Foreign Military Sales: DOD Should Strengthen Oversight of Its Growing Transportation Account Balances

The FMS program is one of the primary ways the U.S. government supports its foreign partners, by annually selling them billions of dollars of items and services. According to DOD, the FMS program is intended to operate on a “no profit, no loss” basis, with purchasers not charged excessive fees and fee revenue covering operating costs. Foreign partners can arrange for their own transportation of FMS items or pay DOD a transportation fee to cover the costs of DOD transporting them. The fees are collected into transportation accounts in the FMS Trust Fund.

House Report 114-537 and Senate Report 114-255 included provisions that GAO review DSCA's management of FMS fees. This report examines (1) the balances of the FMS transportation accounts for fiscal years 2007 through 2018, (2) DSCA's management oversight of the accounts, and (3) DSCA's processes for setting transportation fees. GAO analyzed DOD data and documents, and interviewed DOD officials.

Fees charged by the Department of Defense (DOD) for the transportation of defense items sold through the Foreign Military Sales (FMS) program are intended to approximate DOD's transportation costs over time. However, GAO found that the FMS transportation accounts accrued a combined balance of $680 million by the end of fiscal year 2018. Much of the growth occurred from the end of fiscal year 2011 through fiscal year 2018, when the account grew by approximately $630 million.

The Defense Security Cooperation Agency (DSCA) has developed limited management oversight guidance for the FMS transportation accounts, which has contributed to the substantial balance growth. DSCA internal guidance requires daily and annual reviews of the accounts to monitor for significant changes in account balances and to ensure the accounts maintain a “healthy” level. However, internal guidance does not define a significant change or “healthy” level, such as a target range for the account balances. This has led to inconsistent reviews and limited oversight of the recent balance growth. DSCA also has no internal guidance on how to perform certain aspects of its annual reviews or what information to include in the resulting reports. As a result, DSCA officials have produced reports with incomplete information, such as on the causes for trends in the account balances, undermining DSCA management's ability to make informed decisions about the accounts.

DSCA's processes for setting the FMS transportation fee do not ensure that aggregate fees approximate aggregate costs. For its transportation fee rate reviews, DSCA sends requests to the military departments for historical cost and fee data that lack specificity, such as on timeframes, sampling methodology, and data sources. As a result, DSCA has analyzed data that are not timely or systematically sampled. In addition, military department officials reported difficulty providing the requested data in part because DSCA's guidance did not specify data sources. Consequently, for the most recent review, Air Force and Navy were unable to find sufficient matching cost and fee data for DSCA to consider them usable. Further, DSCA has established no goals for rate reviews and has no written procedures to follow in performing them. These factors together contributed to recent growth in the FMS transportation account balances and will continue to hinder DSCA's ability to make appropriate rate-setting decisions moving forward.

GAO is making 10 recommendations to DOD, including six recommendations to strengthen DSCA's oversight of the transportation accounts—such as by clarifying internal guidance—and four recommendations to improve its transportation fee setting processes. 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 supports its foreign partners, by annually selling them  billions of dollars of defense items and services. From fiscal year 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 administers 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 of  transporting items. Such transportation fees are collected 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. The fee DOD  charges the purchaser for each individual shipment need not equal  DOD’s costs for transporting that individual shipment, but DOD aims to  set fees such that the total amount of fees paid by all FMS purchasers  approximately equals the costs to DOD for all shipments over time,  according to DOD officials. Setting fees accordingly should result in  relatively low balances in the FMS transportation accounts. Our 2018  review of other FMS overhead 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  include provisions for us to, among other things, review DSCA’s  management and use of fees and to determine whether these fees are  generating excess funds. This report examines (1) the balances  maintained in the FMS transportation accounts for fiscal years 2007  through 2018, (2) the extent to which DSCA established and implemented  policies and procedures to help ensure management oversight of the  transportation accounts, and (3) the extent to which DSCA processes for  setting transportation fee rates ensure that the rates are set appropriately.

To examine the balances of the FMS transportation accounts, we  analyzed fiscal year 2007 to 2018 account collections, expenditures, and  balance data maintained by the Defense Finance and Accounting Service  (DFAS) and reviewed related DOD documentation. We did not conduct  any independent testing of these data to determine whether these  amounts were based on correct payments made toward accurate billings,  and instead we reviewed the data in the aggregate and interviewed DFAS  and DSCA officials to assess their reliability. We determined these data to  be sufficiently reliable for reporting on the overall collections,  expenditures, and balances of the individual accounts.

To assess the extent to which DSCA established and implemented  policies and procedures to help ensure management oversight of the  FMS transportation accounts, we reviewed DSCA procedures and  compared those to DSCA documentation of how they implemented those  procedures, and to federal internal control standards. We focused on  management oversight processes related to the overall account balances,  instead of individual transactions that would involve financial oversight.  We interviewed DSCA officials on their implementation of the oversight  procedures and DFAS officials about some of the reporting that DSCA  reviews. We also analyzed trends in the transportation accounts to  assess DSCA’s conclusions in its annual reports regarding these  accounts.

To assess the extent to which DSCA processes for setting transportation  fee rates ensure that the rates are set appropriately, we reviewed DOD  documentation related to all reviews of the FMS transportation fee rates  that DSCA initiated from fiscal year 2007 to 2018. We interviewed DSCA,  DFAS, and military department officials about their roles in the rate review  processes and related data. We also reviewed internal guidance and  interviewed DOD officials regarding the process of determining estimated  actual transportation prices to be charged for transporting certain items.  We took these steps to compare DSCA’s implementation of these  processes with DSCA guidance and federal standards, including the  Statement of Federal Financial Accounting Standards No. 4 and federal  internal control standards.

We conducted this performance audit from May 2018 to September 2019  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.

The FMS program is intended to strengthen the security of the United  States and partner countries. To accomplish this mission, DOD sells a  variety of types of items and services to foreign partners. These sales can  range from fighter jets and integrated air and missile defense systems to  combat helmets and training on the use of items. (See figure 1.)

According to DOD and State officials, FMS provides multiple benefits to  foreign governments and the U.S. government. Foreign governments that  choose to use FMS rather than direct commercial sales receive greater  assurances of a reliable product, benefit from DOD’s economies of scale,  improve interoperability with the U.S. military, and build a stronger  relationship with the U.S. government. From the U.S. perspective, FMS  expands the market for U.S. businesses and contributes to foreign policy  and national security objectives.

While State reviews and approves FMS purchases, DOD is responsible  for program implementation. The responsibilities of DOD components  vary:

DSCA: DSCA is responsible for administering the FMS program for  DOD, including overseeing the FMS transportation accounts’  operations and balances. DSCA also sets policies for the FMS  process, including for how FMS-purchased items can be transported  and how DOD will calculate the fees purchasers will pay to reimburse  DOD for any costs of transporting the items.

DFAS: DFAS provides DSCA’s accounting services for FMS and is  responsible for accounting, billing, disbursing, and collecting funds for  the FMS program.

Military departments: The Departments of the Air Force, Army, and  Navy are the primary DOD agencies that coordinate with purchasers  to prepare and execute FMS agreements, including planning  transportation, if necessary.

U.S. Transportation Command (TRANSCOM): TRANSCOM  supports transportation planned by the military departments to be  conducted through the Defense Transportation System (DTS), which  consists of military and commercial resources. Although FMS  shipments may receive transportation support through TRANSCOM  headquarters, the primary TRANSCOM components providing FMS  transportation are the Military Surface Deployment and Distribution  Command, which provides defense transportation by sea, rail, or  highway, and the Air Mobility Command, which provides defense  transportation by air. Contracts between TRANSCOM and private  transportation service companies can provide additional commercial  resources through DTS. DFAS processes bills to reimburse the  TRANSCOM components and private transportation service  companies for the costs of performing these transportation services.

FMS Funding, Transportation, and Fee Options

Foreign partners who 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.

Foreign partners and BPC programs have different options available to  them for transporting items they purchase through FMS. With the  exception of certain hazardous or sensitive items that must be  transported via DTS, 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 DTS to move all their  FMS purchases.

There are two ways DOD calculates the fees it charges FMS purchasers  to use DTS that lead to collections into the FMS transportation  accounts.

Percentage of price. DOD most commonly calculates the FMS  transportation fee using a percentage rate that is 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,  such as whether the U.S. government will transport the items to their  final destination or to an intermediate destination. As seen in table 1,  since fiscal year 2007, DSCA changed the rates in fiscal years 2009  and 2018. Over the full period, the transportation fee has been as high  as 22.25 percent of purchase price, or as low as 2.75 percent,  depending on where purchasers want to take custody of their items.

