Foreign Military Sales: DOD Should Further Strengthen Financial Oversight of Transportation Fees

From fiscal years 2007 to 2018, DOD collected about $2.3 billion in fees into the FMS transportation accounts and expended about $1.9 billion from the accounts. Foreign partners can pay DOD a fee to cover the costs of DOD transporting items. Fees are collected into transportation accounts in the FMS Trust Fund, and expenditures for related transportation are paid from those accounts. DSCA is responsible for financial oversight of the accounts, and DFAS—a service provider to DSCA—also has some accounting responsibilities related to the accounts.

House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's management of FMS fees. This report examines (1) DSCA's oversight of DOD components' activities that affect fees collected into the FMS transportation accounts, and (2) DSCA's financial oversight of expenditures from the FMS transportation accounts. GAO reviewed DOD guidance, analyzed 3 months of DOD expenditure data, and interviewed DOD officials.

The Foreign Military Sales (FMS) program is one of the primary ways the U.S. government supports its foreign partners, by annually selling them billions of dollars of military equipment and services. However, gaps in the Defense Security Cooperation Agency's (DSCA) oversight of Department of Defense (DOD) components' activities increase the risk that fees collected into the FMS transportation accounts may be inaccurate. While DSCA requires components to perform annual reviews of FMS cases to verify the accuracy of transportation fees collected, DSCA does not routinely oversee these reviews. Additionally, DSCA lacks oversight of the timeliness of DOD components' reporting of deliveries, which should occur within 30 days. DSCA officials indicated that they are developing guidance and processes to help address these challenges, but had not completed them as of February 2020.

DSCA's financial oversight of expenditures from the FMS transportation accounts does not provide reasonable assurance that expenditures are allowable and paid from the correct account. In fiscal year 2016, DSCA established internal guidance for financial oversight of expenditures from the accounts. While that guidance includes a process to review expenditures on a monthly basis, DSCA has not established procedures for conducting that review, including how to analyze expenditure data, or identify and address discrepancies. As a result, DSCA may not review FMS transportation expenditures consistently or identify and address discrepancies. GAO found that approximately 19 percent of expenditures reported to DSCA over a 3-month period in fiscal year 2019 inconsistently identified the DOD component responsible for the transaction. For example, a transaction may indicate that both Navy and Air Force are responsible for the shipment. Further, DSCA has not documented how the Defense Finance and Accounting Service (DFAS) should generate the reports DSCA uses for its review, and DFAS's review of expenditures excludes some expenditures from two DOD components. Without a routine process to review expenditures and correct discrepancies, DSCA cannot provide reasonable assurance that all expenditures are allowable and paid from the correct account, raising the risk of misuse of funds. DSCA officials told GAO that they are developing guidance to help address these challenges, and expect to implement it in 2020.

GAO is making five recommendations to DOD to strengthen financial oversight of the FMS transportation accounts, including two recommendations to strengthen DSCA's oversight of fees collected into the accounts, and three recommendations to strengthen DSCA's and DFAS's oversight of expenditures from the transportation accounts. DOD concurred with all of the recommendations and identified actions it plans to take to address them.

The Foreign Military Sales (FMS) program is one of the primary ways the  U.S. government provides support to its foreign partners, by annually  selling them billions of dollars of defense items and services. These items  and services range from fighter jets and integrated air and missile  defense systems to combat helmets and training on the use of items.  From fiscal years 2007 to 2018, these sales totaled $472 billion. The  Department of State (State) and several components of the Department  of Defense (DOD) share responsibility for the program, including the  Defense Security Cooperation Agency (DSCA), which directs,  administers, and provides guidance related to the program, and the  Defense Finance and Accounting Service (DFAS), which performs billing  and disbursing functions for the program.

To cover the costs of operating the FMS program, DOD charges  purchasers certain overhead fees, including a transportation fee to cover  any costs to DOD for transporting items. DOD collects the transportation  fee from purchasers into a series of transportation accounts in the FMS  trust fund. According to DOD, the FMS program is intended to operate  on a “no profit, no loss” basis, meaning that purchasers should not be  charged excessive fees and fee revenue should cover the program’s  operating costs. From fiscal years 2007 to 2018, the FMS program  collected around $2.3 billion in fees into the FMS transportation accounts,  and expended around $1.9 billion from the accounts. Our 2019 review of  the FMS transportation fee accounts found that DSCA had allowed those account balances to grow substantially in recent years due in part to  weaknesses in DSCA’s management oversight.

House Report number 114-537 and Senate Report number 114-255  included provisions for us to, among other things, review DSCA’s  management and use of fees. This report examines (1) DSCA’s  oversight of DOD components’ activities that affect fees collected into the  FMS transportation accounts, and (2) DSCA’s financial oversight of  expenditures from the FMS transportation accounts.

