Publicly Released: August 19, 2020
Objective
We determined whether the DoD Components recovered their costs for executing security assistance programs and distinguished their assets from those of the security assistance programs.
Background
The Arms Export Control Act and the Foreign Assistance Act authorize the U.S. Government to provide security assistance to foreign customers in the form of defense articles, military education and training, and other defense-related services to advance national policies and objectives.
The Defense Security Cooperation Agency is the DoD agency responsible for directing, administering, and providing guidance for the management of the DoD-executed security assistance programs. The Military Departments and Defense agencies are responsible for daily operational management and decision making for the security assistance programs.
The Arms Export Control Act and the DoD Financial Management Regulation require the DoD to recover its costs for providing support to foreign customers. The DoD charges administrative fees to the customer on the articles and services provided to cover the DoD’s overhead costs. The DoD collects the fees in the Foreign Military Sales Trust Fund administrative account and uses the account funds to reimburse the DoD Components for their overhead costs, such as salaries and maintenance costs.
Findings
We determined that the DoD Components did not recover their costs for executing security assistance programs in accordance with the Arms Export Control Act and the DoD Financial Management Regulation. Specifically, the DoD Components did not recover their costs for:
• paying DoD civilians to work on the security assistance programs;
• storing security assistance assets at DoD facilities; or
• maintaining DoD facilities used to execute security assistance programs.
These conditions occurred because the DoD Components did not design or implement a reliable cost accounting method to track their actual costs incurred for executing the security assistance programs. Additionally, DoD Components did not always request reimbursement for their expenses from the Defense Security Cooperation Agency.
By not recovering their expenses paid with appropriated dollars, DoD Components subsidized the security assistance programs with DoD appropriations.
The DoD Components may have violated the “Purpose Statute” by incorrectly using DoD appropriations to pay for security assistance-related overhead expenses when there was a more appropriate appropriation available to pay for these expenses, such as the SDAF and Foreign Military Sales Trust Fund administrative accounts. In addition, by using DoD funds to pay for security assistance programs, the DoD may have fewer funds to meet its operation goals.
We also determined that DoD Component personnel did not maintain accountability of DoD assets or maintain accurate SDAF inventory records in accordance with Office of Management and Budget Circular No. A-123 or the Defense Security Assistance Management Manual.
These conditions occurred because DoD Component personnel did not design or implement an internal control environment to:
• prevent personnel from shipping Army assets to a foreign customer;
• track and maintain SDAF inventory records from the warehouse inventory systems; and
• periodically inspect or review inventory records for accuracy.
DoD Components need to implement effective controls to prevent or detect the unauthorized use or disposition of an entity’s assets. Without accurate locations or quantities of SDAF inventory, DoD personnel will not know what the DoD has in storage, which may lead to a shortage of materiel necessary to meet the needs of our foreign partners. Conversely, the DoD may order materiel that the DoD already owns, which could be a waste of funds.
Management Comments and Our Response
We made 23 recommendations to the Under Secretary of Defense (Comptroller)/Chief Financial Officer, such as
• recover all security assistance-related salary, storage, and operating costs that the DoD Components did not recover between FYs 2014 and 2019;
• develop, document, and implement Component-level policies and procedures to recover the expenses in future years; and
• perform a preliminary review of potential Antideficiency Act violations that may have occurred within their organizations by subsidizing security assistance-related expenses with appropriated funds.
The Deputy Chief Financial Officer, responding for the Under Secretary of Defense (Comptroller)/Chief Financial Officer, agreed with all 23 recommendations addressed to the Under Secretary; therefore, the recommendations are resolved but will remain open. We will close these recommendations once we verify that the Deputy Chief Financial Officer implements corrective actions that address the intent of the recommendations.
The Deputy Chief Financial Officer, responding for the Under Secretary of Defense (Comptroller)/Chief Financial Officer, also agreed with the potential monetary benefit of $29.1 million in unrecovered expenses. The Deputy Chief Financial Officer stated that the recovered costs will put dollars back into the U.S. Treasury, and future compliance with cost recovery guidance will ensure that FMS partners are fully paying for services, which will return buying power to the DoD.
The Deputy Secretary of Defense agreed to identify and direct the appropriate official to perform a comprehensive analysis of the functions performed by DoD Components and determine whether the current administrative rates charged to foreign customers are adequate for the DoD to recover its security assistance-related costs. The comments from the Deputy Secretary of Defense addressed the specifics of the recommendation; therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify that the DoD official completed the analysis, which includes performing an independent and objective review of the current administrative rates charged to foreign customers.
The Deputy Secretary of Defense agreed to develop, document, and implement detailed guidance to the DoD Components that identifies which costs should be covered and the process for recovering the costs. The comments from the Deputy Secretary of Defense addressed the specifics of the recommendation; therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify that the Deputy Secretary of Defense implements corrective actions that address the intent of the recommendation.
This report is the product of Proj. No. D2019-D000FP-0139.000.