Price per item. DOD may instead charge the FMS purchaser an  estimated transportation price per item for certain types of items, such  as those containing sensitive or hazardous materials.

Structure and Use of the FMS Transportation Accounts

Eight transportation accounts within the FMS trust fund are used to hold  transportation fees collected from FMS purchasers and to pay FMS  transportation bills. In aggregate, we refer to these as the combined FMS  transportation accounts:

Main account. One main account holds transportation funds for all  foreign partner purchasers and smaller BPC programs.

BPC accounts. Seven segregated accounts hold transportation funds  for certain larger BPC programs, such as the Afghan Security Forces  Fund and the Iraq Security Forces Fund. DSCA created the first four  BPC accounts in fiscal year 2012, one in fiscal year 2015, and two  more in fiscal year 2018.

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, DFAS moves the amount of  the related transportation fee from the country account or BPC program  account into the related transportation account and records the amount  as a collection. Once DFAS collects funds into a FMS transportation  account, funds are generally no longer segregated or tracked by their  originating country or BPC program account. DFAS receives monthly  bills from TRANSCOM that include the costs for FMS transportation,  which DFAS pays out of the main transportation account, recording the  amount paid as an expenditure. For FMS shipments associated with the  seven larger BPC programs, the main account is then reimbursed from  the appropriate BPC transportation account.

The FMS Transportation Account Balance Has Grown Substantially

Although aggregate FMS transportation fees are expected to approximate  costs over time, we found that the combined FMS transportation account  balance grew by over 1,300 percent from fiscal years 2007 to 2018. The  ending balance for fiscal year 2018 was $680 million. Collections and  expenditures for the account fluctuated from year to year, but collections  have outpaced expenditures since 2014, particularly for the main  transportation account, which has grown more quickly than the combined  seven BPC accounts.

The Combined FMS Transportation Account Balance Grew More Than 1,300 Percent from Fiscal Years 2007 to 2018

The combined balance of the eight FMS transportation accounts grew  substantially from the beginning of fiscal year 2007 through the end of  fiscal year 2018—from $46 million to $680 million, or by 1,378 percent.  As shown in figure 3, much of that growth occurred from the end of fiscal  year 2011 through fiscal year 2018, during which time the account grew  by approximately $630 million. This substantial recent balance growth  was in contrast to balance activity from fiscal years 2007 to 2011, when  the collections into the account more closely approximated the  expenditures from the account. In fact, the FMS transportation account  was at risk of insolvency starting in fiscal year 2009. In response, DSCA  redistributed $80 million in fiscal year 2009 and $50 million in fiscal year  2011 from the FMS administrative fee account to the main FMS  transportation account to ensure it contained sufficient funding to pay  transportation bills. If not for the redistributions between accounts, the  transportation account may have been unable to disburse payments from  the account, for at least some parts of fiscal years 2009, 2010, and 2011.

Collections and expenditures both fluctuated from year to year, as shown  in figure 4. Year-to-year changes in collections ranged from decreases of  54 percent to increases of 121 percent, while year-to-year changes in  expenditures ranged from decreases of 52 percent to increases of 133  percent. According to DSCA officials, demand for transportation of FMS  purchases through DTS is unpredictable, and the accounts’ balances may  experience volatile swings due to inconsistencies involved in billing the  accounts. For example, delays in billing or reporting a particular shipment  can result in DOD collecting the fee into the transportation accounts and  reimbursing the transportation cost from the accounts at different times.  Further, the fees collected and the costs expended for an individual  shipment may differ because DOD uses different factors to calculate the  transportation fee to charge the purchaser (e.g., the item’s value) than it  uses to calculate the cost to bill the FMS transportation accounts (e.g.,  the shipment’s origin, destination, and weight, among other factors).

Despite this volatility over time, from fiscal years 2014 to 2018, collections  consistently exceeded expenditures, which drove the substantial balance  growth. In figure 4, we show this relationship in a collections-to- expenditures ratio, for which a value of 1.0 would indicate collections  equaled expenditures for the fiscal year. A ratio greater than 1.0 indicates  an increasing account balance that fiscal year. The average collections- to-expenditures ratio for fiscal years 2007 to 2018 was 1.26; from fiscal  year 2014 to 2018, this ratio ranged from 1.46 to 4.97. At the end of each  fiscal year, any collections that exceed expenditures remain in the  account and are carried over to the next fiscal year’s beginning balance,  which contributes to balance growth from year to year.

The Main Account Balance Has Grown More Quickly than the Balances of the Combined BPC Accounts

Much of the recent combined balance growth has been driven by growth  in the main account’s balance, as shown in figure 5. The main account  grew more quickly than the combined balance of the BPC accounts from  fiscal year 2013–the first full year of operation for the BPC accounts–to  fiscal year 2018. The main account grew by 316 percent, from $140  million at the beginning of fiscal year 2013 to $582 million at the end of  fiscal year 2018, while the combined BPC accounts grew by 88 percent,  from $52 million to $98 million, during the same time period.

As seen in figure 6, our analysis shows that, for fiscal years 2013 to 2018,  collections exceeded expenditures more frequently and by a greater  extent in the main account than in the BPC accounts, which has driven  balance growth. On average during this period, collections exceeded  expenditures for the main account by $74 million per year, as compared  to $7 million per year for the BPC accounts.

DSCA officials speculated that BPC programs may use more air  transportation for shipments to areas without regular TRANSCOM  shipment routes, which may result in higher expenditures. DSCA officials  could not provide any further explanation for why the main account’s  balance has grown more quickly than the balances of the BPC accounts.

DSCA’s Limited Management Oversight Guidance Contributed to Substantial Growth in the FMS Transportation Account Balances

DSCA has limited management oversight guidance for the FMS  transportation accounts, which has contributed to their substantial  balance growth. DSCA has established internal guidance for its two main  management oversight processes to monitor for significant changes in the  FMS transportation account balance—a daily review and annual review— but this guidance is unclear and lacks key details. As a result, DSCA’s  implementation of these processes lacks rigor and DSCA’s reporting to its  management has not included complete information about the causes for  recent balance growth. In addition, DSCA has no internal guidance to  ensure that funds remaining in BPC-specific transportation accounts after  the related programs close are transferred to the miscellaneous receipts  of the Treasury, which risks these funds not being transferred as DOD  officials told us DOD intends to do.

DSCA Established Management Oversight Procedures

In fiscal year 2016, DSCA established a Managers’ Internal Control  Program (MICP) for overseeing the FMS transportation accounts,  according to DSCA officials. These procedures formalized two  management oversight processes for the FMS transportation accounts  that DSCA officials had performed previously: daily and annual reviews.  These reviews both serve the purpose of ensuring the accounts have  sufficient funds to pay expenses. MICP documentation to help guide  these processes includes  flow charts that explain certain steps that should be included in each  of these reviews, a risk assessment that explains how each of the MICP processes  mitigates risks for the FMS transportation accounts, and  test procedures that lay out expectations for how each MICP process  should be conducted so that DSCA can periodically test to ensure the  processes were carried out as intended.

Daily review. MICP procedures indicate that DSCA staff should review a  report from DFAS daily that includes the previous day’s balances for each  of the transportation accounts to ensure that the FMS transportation  accounts do not drop below a “healthy level.” If DSCA staff identify a large  decrease or “significant” level of change in the accounts, the procedures  direct them to ask DFAS to explain what caused the change and to take  corrective action, such as to ask for billing corrections, if necessary.  According to the MICP risk assessment, the FMS transportation accounts  experience volatile swings due to inconsistencies involved in billing the  account, and reviewing the account balances on a daily basis helps to  address this risk. The MICP procedures state that, if DSCA allows the  FMS transportation accounts to drop below this “healthy level,” the  accounts could become insolvent and be delinquent in disbursing  transportation expenses.

Annual review. MICP procedures indicate that DSCA should annually  assess the financial health of the transportation accounts, which DSCA  staff have stated they implement by preparing an annual report for DSCA  leadership. To test whether the annual review has occurred, certain  DSCA staff are to examine the annual report to confirm that DSCA  assessed the FMS transportation account with the purpose of ensuring  that the overall financial health of the accounts is strong and collections  are sufficient to pay expenditures.

DSCA Inconsistently Implemented Daily Reviews Due to Unclear Internal Guidance

DSCA has inconsistently implemented its daily reviews due to unclear  internal guidance on these reviews. Specifically, the guidance does not  specify the level of change that warrants further examination or what  DSCA staff should consider as a healthy level, or target range, for the  accounts.

