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entitled 'Defense Management: DOD Needs to Strengthen Internal Controls 
over Funds Used to Support USO Activities' which was released on 
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Report to the Chairman, Committee on Appropriations, House of 
Representatives:

United States General Accounting Office:

GAO:

December 2003:

Defense Management:

DOD Needs to Strengthen Internal Controls over Funds Used to Support 
USO Activities:

GAO-04-56:

GAO Highlights:

Highlights of GAO-04-56, a report to the Chairman, Committee on 
Appropriations, House of Representatives 

Why GAO Did This Study:

For more than 60 years, the United Services Organization (USO), in 
partnership with the Department of Defense (DOD), has provided support 
and entertainment to U.S. armed forces, relying heavily on private 
contributions and on funds, goods, and services from DOD. To assist 
USO, Congress, beginning in fiscal year 2000, provided a total of 
$23.8 million in grants to be awarded through DOD as seed money for an 
endowment fund. The availability of these funds to USO, along with 
DOD’s ongoing support funded in its regular annual appropriations, 
represents a substantial financial commitment.

GAO determined (1) the source and amount of DOD’s support to USO in 
fiscal years 2000-2002 and (2) the sufficiency of internal controls to 
provide reasonable assurance that federal funds are used in an 
appropriate manner. GAO focused its audit on USO World Headquarters’ 
activities and audited a limited selection of USO transactions for 
the 3 fiscal years. 

What GAO Found:

During fiscal years 2000 through 2002, DOD provided USO with 
substantial appropriated and nonappropriated support, but the total 
amount cannot be determined because of limitations in DOD’s and USO’s 
record-keeping systems. GAO identified at least $34.7 million in 
appropriated funds that DOD provided to support USO during fiscal 
years 2000 through 2002. Of this amount, $20.8 million was in 
congressionally appropriated grants to help USO establish the Spirit 
of Hope Endowment Fund to ensure the continuation of USO’s programs 
and services. Another $12.1 million was for reimbursements to USO, and 
at least $1.8 million was paid directly by DOD for tour-related 
expenses such as commercial airfares, visas, and passports. DOD also 
provided other appropriated support, such as lodging and 
transportation. However, GAO could not determine the total monetary 
value of DOD’s support from appropriated funds because neither DOD nor 
USO has record-keeping systems that aggregate the needed information. 
DOD also provides USO with nonappropriated support, largely in the 
form of in-kind goods (e.g., food), services (e.g., Internet access), 
and infrastructure support (e.g., performance facilities), to help 
sustain USO’s overseas tours, but the same limitations precluded GAO 
from determining the total monetary value. 

DOD and USO did not have sufficient financial and management controls 
to reasonably ensure that all appropriated funds were used 
appropriately. DOD properly awarded grant funds to USO, and USO 
properly administered these funds. However, USO did not require its 
independent auditor to fully test internal controls over grants or 
funds reimbursed to USO by DOD, as required by its agreements with 
DOD. In terms of reimbursements to USO and direct payments by DOD, DOD 
lacked clearly written supplemental guidance regarding allowable 
expenses, management oversight in reviewing USO’s invoices, and 
procedures for capturing reimbursable expenses. In some cases, these 
weaknesses resulted in inappropriate expenditures of funds. As shown 
in the table below, based on limited testing, GAO found problems with 
payments totaling about $433,000, including about $86,000 in improper 
expenditures, $3,000 in questionable expenditures, and $344,000 for 
unsupported expenditures. Had USO’s independent auditor tested 
internal controls, the problems GAO identified might have surfaced. As 
a result of GAO’s audit, DOD stated it has initiated several actions 
to improve financial and management controls and to recover funds from 
USO. As of September 2003, DOD had recovered about $19,000 from USO in 
improper payments for overseas tour expenses. 

What GAO Recommends:

GAO recommends that the Secretary of Defense develop and implement 
improvements in program guidance, record- keeping systems, and tests 
of internal controls to improve the accountability and control of 
funds used to support USO’s operations.

In commenting on a draft of this report, DOD generally concurred with 
GAO’s recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-04-56.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Sharon Pickup, (202) 
512-9619, or pickups@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

DOD Provided Substantial Appropriated and Nonappropriated Support to 
USO, but Total Amount Cannot Be Determined:

Sufficient Financial and Management Controls Did Not Exist to Assure 
Appropriate Use of Appropriated Funds:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Details of Improper First-Class and Business-Class 
Travel:

Appendix III: Comments from the Department of Defense:

Appendix IV: Staff Acknowledgments:

Tables:

Table 1: Appropriated Funds Provided by DOD to Support USO Activities 
for Fiscal Years 2000 through 2002:

Table 2: Appropriated Funds Provided Via Direct Payments by DOD for USO 
Activities as Identified by GAO for Fiscal Year 2002:

Table 3: Examples of Improper Payments for Items Reimbursed or Paid by 
AFEO for USO Tours for Fiscal Year 2002:

Table 4: Examples of Questionable Payments for Items Reimbursed or Paid 
by AFEO for USO Tours for Fiscal Year 2002:

Table 5: Examples of Unsupported Payments for Items Reimbursed by AFEO 
for USO Tours for Fiscal Year 2002:

Table 6: Examples of Improper First-Class and Business-Class Travel 
Paid by the Armed Forces Entertainment Office Identified by GAO for 
Fiscal Year 2002:

Figure:

Figure 1: Flow of DOD Funds to Support USO Activities during Fiscal 
Years 2000 through 2002:

Abbreviations:

AFEO: Armed Forces Entertainment Office:

DOD: Department of Defense:

GSA: General Services Administration:

JFTR: Joint Federal Travel Regulations:

JTR: Joint Travel Regulations:

O&M: operations and maintenance:

OMB: Office of Management and Budget:

OSD: Office of the Secretary of Defense:

USO: United Services Organization:

United States General Accounting Office:

Washington, DC 20548:

December 5, 2003:

The Honorable C.W. Bill Young: 
Chairman, Committee on Appropriations 
House of Representatives:

Dear Mr. Chairman:

For more than 60 years, the United Services Organizations (USO), a not-
for-profit, nongovernmental but congressionally chartered 
organization, has offered support and entertainment to the men and 
women of America's armed forces and their families. The USO mission is 
to enhance the quality of life of the personnel within the U.S. armed 
forces community wherever they are based.

Throughout the years, USO has relied on corporate donors and individual 
contributors, as well as on funds, goods, and services provided by the 
Department of Defense (DOD), to support its operations. With the 
creation of a federal charter for USO in 1979, Pub. L. No. 96-165, DOD 
was granted statutory authority to make the department's resources 
available to help USO achieve its mission. DOD provides both 
appropriated and nonappropriated resources to support USO's operations. 
Appropriated support is derived from DOD's operations and maintenance 
(O&M) funds, and nonappropriated support is provided largely through 
DOD-donated goods, services, and infrastructure. DOD's Armed Forces 
Entertainment Office (AFEO), through its Armed Forces Professional 
Entertainment Program, is primarily responsible for coordinating with 
USO to deliver overseas entertainment. Under a contractual arrangement, 
USO solicits celebrity entertainers for gratis or reduced rates to 
perform at overseas DOD locations. AFEO reimburses USO for certain 
expenses incurred in securing celebrity entertainment, including 
honoraria,[Footnote 1] production support, and other administrative 
costs. AFEO and other DOD entities also pay directly from their 
respective O&M accounts, referred to as direct payments, for certain 
goods and services provided for USO tours, such as commercial airfare 
and military airlift services.

At your request, we determined (1) the source and amount of support 
provided to USO during fiscal years 2000 through 2002 and (2) the 
sufficiency of the financial and management controls to provide 
reasonable assurance that funds were used appropriately.

We focused our audit on DOD's support for activities of the USO World 
Headquarters, which operated USO's overseas entertainment tours, and 
did not include the activities of chartered, stateside USO affiliates, 
which are financially autonomous from the USO World Headquarters. We 
did not audit support provided to USO from nonfederal sources. Because 
of limitations in AFEO and USO record keeping, we limited our audit to 
support provided by DOD during fiscal years 2000 through 2002. To 
assess financial and management controls, we evaluated the adequacy of 
the overall control environment and management oversight of controls at 
USO and AFEO, audited selected transactions between AFEO and USO for 
fiscal year 2002, analyzed AFEO's centrally billed account for fiscal 
year 2002, and reviewed AFEO's purchase card account for fiscal years 
2001 and 2002. We also reviewed annual audits of USO's consolidated 
statement of financial position and the related consolidated statement 
of activities and cash flows prepared by an independent audit firm. For 
more details on our scope and methodology, see appendix I.

Results in Brief:

During fiscal years 2000 through 2002, DOD provided significant 
appropriated and nonappropriated support; however, the total amount 
cannot be determined because of limitations in DOD's and USO's record-
keeping systems. For this 3-year period, we identified at least $34.7 
million in appropriated funds that DOD used to support USO's 
activities. Of this amount, $20.8 million was awarded in 
congressionally appropriated grants, which USO used to help fund the 
Spirit of Hope Endowment Fund, a restricted fund intended to ensure the 
continued existence of USO's programs and services. We also identified 
another $12.1 million in reimbursements to USO under its contract with 
AFEO for such costs as celebrity honoraria and production expenses for 
overseas tours, and at least another $1.8 million in direct payments by 
AFEO and other DOD entities for tour-related expenses, such as 
commercial airfares, visas, passports, and military airlift services. 
DOD also provided other appropriated support such as lodging, 
transportation, and use of facilities. However, we could not determine 
the total monetary value of DOD's appropriated support because neither 
DOD nor USO has record-keeping systems to aggregate or report the 
needed information. While DOD also provided nonappropriated support, 
largely in the form of in-kind goods (e.g., food and refreshments), 
services (e.g., Internet and telephone access), and infrastructure 
support (some performance facilities), to help sustain USO's overseas 
operations, the same limitations precluded us from determining the 
total monetary value of this support.