To examine DSCA’s oversight of DOD components’ activities that affect  fees collected into the FMS transportation accounts, we reviewed DOD’s  current guidance and regulations related to the FMS transportation fee,  as well as other documentation and internal guidance developed by  DSCA. We also interviewed DSCA and DFAS officials on their  implementation of oversight procedures.

To examine DSCA’s financial oversight of expenditures from the FMS  transportation accounts, we reviewed DOD’s current regulations related  to financial oversight and transportation, as well as other documentation  and internal guidance developed by DSCA and DFAS. We interviewed  DSCA and DFAS officials about their internal guidance for and  implementation of oversight procedures for expenditures from the FMS  transportation accounts. Additionally, in order to help assess the  sufficiency of DSCA’s and DFAS’s guidance for overseeing expenditures  from the FMS transportation accounts, we analyzed 3 months of  expenditure data for May through July 2019 for the FMS transportation  accounts provided by DFAS. We did not conduct any independent testing  of the data to determine whether the amounts reflected correct payments  for the related transportation provided.

We conducted this performance audit from May 2019 to May 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Background Roles and Responsibilities Related to Collecting and Expending Transportation Funds

State reviews and approves FMS purchases, while DOD is responsible  for program implementation. DSCA administers the FMS program for  DOD, including exercising financial management responsibilities for the  FMS trust fund, and DFAS provides DSCA’s accounting services for  FMS. Additionally, various other DOD components have responsibilities  related to collecting and expending transportation funds, as shown in  figure 1.

Regulations and Guidance for the FMS Program

Several DOD publications provide regulations and guidance for the FMS  program, including:

DOD Financial Management Regulation (FMR). Managed by the  Under Secretary of Defense (Comptroller), the FMR defines financial  management requirements for all DOD components, and states that  DSCA administers the FMS program and is responsible for monitoring  the use of the FMS trust fund. The FMR also states that DOD  components should maintain documentation that constitutes a  complete audit trail.

Defense Transportation Regulation. Managed by the U.S.

Transportation Command (TRANSCOM), the Defense Transportation  Regulation defines requirements for the transportation of items within  the Defense Transportation System, such as the use of unique  identifiers for all shipments and how to use and pay commercial  carriers, when applicable.

Security Assistance Management Manual (SAMM). Managed by  DSCA, SAMM provides guidance to the DOD components that  manage or implement the FMS program.

Foreign partners that purchase items and services through the FMS  program may use their own funds or, if provided, U.S. funds, such as  grants or loans provided through Foreign Military Financing. In addition,  some FMS purchases are made using funds appropriated to DOD, State,  or other U.S. government agencies for Building Partner Capacity (BPC)  programs. These programs purchase items or services for foreign  partners through FMS.

The FMS process begins when an eligible entity requests information on  defense articles or services for purchase. The responsible DOD  component then prepares a Letter of Offer and Acceptance (LOA), which  is the legal instrument used by the U.S. government to sell defense  articles to a foreign country or international organization under authorities  provided in the Arms Export Control Act. The LOA itemizes the defense  articles or services offered and, when implemented, becomes an official  tender by the U.S. government. Signed LOAs are referred to as “FMS  cases,” and the individual items or services included for purchase in the  FMS case are referred to as “case lines.”

Once the LOA is signed, the DOD component responsible for the FMS  case then manages the contracting or requisition of the equipment or  services specified in the agreement, which are then delivered to the  foreign partner. Foreign partners have different options available to them  for transporting items they purchase through FMS. Other than when  purchasing certain hazardous or sensitive items that must be transported  via the Defense Transportation System, foreign partners have the option  to arrange for their own transportation of FMS items they purchase—such  as using a freight forwarder—for all or part of the transportation needed to  reach the final destination. On the other hand, BPC programs use the  Defense Transportation System to move all their FMS purchases.

When all items have been delivered, all ordered services have been  performed, and no new orders exist or are forthcoming, the DOD  component responsible for managing the FMS case may mark it as  closed.

DOD most commonly calculates the FMS transportation fee using a  percentage rate applied to the price of the item. The percentage rate  varies depending on the extent of the U.S. government’s responsibility for  transporting the items purchased, as agreed to between DOD and the  foreign partner in the LOA. DOD first determines the estimated  transportation fees for shipping FMS purchases based on the terms  agreed upon in the LOA. When an item is shipped, the transportation fee  is collected from the FMS purchaser’s account into the FMS  transportation accounts.

Eight transportation accounts within the FMS trust fund are used to hold  transportation fees collected from FMS purchasers’ accounts, and to pay  FMS transportation bills. Seven separate accounts hold transportation  funds for certain larger BPC programs. These seven BPC accounts  allow BPC program transportation fee collections and expenditures to be  tracked. In addition, one main account holds transportation funds for all  foreign partner purchasers and smaller BPC programs.