DSCA’s Internal Guidance Does Not Define What Changes in Daily Transportation Account Balances Warrant Examination

DSCA’s daily review procedures are meant to monitor for significant  changes in the FMS transportation accounts so that such changes can be  further examined and, if needed, corrected; however, MICP internal  guidance does not establish criteria for determining what constitutes a  significant change in these accounts’ balances. According to federal  internal control standards, management should define the acceptable  level of variation in performance, or risk tolerance, in specific and  measurable terms. However, the MICP procedures use different and  undefined terms when referencing the types of balance changes DSCA  should look for in their daily review procedure. These terms include:  “change,” “significant change,” and “significant reduction.” Although some  of these terms could be interpreted as DSCA needing to monitor for any  significant changes—whether increases or decreases in the accounts— DSCA staff have chosen to focus these reviews on decreases.

As a result of DSCA’s unclear internal guidance, DSCA staff have  inconsistently determined which changes warrant examination and should  trigger them to contact DFAS to examine the reasons for the change. This  makes it less likely that DSCA will be alerted to and take corrective action  to address significant changes in the account balances. From fiscal year  2018, DFAS was able to provide one documented instance of DSCA staff  contacting DFAS as a result of the daily review. The contact was  regarding an 11 percent balance decrease of approximately $6 million in  the Afghan Security Forces Fund’s transportation account that occurred  on July 5, 2018. However, we identified a total of 30 instances of  balance changes greater than 11 percent (12 decreases and 18  increases) in fiscal year 2018 across the eight FMS transportation  accounts. For example, figure 7 shows the fiscal year 2018 daily balance  changes for the Afghan Security Forces Fund. This figure includes the  July 2018 balance decrease that resulted in DSCA contacting DFAS to  examine the change, as well as nine other instances of balance changes  greater than 11 percent that did not result in any documented contact  between DSCA and DFAS.

By inconsistently conducting daily reviews, DSCA weakens the  effectiveness of this oversight mechanism to identify potential errors,  which risks allowing either insufficient or excessive funds in the accounts.  In particular, in recent years, the lack of clarity on what these reviews  should monitor for has weakened DSCA’s oversight and contributed to  the substantial balance growth.

DSCA’s Internal Guidance Does Not Establish a Target Range for the Transportation Account Balances

DSCA has not defined what it considers an acceptable target range for  these accounts despite the unpredictability of transportation account  balances and the MICP daily review procedures requiring DSCA officials  to monitor account balances to ensure they remain at or above a “healthy  level.” According to DSCA officials, DSCA has not determined an  acceptable target range for the transportation accounts because future  collections and expenditures are difficult to predict, making it difficult to  know how much money DSCA needs in the accounts. However, this  unpredictability makes it all the more important for DSCA officials to  establish a target range for what is “healthy” account activity to enhance  their oversight of the accounts. As we previously reported, to ensure the  accountability of fee-funded programs and the ability to manage a  program with sufficient reserves, federal agencies are advised to use a  risk-based strategy to establish desired upper and lower bounds for  account balances.

DSCA has already established upper and lower bounds for two other  FMS overhead fee accounts, the FMS administrative fee and contract  administration services fee accounts. DSCA calculates these bounds  based on the amounts of planned expenses from the accounts, which  automatically adjusts the bounds over time to reflect the size and needs  of the FMS program. DSCA’s internal guidance states that setting upper  and lower bounds of acceptable levels provides the agency with a “control  box” to alert it to a dramatic change in the FMS operating environment  that may require an agency response such as a fee rate review.

Similarly, establishing a target range, with an upper and lower bound, for  the FMS transportation account balances could strengthen DSCA’s ability  to use its daily reviews to manage the accounts’ volatility by identifying  when the account balances are growing excessively high or falling  excessively low. Such an upper bound could better inform DSCA  leadership and help prevent excessive growth in the transportation  accounts while a lower bound could help to ensure that the accounts  have sufficient funds to pay for transportation bills.

DSCA Prepared Annual Reports Missing Key Details Due to Lack of Internal Guidance

DSCA has no internal guidance for its staff to follow when preparing  annual reports on the health of the FMS transportation accounts, which  has led the reports DSCA produced for fiscal years 2015 to 2018 to  contain incomplete information on the underlying causes for the trends in  the accounts and for the reports to lack key details about the source of  some of the funds in the main FMS transportation account.

Lack of Internal Guidance Regarding Annual Reports Has Contributed to Incomplete Reporting

For fiscal years 2015 to 2018, DSCA produced annual reports assessing  the financial health of FMS transportation accounts that contained  incomplete information because DSCA did not use rigorous methods to  determine the underlying causes for trends in the accounts. As a result,  DSCA had a limited ability to make informed decisions about the  accounts at a time when the balances were experiencing substantial  growth. According to the DSCA staff who produce the annual reports,  they distribute the reports within DSCA up to the agency’s Director to  provide information about the health of the FMS transportation accounts.

DSCA’s annual reports on the FMS transportation accounts for fiscal  years 2015 to 2018 followed a consistent format. These reports contained  information on the net change in balances for each of the transportation  accounts during the fiscal year. The reports also included a summary of  any major activity in each of the accounts. For example, the fiscal year  2018 assessment stated that the main FMS transportation account grew  by $77.8 million during that fiscal year due to several large collections  significantly greater than billings. All of the reports end with a conclusion  regarding the health of the accounts, which for fiscal years 2015 to 2018,  was that the accounts were healthy and should remain financially solvent.

All of these annual reports also include statements regarding the  underlying causes of account trends, which we found to be incomplete  and unsupported by rigorous data analysis. When discussing reasons for  year-to-year account balance increases, DSCA’s reports stated they were  mainly due to a decline in oil prices and a legal change that DOD  implemented in July 2014 that allowed TRANSCOM to charge lower DOD  rates for FMS air shipments, both of which could likely affect expenditures  from the account. However, DSCA officials said that they conducted no  specific analysis to support the extent to which these two factors affected  the account balance increases. As seen in figure 8, our analysis shows  that these reasons could not fully explain the account balance increases  in each of the annual reports from fiscal year 2015 to 2018. In particular,  while FMS transportation expenditures began to decrease in fiscal year  2012, the price of oil did not begin to significantly decline and the legal  change did not come into effect until 2014. Further, the annual reports did  not discuss underlying reasons for trends in collection activity, which also  affect the account balance.

DSCA’s analysis for its annual reports is limited by the lack of internal  guidance for completing these reports. Specifically, the MICP guidance  for the annual review process does not specify how to prepare the annual  report. Without such guidance, according to DSCA officials, DSCA’s  analysis for the annual reports has involved re-reviewing the  documentation related to the daily reviews as well as monthly reviews  that DSCA performs for financial oversight purposes. DSCA officials  completed no additional analysis to inform the annual reports, such as  any quantitative analysis to understand annual changes or trends over  time. Federal internal control standards state that effective internal  guidance communicates the who, what, when, where, and why of what  needs to be accomplished, and that management should obtain relevant  data from reliable sources and process that data into quality information  to aid decision making. Without clear internal guidance, the annual  account reviews lack the rigor necessary to ensure DSCA management is  provided reliable information for decision making.

DSCA Has Not Reported Redistributions between Accounts or Assessed Whether to Return Funds Due to Lack of Internal Guidance

According to DSCA officials, DSCA’s annual review process should also  involve an assessment of whether funds should be redistributed between  the FMS overhead fee accounts; however, DSCA does not have specific  internal guidance on when and how to perform such assessments or on  what to include about this portion of the annual review in its resulting  annual reports. This lack of guidance has led DSCA to produce annual  reports without information related to redistributed funds and to not  conduct assessments related to redistributed funds. According to DOD’s  financial management regulations, DSCA and DFAS should periodically  review activity in the FMS overhead fee accounts to serve as a basis for  decisions by DSCA management to, among other purposes, redistribute  account balances between these accounts. According to DSCA officials,  if they were to perform these periodic assessments, they would perform  them as part of their annual account reviews. However, the MICP  guidance for the annual reviews does not describe how to assess  whether or how much to redistribute funds between the fee accounts, or  how or when to assess returning previously redistributed funds.

The annual FMS transportation account and administrative account  assessments for fiscal years 2015 to 2018 do not report that $130 million  in the main FMS transportation account came from funds redistributed  from the FMS administrative account between fiscal years 2009 and 2011  that have not been returned. According to DSCA officials, they only  report redistributions in the year that they occur.