DOD and USO did not have sufficient financial and management controls 
in place to provide reasonable assurance that all appropriated funds 
were used appropriately. DOD properly awarded grant funds to USO, and 
USO appropriately administered these funds. However, USO did not 
require its independent auditor to fully test internal controls over 
grant funds or funds reimbursed by DOD, as required under agreements 
with DOD. For support provided through contract reimbursements and 
direct payments, AFEO lacked clear written supplemental guidance 
regarding allowable expenses, effective management oversight in 
reviewing USO invoices, and adequate procedures for capturing 
reimbursable expenses. In some cases, these weaknesses resulted in 
inappropriate expenditures of funds. Specifically, based on our limited 
testing, we found problems with expenditures totaling about $433,000, 
including about $86,000 in improper expenditures, about $3,000 in 
questionable expenditures, and approximately $344,000 for unsupported 
expenditures. For example, AFEO improperly reimbursed USO about $9,000 
for administrative services that had already been paid and about $1,300 
for unallowable food, liquor, and other miscellaneous expenses. Also, 
AFEO improperly incurred approximately $67,000 for first-class and 
business-class travel expenses that were not authorized in accordance 
with DOD and federal travel regulations and around $9,000 for 
transportation expenses for unauthorized travelers. These latter 
expenses were paid by AFEO, but they should have been billed to and 
paid by USO. As a result of our audit, AFEO officials told us they 
initiated several actions to improve financial and management controls 
and to recover funds from USO. As of September 2003, AFEO had recovered 
from USO about $19,000 in improper payments it made to support USO's 
overseas tours.

We are making recommendations to the Secretary of Defense to develop 
and implement improvements in program guidance, record-keeping systems, 
and tests of internal controls to improve the accountability and 
control of funds used to support USO operations. In commenting on a 
draft of this report, DOD generally concurred with our recommendations.

Background:

USO is a congressionally chartered, nonprofit, nongovernmental, and 
charitable corporation whose mission is to enhance the quality of life 
for U.S. armed forces personnel and their families. The USO World 
Headquarters acts as the enabling body for the organization, sets 
overall policy and strategy, is responsible for the operation of 
overseas USO centers, and produces overseas celebrity entertainment 
tours in partnership with AFEO. From World War II through the Vietnam 
War, USO and DOD partnered to enhance troop morale and provide 
entertainment to military outposts worldwide. Following the Vietnam 
War, legislation establishing USO's federal charter and various DOD 
directives and instructions formalized this close association and made 
DOD resources, including funds, available to the maximum extent 
possible to support USO's mission.[Footnote 2] DOD uses both 
appropriated and nonappropriated resources to support USO's operations. 
Appropriated support is derived from DOD's O&M funds, and 
nonappropriated support is provided largely through DOD-donated goods, 
services, and infrastructure.

DOD regulations designate (1) the Under Secretary of Defense for 
Personnel and Readiness as the official liaison between DOD and USO and 
(2) AFEO, a joint-service operation, as the DOD liaison office for USO. 
AFEO, established in 1951, administers DOD's Armed Forces Entertainment 
Program in partnership with USO. The U.S. Air Force is the executive 
agent for AFEO, having assumed that role from the U.S. Army in 1997. 
AFEO's mission is to provide free, high quality, live entertainment to 
U.S. military personnel and their families stationed overseas. AFEO 
supplies all noncelebrity entertainment, and USO is the primary 
provider of celebrity entertainment. Noncelebrity entertainment is made 
up of up-and-coming performers professionally managed by an agent; 
celebrity entertainment consists of well-known entertainers, listed in 
Billboard or with gold or platinum recordings.

Under a contractual arrangement with AFEO, USO recruits celebrity 
performers for the Armed Forces Entertainment Program. AFEO reimburses 
USO for certain tour-related expenses such as honoraria, production 
support, and other direct costs. In some cases, AFEO and other DOD 
entities also make arrangements to support USO overseas tours and pay 
directly for these expenses, such as for commercial airfares, visas, 
passports, and military airlift services, from their respective O&M 
accounts. Also, USO has agreed to pay for certain tour-related costs, 
for example, paying the difference between the cost of business-class 
and first-class air travel and the travel costs for individuals 
accompanying performers whose costs are not covered under the contract 
with AFEO.

Following the 1991 Gulf War, USO faced serious financial problems 
because of declining contributions and therefore became concerned about 
its continued ability to serve the military. To address these concerns, 
USO's Board of Governors established the Spirit of Hope Endowment Fund 
in 1998. According to a former USO official, the intent of the fund was 
to infuse USO with funds to provide for the perpetuity of its programs 
and services. To assist USO, the Congress, beginning in fiscal year 
2000, provided a total of $23.8 million in O&M funds in the form of 
grants for USO. As of September 2003, DOD had provided about $20.8 
million to USO. USO used these funds as seed money for the endowment.

DOD Provided Substantial Appropriated and Nonappropriated Support to 
USO, but Total Amount Cannot Be Determined:

During fiscal years 2000 through 2002, DOD provided substantial 
appropriated and nonappropriated support, but the total amount cannot 
be determined because of limitations in DOD's and USO's record-keeping 
systems. For this 3-year period, we identified at least $34.7 million 
in appropriated funds that DOD provided to support USO activities in 
the form of grants, contract reimbursements, and direct payments. DOD 
also provided other appropriated support such as lodging, 
transportation, and use of some facilities. However, we could not 
identify the total monetary value of DOD's support derived from 
appropriated funds because neither DOD nor USO has record-keeping 
systems to aggregate or report the needed information. While DOD also 
provides nonappropriated support, largely in the form of in-kind goods 
(e.g., food and refreshments), services (e.g., Internet and telephone 
access), and infrastructure support (some performance facilities), to 
help sustain USO's overseas operations, the same limitations precluded 
us from determining the total monetary value for this support.

USO Received Appropriated and Nonappropriated Support from Many DOD 
Sources:

During fiscal years 2000 through 2002, USO received appropriated and 
nonappropriated support from a variety of DOD sources. As figure 1 
shows, this appropriated money flowed to USO in the form of grants 
awarded by the Office of the Secretary of Defense (OSD) and from 
contract reimbursements and direct payments provided by AFEO and other 
DOD components. Nonappropriated support was provided largely through 
in-kind contributions that included goods (e.g., food and 
refreshments), services (e.g., Internet and telephone access), and 
infrastructure support (some performance facilities), contributed by 
various DOD components.

Figure 1: Flow of DOD Funds to Support USO Activities during Fiscal 
Years 2000 through 2002:

[See PDF for image]

[End of figure]

Appropriated Funds:

We identified at least $34.7 million in appropriated funds that DOD 
provided to support USO's activities during fiscal years 2000 through 
2002. As table 1 shows, this funding included grants and contract 
reimbursements to USO and direct payments by DOD.

Table 1: Appropriated Funds Provided by DOD to Support USO Activities 
for Fiscal Years 2000 through 2002:

Dollars in millions.

Grants; 
Fiscal year 2000: $4.8; 
Fiscal year 2001: $7.5; 
Fiscal year 2002: $8.5; 
Total: $20.8.

Contract reimbursements; 
Fiscal year 2000: 4.3; 
Fiscal year 2001: 3.5; 
Fiscal year 2002: 4.3; 
Total: 12.1.

Direct payments; 
Fiscal year 2000: [A]; 
Fiscal year 2001: [A]; 
Fiscal year 2002: 1.8; 
Total: 1.8.

Total appropriated funds; 
Fiscal year 2000: $9.1; 
Fiscal year 2001: $11.0; 
Fiscal year 2002: $ 14.6; 
Total: $34.7.

Source: GAO analysis of DOD data.

[A] AFEO officials could not provide a total amount for direct payments 
made to support USO's activities during fiscal years 2000 and 2001, 
because of limitations in AFEO's record-keeping system; therefore, 
there are no entries for those fiscal years.

[End of table] 

We also found that DOD components often provide in-kind support, 
derived from appropriated funds, to USO for its overseas tours such as 
transportation, free lodging, and some office and performance 
facilities.

Grants:

During fiscal years 2000 through 2003, the Congress authorized DOD to 
provide a total of $23.8 million in grants to support USO's activities. 
As of September 2003, in fiscal years 2000 through 2002, DOD had 
provided a total of $20.8 million in grants to USO as seed money to 
fund the Spirit of Hope Endowment Fund, which is intended to ensure the 
continued existence of USO's programs and services. The Congress 
provided the funds through DOD's O&M appropriation in four annual 
defense appropriations acts.[Footnote 3] The funds, appropriated only 
for grants to USO, were first allocated to the Deputy Assistant 
Secretary of Defense for Personnel Support, Families and Education. In 
1998, USO established the Spirit of Hope Endowment Fund and, after 
receiving the grants from DOD, transferred the funds into the endowment 
fund. According to USO policy, the USO Board of Governors established 
the Spirit of Hope Endowment Fund, which is a restricted account. Money 
placed into the fund is to be considered as principal and must remain 
in the account. USO can use the income (e.g. interest and dividends) 
that accrues on the balance held in the endowment fund to support its 
operations. USO used about $333,000 in investment income in calendar 
years 1999 and 2000 for its operations.

Contracts:

AFEO provided USO with about $12.1 million in contract reimbursements 
during fiscal years 2000 through 2002. In September 1999, AFEO awarded 
an $8.7 million sole source, indefinite delivery, indefinite quantity 
contract to USO.[Footnote 4] The purpose of this contract was to 
provide celebrity entertainment for U.S. armed forces at military 
installations overseas. The contract performance period was for 3 years 
(October 1, 1999, to September 30, 2002) with five 1-year option 
periods (October 1, 2002, to September 30, 2007). According to AFEO and 
Air Force contracting officials, AFEO spent the entire $8.7 million 
before the end of the first 3-year period, and it is currently amending 
the contract to increase the amount of funding. In addition to the $8.7 
million contract, AFEO negotiated separate purchase orders for costs 
associated with specific USO tours. The terms of the $8.7 million 
contract applied to each of these separately negotiated purchase 
orders. Specifically, the contract provided reimbursements to USO for:

* administrative support services--accounting and administrative 
services needed to plan and execute overseas tours, including compiling 
and submitting voucher packages to AFEO for expense reimbursements;

* celebrity honoraria--payments to celebrity entertainers or groups and 
their production and/or tour managers to help defray day-to-day 
expenses; and:

* other direct costs--tour production and equipment rental costs; 
travel costs to include commercial airfare, car rental or bus fares; 
lodging and per diem if authorized by DOD's Joint Travel Regulations; 
miscellaneous expenses such as shipping, visas, and equipment repair or 
replacement for celebrity tours; and a 19 percent management fee, 
calculated using the total of other direct costs expended for 
noncelebrity tours.[Footnote 5]

Direct Payments:

AFEO and the Air Mobility Command used appropriated O&M funds to pay 
directly for USO tour-related expenses, such as commercial airfares, 
visas and passports, and military airlift services. As table 2 shows, 
during fiscal year 2002 alone, we identified direct payments that 
totaled at least about $1.8 million. However, because of record-keeping 
limitations, AFEO officials could not assure that these amounts 
represented all direct payments.