Individual shipments trigger collections into and expenditures from the  FMS transportation accounts. As shown in figure 2, after DOD ships an  item and DFAS is notified of that shipment—through a process known as  delivery reporting—DFAS moves the amount of the related transportation  fee from the FMS country or BPC program account into the main  transportation account or corresponding BPC program transportation  account and records the amount as a collection. DFAS receives monthly  bills that include the costs for FMS transportation, which DFAS pays out  of the main transportation account, recording the amount paid as an  expenditure.

Subsequently, DFAS reviews the transportation bills and associated  expenditure transaction data to identify any expenditures associated with  the seven BPC programs with dedicated transportation accounts. For any  BPC transactions identified, DFAS reimburses the main transportation  account for the cost of the expenditure by moving funds from the relevant  BPC transportation account into the main transportation account through  a process DOD refers to as realignment.

DOD and DSCA Guidance Identifies Controls, but DSCA Lacks Routine Oversight Over DOD Components’ Activities

DOD and DSCA Guidance Identifies Controls for Fees Collected into the FMS Transportation Accounts

DOD and DSCA guidance to DOD components identifies controls over  the information used to calculate the fees collected into the FMS  transportation accounts. For example, DOD has various codes that  identify the percentage rate used to calculate the transportation fee  charged to FMS purchasers. DSCA provides guidance to components  on how to use those codes, and components are responsible for  managing the use of those codes. Both DSCA’s guidance and the FMR  require that components maintain documentation, such as documentation  of significant events related to delivery transactions and authorized  exceptions to normal billing procedures. Additionally, both the FMR and  DSCA’s guidance to components identifies that components are  responsible for submitting delivery reporting within 30 days of completion,  which triggers collection of the transportation fee. DSCA’s guidance to  components requires components to perform various case reviews and  reconciliations, including annual case reviews to verify the accuracy of  information, such as the accuracy of the codes applied to case lines, as  well as the timeliness of delivery reporting.

DSCA Lacks Routine Oversight of DOD Components’ Annual Case Reviews

DSCA’s guidance to DOD components requires components to review  FMS cases at least annually to verify the accuracy of data—including the  accuracy of the transportation fee collected and the timeliness of delivery  reporting—but DSCA does not have a routine process to oversee those  reviews. DSCA’s guidance to components also states that DSCA may  request copies of components’ annual case reviews for oversight  purposes, and DSCA officials told us that they request copies on an ad  hoc basis. Although DSCA has oversight responsibility over collections  into the FMS transportation accounts, DSCA officials said they do not  have a standard process for selecting and examining components’ annual  case reviews, and do not document their reviews. Federal internal control  standards state that management should establish and implement  activities to monitor internal control systems and evaluate results, and  ensure that activities are performed routinely and consistently.  Management may use ongoing monitoring, separate evaluations, or a  combination of the two to obtain reasonable assurance of the operating  effectiveness of the controls in place. Without routine oversight of  components’ annual case reviews—which could include a process to  select annual case reviews for examination, and guidance on how to  perform and document examinations—DSCA increases the risk that  components may not complete such reviews consistent with DSCA’s  guidance, thereby increasing the likelihood that fees collected may be  inaccurate. Additionally, according to DOD, the FMS program is intended  to operate on a “no profit, no loss” basis, and inaccuracies in the  collection of the FMS transportation fee could lead to over- or under- collecting fees from an FMS purchaser.

DSCA officials told us that they have begun to work on an initiative to  analyze a sample of annual case reviews on a routine basis. According to  DSCA officials, the process will include reviewing and documenting cases  based on certain events and is expected to be implemented in April 2020.  The successful implementation of this initiative may help DSCA ensure  that components’ annual case reviews comply with DSCA guidance.  However, until DSCA fully implements this initiative, the risk remains that  components may not complete annual case reviews consistent with  DSCA’s guidance.

DSCA Lacks Oversight of DOD Components’ Delivery Reporting

DSCA does not have a process to monitor the timeliness of DOD  components’ delivery reporting of shipments of items, which triggers  collections into the FMS transportation accounts. According to DOD  regulations, components are required to submit delivery reporting in their  systems within 30 days of shipment. Although DSCA has financial  responsibility over collections into the FMS transportation accounts,  DSCA officials told us that they do not monitor components’ compliance  with this regulation. Federal internal control standards state that  management should design internal control activities to achieve control  objectives and respond to risks, ensure the accurate and timely recording  of transactions, and evaluate and document the results of ongoing  monitoring activities. Further, the FMR incorporates the federal  accounting standards into DOD accounting and financial reporting policy.  The federal accounting standards state that revenue transactions—such  as the FMS transportation fee—should be recorded when services are  provided.