In addition to not including this information in its annual reports, DSCA  has not assessed the need for other redistributions of funds between the  FMS fee accounts since it last redistributed funds from the FMS  administrative account to the main FMS transportation account in fiscal  year 2011. DSCA officials indicated they intend to return the funds to the  administrative account but have not done so because they have no  urgency, given that the FMS administrative account balance has been  consistently above its lower bound in recent years. As of the end of fiscal  year 2018, the FMS administrative account balance was approximately  $4.7 billion, which was approximately $3.1 billion more than the account’s  lower bound that DSCA determined was necessary to support FMS  operations.

The lack of specific internal guidance on how to assess and report  redistributions has resulted in incomplete reports to DSCA management,  which inhibits DSCA management’s ability to make informed decisions in  overseeing the FMS fees. In particular, without reports that clearly state  the amount of redistributed funds and their source(s), and assess their  continued need, DSCA management is less informed when determining  whether and when to redistribute funds, including whether to return  previously redistributed funds.

According to our User Fee Design Guide, assigning costs to identifiable  users can promote equity and more informed rate-setting; however,  redistributing fees from the FMS administrative account to the main FMS  transportation account has intermingled funds that have different  sources. DOD charges the FMS administrative fee to all FMS  purchasers while DOD charges the FMS transportation fee to only certain  purchasers for the portion of the transportation of their FMS items that uses DTS. Distributing funds from the FMS administrative account to the  main FMS transportation account intermingled these fees, which has two  main effects. First, not returning redistributed funds if the transportation  account no longer needs them raises concerns regarding the fees’ equity  in ensuring only the beneficiaries of a service pay for the cost of providing  it. Second, the appropriateness of DSCA management’s rate-setting  decisions for both fees is limited by incomplete information about the full  expected balance of the fee accounts from which future expenditures  could be paid.

DSCA Has No Internal Guidance to Ensure Proper Disposition of Unused Funds in BPC Transportation Accounts

DSCA has no internal guidance to ensure proper disposition of any funds  remaining in the BPC-specific transportation accounts after the related  programs close and those remaining funds are no longer needed. In fiscal  year 2020, DSCA expects the first BPC-specific transportation account to  close, which had a balance of approximately $42 million at the end of  fiscal year 2018. DSCA officials have said that funds remaining in the  BPC-specific transportation accounts after the related programs close  should be transferred to the miscellaneous receipts of the U.S. Treasury.  According to DSCA officials, this process was agreed to with DOD’s  Office of the Under Secretary of Defense (Comptroller) in November 2011  when DSCA met with that office to discuss how DSCA would handle  creating the BPC-specific transportation accounts. DSCA officials also  said that following this process would be in line with a requirement in  DOD’s financial management regulations for any collections that are  authorized or required to be credited to an account after that account’s  closure to be deposited in the Treasury as miscellaneous receipts.

However, DOD officials could not provide a documented agreement from  the November 2011 meeting, and we do not consider the referenced  regulation specific enough to this circumstance to alone serve as internal  guidance that would ensure the funds are transferred. In particular, this  regulation applies broadly to DOD collections received after an account’s  closure, and does not specifically address the disposition of funds that  had already been collected into an account upon the closure of that  account .

Officials from relevant DOD components have different understandings of  how this process should occur, which could risk the process not being  completed as intended without related specific internal guidance.  According to DSCA officials, DFAS will be responsible for moving any  remaining funds in these transportation accounts to the miscellaneous  receipts of the Treasury, but the pertinent DFAS officials have stated they  are unaware of what should be done in such circumstances. According to  DSCA officials, they intend to write a memo to DFAS related to each  instance of a BPC-specific transportation account closure instead of  providing DFAS written guidance to follow in any such instance because  DSCA officials prefer providing specific directions to DFAS regarding  moving such funds. DSCA officials said they do not need specific internal  guidance to ensure they direct DFAS to complete such fund transfers  because DOD’s Office of the Under Secretary of Defense (Comptroller)  would ensure that DSCA does so when that office reviews all DOD  accounts. However, Comptroller’s Office officials stated that, as part of  DSCA’s program oversight responsibilities for FMS, DSCA is responsible  for ensuring any funds are identified and transferred to the miscellaneous  receipts of the Treasury.

Without clear internal guidance, DOD may not have accurate information  on or sufficient oversight of its budgetary resources and account  balances, and funds that could be put to other uses may remain in the  BPC transportation accounts. Federal internal control standards state that  effective internal guidance communicates the who, what, when, where,  and why of what needs to be accomplished, thereby providing a means to  retain organizational knowledge and mitigate the risk of having that  knowledge limited to a few personnel. According to DSCA officials, the  first BPC-specific transportation account likely to close is dedicated to the  Iraq Security Forces Fund, which had a balance of approximately $42  million at the end of fiscal year 2018. According to DSCA records, this  program’s appropriations were canceled at the end of fiscal year 2017  and, according to DSCA officials, by sometime in fiscal year 2020, the  program’s FMS cases should go through their final reconciliation process.  Through this process, DOD may pay outstanding bills or correct  accounting errors and the related cases will close. According to DSCA  officials, the BPC-specific transportation account would then be ready for  closure.

DSCA’s Processes for Setting Transportation Fees Have Not Ensured Fees Approximate Costs over Time and Contributed to Account Balance Growth

DSCA’s processes for setting the FMS transportation fee do not ensure  that aggregate fees DOD collects approximate aggregate transportation  costs over time, thus contributing to recent growth in the FMS  transportation account balances. DSCA’s ability to set appropriate  transportation fee rates is undermined by DSCA’s unclear guidance to the  military departments on what data they should provide DSCA to analyze  in its transportation fee rate reviews, leading DSCA to review data that is  not timely or systematically sampled. Further, the lack of clarity in its  internal guidance for these reviews has led DSCA to complete these  reviews infrequently, perform limited analysis, and burden the military  departments with compiling data DSCA did not use. In addition, our  analysis raises concerns about negative effects of the current  transportation fee rate structure, including that the structure makes it  more difficult for DSCA to determine appropriate transportation fee rates.  Finally, DSCA’s internal guidance to the military departments for  estimating transportation prices, instead of rates, for certain items lacks  key specific details. As a result, the military departments follow varying  procedures for estimating these prices, and are unsure of the prices’  accuracy.

DSCA’s Transportation Fee Rate Reviews Used Unsuitable Data, Were Completed Infrequently, and Involved Limited Analysis

DSCA’s ability to set appropriate transportation fee rates is undermined  by unclear guidance for its reviews of these rates. The lack of clear  guidance has led the military departments to provide DSCA data that is  not suitable for rate-setting decisions because, while the individual data  points DSCA analyzed were accurate, they may not accurately predict  future rates because they were not timely or systematically sampled.  Unclear guidance also led DSCA to perform infrequent and limited  analysis of these data.

DSCA’s Rate Reviews Do Not Use Timely and Systematically Sampled Data

DSCA’s ability to determine the appropriate FMS transportation fee rates  is limited by the data analyzed in its rate reviews that are not timely or  systematically sampled. According to its MICP documentation, DSCA is  to review its FMS transportation fee rates to ensure the resulting  transportation fees collected from FMS purchasers in aggregate cover the  amount needed to pay for transportation expenses. DSCA requests the  military departments provide historical data on transportation fees  charged and transportation costs paid so that DSCA can analyze these  data to determine appropriate fee rates. However, DSCA’s data requests  to the military departments are unclear in multiple key respects, which  leads the military departments to provide data to DSCA that—though it  contains accurate cost and fee data—are unsuitable to use for DSCA’s  resulting rate-setting decisions because it is not timely or systematically  sampled. The combined effects of these deficiencies could skew DSCA’s  rate review process.

When DSCA requests data from the military departments for the rate  reviews, DSCA does not specify key elements about which data to  provide or which information sources to use to obtain each data element.  As a result, the departments have followed different processes and  provided data that was not timely. As shown in table 2, the data submitted  by the military departments varied significantly.

Because DSCA’s data requests did not specify where the data should be  sourced, the military departments have had difficulty responding to these  requests and the amount of data they have produced has been limited.  Military department officials explained difficulties finding the necessary  data in other DOD agencies’ systems, understanding those data’s  reliability, and accurately matching the data across multiple systems. In  particular, transportation cost data is stored in multiple TRANSCOM  billing systems, which military department officials responsible for  responding to DSCA’s data requests said they do not regularly access.  In addition, DFAS has copies of transportation cost data in the monthly  bills that it pays from the FMS transportation accounts. The bills include  the individual costs of each shipment made during that month, but are  stored in individual documents and are not accessible to the military  departments. Transportation fee data is available in a DFAS system used  to process the FMS transportation fee, but, according to DFAS  documents and officials, this system is not built to easily extract such data  and therefore neither DFAS nor the military departments can reliably pull  fee data from this system specific to particular shipments or cases.