Table 2: Appropriated Funds Provided Via Direct Payments by DOD for USO 
Activities as Identified by GAO for Fiscal Year 2002:

Funding source: Direct payments--AFEO: 

Direct payments--AFEO: Centrally billed account; Fiscal year 2002: 
$783,684.

Direct payments--AFEO: Purchase card[A]; Fiscal year 2002: 2,466.

Direct payments--AFEO: Appropriated funds cite; Fiscal year 2002: 
602,212.

Funding source: Direct payments--Air Mobility Command: 

Direct payments--Air Mobility Command: Appropriated funds cite; Fiscal 
year 2002: 412,227.

Total direct payments; Fiscal year 2002: $1,800,589.

Source: GAO analysis of DOD data.

[A] AFEO could not assure that this total includes all funds used in 
support of USO overseas tours.

[End of table]

AFEO used its centrally billed account to pay about $783,000 for its 
personnel travel expenses and commercial airfares for USO personnel and 
tour entertainers; its purchase card account to pay around $2,500 for 
visas, passports, and shipping expenses for entertainment equipment; 
and its appropriated funds cite to make direct payments totaling about 
$602,200 for its personnel travel expenses and airlift services 
provided by the U.S. Air Force, Air Mobility Command. We also 
identified about $412,000 that the Air Mobility Command paid directly 
for airlift services for one USO tour. According to AFEO and Air 
Mobility Command officials, the command's airlift services included the 
movement of passengers and baggage either on regularly scheduled 
flights or on special assignment airlift missions from designated U.S. 
stateside military locations to overseas military locations. These 
special assignment airlift missions involve chartering a military 
aircraft for a specific purpose.

Nonappropriated Support:

DOD components provide nonappropriated support largely in the form of 
in-kind goods, services, and infrastructure, such as food and 
refreshments, Internet and telephone access, and free office space, 
lodging, and some performance facilities, to help sustain USO's 
overseas tours.

Total Amount of Support Could Not Be Determined Because of Limitations 
in DOD's and USO's Record-keeping Systems:

We could not determine the total amount of appropriated and 
nonappropriated support to USO's activities because of limitations in 
DOD's and USO's record-keeping systems. Specifically, we were unable to 
identify the total value of appropriated support for the fiscal year 
2000 through 2002 period because DOD's records were incomplete. For 
example, AFEO could not readily provide an accurate accounting of 
contract reimbursements or direct payments for charges to its centrally 
billed and purchase card accounts, primarily because it did not track 
and identify which transactions were for USO celebrity tours and which 
transactions were for noncelebrity tours that did not involve USO. 
(Most federal funds that are provided to support USO's activities are 
provided for celebrity tours. The cost of noncelebrity tours is paid by 
AFEO.) Our audit of AFEO's purchase card transactions confirmed that 
one could not distinguish between USO and non-USO activities. Without 
such detail, AFEO could not provide complete reports on funding for 
USO's activities.

During our audit, AFEO provided us with total amounts for contract 
reimbursements and some direct payments for fiscal year 2002, but it 
could not ensure that the totals included all appropriated funds 
provided in support of USO's overseas tours. Moreover, AFEO could not 
provide the same information for fiscal years 2000 and 2001 because the 
records for those years were less complete, and the time and resources 
required to gather and verify the information were more than AFEO could 
expend given the unit's workload.

Additionally, AFEO could not provide data on how much appropriated 
funds were spent for military airlift services to support USO's 
overseas tours because neither AFEO nor the Air Mobility Command has 
record-keeping systems to aggregate or report the needed information. 
For example, the command's records can track and report all airlift 
services charged to AFEO, but those records do not indicate whether the 
services were provided to support USO's tours, nor do they 
differentiate between celebrity and noncelebrity tours. Furthermore, 
neither AFEO nor the Air Mobility Command maintains records of the cost 
of airlift services that other U.S. military units (such as the Army 
and the Navy) provided in support of USO's tours.

We also could not identify the monetary value for other support derived 
from appropriated funds, such as transportation, free lodging, and some 
office and performance facilities provided by military units other than 
the Air Mobility Command. We could not identify the value of this 
support because neither DOD nor its components have record-keeping 
systems to aggregate or report the needed information.

Finally, we could not identify the value of DOD's nonappropriated 
support to USO, provided largely through in-kind contributions that 
included goods (e.g., food and refreshments), services (e.g., Internet 
and telephone access), and infrastructure support (some performance 
facilities) again, because neither DOD nor its components have record-
keeping systems to aggregate or report the needed information. 
Furthermore, USO's records for in-kind contributions do not clearly 
identify all private sector and DOD contributions.

Sufficient Financial and Management Controls Did Not Exist to Assure 
Appropriate Use of Appropriated Funds:

DOD and USO did not have sufficient financial and management controls 
in place to provide reasonable assurance that all appropriated funds 
were used appropriately. DOD properly awarded grant funds to USO, and 
USO appropriately administered these funds. However, USO did not 
require its independent auditor to fully test internal controls over 
grant funds or funds reimbursed by DOD, as required under grant and 
contractual agreements with DOD. For support provided through contract 
reimbursements and direct payments, AFEO lacked clearly written 
supplemental guidance regarding allowable expenses, effective 
management oversight in reviewing USO invoices, and adequate procedures 
for capturing reimbursable expenses. In some cases, these weaknesses 
resulted in inappropriate expenditures of funds. Specifically, we found 
problems with expenditures totaling about $433,000, including 
approximately $86,000 in improper expenditures, $3,000 in questionable 
expenditures, and $344,000 for unsupported expenditures. As a result of 
our audit, AFEO officials told us they have initiated several actions 
to improve financial and management controls and to recover funds from 
USO.

DOD and USO Had Sufficient Procedures for Administering Grants, but USO 
Did Not Fully Comply with Audit Requirements:

During fiscal years 2000 through 2002, DOD awarded about $20.8 million 
in congressionally appropriated grants to USO. DOD properly transferred 
these funds. Specifically, before transferring funds, it entered into 
grant agreements with USO that included conditions for the use of these 
funds. For example, these agreements allowed USO to deposit the funds 
in the Spirit of Hope Endowment Fund or use any investment income 
earned from the funds for operational expenses.

The agreements also set forth administrative and accounting 
requirements, to include compliance with the Office of Management and 
Budget (OMB) Circular A-133, Audits of States, Local Governments, and 
Non-Profit Organizations, as revised June 1997, which implements the 
Single Audit Act, as amended.[Footnote 6] The Single Audit Act is 
intended to promote sound financial management, including effective 
internal controls over federal funds. The single audit is an important 
tool utilized by federal agencies--including DOD--to monitor federal 
awards to nonprofit organizations and ensure that the federal funds are 
properly used.[Footnote 7] OMB Circular A-133 §_.500 requires an audit 
of the financial statement(s) for the program receiving federal funds 
in accordance with generally accepted government audit standards. The 
audit should be an organizationwide audit that focuses on the 
recipient's internal controls and compliance with laws and regulations 
governing federal awards and be designed to test the program's internal 
controls in a manner sufficient to illustrate that a low level of risk 
exists for the program.[Footnote 8]

Furthermore, OMB Circular A-133, subpart B, §.200, requires nonfederal 
entities expending $300,000 or more a year in federal awards to have a 
single or program-specific audit conducted for that year in accordance 
with the provisions of the circular. Specifically, §.205 states that 
the determination of when an award is expended should be based on when 
the activity related to the award occurs. Generally, the activity 
pertains to the expenditure or expense transactions associated with 
grants. Specifically, the cumulative balance of federal awards for 
endowment funds, which are federally restricted, is considered expended 
in each year in which the funds are restricted.

Consistent with the grant agreements, USO deposited the entire $20.8 
million in grant funds in investment accounts designated specifically 
for the Spirit of Hope Endowment Fund, and used investment income 
earned on these funds for operational expenses. With respect to these 
deposits, USO invested the funds in income-producing assets such as 
stocks, bonds and U.S. Treasury bills. USO used about $333,000 drawn 
from investment income for operational expenses, and the entire amount 
of deposited grant funds remained invested. However, USO did not fully 
comply with the agreements' audit requirements in identifying the scope 
of work to be performed by its independent auditor in performing annual 
audits. While USO arranges for its independent auditor to perform an 
annual audit, this audit focuses on verifying the sources and accuracy 
of amounts included in USO's financial statements and does not 
comprehensively test internal controls on the receipt and use of grant 
funds or document tests performed as required by OMB Circular A-133. 
USO officials initially believed there was no need for an audit that 
complied with the Single Audit Act, since it spent only investment 
income from the grant funds and none of the actual grant funds. Based 
on our review, USO officials now agree that the act applies and that 
the annual audit should be performed in accordance with the act's 
requirements and OMB Circular A-133.

Internal Control Weaknesses Led to Problem Expenditures for Contract 
Reimbursements and Direct Payments:

For contract reimbursements and direct payments, we found significant 
problems with DOD and USO controls over these funds. For example, AFEO 
lacked clearly written supplemental guidance regarding allowable 
expenses, effective management oversight in reviewing USO's invoices, 
and adequate procedures for capturing reimbursable expenses. Also, 
similar to the grant funds, USO did not fully comply with audit 
requirements contained in its contracts with DOD.

