will close these 25 recommendations when we verify that the Director has implemented the corrective action plans.
The DSCA Director did not agree with the DoD OIG’s methodology and calculation used to determine the $745.5 million in potential monetary benefit. The Director stated that the DoD OIG’s position is unsubstantiated because the DoD OIG did not account for the offsetting collections recorded in the DoD Miscellaneous Receipt accounts, which would have reduced the potential monetary benefit. In addition, the Director stated that the DoD OIG incorrectly included lease payments, which are not authorized SDAF collections. Therefore, the DSCA Director did not agree with our recommendation to recover and transfer into the SDAF all lease payments dating back to FY 2012 that DFAS had not transferred into the SDAF account.
We disagree with the Director’s response. We acknowledge in Appendix A of the report that offsetting collections were recorded in the DoD Miscellaneous Receipt accounts, which may have reduced the $745.5 million in potential monetary benefit. DFAS‑Indianapolis personnel did not provide the documentation needed to justify reducing the potential monetary benefit.
We also disagree with the Director’s comments that lease payments are not authorized SDAF collections. According to the Arms Export Control Act, “the [SDAF] shall consist of collections from sales representing the value of asset use charges.” Asset use charges are charges collected on an FMS case when a foreign customer or DoD contractor rents or leases defense articles. Additionally, the DoD Financial Management Regulation states that lease rental payments should be collected and posted to the SDAF account. Therefore, the recommendation is unresolved. We ask that the Director provide additional comments on the final report. The Director should explain how the DSCA will comply with the DoD FMR requirement to collect and post all lease rental payments to the SDAF.
Although not required to comment, the Assistant Deputy Chief Financial Officer for the Office of the Under Secretary of Defense (Comptroller) disagreed with the recommendation for the DSCA and DFAS‑Indianapolis to report all SAA balances in the DoD Agency Financial Report. The Assistant Deputy Chief Financial Officer stated that the DSCA‑SAAs should be considered a stand‑alone entity and not included in the DoD Agency Financial Report.
We disagree with the Assistant Deputy Chief Financial Officer’s response. Statement of Federal Financial Accounting Standards 47 requires the DoD to consolidate and report on all entities for which it is administratively accountable in the DoD Agency Financial Report. The DoD was assigned administrative responsibilities for the SAAs in the Foreign Assistance Act, Arms Export Control Act, and Executive Orders 12163 and 13637. DoD Directives 5105.65 and 5132.03 established the DSCA as the DoD agency responsible for the execution of DoD security assistance programs and activities. By not consolidating and reporting the financial activity of the DSCA’s security assistance programs, the DoD is not complying with Standard 47 requirements.
This report is a result of Project No. D2018‑D000FP‑0115.000.