DSCA officials told us that they rely on DFAS to monitor components’  delivery reporting. During the course of our review, DFAS officials told us  that they began providing a report to DSCA and other components that  detailed information on each components’ delivery reporting, which was  based on a prior FMR requirement. Both DSCA and DFAS officials told  us that they are working on an agreement that would formalize DFAS’s  reporting, but have not finalized this agreement as of February 2020.  However, DFAS officials told us that they have not followed up with  components to verify the accuracy of the delivery reporting, and are not  required to do so. While DSCA officials told us that DFAS’s reporting may  help provide transparency, without a process to oversee that reporting,  DSCA’s lack of monitoring of components’ delivery reporting raises the  risk that such reporting may not be timely. As timeliness is an element of  accuracy, untimely component delivery reporting may result in the  inaccurate collection of related transportation fees into the FMS  transportation accounts. A documented process to review reporting and  monitor the timeliness of components’ delivery reporting—which could  include DSCA’s review of DFAS’s reporting to identify and follow up on  discrepancies—could help reduce the risk that transportation fees may  not be collected into the FMS transportation accounts in a timely manner.  Further, such oversight could assist components during other required  reviews, such as annual case reviews.

DSCA’s Financial Oversight of Expenditures Does Not Provide Reasonable Assurance That Expenditures Are Allowable and Paid from the Correct FMS Transportation Account

DSCA has limited financial oversight of expenditures from the FMS  transportation accounts. While DSCA established internal guidance  related to monthly reviews of expenditures from the accounts, that  guidance lacks procedures to review expenditures and is not fully  documented. In addition, DSCA has not provided guidance to DFAS on  preparing the reports DSCA uses for its monthly review. Also, DFAS’s  internal guidance on reviewing and realigning expenditures is inconsistent  and lacks key controls and details, such as procedures to provide  reasonable assurance that all transportation expenditures are reviewed.  As a result, DSCA’s financial oversight of the FMS transportation  accounts is insufficient to provide reasonable assurance that  expenditures paid from the FMS transportation accounts are allowable  and paid from the correct account, which limits DSCA’s ability to help  ensure that relevant BPC program expenditures are paid from the related  BPC accounts. During the course of our audits of the FMS program,  DSCA officials told us that they began developing new internal guidance  to address financial oversight of expenditures from the FMS  transportation accounts, and expect it to be implemented by May 2020.  However, until DSCA finalizes and implements that guidance, the risk  remains that DSCA may use the FMS transportation accounts to pay for  unallowable costs, or pay transportation costs from the incorrect account.

DSCA Established Some Guidance for the Monthly Review of FMS Transportation Expenditures

In fiscal year 2016, DSCA established a Managers’ Internal Control  Program to oversee the FMS transportation accounts, according to DSCA  officials. This internal guidance identified the risk that DSCA may use the  FMS transportation accounts to pay for unallowable costs—such as those  not related to FMS transportation and that may be a result of misuse—or  that DSCA may pay transportation costs from the incorrect account. To  address these risks, the guidance identified procedures for DSCA to  review expenditures. As shown in figure 3, the procedures state that  DSCA will review expenditures from the FMS transportation accounts on  a monthly basis to ensure costs are valid and applied to the proper  account, and to identify and correct discrepancies.

DSCA officials told us that to perform their monthly review they use  reports provided by DFAS, and DFAS officials told us they provide those  reports to DSCA on a monthly basis based on internal guidance. These  reports include information on the FMS transportation account balances,  and, in addition, DFAS provides supporting documentation that includes:  copies of bills paid from the accounts and detailed analysis of  individual transportation expenditures; an analysis of discrepancies DFAS identified for each transaction; and  financial transactions DFAS performed to reimburse the main  transportation account for specific BPC transportation expenditures,  through a process DOD refers to as realignment.

Both DSCA and DFAS officials said they use two pieces of information  from the reports and analyses:

The transportation account code, which identifies the DOD  component responsible for a particular expenditure, and may provide  information on the country or program associated with the  transportation expenditure.

The transportation control number, which is a unique 17-character  code that is associated with a shipment and used throughout the  Defense Transportation System for shipment tracking and payment  processing. For FMS shipments, the transportation control number  includes information that identifies the DOD component and foreign  partner, and may be used to tie a particular transportation expenditure  to an FMS case.

The transportation account code and the transportation control number  are entered by DOD components directly involved in ordering and  processing shipments into their individual systems. Figure 4 provides  additional details regarding the composition of the transportation control  number.

DSCA Lacks Sufficient Internal Guidance for the Monthly Review of FMS Transportation Expenditures

DSCA’s Internal Guidance Lacks Procedures for Conducting the Monthly Review of Expenditures

DSCA’s internal guidance does not contain procedures explaining how  DSCA staff should review transportation expenditures. Federal internal  control standards state that management should design control activities  to respond to risks, implement activities that address those controls, and  identify the information requirements needed to achieve objectives.  DSCA’s monthly review of expenditures from the FMS transportation  accounts is meant to provide financial oversight of the accounts, and  DSCA’s internal guidance establishes that, as part of its monthly review,  DSCA should review expenditures to ensure they are allowable and paid  from the correct account, and follow up on any discrepancies. However,  DSCA’s internal guidance does not explain how to review expenditures,  and DSCA officials told us that they do not have internal guidance  identifying the data needed to oversee expenditures or explaining how  they should evaluate expenditure data, which could include steps such as  identifying and correcting discrepancies including mismatched, missing,  or incomplete entries.