Lack of Clear and Current Written Supplemental Guidance:

At the time of our audit, the guidance in effect concerning the 
expenses AFEO will pay in support of USO's overseas tours was not 
sufficiently detailed to provide clear, consistent instructions to be 
followed by AFEO or USO. This guidance included the contract agreement 
between AFEO and USO, general rules regarding AFEO's direct payment 
accounts, federal acquisition and travel regulations, and DOD 
Instruction 1330.13.

AFEO refers to the aforementioned guidance in paying for USO overseas 
tour expenses through contract reimbursements and direct charges to its 
centrally billed and purchase card accounts. However, as described 
below, we found several weaknesses in the guidance.

* Contract reimbursements. The contract between AFEO and USO identifies 
the general categories of tour-related expenses for which USO can be 
reimbursed to include administrative support services; honoraria; and 
other direct costs such as production support/equipment rental, travel, 
lodging, and miscellaneous expenses. The contract contains numerous 
clauses and statements that indicate reimbursements will be made in the 
accordance with Joint Travel Regulations and the Federal Acquisition 
Regulation. However, the contract is not specific concerning the types 
of costs--such as the type of production support and other incidental 
direct costs--and the supporting documentation needed to ensure that 
AFEO only pays for costs that are allowable and proper. AFEO officials 
stated that they follow additional policies related to the allowable 
contract reimbursements for tour-related expenses, such as "thank you" 
dinners, but these policies are not documented in writing.

* Centrally billed account. AFEO stated that it uses the account 
primarily to pay for commercial airfares for USO personnel and 
entertainers covered under invitational travel orders.[Footnote 9] 
Federal travel regulations contain stringent circumstances under which 
first-class and business-class travel can be authorized. However, 
according to AFEO and USO officials, neither has more detailed, 
written, and program specific guidance to determine when and how USO 
will pay for first-or business-class travel.

* Other direct charges. AFEO provides additional support to USO by 
directly charging the cost of travel-related expenses, such as visas 
and passports, to its purchase card account, and by allowing its O&M 
funds account cite to be charged for Air Mobility Command airlift 
services. However, AFEO has no specific program guidance regarding how 
USO should be billed for unauthorized travelers on Air Mobility Command 
flights.

Furthermore, DOD Instruction 1330.13, last updated September 8, 1985, 
establishes policy and assigns responsibility for carrying out the 
Armed Forces Professional Entertainment Program for entertaining troops 
overseas. This instruction states that the Secretary of the Army has 
responsibility for administering the program; however, the Air Force 
assumed responsibility in fiscal year 1997. An AFEO official 
acknowledged that this instruction is out of date. Also, this policy 
lacks clear statements regarding expenses that should be paid by AFEO 
and USO, respectively.

Insufficient Management Oversight:

The lack of sufficient management oversight of funds provided to USO 
was also a key internal control problem. For example, AFEO officials 
generally did not closely review or question expenses USO submitted for 
reimbursement. Additionally, AFEO's review and reconciliation process 
for its centrally billed account and billings from the Air Mobility 
Command was not sufficient to identify airlift expenses that should be 
charged to USO. Furthermore, during our audit of contract files at the 
Air Force contracting office responsible for administering the 
contracts between AFEO and USO, we found no evidence of contract 
reviews. An Air Force contracting official stated its office sometimes 
questioned the need for some expenses for celebrity tours when 
modifications to the contracts were requested. At these times, the 
expenses were questioned because the supporting documentation provided 
to the contracting office by AFEO was not always adequate. However, 
according to the Air Force contracting officer currently responsible 
for the contracts, the existing workload and higher priorities require 
her to perform more detailed oversight of high-dollar defense 
contracts. Because celebrity tour costs generally ranged from $10,000 
to $300,000, they are given lower priority for contract oversight.

Furthermore, we found that USO did not perform the type of audit 
required under the terms of its contracts with AFEO. Similar to the 
grant agreements, the contracts contain a requirement for a single 
audit that would focus on USO's internal controls as they relate to the 
federal funds provided through contracts to USO to support the Armed 
Forces Entertainment Program. USO signed the contracts with AFEO. These 
contracts were to provide celebrity entertainment for U.S. armed forces 
at military installations overseas, on a fixed price and cost 
reimbursable basis. When USO signed these contractual agreements, it 
agreed to comply with all contractual requirements. These contractual 
agreements set forth accounting requirements to be met in accordance 
with Federal Acquisition Regulation 52.215-2, Alternate II, which 
requires compliance with OMB Circular A-133. As previously discussed, 
this circular implements the Single Audit Act, as amended, and is 
intended to promote sound financial management, including effective 
internal controls over federal funds.

Our review of USO's audited financial statements, discussions with the 
independent auditor responsible for performing the audit, and 
discussions with USO officials indicated that the single audit 
requirement set forth in the contractual agreements was not met. As 
discussed previously, USO arranges for an annual audit of its financial 
statements, but this audit does not include comprehensive testing of 
internal controls and the documentation of tests performed that is 
required by OMB Circular A-133. USO officials initially believed there 
was no need for an audit that complied with the Single Audit Act, since 
USO is merely a vendor providing services for AFEO, but now, based on 
our audit, it agrees that such an audit is required.

Payment of Improper, Questionable, and Unsupported Expenses:

In the absence of strong internal controls, we found numerous instances 
where AFEO paid for improper, questionable, and unsupported expenses in 
support of USO's overseas celebrity tours. Based on our limited testing 
of six celebrity tour files, our analysis of AFEO's centrally billed 
account, and our examination of Air Mobility Command records, we 
identified a total of about $433,000 in problem expenditures during 
fiscal years 2000 to 2002 including improper and questionable expenses 
totaling around $89,021 and unsupported expenses totaling approximately 
$344,000. We defined an expense as improper when an item was not 
authorized or properly justified in accordance with the contracts 
between AFEO and USO, the Joint Travel Regulations and the Joint 
Federal Travel Regulations issued by DOD, and the Federal Travel 
Regulation issued by the General Services Administration.[Footnote 10] 
For example, we found improper reimbursements for expenses such as 
alcoholic beverages, meals, lodging, and duplicate billings for 
administrative services. AFEO also inappropriately paid for first-class 
and business-class travel and some military airlift services. We 
identified numerous examples of questionable payments of USO tour costs 
by AFEO for items such as limousine services, hotels, and airport VIP 
lounge services. We defined a questionable payment as any item that was 
reimbursed without documentation showing that the item was necessary 
for official government business under the Armed Forces Entertainment 
Program. We also identified numerous unsupported payments. We defined 
an unsupported payment as any item that was reimbursed without 
documentation detailing the nature of the expense and the way the price 
for the expense was determined.

Improper Expenses:

We found payments for improper expenses for items such as unallowable 
alcoholic beverages, meals, and lodging, honorarium, and production 
support for an entertainer who did not participate in a tour for which 
expenses were reimbursed, and a duplicate billing for administrative 
services. Moreover, AFEO inappropriately paid for first-class and 
business-class travel and some military airlift services. AFEO 
acknowledged that these expenses should not have been reimbursed or 
paid. For example, AFEO explained that meal expenses for celebrities 
receiving honorarium are not reimbursable because the honorarium is 
intended to help defray the cost of meals and other essentials, and the 
invitational travel orders we reviewed specifically stated that meal 
expenses were not authorized. Expenses for alcoholic beverages are 
never allowable in conjunction with government travel. The cost for 
first-class travel, and the cost for unauthorized travelers on Air 
Mobility Command airlifts, should have been borne by USO. Table 3 
highlights the improper payments we identified.

Table 3: Examples of Improper Payments for Items Reimbursed or Paid by 
AFEO for USO Tours for Fiscal Year 2002:

Improper expenses: Alcoholic beverages; Reason item was improper: Not 
allowed under DOD and federal travel regulations; Amount: $56.

Improper expenses: Hotel meals; Reason item was improper: Per diem was 
not authorized for travelers; Amount: 252.

Improper expenses: Lodging for one individual; Reason item was 
improper: No travel orders authorizing lodging expenses; Amount: 61.

Improper expenses: Celebrity honorarium; Reason item was improper: 
Traveler did not participate in tour; Amount: 600.

Improper expenses: Production support; Reason item was improper: 
Traveler did not participate in tour; Amount: 300.

Improper expenses: Duplicate billing for administrative services; 
Reason item was improper: Expense already paid; Amount: 8,894.

Improper expenses: First-class travel; Reason item was improper: First-
class travel was not authorized or properly documented in accordance 
with DOD and federal travel regulations; Amount: 29,586.

Improper expenses: Business-class travel; Reason item was improper: 
Justification for travel was not authorized or properly documented in 
accordance with DOD and federal travel regulations; Amount: 37,153.

Improper expenses: Air Mobility Command airlift services; Reason item 
was improper: No travel orders authorizing payment of airlift services; 
Amount: 9,065.

Improper expenses: Total improper expenses identified: Amount: $85,967.

Source: GAO analysis of DOD data.

[End of table]

Improper expenses of particular note are explained in more detail 
below:

* Duplicate billing for administrative services. In calendar year 2002, 
AFEO paid USO twice for administrative expenses associated with 
overseas tours. We identified improper payments totaling about $9,000. 
A USO contract employee, responsible for preparing the expense reports 
for overseas tours, included invoices for these services in several of 
the tour files we audited. According to the contract employee, USO 
officials directed that the invoices be submitted to AFEO for payment. 
The Air Force contracting officials responsible for managing the 
contract stated that in accordance with the terms of the contract 
between AFEO and USO, USO is paid a monthly administrative fee that 
covers numerous administrative tasks, including preparing the expense 
reports for USO tours.[Footnote 11] Contracting officials stated that 
the monthly administrative fee included the cost for all accounting 
services, including those performed by the contractor.[Footnote 12] 
Neither AFEO nor USO could provide an estimate of how long the double 
billings occurred. However, one USO official believed that the contract 
employee started to submit the invoices with the inception of the 
contract in 1999 and ended with the termination of the contractor's 
services in May 2003. Based on our review of documentation provided by 
USO for calendar years 2001 and 2002, the amount billed could have 
totaled $78,000. We found no indication that the individual was paid 
twice for the services performed.