According to DSCA officials, ultimately DSCA only used Army data for  setting rates in 2018 because Navy and Air Force provided relatively  small samples.

Navy. Navy officials reported having particular difficulty finding data  on transportation costs for the most recent rate review. After  unsuccessfully requesting more specific guidance or assistance from  DSCA and DFAS, according to Navy officials, Navy found a  spreadsheet DSCA had provided Navy for an unrelated purpose that  contained the costs for Navy FMS shipments moved by  TRANSCOM’s Air Mobility Command. According to Navy officials,  because researching the individual transportation fees for each FMS  shipment was time-consuming and they lacked clear guidance about  how much data DSCA needed for its rate review, they decided to  provide related fee data on 103, or 3 percent, of the 3,536 air  shipments for which Navy had cost data.

Air Force. The U.S. Air Force Security Assistance and Cooperation  Directorate has developed a detailed process, described in a 280- page internal guidance document, to respond to DSCA’s requests, but  following this process does not yield much data. For the most recent  review, Air Force provided DSCA with data for 639, or 2 percent, of  28,886 shipment orders for which they reviewed data because of the  difficulty of finding relevant matching cost and fee data across the  different systems used, as shown in table 3.

Not only were the data DSCA reviewed not indicative of all FMS  shipments since they included no Navy or Air Force data, the data were  also not indicative of Army’s shipments and included older data because  the DSCA data requests were unclear. In particular, DSCA’s data  requests stated that each military department should provide at least 20  cost and fee comparisons for each fee rate for each of the FMS  transportation accounts, and requested that these data include as many  different foreign partners or FMS cases as possible. As a result,  according to Army officials, the data Army provided to DSCA included a  mix of different partners and cases of different dollar values; however, no  systematic sampling methods were used that would have ensured that the resulting data were indicative of overall Army shipments during the  time period covered. Also, DSCA’s request did not specify a time period  the data should cover. Army provided data for cases that likely were at  least 5 to 7 years old. According to DSCA officials, if the rate review is to  analyze case-level data, such as Army provided, it is necessary to  analyze data on cases for which the FMS agreements were signed  multiple years prior, because shipments may not take place until multiple  years into cases. However, the Army officials we spoke to about the data  Army provided were unaware how long ago the shipments occurred for  the related cases, and stated that some may have occurred years before.  TRANSCOM pricing changes annually, so cost information that is multiple  years old and not adjusted to reflect such changes would be unlikely to  predict future costs. As a result, DSCA set rates to cover future costs  based on a sample of cases that was not systematically sampled and  may have included shipments over the past 5 or more years.

DSCA officials stated that their data requests are not more specific  because they thought the military departments had direct access to these  data and that more specificity would hinder the military departments’  ability to respond to the requests. However, related data are available in  TRANSCOM and DFAS, instead of military departments’, systems.  Further, the current processes produce data that are not timely or  systematically sampled, making it unsuitable to use to determine future  costs and rates. In setting user fees, agencies should analyze timely and  reliable data, consistent with applicable accounting standards, to avoid  the risk of making skewed fee-setting decisions. DSCA’s use of data  that are not timely or systematically sampled for its rate reviews could  skew its rate-setting decisions, ultimately affecting transportation account  balances.

DSCA’s Unclear Internal Guidance Has Contributed to Rate Reviews Completed Infrequently and with Limited Analysis

DSCA’s internal guidance for its rate reviews is unclear regarding the  timing of the reviews and lacks key details, which has limited DSCA’s  ability to use the rate review to set appropriate rates.

Timing. DSCA’s internal guidance for overseeing the FMS  transportation accounts is unclear. In one part the guidance indicates  that DSCA should conduct a rate review every 5 years, which is in line  with the expectations explained by DSCA officials who oversee these  accounts. However, other parts of DSCA’s internal guidance indicate  that DSCA should conduct such a review annually.

How reviews should be conducted. DSCA’s internal guidance  states that the rate reviews should allow DSCA to determine whether  current transportation fee rates are sufficient, based on predetermined  criteria, to cover the related costs. However, this internal guidance  does not specify how these criteria should be determined or contain  any procedures regarding how DSCA should analyze the data  collected for its rate review.

DSCA has not completed its transportation fee rate reviews in a timely  manner, which allowed the FMS transportation account balances to grow  over recent years as collections consistently exceeded expenditures but  fee rates remained constant. Since fiscal year 2007, DSCA has  completed two reviews more than 9 years apart: in March 2009 and May  2018.

For these reviews, DSCA officials did not predetermine criteria for the  level of alignment between cost and fee that each review should achieve  and DSCA’s analysis considered few factors and involved a limited  analysis of only Army data, which hindered DSCA’s ability to set  appropriate fee rates. In particular:

Fiscal year 2009: For this review, DSCA compared the transportation  cost to the transportation fee charged across seven transportation fee  rates for 144 of the thousands of Army’s FMS cases. In this sample,  the transportation costs exceeded the fees paid by 19 percent overall.  When briefing DSCA management on the review, DSCA officials  reported a concentration of undercharges in two of the rates. As a  result, DSCA decided to increase these two rates such that, if the new  rates had applied to the full sample DSCA analyzed, fees on the  cases in the full sample would have exceeded costs by 14 percent.  Our analysis of the sample showed that while these two rates had the  largest difference in value between the costs and fees, other rates  also had large differences within this sample. Specifically, one other  rate had a larger percentage of undercharges and three of the other  rates had percentages of overcharges exceeding 1,000 percent.  However, DSCA made no changes to these other rates.

Fiscal year 2018: For this review, DSCA compared the transportation  cost to the transportation fee charged across the seven transportation  fee rates for a sample that contained data on 993 Army cases. For  this sample, on average transportation fees charged to purchasers  exceeded transportation costs by 158 percent, with all rates except  one overcharging on average. However, when briefing DSCA  management on the review, DSCA officials reported incorrect data to  serve as the basis for decision making. In particular, according to the  DSCA official responsible for the analysis, likely due to an oversight,  DSCA included data on only 878 of these cases in the briefing to  DSCA management. Total fees for this portion of the sample were 90  percent higher than the related total costs. Based on this limited data,  DSCA decided to decrease all of its transportation fee rates such that,  if the new rates had applied to the full sample DSCA analyzed, fees  would still have exceeded costs by 77 percent, with five of the seven  fee rates still exceeding the cost by more than 100 percent for that  sample. DSCA officials stated that their intent in this rate review was  to lower the rates modestly to see their effect on the account  balances; however, their ability to accurately meet this goal is reduced  by its lack of specificity and the limited analysis DSCA performed.

Given that the data DSCA analyzed for both these reviews was not  generalizable to all shipments, the above percentages do not indicate that  the rates overall would have affected fees in these exact ways. Instead,  DSCA’s decision making may have been further skewed by its method of  analysis.

In addition to completing these two reviews, DSCA also initiated rate  reviews by sending requests to the military departments three additional times for data DSCA did not use, thereby placing an unnecessary burden  on the military departments. Specifically, DSCA requested data from the  military departments in November 2011, September 2013, and November  2014. After obtaining the data from the military departments, DSCA  officials said that management decided DSCA would not analyze the data  due to competing priorities, and DSCA did not use these data for any  other purpose. Air Force officials said that the months of work put into  responding to each of DSCA’s rate review requests seemed like a waste  of resources because their data has consistently shown that the  transportation fees collected were drastically higher than the related costs  and yet the fee remained unchanged for years. To respond to DSCA’s  request for data for the fiscal year 2018 rate review, each military  department spent between 2 to 4 months of staff time to collect and  prepare the data, according to military department officials. Asking for and  then not using such data put an unnecessary burden on the military  departments and wasted DOD staff resources.

Without clearer internal guidance for its rate reviews regarding their timing  and the analysis needed, it will be difficult for DSCA management to  make appropriate fee-setting decisions based on future rate reviews.  Federal internal control standards state that effective internal guidance  communicates the who, what, when, where, and why of what needs to be  accomplished. According to DSCA officials, DSCA is considering  conducting its next transportation fee rate review in fiscal year 2020, with  a goal of lowering the FMS transportation account balances. DSCA  officials’ ability to meet this goal could be hindered without more clarity  about the timing of the reviews and more rigorous analysis that involves  explicit goals, such as for the level of alignment between cost and fee or  of the account balances.