To assess transportation expenditure data reviewed by DFAS and DSCA,  we analyzed a nongeneralizable sample of expenditure data for the FMS  transportation accounts provided by DFAS for the period from May  through July 2019. Over that 3-month period, DFAS reported about 6,200  transportation expenditures totaling approximately $21.6 million. Our  review of those expenditures identified discrepancies or missing data  such as transactions with:

Mismatched DOD component codes. Approximately 19 percent of  expenditures we examined—representing around $4 million—had  transportation account codes and transportation control numbers  identifying different DOD components. According to DFAS officials, if  the transportation account code and transportation control number for  an expenditure do not identify the same component, the mismatch  may be a discrepancy. For example, a mismatch could indicate that  staff at a component entered an incorrect transportation account  code, or misapplied a transportation account code, which may result  in the payment of a non-FMS expenditure from the FMS  transportation account.

Missing or misformatted control numbers. Approximately 3  percent of the number of expenditure transactions in our sample— representing around $40,000—either lacked transportation control  numbers or included transportation control numbers that did not  contain 17 digits. Without a valid transportation control number, DSCA  may not be able to determine whether an expenditure is allowable or  paid from the correct account.

Because DSCA’s internal guidance lacks procedures—including those  explaining what expenditure data is needed to perform oversight and how  to evaluate that data for and address discrepancies—DSCA cannot  provide reasonable assurance that it appropriately reviews expenditures  from the FMS transportation accounts. Without guidance that addresses  the risk that unallowable costs may be paid from the transportation  account, DSCA raises the risk of misuse of funds of the FMS  transportation accounts. Additionally, without guidance that identifies and  addresses discrepancies—such as missing transportation control  numbers—DSCA raises the risk that transportation expenditures may not  be paid from the correct account. DSCA officials told us that they were  developing new internal guidance and collaborating with DFAS on an  initiative to follow up on discrepancies, and expect both to be  implemented by May 2020. However, until DSCA finalizes and  implements that guidance, the risk remains that DSCA may use the FMS  transportation accounts to pay for unallowable costs, or pay  transportation costs from the incorrect account.

DSCA’s Internal Guidance Lacks Procedures for Documenting the Monthly Review of Expenditures

DSCA’s internal guidance does not identify how DSCA officials should  document their monthly review of expenditures. Additionally, DSCA  officials confirmed that they do not document their monthly review of  expenditures. DSCA officials told us that while DSCA staff conducted  regular monthly reviews, DSCA has not issued specific internal guidance  explaining how staff should conduct and document these reviews.  Federal internal control standards state that management should develop  documentation of its internal control system, document internal control  activities such as by documenting that activities occurred, and ensure that  activities are performed routinely and consistently. Without internal  guidance that identifies how staff should perform and document monthly  reviews as well as a process to ensure reviews are documented, DSCA  cannot provide reasonable assurance that staff perform monthly reviews  consistently. DSCA officials told us that their planned internal guidance  should address how the monthly review process is conducted, and should  be implemented by July 2020. However, until DSCA finalizes and  implements that guidance, DSCA will not have guidance on documenting  its monthly review of expenditures consistent with federal internal control  standards.

DSCA Lacks Written Guidance to DFAS on Preparing Monthly Reports

DSCA officials have not provided written guidance to DFAS on preparing  the reports and analyses DSCA uses for its monthly review, and, as a  result, those reports and analyses may be inconsistent and incomplete.

Federal internal control standards state that management should design  control activities that respond to risks, document internal controls,  communicate required information to external parties, and obtain relevant  data from external sources based on information requirements. DFAS  officials confirmed that they do not have written guidance from DSCA  regarding how to generate the reports for DSCA, such as what analyses  to perform on expenditure data.

We found that DFAS’s analyses vary and lack key procedures. For  example, our review of the expenditure data DSCA received from DFAS  for May through July 2019 showed that DFAS performed certain  analyses—such as verifying the validity of the transportation control  number—on some transactions, but not on others. Additionally, DSCA did  not provide DFAS with a complete list of transportation account codes to  use to identify transactions for review. As a result, DSCA’s review of  expenditures based on DFAS’s reports—both for allowability, as well as  to ensure those transactions are paid from the correct account—excludes  some transactions.