* Improper payments for first-class and business-class travel. Our 
analysis of AFEO's centrally billed account[Footnote 13] for fiscal 
year 2002 and selected tour files revealed numerous instances of 
improper payments by DOD for first-class and business-class travel 
totaling about $66,000. These first-class and business-class airline 
tickets were considered improper because they were not authorized and/
or properly justified in accordance with the Joint Travel 
Regulations[Footnote 14] and the Joint Federal Travel Regulations 
issued by DOD and the Federal Travel Regulation[Footnote 15] issued by 
the General Services Administration (GSA).

AFEO's policy, while not written, is to authorize up to business-class 
travel for overseas flights for USO celebrity tours. According to an 
AFEO official, AFEO's policy is to not authorize first-class travel, 
and the Director of Services, Air Force Office of Installations & 
Logistics, the office to which AFEO reports, is required to approve 
business-class travel. If first-class travel is requested, USO is 
supposed to pay for the cost of the upgrade from business-class to 
first-class. However, contrary to the stated policy and statements made 
by AFEO officials, this was not always the case. In each case, we found 
AFEO purchased and paid for either the unauthorized first-class or 
business-class ticket. We found no instances in which AFEO requested 
reimbursement from USO for the cost difference between business-class 
and first-class airline tickets. Further, neither AFEO nor USO could 
provide any documentation that indicated that USO paid the additional 
cost of first-class travel at the time the tickets were purchased.

USO officials stated that they were unaware that first-class airline 
tickets were charged to AFEO's centrally billed account for USO tours. 
USO officials stated they would have reimbursed AFEO for the cost of 
the upgrade from business-class to first-class if AFEO had notified 
them or if they were provided documentation of the first-class charges. 
AFEO officials acknowledged that closer scrutiny of the documentation 
received from USO should have identified those instances in which 
first-class and business-class airline tickets were improperly paid by 
AFEO. Additionally, AFEO noted that the monthly reconciliation of the 
centrally billed account statement to the individual airline ticket 
transactions[Footnote 16] should have identified the discrepancies we 
found. Our review of the monthly reconciliations showed that first-
class travel was clearly identified, but AFEO failed to seek 
reimbursement from USO. A more in-depth discussion of our analysis of 
the improper first-class and business-class travel we identified is 
detailed in appendix II.

* Improper payments for Air Mobility Command Airlift Services. Our 
analysis of AFEO-issued invitational travel orders and Air Mobility 
Command billing data for airlift services showed that AFEO paid around 
$9,000 for airlift services provided by the Air Mobility Command, for 
individuals traveling on "no cost" travel orders. According to AFEO, no 
cost travel orders are issued to USO tour support personnel and some 
entertainers in those cases where AFEO has stated the government will 
not pay the transportation costs. These orders enable certain support 
personnel or guests of entertainers to utilize government 
transportation with the costs of their transportation being the 
ultimate responsibility of USO. In cases where AFEO has paid for travel 
conducted on no cost orders, it is necessary for USO to reimburse AFEO.

According to AFEO, these improper charges and payments occurred because 
it was unaware that the travel was being billed to its appropriated 
fund cite. An AFEO official believed that the Air Mobility Command was 
billing USO directly for the airlift services. According to an Air 
Mobility Command official, its billing system recognizes airlift 
charges incurred by AFEO personnel and personnel traveling in support 
of AFEO's mission, but the system does not identify if the travel is 
USO related. Nor can the Air Mobility Command bill a nongovernmental 
entity for airlift services unless that entity has an account in the 
command's billing system.

Questionable Expenses:

We identified numerous examples of questionable payments of USO tour 
costs by AFEO totaling about $3,000, as shown in table 4.

Table 4: Examples of Questionable Payments for Items Reimbursed or Paid 
by AFEO for USO Tours for Fiscal Year 2002:

Questionable expenses: Limousine services; Reason item was 
questionable: Appears to be excessive with no explanation or 
documentation showing why it was necessary; Amount: $1,656.

Questionable expenses: Miscellaneous hotel expenses for tour members; 
Reason item was questionable: No existing guidance consistent with DOD 
and GSA regulations; Amount: 579.

Questionable expenses: Airport VIP lounge; Reason item was 
questionable: Appears excessive with no explanation or documentation 
showing why it was necessary; Amount: 375.

Questionable expenses: USO dinner; Reason item was questionable: No 
existing guidance consistent with DOD and GSA regulations; Amount: 330.

Questionable expenses: USO tour producer meals; Reason item was 
questionable: No existing guidance consistent with DOD and GSA 
regulations; Amount: 114.

Questionable expenses: Total questionable expenses identified: 
Amount: $3,054.

Source: GAO analysis of DOD data.

[End of table]

More specifically, we found that AFEO paid for:

* 19 hours of limousine services from hotels in the Washington, D.C., 
area to Andrews Air Force Base, Maryland, at a cost of $1,656 before an 
overseas tour began and:

* several USO thank you dinners for the USO entertainers at the end of 
a tour.

We could find no documentation to indicate why these expenses were 
necessary. For example, concerning the thank you dinners, AFEO 
officials said it was their policy, although unwritten, to reimburse 
USO for one dinner per tour. Our audit of the documentation indicated 
that this practice was inconsistently applied. In one instance, we 
found that AFEO disallowed a thank you dinner for one tour, but it paid 
for several meals that were classified as thank you dinners for another 
tour. Additionally, the documentation was not always adequate to 
identify whether these expenses were for meals for celebrities or for 
other individuals on the tour. For example, we found that tour managers 
and a USO tour producer's meals were reimbursed over a number of days. 
An AFEO official acknowledged that there was no existing guidance that 
identified these items as allowable expenses. AFEO officials told us 
that they plan to discontinue the practice of reimbursing USO for thank 
you dinners.

Unsupported Expenses:

We identified numerous examples of unsupported payments by AFEO 
totaling approximately $344,000 for production support for USO tours. 
Table 5 highlights the unsupported payments we identified.

Table 5: Examples of Unsupported Payments for Items Reimbursed by AFEO 
for USO Tours for Fiscal Year 2002:

Unsupported expenses: Production support[A]; Reason item was 
unsupported: Lack of detailed supporting documentation; Amount: 
$260,660.

Unsupported expenses: Production tour manager expense; Reason item was 
unsupported: Lack of detailed supporting documentation; Amount: 56,250.

Unsupported expenses: Celebrity honorarium; Reason item was 
unsupported: Lack of detailed supporting documentation; Amount: 27,000.

Unsupported expenses: Total unsupported expenses identified; Amount: 
$343,910.

Source: GAO analysis of DOD data.

[A] We identified four instances of unsupported production support. The 
total amount includes the unsupported expenses for all four instances.

[End of table]

We found that supporting documentation for the six celebrity tour files 
we audited was inadequate for a number of invoices, and therefore AFEO 
had no assurance that the reimbursed costs were proper. We asked AFEO 
to provide additional documentation on these invoices. AFEO could not 
provide the necessary documentation and stated that this was the only 
documentation USO provided. We asked USO for detailed support for a 
number of selected invoices. USO did not have support readily available 
in its records. In response to our request for additional 
documentation, USO contacted the vendors and received details on 
several invoices. USO provided additional support for $43,910 of the 
$343,910 included in table 5.

For the largest case in our testing, AFEO reimbursed $216,750 for 
production support based on a single entry on an invoice. In contrast, 
our examination of another invoice for production support included an 
itemized list of specific items such as microphone stands, speakers, 
and stage supports. Additionally, based on our audit of five 
noncelebrity tours, we found that documentation was far more 
comprehensive in support of the expenses paid by AFEO.

Additionally, in some instances we were unable to identify which 
individuals received celebrity honoraria. We traced names from the 
invitational travel orders on the six tours audited but were unable to 
verify which individuals were being paid honoraria and which ones were 
not. In some cases, individuals who were part of a celebrity's 
entourage were classified as celebrities and received honoraria while 
others were not. AFEO agreed that it was not always possible to 
identify which names listed on invitational travel orders received 
honoraria. In one instance, honoraria and production support costs were 
charged for 13 individuals, but the supporting documentation indicated 
that only 12 individuals participated in the tour. An AFEO official 
stated that the individual's itinerary must have changed and 
acknowledged that this should have been documented in the file. Based 
on available documentation, AFEO was charged $900 in honoraria and 
production support costs for an individual who did not participate in 
the tour. As a result of our analysis, AFEO verified that this 
individual did not participate in the tour, and it is seeking 
reimbursement from USO.

USO officials acknowledged the problems we identified with the 
transactions we reviewed. They stated they did not have a clear 
understanding of AFEO's policy as to which expenses were reimbursable 
and which ones were not. They stated that they submitted invoices based 
on prior verbal agreements and past practices with AFEO. USO officials 
stated that AFEO's practice over the last several years was 
inconsistent and that reimbursement for certain expense items was "hit 
or miss" from one tour to the next. According to USO officials, it was 
their intention to submit invoices and vouchers for expenses in 
accordance with federal laws and regulations. However, because they had 
no specific instructions identifying which costs were allowable and 
which costs were not allowable, it was sometimes frustrating for them 
to decide what to include as an expense item in an invoice package.

Actions Taken to Improve Controls over Support Provided to USO:

USO and AFEO acknowledged that they need better policies and procedures 
to provide reasonable assurance that expenses are authorized in an 
appropriate manner and are reimbursable based upon the contracts 
between the organizations. As a result of our audit, USO and AFEO 
officials told us they have initiated some actions to improve 
accountability and controls over federal funds used to support USO's 
activities and to recover funds paid by AFEO that USO should have paid. 
For example, a USO official told us USO is in the process of developing 
written guidance for its celebrity tour managers and accounting staff 
that specifies those expenses that are reimbursable under the contracts 
with AFEO and those that are not.

AFEO officials told us that to improve financial and management 
controls, their office, in conjunction with the Air Force Directorate 
of Services, is in the process of drafting an operating instruction for 
AFEO. They stated that this operating instruction will address AFEO 
roles and responsibilities, overseas areas served, points of contact, 
promotional package selection process, tour projections, authorized 
reimbursements, invitational travel orders, passports, visas, 
immunizations, military and commercial transportation, final payment 
process, and tour evaluation forms. Additionally, according to AFEO 
officials, they have taken the following actions.

* Established procedures to track those contract reimbursement and 
purchase card transactions used to fund USO celebrity tours versus 
noncelebrity tours.