DSCA’s Rate Structure Hinders Its Ability to Set Appropriate Transportation Fee Rates

The structure of the FMS transportation fee rate further hinders DSCA’s  ability to set appropriate rates. According to DSCA officials, the current  rate structure was developed to use data that are easily available, which  limits DOD’s administrative burden in calculating the fee. However, our  analysis raises concerns about the extent to which the current rate  structure may have negative implications for the transportation fee’s  equity, efficiency, and revenue adequacy. We have previously reported  that fee design should balance ways to encourage greater efficiency,  equity, and revenue adequacy while reducing administrative burden on  the agency and payers of the fees, as shown in Table 4. These factors  interact and often conflict with each other so that tradeoffs among these  factors should be considered when designing a fee’s structure.

The current transportation fee rate structure limits DSCA’s administrative  burden because it relies on only a few factors, which involve easily  accessible data, but these factors vary considerably from those  TRANSCOM uses to price its transportation. The FMS transportation fee  amount charged to purchasers is generally based on three factors, which  should be identified in FMS agreements: (1) the price of the item; (2) the  foreign destination rate area; and (3) the extent of U.S. government  responsibility for transporting the item (e.g., to an inland destination in the  continental United States or to a foreign inland or port destination). At  the time of the FMS agreement, DSCA and the military departments lack  information about other factors that would make it easier for DOD to set  fee rates such that fees would approximate the actual cost of the  transportation. For example:

Mode. DOD may not know how it will move the items at the time of  the FMS agreement, and costs vary depending on the mode of  transportation, such as by air or a surface vessel.

Route. Although DOD should be aware of the final destination for  items, DOD may be unaware of where the shipment will originate or  the specific route the items will take, and transportation costs can vary  depending on the specific route. For example, to transport goods in a  20-foot container on a surface vessel door-to-door from a location on  the East Coast of the United States to Afghanistan in fiscal year 2018,  TRANSCOM rates ranged from $548.85 to $1,077.03 per  measurement ton shipped, depending on the specific route, whereas  DSCA’s fee rates would be constant and applied to the price of the  items.

Also, even if DOD knew the exact mode and route, approximating the  exact cost for each shipment would be difficult because TRANSCOM  updates its rates annually, and shipments often occur years after signing  the FMS agreement.

The distinct factors used to determine the fee and cost for FMS  transportation make it difficult for the cost and fee to align, which has  potential implications for the fee’s equity. Although the data DSCA  obtained from the military departments for its fiscal year 2018 rate review  was unsuitable for that purpose because it was not timely or statistically  sampled, we performed extensive data reliability procedures to determine  that the individual cost and fee data points are reliable and as a result  analyzed these data to obtain insights into the extent to which the cost  and fee were aligned within that sample. As shown in figure 9, we found  extreme differences between the transportation cost billed to the FMS  transportation accounts and the fee the purchaser paid. Within this  nongeneralizable sample, costs and fees were within 10 percent of each  other for only 30 of the 1,152 cases or shipments (3 percent), whereas  the difference was more than 1,000 percent higher or lower for 492 of the  cases or shipments (43 percent). In addition, we identified five instances  of the difference between the cost and the fee exceeding 1,000,000  percent. Although these data were not systematically sampled to ensure  they would be indicative of the full population of shipments, the high  incidence of such large differences is concerning. Within this sample, we  also found that certain countries were either always over-charged or  always under-charged. Since the rate review data are not generalizable,  this pattern may or may not be consistent across FMS shipments.  However, such a pattern could plausibly occur due to the differences  between TRANSCOM’s and DSCA’s rate areas.

Potential concerns about the fee structure’s efficiency and revenue  adequacy also stem from the difficulty in aligning the current fee structure  with related costs.

Efficiency. The large disparities between cost and fee in the current FMS  transportation fee rate structure may be leading some FMS purchasers to  choose not to use DTS. According to Army officials, some FMS  purchasers choose to use their own freight forwarders instead of DTS  because of a perception that the FMS transportation fee is too high.  These decisions could have broader effects on DTS. According to  TRANSCOM, the additional demand from FMS purchasers allows  TRANSCOM to better leverage DTS, such as by filling excess capacity  with paying cargo and supporting training needs to maintain combat  readiness.

Revenue adequacy and stability. The potentially large differences  between the transportation cost and fee resulting from the current FMS  transportation fee rate structure has led to large fluctuations in collections  and expenditures over time. For example, in fiscal years 2009 and 2011,  DSCA had to redistribute a combined $130 million into the main FMS  transportation account from the FMS administrative fee account to cover  costs and avoid insolvency.

Around the time of the fiscal year 2009 rate review, DSCA began  reviewing the fee rate’s structure as part of an overall attempt to address  issues related to the transportation account nearing insolvency. As part of  that review, DSCA worked with the military departments and TRANSCOM  to assess factors such as administrative burden, data availability, and  ability to more accurately charge transportation costs to FMS purchasers,  which would have enhanced the fee’s equity and efficiency. Specifically,  they considered the benefits and costs of six alternative rate structures:

Three of the six options would have involved replacing the rate-based  fee for some or all shipments, by charging actual transportation costs  or estimating likely actual costs per type of item. According to  documentation from this review, the DOD agencies said these three  options would have placed high administrative burdens on the military  departments and required changes to military department or  TRANSCOM information systems.

The other three options the DOD agencies considered would have  modified the structure of the current rate-based fee to take into  account additional factors, such as transportation method (e.g., air)  and item weight, or creating additional rate areas to target specific  locations where costs of transportation were higher. The agencies  determined that some of these options would have a lower  administrative burden than the first three options.

However, DSCA decided to maintain its current fee rate structure and  address the potential insolvency through other approaches such as by  redistributing funds from the FMS administrative fee account to the  transportation account. According to DSCA officials, DSCA made this  decision because it could not obtain agreement with the military  departments and TRANSCOM on any of the other options. DSCA has not  since reviewed the rate structure.

DSCA Internal Guidance to the Military Departments Does Not Specify Key Details on How to Estimate Transportation Prices for Certain Items

DSCA provides internal guidance to the military departments on how to  estimate the transportation prices to be charged for certain items, but the  internal guidance does not specify key details about how to calculate the  estimates. As a result, the military departments follow different  procedures for estimating these prices, and individual military department  procedures may differ over time depending on staff turnover. Federal  internal control standards state that management should use quality  financial information that is complete and reasonably free from error, and  that effective internal guidance informs users of the who, what, when,  where, and why of what needs to be accomplished, thereby helping to  retain organizational knowledge.

Estimated Transportation Prices for  Certain Items   For certain items that need to be shipped via  the Defense Transportation System, such as  goods with sensitive or hazardous materials,  and for which charging the transportation fee  rate would significantly differ from  transportation costs, DOD may instead charge  a set transportation price per item. The fees  collected from these estimated prices and the  costs to transport these items are paid in and  out of the FMS transportation accounts.  These prices are not location-specific  because DOD charges each purchaser of this  item the same estimated price. According to  DOD officials, such items are often low- weight, high-cost items, such as missiles, for  which the usual transportation fee rate could  greatly overcharge the FMS purchaser.

DSCA’s internal guidance for how to estimate these transportation prices  includes limited information and does not take into account key  information for accurately estimating transportation costs. Specifically, the  guidance lists certain types of transportation cost elements to include and  not to include in these price estimates. For example, estimated port  handling costs should be included while security costs should be charged  to the FMS purchaser separately. The guidance also indicates the  estimates should be on a per-item basis with two potential prices to  transport each item, one for any transportation within the United States  and one for transportation to any foreign destination. Other key factors in  transportation costs, such as the transportation mode or specific origin or  destination, are not considered. Also, DOD charges these prices per item,  although economies of scale can be gained by transporting batches of the  same item together.

The lack of specificity in DSCA’s internal guidance has led the military  departments to adopt inconsistent estimation processes that may not lead  prices to approximate actual costs. These inconsistent processes could  lead DOD to charge FMS purchasers more or less than DSCA intends  and ultimately affect account balances. For example:  Origin and destination. The three military departments take different  approaches to compensate for having to estimate the cost of transporting  an item without knowing its specific origin and destination. Although all  military departments follow the same general process of estimating  potential transportation costs for commonly used origin and destination  ports and averaging these to attempt to estimate these prices, they all  use different locations to create their estimates, which leads to different  pricing. For example, one command within Army uses a central location  within the United States as the origin for its estimates to simulate an  average of potential costs for transportation from any continental United  States location. However, according to Army officials, another command  within Army attempts to ensure that the transportation price estimated will  cover costs by simulating a “worst case scenario” by basing its estimates  on locations distant from each other.