Because DSCA has not provided written guidance to DFAS on how to  generate the reports needed for its monthly review process—including  what analysis to perform on expenditure data—or provided DFAS with the  necessary transportation account codes, DSCA cannot provide  reasonable assurance that all expenditures from the FMS transportation  accounts are allowable and paid from the correct account. Additionally,  the lack of consistent identification and review of all transactions by  DSCA raises the risk of misuse of funds in the FMS transportation  accounts. DSCA officials told us that they are developing guidance in  coordination with DFAS, and that it should be implemented by July 2020.  However, until DSCA finalizes that guidance to DFAS, DSCA may review  inconsistent analyses and may not review all transportation expenditures,  and the risk remains that DSCA may use the FMS transportation  accounts to pay for unallowable costs, or pay transportation costs from  the incorrect account.

DFAS’s Internal Guidance on Reviewing Transportation Expenditures Lacks Key Steps

DFAS established procedures to review FMS transportation expenditures  and to realign BPC expenditures to the correct FMS transportation  accounts in part based on direction from DSCA. However, these  procedures lack key steps to ensure that DFAS reviews all expenditures  and identifies discrepancies, as well as to address discrepancies that may  limit DFAS’s ability to identify transactions for realignment. Federal  internal control standards state that management should design control  activities to respond to risks, implement activities that address those  controls, and ensure that activities are performed consistently.

DFAS maintains a separate set of procedures for each of the three  transportation service providers that submit FMS transportation bills.  The results of DFAS’s procedures—such as how transportation  expenditures were realigned—are included as supporting documentation  for the monthly reports provided to DSCA. Our review of DFAS’s  realignment procedures determined that the procedures are inconsistent  or missing key steps that could help address the risk that expenditures  paid from the FMS transportation accounts may be unallowable or paid  from the incorrect account.

We found that DFAS’s procedures do not ensure that DFAS reviews all  transactions, including those that may require realignment. For example,  DFAS’s procedures for DOD’s commercial transportation payment  system—known as Syncada—do not include a step for reconciling the  amount of the payment to the service provider against a list of detailed  expenditure transactions, which may provide assurance that the list of  transactions is complete. Specifically, for Syncada, DFAS queries the  provider’s system using only nine transportation account codes provided  by DSCA, which do not include any account codes associated with Navy,  and only some associated with Air Force. Conversely, the realignment  procedures for the Air Mobility Command and the Surface Deployment  and Distribution Command include a step for reconciling the amount of  the payment to the service provider against a list of detailed expenditure transactions, which helps to provide assurance that the list of transactions  being reviewed is complete. Table 1 shows the results of our review of  DFAS’s realignment procedures and analysis.

Because DFAS’s procedures do not include steps to identify all Navy and  Air Force transportation account codes, DFAS does not have reasonable  assurance that all expenditures are reviewed by DFAS for realignment  and provided to DSCA with the monthly report, which DSCA subsequently  uses to review the validity of expenditures. As a result, any of these  transactions that should be paid from a BPC transportation account are  instead paid from the main FMS transportation account. As shown in  figure 5, our review of Syncada expenditure data for May through July  2019 found that the use of DFAS’s procedures resulted in approximately  15 percent of expenditures not being reviewed. Those transactions  represent 11 percent of the dollar value of transportation expenditures for  that period, or approximately $392,000.

In addition, we found that DFAS’s procedures do not address how to  correct or follow up on discrepancies. Specifically, all three sets of  realignment procedures state that analyzing the list of detailed  transactions may identify transactions with discrepancies in their data, but  none of the procedures fully address the types of discrepancies or their  implications, such as if the expenditure does not include a transportation  control number. Rather, according to DFAS officials, if DFAS identifies  such a discrepancy with a specific expenditure, that cost remains as an  expenditure from the main transportation account.

Because DFAS’s procedures do not include steps to reconcile the amount  of payments to all service providers against a list of detailed cost  transactions or to identify all transportation expenditure transactions,  DFAS may not review all FMS transportation expenditures and may not  pay all expenditures from the correct transportation account. Additionally,  because the list of transportation account codes provided to DFAS does  not include all FMS account codes, neither DFAS nor DSCA review all  expenditures from the FMS transportation accounts, which raises the risk  of unallowable or unapproved expenditures. As a result, DSCA’s ability to  provide reasonable assurance that all transportation expenditures are  allowable and paid from the correct account is limited. DSCA officials told  us that they are developing guidance in coordination with DFAS to identify  and follow up on discrepancies and clarify how DFAS is to perform its  analysis, and that the guidance should be implemented by July 2020.  However, until DSCA finalizes that guidance to DFAS, DSCA may review  inconsistent analyses and may not review all transportation expenditures,  and the risk remains that DSCA may use the FMS transportation  accounts to pay for unallowable costs, or pay transportation costs from  the incorrect account.