* Created a listing of reimbursable items, specified by contract line 
item number, allowed and the required documents needed for final 
payment processing. The listing was provided to USO, as well as to the 
U.S. Air Force contracting office responsible for administering the 
contracts between AFEO and USO for a modification to the basic 
contract.

* Improved controls over the purchase of airline tickets charged to the 
centrally billed account by implementing procedures for processing 
requests for approval of upgrades to business-class travel through the 
U.S. Air Force, Director of Services. According to AFEO officials, they 
now document cost comparisons of economy-class airline tickets versus 
business-class travel in the AFEO business-class authorization letter. 
A copy of the approved upgrade letter will be provided to the contract 
travel office and maintained in the individual tour folders with copies 
of the annotated invitational travel orders.[Footnote 17] For those 
portions of overseas travel that are upgraded to business-class because 
no other class of travel is available, the commercial travel office 
will certify these circumstances by entering a statement on the 
itinerary as required by the Joint Travel Regulations. No prior 
approval is necessary under these circumstances. USO will fund any 
domestic portion of travel that incurs additional costs above economy-
and/or coach-class standards. If any other type of upgrade is provided, 
at no additional cost to AFEO, the change in travel class will be noted 
with a memorandum for the record and filed in the tour folder.

* Improved oversight of expenses reimbursed to USO for overseas tours. 
According to AFEO officials, now, at least three individuals are 
reviewing expense packages for payment certification. First, the 
applicable AFEO circuit manager reviews the voucher package to assure 
receipts and requests for reimbursement match the itinerary and are 
appropriate. Second, the AFEO financial advisor reviews the package to 
assure reimbursements are authorized and properly documented, then 
signs the package as the acceptance officer. Third, either the AFEO 
administrative assistant or the AFEO deputy director performs a final 
review and certifies the package for payment. The Defense Finance and 
Accounting Form 250 is prepared and certified by two signatures. 
Additionally, as of September 2003, AFEO had recovered about $19,000 in 
improper and questionable payments it made to support USO overseas 
tours.

We have not audited any transactions since AFEO officials stated these 
actions have been taken and thus cannot conclude whether these actions 
have actually taken place or have resulted in improved financial and 
management controls.

Conclusions:

As U.S. armed forces continue to be actively engaged in operations 
throughout the world, it is important that troop morale is maintained 
at high levels. USO's overseas entertainment tours have provided 
quality entertainment to the troops, and DOD's financial and in-kind 
support has been key to the Armed Forces Professional Entertainment 
Program's continued success. When a nongovernmental organization, such 
as USO, receives federal funds to assist a government organization, 
such as DOD, that organization is accountable for the proper use of the 
funds. A key factor in helping achieve that accountability is to 
implement appropriate internal controls. However, our audit found that 
DOD's program lacks effective financial and management controls to 
provide reasonable assurance that federal funds are used consistent 
with the terms specified in grant and contract agreements. Neither AFEO 
nor USO can determine the total amount of financial or in-kind support 
DOD provides to sustain USO's overseas tours. Furthermore, without 
adequate supplemental guidance to identify allowable costs for overseas 
tours and effective management oversight, AFEO does not have reasonable 
assurance that it is paying for only allowable costs and that 
appropriated funds are being spent in accordance with federal laws and 
regulations. Moreover, USO's failure to fully comply with audit 
requirements in grant and contract agreements reduces DOD's assurance 
that USO has adequate internal controls over federal program funds, 
leaving the program vulnerable to fraud, waste, and abuse. Had USO's 
independent auditor fully tested internal controls, the problems we 
identified might have surfaced. AFEO officials stated they have taken 
action to improve management oversight during the review of invoice 
packages and to develop written policies and procedures consistent with 
DOD and federal travel regulations. Although these actions, if 
implemented, should assist AFEO in achieving a stronger control 
environment, an earnest commitment by DOD and USO management is also 
needed to ensure proper controls and use of DOD funds.

Recommendations for Executive Action:

To improve financial and management controls over support provided to 
USO, we recommend that the Secretary of Defense direct the Under 
Secretary of Defense for Personnel and Readiness, in consultation with 
the Secretary of the Air Force, to take the following actions.

* Develop and implement a record-keeping system capable of reporting 
all appropriated and nonappropriated funds, including all in-kind 
goods, services, and infrastructure provided by DOD in support of USO 
overseas tours and operations. Among other things, this system should 
clearly identify airlift services provided in support of USO tours.

* Take steps to ensure USO complies with the Single Audit Act as 
stipulated in its grant and contractual agreements with DOD, which 
require an annual audit that tests internal controls over federal funds 
to assess control risk.

* Develop and consistently implement supplemental guidance, in 
accordance with contract terms, and federal travel and acquisition 
regulations, to identify allowable expenses and reimbursements and 
appropriate documentation for:

* travel-related USO expenses, including commercial air travel,

* honoraria, and:

* services and equipment provided for USO.

* Identify all expenses AFEO inappropriately paid, which should have 
been paid by USO, and request that USO fully reimburse AFEO for the 
expenses.

* Arrange for DOD's Inspector General to perform internal control 
audits periodically to determine if the control weaknesses we 
identified are resolved, and report the results of these audits to the 
Secretary of Defense and the Secretary of the Air Force.

Agency Comments and Our Evaluation:

In commenting on a draft of this report, the Principal Deputy Under 
Secretary of Defense for Personnel and Readiness concurred with four of 
our recommendations and partially concurred with the fifth. The 
Principal Deputy Under Secretary indicated that actions are underway or 
completed to address our recommendations and correct the deficiencies 
noted in our report. Furthermore, although he concurred with our first 
recommendation, he acknowledged that DOD financial systems do not 
support an automated means for reporting the type of information we 
suggested. However, he noted that AFEO continues to implement and 
improve its record-keeping systems to clearly identify and report USO 
tour costs by establishing:

a separate Bank of America centrally billed account for all commercial 
transportation costs associated with USO celebrity tours;

a separate purchase card account for visas, excess baggage, printing, 
shipping, and miscellaneous costs associated with USO celebrity tours; 
and:

an accounting line in the Air Mobility Command billing process to 
identify, where possible, military airlift transportation costs 
associated with USO celebrity tours.

The Principal Deputy Under Secretary further indicated AFEO has taken 
action to identify and recoup expenses inappropriately reimbursed to 
USO, and that DOD Instruction 1330.13, Armed Forces Entertainment, will 
also be revised to require the military services to submit to AFEO an 
annual report identifying appropriated funds, nonappropriated funds, 
and in-kind goods or services provided to USO. According to the 
Principal Deputy Under Secretary, all actions are to be completed by 
April 30, 2004.

Finally, the Principal Deputy Under Secretary partially concurred with 
our final recommendation, agreeing that periodic internal control 
audits are necessary to determine whether control weaknesses we 
identified are resolved. He believes, however, that USO's independent 
auditor's annual audit, performed in accordance with the Single Audit 
Act, rather than audits performed by the DOD Inspector General, would 
meet the requirement to test internal controls over federal funds to 
assess control risk, and that the DOD Inspector General would provide 
periodic oversight of the single audits performed for USO. We agree 
that these actions meet the intent of our recommendation.

The Principal Deputy Under Secretary's comments are included in 
appendix III of this report.

Unless you publicly announce its contents earlier, we plan no further 
distribution of this report until 10 days from the date of this letter. 
At that time, we will send copies of this report to interested 
congressional committees with jurisdiction over DOD's budget, as well 
as to the Secretary of Defense, the Secretary of the Air Force, and the 
President and Chief Executive Officer of USO. We will make copies 
available to others on request. In addition, the report will be 
available at no charge on the GAO Web site at http://www.gao.gov.

Please contact Sharon L. Pickup on (202) 512-9619 or Greg D. Kutz on 
(202) 512-9505 if you or staff have any questions. You may also contact 
George F. Poindexter, Assistant Director, on (202) 512-7213, or Darby 
W. Smith, Assistant Director, on (202) 512-7803. Major contributors to 
this report are listed in appendix IV.

Sharon L. Pickup: 
Director: 
Defense Capabilities and Management:

Gregory D. Kutz: 
Director: 
Financial Management and Assurance:

Signed by Sharon L. Pickup and Gregory D. Kutz: 

[End of section]

Appendix I: Scope and Methodology:

We reviewed the Department of Defense's (DOD) Armed Forces 
Entertainment Program and its partnership with the United Services 
Organization (USO) in providing U.S. armed forces with celebrity 
entertainment overseas. We collected, reviewed, and analyzed relevant 
program information and conducted interviews with DOD and USO officials 
responsible for administering the Armed Forces Entertainment Program, 
specifically officials from the Office of the Under Secretary of 
Defense (Personnel and Readiness), Morale, Welfare and Recreation 
Policy; Armed Forces Entertainment Office (AFEO); Defense Supply 
Service--Washington, Department of the Army; 11th Contracting Squadron, 
Department of the Air Force, Bolling Air Force Base, District of 
Columbia; and USO. Additionally, we interviewed personnel with the 
Deloitte and Touche Accounting Firm, the independent auditing firm 
responsible for auditing USO's annual consolidated financial statements 
and supplemental schedules.

To determine the source and amount of federal funding provided to 
support USO, we reviewed and analyzed relevant congressional 
authorization and appropriations acts. We also reviewed and analyzed 
applicable grant agreements; contract negotiation files; DOD and Air 
Force operations and maintenance budget data; USO's annual audited 
financial statements and supporting documentation and annual financial 
reports; AFEO financial records, including the centrally billed and 
purchase card accounts; and Air Mobility Command billing data for 
passengers and baggage for selected airlift missions. We discussed 
discrepancies that existed among the various financial records with 
AFEO, USO, Air Force Contracting Squadron, and Air Mobility Command 
officials. Other than for the grants, we were unable to obtain complete 
appropriated funding data for fiscal years 2000 through 2002 for 
federal funds provided to USO for overseas tours. We could not obtain 
complete funding data because of limitations in DOD's record-keeping 
systems, which did not differentiate between costs for celebrity versus 
noncelebrity tours. Therefore, AFEO officials agreed to take the steps 
necessary to provide, to the extent possible, complete funding data for 
fiscal year 2002. However, AFEO officials could not assure us that the 
totals included all appropriated funds provided in support of USO 
overseas tours. Additionally, they told us they could not provide the 
same information for fiscal years 2000 and 2001, because the records 
for those years were less complete, and the time and resources required 
to gather and verify the information were more than could be expended 
given the unit's current workload. DOD officials could not provide 
sources and amounts for total nonappropriated support provided to USO 
because their recording-keeping systems do not aggregate or report the 
needed information. We reviewed USO records for in-kind contributions, 
but those records do not clearly distinguish private sector 
contributions from federal contributions.