Batch shipments. The military departments also vary in terms of how  they estimate per item costs for items that could often be transported in  batches. Air Force and Navy calculate how many of an item can fit in a  container, and then divide the average price estimated to transport such a  container by this batch size to determine final pricing, but Army does  not. When Air Force and Navy estimate prices this way, they do not  require shipments to be transported in a container of this size or for  purchasers to buy or receive these items only in batches of this size,  which could lead the price charged to vary greatly from the actual costs.  For example, for one type of missile, Air Force determined that 20 of them  could fit in a container and therefore divided the average price it had  estimated to transport a container by 20 before submitting the price to  DSCA. Therefore, if only one of the item were purchased, instead of the  20 built into the estimate, the transportation cost could be about 20 times  the fee.

The lack of specificity of DSCA’s guidance has also led to large changes  in one of the military departments’ estimated prices after staff turnover.  According to the Air Force official who prepared Air Force’s 2018 updates  to these prices, that was the first year that official estimated these prices  after another Air Force official had done so through 2015. The new Air  Force official said that Air Force had not updated its prices during the  previous 3 years because it lacked rates to estimate the costs of  transporting explosive materials by ocean vessel. After receiving  guidance from DSCA to exclude these rates from their estimates, the new  Air Force official updated the prices for 2018. When doing so, this Air  Force official found that some of the updated price estimates were much  higher than the prior prices due to increased port handling rates, whereas  the prices to transport items to foreign destinations were at times lower  due to lower air rates used in the estimates. For example, the price to  transport a certain item within the continental U.S. had been set at  $278.00 per item for 2015 through 2017, and the 2018 price estimate was  $8,447.00. DSCA initially accepted the updated prices, but Air Force later  rescinded them after foreign partner countries voiced concerns about the  increased prices affecting existing contracts and Air Force was unable to  prove that the new estimates better approximated actual costs without the  ability to compare actual bills with the price estimates. According to the  responsible Air Force official, the calculation process from 2015 was used  to recalculate the 2018 prices and was again used for 2019, albeit with  current fiscal year rate information, due to continued uncertainty  regarding this process.

Since late 2016, the military departments have voiced concerns to DSCA  regarding the difficulty of following DSCA’s internal guidance to estimate  these transportation prices. In particular, in late 2016, Army officials  developed a white paper for DSCA that described challenges developing  these estimated prices posed by updates to how TRANSCOM calculates  its transportation pricing. In September 2018, Air Force officials also  raised various concerns regarding the accuracy of the prices, such as  concerns about how the batch size of a shipment affects per item costs  and the lack of key details affecting transportation costs. Military  department officials said they would prefer more specific guidance from  DSCA that could help them to more uniformly calculate these prices. In  January 2019, DSCA officials stated they were at an early stage of  exploring possible changes to the information required to calculate these  types of transportation prices. In May 2019, DSCA officials stated that  they were still working to define the problem and how it could be  addressed. Further research into the military departments’ difficulties in  establishing these price estimates and the costs and benefits of the  methodologies they use would better inform DSCA on what pricing  process could most accurately reflect costs moving forward.

FMS is one of the primary ways the U.S. government engages in security  cooperation with its foreign partners, by annually selling them billions of  dollars in defense items and services. When transporting FMS items on  their behalf, DOD charges purchasers a transportation fee such that,  according to DOD, it should involve “no profit, no loss”–foreign partners  should not be charged excessive fees and fee revenue should cover the  program’s operating costs. However, from fiscal year 2007 to 2018, the  FMS transportation accounts experienced substantial balance growth of  over 1300 percent. To address risks such as the historical unpredictability  of collections and expenditures prior to recent dramatic account growth,  DSCA implemented processes to conduct daily and annual management  oversight of the accounts. However, the effectiveness of these processes  is limited by a lack of specific internal guidance. In particular, although the  daily reviews are meant to keep DSCA aware of significant changes in  the accounts and ensure that they maintain healthy balances, DSCA has  not specified what should be considered as significant changes or how to  calculate healthy target levels for the accounts. Lack of rigorous annual  review processes has also led the annual reports provided to DSCA  management to be missing key details. In particular, they have contained  incomplete information on the causes for account trends and have  omitted information on the source of $130 million that had been  redistributed into this fee account from the FMS administrative fee  account in fiscal years 2009 to 2011 to address a danger of insolvency  that the FMS transportation accounts no longer face. The resulting  reports inhibit DSCA management’s ability to oversee the accounts at a  time when they have grown so quickly. In addition, a lack of clear internal  guidance explaining how to assess when redistributions are needed and  when to return unused BPC-specific transportation funds may lead to a  surplus of funds in the FMS transportation accounts that could be used  for other purposes.

Similarly, DSCA has established a process to review FMS transportation  fee rates but this process has several weaknesses that may skew  DSCA’s rate setting decisions. DSCA’s rate review process involves  analysis of historical cost and fee data provided by the military  departments, but due to unclear requests to the military departments, the  process is burdensome and leads to data that are untimely and  unsystematically sampled. Although DSCA requested such data from the  military departments five times between fiscal years 2007 to 2018, DSCA  only conducted rate reviews using these data twice because DSCA did  not prioritize use of its resources for the other reviews. In addition, for the  two reviews it did conduct, DSCA never used Air Force or Navy data  because unclear guidance from DSCA and difficulties finding sufficient  data across disparate DOD information systems limited the data Air Force  and Navy could provide. Further, DSCA based their reviews on minimal  internal guidance and used limited analysis and unclear criteria upon  which to set new rates.

The current rate review process and the overall fee rate structure reduce  DSCA’s administrative burden, but raise various concerns regarding the  fee’s equity, efficiency, and revenue stability. DSCA also has similarly  unclear internal guidance for the military departments for situations when  the FMS purchaser is charged a set transportation price per item instead  of a transportation fee rate. By strengthening these rate setting  processes, DSCA would enhance its ability to manage account balances  and to make timely decisions to ensure the FMS transportation fee rate is  set to cover related transportation costs but not overcharge FMS  purchasers.

We are making the following 10 recommendations to DOD:  The Secretary of Defense should ensure that the Director of DSCA clarify  internal guidance for daily account reviews by specifying criteria for the  level (such as percentage or dollar amount) of change in transportation  account balances that would require DSCA to contact DFAS for further  examination. (Recommendation 1)

The Secretary of Defense should ensure that the Director of DSCA  establish a methodology to calculate a target range, with desired upper  and lower bounds, for FMS transportation account balances that could be  used to better inform DSCA’s account reviews. (Recommendation 2)

The Secretary of Defense should ensure that the Director of DSCA  modify the internal guidance for the annual review process to include the  specific steps DSCA officials should take in preparing the annual report,  including ensuring that they incorporate rigorous analysis into the annual  reports. (Recommendation 3)

The Secretary of Defense should ensure that the Director of DSCA  develop internal guidance related to the redistribution of funds between  the FMS trust fund fee accounts. Such internal guidance could include  criteria for when to consider redistributing funds between accounts and  for when to return those funds, how to analyze the amount of any  redistributions needed, and how to clearly report any redistributions to  DSCA management. (Recommendation 4)

The Secretary of Defense should ensure that the Director of DSCA  assess whether funds redistributed from the administrative account to the  transportation account should be moved back to the FMS administrative  account and document this decision. If the Director of DSCA determines  that the funds should be moved back to the FMS administrative account,  the Director should ensure the movement of funds in accordance with this  decision. (Recommendation 5)

The Secretary of Defense should ensure that the Director of DSCA  develop internal guidance for the steps that DSCA, in combination with  DFAS, should undertake when a BPC-specific transportation account  closes to help ensure that any remaining unused funds are transferred to  the miscellaneous receipts of the U.S. Treasury in accordance with DOD  officials’ stated intention to do so. (Recommendation 6)

The Secretary of Defense should ensure that the Director of DSCA create  specific internal guidance for how and from where data should be  obtained to be used for its transportation fee rate reviews and the  timeframes the data should cover to ensure DSCA has a systematic  sample upon which to base its rate setting decisions. This updated  internal guidance should be based on consultations with the military  departments, DFAS, and TRANSCOM on which sources of transportation  cost and fee data are the most reliable and comparable for use in its FMS  transportation fee rate reviews. (Recommendation 7)

The Secretary of Defense should ensure that the Director of DSCA  develop specific internal guidance to follow when performing  transportation fee rate reviews. Such internal guidance could specify  when these reviews should occur; a process to obtain management  commitment to complete a review before DSCA requests that the military  departments compile data for it; and a process for performing the reviews  that includes developing clear, documented goals and an appropriate  level of analysis to best ensure that DSCA’s analysis meets those goals.  (Recommendation 8)

The Secretary of Defense should ensure that the Director of DSCA  conduct a review of the current structure of the FMS transportation fee  rate, in consultation with other relevant DOD agencies, to determine if  other rate structures could better balance considerations related to  administrative burden, equity, efficiency, and revenue adequacy.  (Recommendation 9)

The Secretary of Defense should ensure that the Director of DSCA clarify  internal guidance for the military departments on how to calculate the  estimated actual transportation prices to charge FMS purchasers for  certain items, such as by specifying a calculation methodology. This  updated internal guidance should be based on consultations with the  military departments, TRANSCOM, and any other relevant DOD  components on which sources of data and which calculation  methodologies would be most accurate. (Recommendation 10)

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 identified actions it plans to take to address them  and initial steps it has begun to take toward addressing some of them.  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 balances maintained in the Foreign Military  Sales (FMS) transportation accounts for fiscal years 2007 through 2018,  (2) the extent to which the Defense Security Cooperation Agency (DSCA)  established and implemented policies and procedures to help ensure  management oversight of the transportation accounts, and (3) the extent  to which DSCA processes for setting transportation fee rates ensure that  these rates are set appropriately.