DSCA has developed financial oversight procedures for overseeing the  billions of dollars that are collected into and expended from the FMS  transportation accounts, but we found weaknesses in oversight of both  collections and expenditures. Regarding collections, gaps in DSCA’s  oversight of DOD components’ annual case reviews and delivery  reporting increase the risk that transportation fees collected may be  inaccurate. Similarly, regarding expenditures, we identified gaps in  DSCA’s oversight. Specifically, DSCA has not established procedures for  conducting monthly reviews of expenditures and correcting discrepancies,  or defined the information it needs from DFAS. Further, DFAS’s  procedures to review and realign costs between FMS transportation  accounts—which are based on guidance from DSCA—do not ensure that  all transactions are included.

By improving financial oversight of the FMS transportation accounts,  DSCA could better ensure the accuracy of fees collected and help  provide reasonable assurance that expenditures are allowable and paid  from the correct account. DSCA officials told us that they are developing  guidance to address these issues, and plan to implement that guidance in  2020. However, until DSCA finalizes and implements that guidance, the  risks remain that DSCA may collect inaccurate transportation fees, use  the FMS transportation accounts to pay for unallowable costs, or pay  transportation costs from the incorrect account.

We are making the following five recommendations to DOD:  The Secretary of Defense should ensure that the Director of DSCA  implements the planned initiative to routinely examine annual case  reviews performed by DOD components to help ensure that fees  collected into the FMS transportation accounts are accurate.  (Recommendation 1)

The Secretary of Defense should ensure that the Director of DSCA works  with DFAS and DOD components to establish a written process to  monitor the timeliness of components’ delivery reporting to help ensure  that fees collected into the FMS transportation accounts are accurate.  (Recommendation 2)

The Secretary of Defense should ensure that the Director of DSCA  finalizes and implements internal guidance on how to conduct and  document DSCA’s monthly review of expenditures from the FMS  transportation accounts, including what information should be reviewed  and how to identify and follow up on discrepancies. (Recommendation 3)

The Secretary of Defense should ensure that the Director of DSCA works  with DFAS to finalize written guidance to DFAS on how to generate the  reports needed for DSCA’s monthly review of expenditures from the FMS  transportation accounts, including the type of analysis needed.  (Recommendation 4)

The Secretary of Defense should ensure that the Director of DSCA works  with DFAS and other DOD components to finalize the planned guidance  to DFAS for the review and realignment of expenditures from the FMS  transportation accounts to ensure reviews are consistent and include all  expenditures. (Recommendation 5)

We provided a draft of this report to DOD and State for review and  comment. DSCA provided written comments on behalf of DOD, which are  reprinted in appendix II. DSCA concurred with all of our  recommendations, and indicated that it had developed plans to address  them and had begun implementing some of those plans. DOD noted that  annual case reviews and delivery reporting are not directly related to  financial transactions tied to the FMS transportation account. However,  both annual case reviews and delivery reporting provide an opportunity  for oversight that can help verify the accuracy of data, which affects the  accuracy of transportation fees collected from FMS purchasers’ accounts  into the FMS transportation accounts. We also received technical  comments from DOD, which we incorporated in our report as appropriate.  State did not provide any written or technical comments.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of State, and other  interested parties. In addition, this report is available at no charge on the  GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-6881 or BairJ@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix III.

Appendix I: Objectives, Scope & Methodology

This report examines (1) the Defense Security Cooperation Agency’s  (DSCA) oversight of Department of Defense (DOD) components’  activities that affect fees collected into the Foreign Military Sales (FMS)  transportation accounts, and (2) DSCA’s financial oversight of  expenditures from the FMS transportation accounts.

To obtain information on both of our objectives, we reviewed DSCA’s  guidance related to the FMS program and FMS transportation, and  analyzed fiscal years 2007 to 2018 summary collections and expenditures  data for the FMS transportation accounts maintained by the Defense  Finance and Accounting Service (DFAS) in the Defense Integrated  Financial System. We chose to review data from these fiscal years based  on data availability. Under a prior review of the management oversight of  FMS transportation fees, we assessed the reliability of these data by  reviewing for duplicate entries, gaps, and obvious errors, comparing the  data to similar data obtained under prior reviews, and interviewing agency  officials to clarify questions about how to interpret the data. On the basis  of this assessment, we determined these data to be reliable for the  purposes of summarizing the total collections into and expenditures from  the FMS transportation accounts during fiscal years 2007 to 2018.

To examine DSCA’s oversight of DOD components’ activities that affect  fees collected into the FMS transportation accounts, we reviewed DOD’s  current guidance related to the FMS transportation fee, as well as other  documentation and internal guidance developed by DSCA. We  interviewed DSCA and DFAS officials on their implementation of  oversight procedures. To determine and assess the controls DSCA  should be using to manage and oversee the account, we reviewed DOD’s  Financial Management Regulation, DSCA’s Security Assistance  Management Manual, other internal DSCA guidance, federal accounting  standards, federal internal control standards, and our prior report on  DSCA’s management oversight of the FMS transportation account  balances.