To assess the adequacy of internal controls in place to provide 
reasonable assurance that appropriated federal funds are used 
consistent with the terms specified, we reviewed applicable federal 
laws and regulations, DOD policies and procedures, and GAO's Standards 
for Internal Control in the Federal Government.[Footnote 18] 
Additionally, we audited the contract between USO and AFEO. We 
interviewed USO and AFEO officials to gain an understanding of internal 
controls, and reviewed the payment process for celebrity and 
noncelebrity tours. In gathering this information, we concluded that 
internal controls over the payment process were ineffective, and 
therefore we limited our auditing to a nonrepresentative selection of 
tours. We audited selected USO tour transactions to evaluate the design 
and implementation of key internal control procedures and activities. 
We selected 11 tours--6 celebrity and 5 noncelebrity tours. We traced 
expenses that were paid by AFEO to supporting invoices and receipts, 
requesting additional documentation from AFEO as well as from vendors 
for certain transactions. In addition to our audit of selected 
transactions, we looked at whether indications existed of potentially 
improper and questionable transactions as well as invoices that were 
reimbursed without adequate documentation. We discussed discrepancies 
with AFEO, USO or contract officials at Bolling Air Force, District of 
Columbia, who were responsible for administering the contract between 
USO and AFEO. Additionally, we interviewed the USO contract accountant 
to determine the relationship between accounting fees collected under 
the contract and those billed as part of tour expenses that were 
submitted to AFEO by USO for reimbursement. Based on our initial review 
of the tour files, we also audited AFEO's centrally billed and purchase 
card accounts for fiscal year 2002.

We audited AFEO's centrally billed account for fiscal year 2002 to 
determine if the amount spent on first-class and business-class airline 
travel in support of USO tours was in accordance with DOD and federal 
policies and procedures. To assess the magnitude of first-class and 
business-class travel, we isolated those transactions billed to AFEO's 
centrally billed account specifically related to airline travel. We 
created a new file that contained only the first-class and business-
class travel billed to AFEO's centrally account. The airline industry 
uses certain fare and service codes to indicate the class of service 
purchased and provided. The database contained transaction specific 
information, including the fare and service code to price the tickets 
AFEO purchased. Using data-mining techniques, we identified the fare 
basis codes that corresponded to the issuance of first-, business-, and 
coach-class travel. Using these codes, we selected all airline 
transactions that contained at least one leg in which AFEO paid for 
first-class and business-class travel accommodations. We estimated the 
cost of coach travel using the government rates established by General 
Services Administration (GSA). For flights not covered by GSA, we 
estimated coach travel using the lowest current rates identified from 
Expedia.com. We also analyzed purchase card transactions for fiscal 
years 2001 and 2002 to provide reasonable assurance that charges were 
in accordance with DOD policies and procedures and in support of USO 
tours.

We also reviewed USO's independent auditor's reports and management 
letters for calendar years 1996 through 2001, as well as the 
independent auditor's work papers for audit work related to USO 
transactions with AFEO for calendar year 2001. The 2001 audit was the 
most recently completed audit that was available through the end of our 
field work.

In performing this audit, we used the same accounting records and 
financial reports DOD and USO use to manage the Armed Forces 
Entertainment Program. We did not independently determine the 
reliability of all the reported financial information. However, our 
recent audits addressing the reliability of DOD's financial statements 
question the reliability of reported financial information.[Footnote 
19] Furthermore, our recent audits of DOD's travel card and purchase 
card accounts identified weaknesses in the overall control environments 
and breakdowns in key controls relied on to manage these programs, 
leaving them vulnerable to fraud, waste, and abuse.[Footnote 20]

We performed our audit from March 2003 through September 2003 in 
accordance with generally accepted government auditing standards.

[End of section]

Appendix II: Details of Improper First-Class and Business-Class 
Travel:

Table 1 details our analysis of the improper first-class and business-
class travel we identified based on our limited testing. Without 
authorization or adequate justification, these cases illustrate the 
improper use of first-class and business-class travel and the resulting 
increase in travel costs. Following the table is more detailed 
information on some of these cases.

Table 6: Examples of Improper First-Class and Business-Class Travel 
Paid by the Armed Forces Entertainment Office Identified by GAO for 
Fiscal Year 2002:

Example number: 1; Type of tour: Celebrity; Itinerary: Los Angeles to 
Washington, D.C., and back; San Francisco to Washington, D.C.; 
Philadelphia to Cincinnati; Philadelphia to Dallas; Class of tickets 
purchased: 8 first-class tickets; Cost of tickets paid: $16,658; 
Estimated pretax cost of coach fare tickets: $1,680; Reason 
travel was improper: First-class travel was not authorized.

Example number: 2; Type of tour: Celebrity; Itinerary: Los Angeles to 
Washington, D.C., and back; San Francisco to Washington, D.C.; 
Philadelphia to Cincinnati; Philadelphia to Dallas; Class of tickets 
purchased: 6 first-class tickets; Cost of tickets paid: 8,397; 
Estimated pretax cost of coach fare tickets: 1,901; Reason 
travel was improper: First-class travel was not authorized.

Example number: 3; Type of tour: Celebrity; Itinerary: Washington, 
D.C., to Atlanta to Las Vegas; Dallas to Washington, D.C.; Boston to 
Washington, D.C., and back; and Albuquerque to Dallas; Class of tickets 
purchased: 7 business-class tickets; Cost of tickets paid: 13,488; 
Estimated pretax cost of coach fare tickets: 1,400; Reason 
travel was improper: Business-class was not authorized.

Example number: 4; Type of tour: Noncelebrity; Itinerary: Washington, 
D.C., to Atlanta to Las Vegas; Dallas to Washington, D.C.; Boston to 
Washington, D.C., and back; and Albuquerque to Dallas; Class of tickets 
purchased: 3 business-class tickets; Cost of tickets paid: 2,193; 
Estimated pretax cost of coach fare tickets: 2,193[A]; Reason 
travel was improper: Lacked specific documentation justifying business-
class travel.

Example number: 5; Type of tour: Celebrity; Itinerary: Los Angeles to 
Washington, D.C., and back; Pittsburg to Washington, D.C.; Class of 
tickets purchased: 2 first-class tickets; Cost of tickets paid: 1,556; 
Estimated pretax cost of coach fare tickets: 720[B]; Reason 
travel was improper: Only business-class was authorized.

Example number: 6; Type of tour: Celebrity; Itinerary: Los Angeles to 
Washington, D.C.; Frankfurt, Germany; Cairo, Egypt, and back; Class of 
tickets purchased: 2 business-class tickets; Cost of tickets paid: 
15,660; Estimated pretax cost of coach fare tickets: 7,694; 
Reason travel was improper: Lacked specific documentation justifying 
business-class travel.

Example number: 7; Type of tour: Celebrity; Itinerary: Los Angeles to 
Vancouver, British Columbia; London, England; Doha, Qatar; Amman, 
Jordan, and back; Class of tickets purchased: 1 business-class ticket; 
Cost of tickets paid: 8,005; Estimated pretax cost of coach fare 
tickets: 4,085; Reason travel was improper: Lacked specific 
documentation justifying business-class travel.

Example number: 8; Type of tour: Noncelebrity; Itinerary: Cairo, Egypt, 
to Istanbul, Turkey, to Athens, Greece, to various cities in Italy; 
Class of tickets purchased: 4 business-class tickets; Cost of tickets 
paid: 5,052; Estimated pretax cost of coach fare tickets: 4,863; 
Reason travel was improper: Lacked specific documentation 
justifying business-class travel.

Example number: 9; Type of tour: Noncelebrity; Itinerary: Cairo, Egypt, 
to Istanbul, Turkey; Class of tickets purchased: 13 business-class 
tickets; Cost of tickets paid: 4,441[C]; Estimated pretax cost of coach 
fare tickets: 3,650; Reason travel was improper: Lacked 
specific documentation justifying business-class travel.

Example number: 10; Type of tour: Celebrity; Itinerary: Atlanta and 
Little Rock, to Washington, D.C.; New York and Chicago to Tulsa, Okla.; 
Class of tickets purchased: 2 first-class tickets; Cost of tickets 
paid: 2,975[D]; Estimated pretax cost of coach fare tickets: 1,402; 
Reason travel was improper: First-class travel was not 
authorized.

Total; Cost of tickets paid: $78,425; Estimated pretax cost of coach 
fare tickets: $29,588.

Source: GAO analysis of DOD data.

[A] Estimated leg of business-class travel.

[B] Estimated business-class fare.

[C] Estimated legs of first-class fare.

[D] Estimated legs of first-class fare.

[End of table]

Example 1 involved five individuals traveling first class at a cost to 
the government of $16,658. An audit of the tour files and the travel 
order indicated that the travel order specifically states that travel 
at government expense shall not exceed the cost of common carrier 
(i.e., the rate authorized under the government contract). However, the 
individuals were issued first-class tickets for this trip, resulting in 
an additional cost to the government of $14,978 compared to an 
estimated total cost of about $1,680 for eight coach tickets.

Example 2 involved six individuals traveling first class at a cost to 
the government of $8,397. An audit of the tour files and the travel 
order indicated that the travel order specifically states that travel 
at government expense shall not exceed the cost of common carrier. 
However, the individuals were issued first-class tickets for this trip, 
resulting in an additional cost to the government of $6,496 compared to 
an estimated total cost of about $1,901 for six coach tickets. This 
tour also had seven individuals traveling business-class at a cost to 
the government of $13,488 for domestic flights. According to AFEO, 
business-class is only authorized for overseas flights, not domestic 
flights. This resulted in an additional cost to the government of 
$12,088 compared to an estimated cost of about $1,400 for coach-class 
tickets.