To examine the balances of the FMS transportation accounts, we  analyzed fiscal year 2007 to 2018 overall collections, expenditures, and  balance data for each of the individual FMS transportation accounts  maintained by the Defense Finance and Accounting Service (DFAS) in  the Defense Integrated Financial System (DIFS). We chose to review  data from these fiscal years based on data availability. To determine the  reliability of these data, we reviewed the data for internal consistency by  reviewing for duplicate entries, gaps, and obvious errors, and we  compared the data to similar data obtained for a prior review of two other  FMS fees. We also reviewed relevant documentation, including annual  account assessments conducted by DSCA and the internal control  procedures for conducting such reviews. Lastly, we interviewed DFAS  and DSCA officials to clarify questions about how to interpret the data.  We did not conduct any independent testing of the data obtained from  DFAS to determine whether the amounts reflected correct payments  made toward accurate billings. As such, when presenting collections and  expenditures, we note that they reflect the amount of funds in the  aggregate moved into and out of the FMS transportation accounts. We  determined the collections, expenditures, and balance data to be reliable  for the purpose of showing the movement of funds in and out of the FMS  transportation accounts and the accounts’ balances over time.

To analyze trends in collections into and expenditures from the FMS  transportation accounts, such as in figures 4 and 6, we adjusted the data  to remove the effects of two redistributions from the FMS administrative  fee account that took place in fiscal years 2009 and 2011, as well as  amounts that were moved into certain new Building Partner Capacity  (BPC) transportation accounts to initially fund them in fiscal years 2012  and 2015. We reviewed documentation related to the two redistributions  of funds from the FMS administrative fee account to the transportation  account and the initial funding amounts allocated to new BPC  transportation accounts, and interviewed DFAS and DSCA officials to  understand how they accounted for these fund movements.

To assess the extent to which DSCA established and implemented  policies and procedures to help ensure management oversight of the  FMS transportation accounts, we reviewed DSCA internal guidance  included in DSCA’s Managers’ Internal Control Program (MICP)  procedures for daily and annual FMS transportation account reviews,  federal internal control standards, our prior report on federal user fees,  and documentation showing how DSCA officials implemented those  procedures. We also interviewed DSCA officials responsible for these  reviews.

Daily reviews. We reviewed a DSCA spreadsheet in which DSCA  officials documented the daily reviews they conducted in fiscal year  2018. We chose to review this one fiscal year of data because it was  the most recent complete fiscal year and would thereby be most  relevant to current implementation. We also analyzed these data  against the related MICP procedures, interviewed relevant DSCA and  DFAS officials, and requested documentation of related  correspondence to determine the extent to which DSCA consistently  took any actions in response to these reviews. Because the data in  these daily reviews is sourced from the same balance data in DIFS as  we analyzed for our first objective, we compared the data between the  two sources to ensure its consistency, and interviewed DFAS and  DSCA officials about how these data were pulled for the daily reports.  Based on these steps, we determined these data to be sufficiently  reliable for assessing DSCA’s implementation of the daily review  process.

Annual reviews. We reviewed the annual reports DSCA created for  fiscal years 2015 to 2018—all of the years for which DSCA created  such reports—and interviewed DSCA officials about their process for  creating these reports and other aspects of the MICP procedures for  the annual review. To determine the extent to which the annual  reports accurately convey information about the causes of trends in  the accounts, we compared account expenditures data to oil price  data for fiscal years 2007 to 2018. We performed this analysis  because DSCA’s annual reports cite declining oil prices as a factor  contributing to the increasing account balances in the FMS  transportation accounts. For data on oil prices, we analyzed data from  the U.S. Energy Information Agency on Cushing, Oklahoma, West  Texas Intermediate oil prices by month, which is an established  source for these data that is used commonly as a global benchmark  for oil prices. As such, we determined these data to be reliable to use  for this purpose. We also reviewed legislation that changed the rates  the Department of Defense (DOD) can charge for FMS air shipments,  and interviewed DSCA and U.S. Transportation Command officials  about the effect and timing of this legislative change. We also  reviewed the fiscal year 2015 to 2018 annual reports for the FMS  transportation and administrative accounts to determine whether the  redistributions that had been made from the FMS administrative  account to the FMS transportation accounts were clearly reported,  and reviewed related internal guidance in DOD’s Financial  Management Regulations.

For BPC-specific transportation accounts, we reviewed DOD’s Financial  Management Regulations and related DSCA documentation against  federal internal control standards regarding the clarity of internal control  guidance. We also interviewed DSCA officials and received written  responses to questions from DOD’s Office of the Under Secretary of  Defense (Comptroller) regarding the process DSCA should follow when  any of the BPC-specific transportation accounts close.

To review the extent to which DSCA processes ensure that transportation  fee rates are set appropriately, we reviewed DSCA guidance and  interviewed DSCA and military department officials about the different  processes DSCA uses to set transportation fees. For the transportation  fee rate review, we reviewed DSCA’s MICP procedures and the requests  DSCA sent to the military departments for data to analyze in its rate  reviews against the Statement of Federal Financial Accounting Standards  No. 4, our prior report on federal user fees, and federal internal control  standards. To understand the reliability of the data the military  departments submitted to DSCA and what these data showed in terms of  the alignment between transportation costs and fees, we reviewed the  data, including by performing internal consistency checks on the data,  such as by reviewing it for duplicate entries, gaps, or obvious errors. We  also reviewed any military department procedures for compiling these  data and interviewed or received written responses from military  department officials responsible for compiling the data. Based on these  steps, we determined that these data were reliable for our purposes of  making some comparisons between costs and fees for the sample  provided. However, as noted earlier in this report, the departments could  only provide partial data, which they did not select using systematic  sampling techniques to ensure the data were indicative of the full  population of shipments. Therefore, we determined that these data were  unsuitable for DSCA’s purpose of making fee-setting decisions.

We also reviewed DSCA documentation of the analysis it performed for  its 2009 and 2018 transportation fee rate reviews, including analysis  spreadsheets and briefings to DSCA management on the reviews’  results. Regarding instances when DOD charges FMS purchasers  estimated transportation prices instead of a transportation fee rate, we  reviewed DSCA guidance on this process in the Security Assistance  Management Manual against related federal internal control standards.  We also reviewed any internal guidance the military departments have  developed to further guide these estimation processes, examples of the  military department estimation processes, and other documents that  showed concerns regarding these processes that the military  departments had previously raised to DSCA. We interviewed and sent  questions for written responses to DSCA and military department officials  regarding these processes and the military departments’ concerns.

We conducted this performance audit from May 2018 to September 2019  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.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Cheryl Goodman (Assistant  Director), Heather Latta (analyst in charge), Adam Peterson, Benjamin L.  Sponholtz, John (Ryan) Bolt, Ming Chen, John Hussey, and Brandon  Voss made key contributions to this report. Martin de Alteriis, Christopher  Keblitis, Grace Lui, Susan E. Murphy, Laurel Plume, Heather  Rasmussen, and Chanetta Reed also contributed to this report.

U.S. foreign partners buy billions of dollars of defense items and services annually through the U.S. Foreign Military Sales program. To transport the items they buy, buyers pay fees that should roughly equal what the U.S. government pays to transport the goods.

However, the transportation fee account balances have grown by over 1300%. Because there was no guidance on how to determine whether account balances were too high or too low, the fees weren’t adjusted appropriately.

We made 10 recommendations to DOD to improve how it sets fees and manages the transportation accounts, including setting target ranges for account balances.