To examine DSCA’s financial oversight of expenditures from the FMS  transportation accounts, we reviewed DOD’s current regulations related  to financial oversight and transportation, including DOD Financial  Management Regulation and DOD Defense Transportation Regulation.

Additionally, we reviewed DSCA’s Managers’ Internal Control Program  procedures for monthly FMS transportation account reviews, and we  interviewed DSCA officials responsible for these reviews. We also  reviewed DSCA’s Security Assistance Management Manual, which  provides guidance to DOD components related to the FMS program, and  DFAS’s internal guidance on reviewing and realigning expenditures from  the FMS transportation account.

We analyzed a nongeneralizable, 3-month sample of expenditure data for  the FMS transportation accounts provided by DFAS for the period from  May through July 2019, including transportation service provider bills and  detailed transaction-level expenditures. These data included the  transportation account codes and transportation control numbers that  DSCA and DFAS use to verify that individual expenses are allowable, and  to realign transportation expenditures to the correct FMS transportation  account. We initially obtained 1 month of transportation expenditure data,  but decided to expand our analysis to 3 months of data to account for any  variability between months. Additionally, we chose to review data from  this period because they were the most current at the time of our request,  and therefore the data were compiled using DFAS’s current process. We  determined this period to be sufficient for our analysis of the data, which  DSCA and DFAS use to provide assurance that expenditures from the  FMS transportation accounts are allowable and paid from the correct  account.

To assess the reliability of these data, we reviewed the data for internal  consistency by reviewing for duplicate entries, gaps, and obvious errors;  compared them to DOD regulations on transportation account code and  transportation control number construction; and interviewed DSCA and  DFAS officials about their data collection and verification procedures. We  found the data to be sufficiently reliable for our purpose of presenting the  total number and dollar amount of transportation expenditures reviewed  by DSCA and DFAS for each month, and to identify the number and  dollar amount associated with expenditure records where we identified  discrepancies. We found instances of blank or incorrectly formatted  transportation account codes and transportation control numbers, and  instances where the first characters of the transportation account code  and transportation control number did not match, which DFAS officials  identified as possible discrepancies in the data. As we discuss in the  report, these instances raise questions about the reliability of the data for  financial oversight, since DSCA and DFAS use this information to ensure  that expenditures are allowable and paid from the correct FMS  transportation accounts. We did not conduct any independent testing of  the data to determine whether the amounts reflected correct payments  made toward accurate billings.

To review DFAS’s internal guidance for reviewing and realigning  expenditures from the FMS transportation account, we reviewed copies of  the procedures provided by DFAS for each of the three transportation  service providers. We identified major steps in the procedures related to  reviewing expenditure data, as well as various internal controls related to  analyzing data. We reviewed each of the procedures against one another  to determine the extent to which they addressed the same elements, and  we compared relevant procedures against standards for internal control  related to obtaining, evaluating, and correcting data, to determine whether  they were sufficient to provide financial oversight. Additionally, we  interviewed DFAS officials responsible for these procedures.

In order to determine whether DFAS’s procedures included all  expenditures, we requested and obtained information from Army, Navy,  and Air Force on the transportation account codes that each component  used in fiscal year 2019, and compared them to the account codes  provided to DFAS by DSCA and used to query the third-party  transportation service provider system for relevant FMS transportation  expenses. We identified a list of transportation account codes not queried  as part of DFAS’s procedures, and we requested that DFAS query the  third-party transportation service provider’s system for the period of May  through July 2019 using that list. We requested data from this period to  be consistent with the expenditure data DFAS initially provided us for the  same period. We reviewed the resulting data and compared it to the  previously-provided data in order to determine the relative size of each  data set for this period. We did not independently test to determine  whether the lists of transportation account codes provided to us were  complete, and therefore the data reviewed may not include all relevant  transportation expenditures.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

Jason Bair, (202) 512-6881 or BairJ@gao.gov  In addition to the contact named above, Cheryl Goodman (Assistant  Director), Benjamin L. Sponholtz (Analyst-in-Charge), Adam Peterson,  and Heather Rasmussen made key contributions to this report. Martin de  Alteriis, John Hussey, Christopher Keblitis, Heather Latta, and Grace Lui  also contributed to this report.

Foreign partners buy billions of dollars of defense items and services annually through the U.S. Foreign Military Sales program. DOD collects a transportation fee from buyers to cover shipping costs and pay shipping expenses.

DOD’s financial oversight is supposed to ensure that money goes in and out of the transportation accounts appropriately. However, DOD’s oversight processes do not ensure that:

annual reviews are routinely overseen, which increases the risk that fees collected may be inaccurate

shipping expenses paid are accurate and allowable

Our recommendations are to improve DOD’s financial oversight of the transportation accounts