Example 5 involved two individuals who traveled first class from New 
York-LaGuardia to Jacksonville, Florida. Supporting documentation 
indicates that business-class was authorized. The cost of two business-
class tickets amounted to $720[Footnote 21] compared to the two first-
class tickets of $1,556. Without authorization or valid justification, 
the additional $836 spent on the first-class ticket was improper. 
Furthermore, our audit showed that the difference in the cost of first-
class travel and the cost of economy class can be significant. For 
example, during a review of one tour, we found that the cost of one 
first-class round trip ticket was $3,982, whereas an economy-class 
airline ticket for the same trip cost $280.

GSA and DOD travel regulations specify stringent circumstances under 
which premium-class travel (e.g., first-class, business-class) can be 
authorized. For example, the Joint Travel Regulations (JTR)[Footnote 
22] and the Joint Federal Travel Regulations (JFTR) limit the authority 
to authorize first-class travel to the Secretary of Defense, his 
Deputy, or another authority as designated by the Secretary of Defense. 
Further, the delegation of authority to authorize and/or approve first-
class travel is to be held at "as high an administrative level as 
practicable to ensure adequate consideration and review of the 
circumstances necessitating the first-class accommodations." A DOD 
directive[Footnote 23] on transportation and management specifically 
states that the secretaries for personnel within the military services 
and secretariats are the approving authorities for first-class travel. 
The military service secretaries may delegate approval authority for 
first-class travel to under secretaries, service chiefs of staff or 
their vice and/or deputy chief of staff, and four-star major commanders 
or their three-star vice and/or deputy commander. The directive 
explicitly states that approving authority cannot be delegated to 
anyone lower than these officials. DOD and GSA policies also require 
that authorization for premium-class airline accommodations be made in 
advance of the actual travel unless extenuating circumstances or 
emergency situations make advance authorization impossible.

Specifically, JTR and JFTR require that first-class accommodation be 
authorized only when:

* coach-class airline accommodations or premium-class other than first-
class airline accommodations are not reasonably available;

* first-class airline accommodations are necessary because the employee 
and/or dependent is so handicapped or otherwise physically impaired 
that other accommodations cannot be used, and such condition is 
substantiated by competent medical authority; or:

* first-class airline accommodations are needed when exceptional 
security circumstances require such travel.

JTR and JFTR allow the transportation officer, in conjunction with the 
official who issued the travel order, to approve premium-class travel 
(i.e. business-class) other than first-class travel. DOD restricts 
premium-class travel to the following eight circumstances:

* Regularly scheduled flights between origin and destination provide 
only premium-class accommodations and it is certified on the travel 
voucher.

* Coach-class travel is not available in time to accomplish the purpose 
of the official travel, which is so urgent it cannot be postponed.

* The traveler's disability or other physical impairment requires use 
of other than first-class service and the condition is substantiated in 
writing.

* Premium-class accommodations are required for security purposes or 
because exceptional circumstances make the use essential to the 
successful performance of the mission.

* Coach-class service on authorized and/or approved foreign carriers 
does not provide adequate sanitation or meet health standards.

* Premium-class accommodations would result in overall savings to the 
government because of subsistence costs, overtime, or lost productive 
time that would be incurred while awaiting coach-class accommodations.

* Transportation is paid in full by a nonfederal source.

* Travel is to or from a destination outside the continental United 
States, and the scheduled flight time (including stopovers) is in 
excess of 14 hours. However, a rest stop is prohibited when travel is 
authorized by premium-class accommodations.

Both GSA and DOD regulations allow a traveler to upgrade to premium-
class, other than first-class travel at personal expense, including 
through redemption of frequent traveler benefits. GSA also identified 
agency mission as one of the criteria for premium-class travel.

[End of section]

Appendix III: Comments from the Department of Defense:

PERSONNEL AND READINESS:

OFFICE OF THE UNDER SECRETARY OF DEFENSE 4000 DEFENSE PENTAGON 
WASHINGTON, D.C. 20301-4000:

NOV 13 2003:

Ms. Sharon Pickup:

Director, Defense Capabilities and Management:

U.S. General Accounting Office Washington, DC 20548:

Dear Ms. Pickup:

This is the Department of Defense (DoD) response to the GAO draft 
report, GAO-04-56, "DEFENSE MANAGEMENT: DoD Needs to Strengthen 
Internal Controls Over Funds Used to Support USO Activities," dated 
September 29, 2003 (GAO Code 350320).

The DoD concurs with recommendations one through four in the draft 
report and is already taking action to correct the noted deficiencies. 
Responses to the specific recommendations are provided in the 
attachment. The Department partially concurs with recommendation five. 
The fact that the USO's independent auditors will perform their annual 
audit in accordance with the Single Audit Act would meet the 
requirement to test internal controls over federal funds to assess 
control risk. The DoD Inspector General will provide periodic oversight 
of the Single Audits performed for the USO.

The Department appreciates the opportunity to comment on the draft 
report.

Sincerely,

Signed by: 

Charles S. Principal Deputy:

Enclosure: As stated:

GAO-04-56/GAO CODE 350320:

"DEFENSE MANAGEMENT: DOD NEEDS TO STRENGTHEN INTERNAL CONTROLS OVER 
FUNDS USED TO SUPPORT USO ACTIVITIES":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense for Personnel and Readiness, in 
consultation with the Secretary of the Air Force, to develop and 
implement a record keeping system capable of reporting all appropriated 
and non-appropriated funds, including all in-kind goods, services, and 
infrastructure provided by DoD in support of USO overseas tours and 
operations. Among other things, this system should clearly identify 
airlift services provided in support of USO tours. (Page 25/Draft 
Report):

DoD RESPONSE: Concur, with comment.

* The DOD financial systems do not support an automated means for 
reporting other support to USO tours, such as non-appropriated funds, 
in-kind goods, services, infrastructure, and military airlift provided 
with installation assets. However, Armed Forces Entertainment (AFE) has 
implemented and continues to implement changes to existing AFE record-
keeping systems in order to clearly identify and report USO tour costs.

* AFE will establish a separate Bank of America centrally billed account 
for all commercial transportation costs associated with USO celebrity 
tours. Estimated Completion Date (ECD): 30 Nov 03:

* A separate purchase card account will be established for any visas or 
other official travel permits, printing, shipping and miscellaneous 
costs associated with USO celebrity tours. ECD: 30 Nov 03:

o AFE will work with Air Mobility Command (AMC) to establish accounting 
lines in the AMC billing process to identify, where possible, military 
airlift transportation costs associated with USO celebrity tours. ECD: 
31 Jan 04:

* DODI 1330.13 Armed Forces Entertainment will be revised to require the 
military Services to submit to AFE an annual report identifying 
appropriated funds, non-appropriated funds, in-kind goods or services 
provided to the USO. ECD: 30 Apr 04:

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense for Personnel and Readiness, in 
consultation with the Secretary of the Air Force, to take steps to 
ensure USO complies with the Single Audit Act as stipulated in its 
grant and contractual agreements with DoD, which require an annual 
audit that tests internal controls over federal funds to assess control 
risk. (Page 25/Draft Report):

DoD RESPONSE: Concur.

* AFE, by letter on 2 Oct 03, requested that the 11tH Contracting 
Squadron, Bolling Air Force Base ensure the USO complies with the 
contract requirement to perform an annual audit in accordance with the 
Single Audit Act and that USO provide a copy of the annual audit to 
AFE. The USO has instructed their independent auditors to perform their 
annual audit in accordance with the Act's requirements. Closed.

RECOMMENDATION 3: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense for Personnel and Readiness, in 
consultation with the Secretary of the Air Force, to develop and 
consistently implement supplemental guidance, in accordance with 
contract terms, and federal travel and acquisition regulations, to 
identify allowable expenses and reimbursements and appropriate 
documentation for:

* travel-related USO expenses, including commercial air travel * 
honoraria, and:

* services and equipment provided for USO. (Page 25/Draft Report):

DoD RESPONSE: Concur.

* Armed Forces Entertainment, on 10 Sep 03, requested that the 11tH 
Contracting Squadron, Bolling Air Force Base, modify the contract with 
USO to include detailed descriptions of authorized reimbursable items, 
to include travel, honoraria, services and equipment. The modification 
describes the appropriate documentation to be submitted with invoices 
for reimbursement of USO tour expenses.

* AFE provided this detailed list of authorized reimbursable items to 
the USO on 14 Jul 03 to incorporate into their billing process. Closed. 
* AFE finalized an operating instruction on 10 October 2003 issued by 
the Director of Services that provides clear, written guidance for what 
are allowable reimbursable expenses and outlines AFE's internal 
processes and procedures. Closed.

* AFE Chief or Deputy will periodically review the files to ensure 
compliance with established guidance. Closed.

DODI 1330.13 Armed Forces Entertainment will be revised to reflect the 
above guidance and also designate AFE as the single coordinating focal 
point for all armed forces entertainment overseas. ECD: 30 Apr 04:

RECOMMENDATION 4: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense for Personnel and Readiness, in 
consultation with the Secretary of the Air Force, to identify all the 
expenses AFE inappropriately paid, that should have been paid by USO, 
and request that USO fully reimburse AFE for the expenses. (Page 25/
Draft Report):

DoD RESPONSE: Concur.

* AFE has taken action to identify and recoup expenses inappropriately 
reimbursed to the USO.

* Reimbursements for alcohol, celebrity honorarium, first-class travel 
and Air Mobility Command airlift services have been received from the 
USO. Closed.

* AFE will review files to identify any remaining unauthorized expenses 
for meals, production support, duplicate billing for administrative 
assistant and lodging and prepare a request for reimbursement from the 
USO to be paid within 30 days of receipt. ECD: 15 Dec 03:

RECOMMENDATION 5: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense for Personnel and Readiness, in 
consultation with the Secretary of the Air Force, to arrange for DoD's 
Inspector General to perform internal control audits periodically to 
determine if the control weaknesses we identified are resolved, and 
report the results of these audits to the Secretary of Defense and the 
Secretary of the Air Force. (Pages 25-26/Draft Report):

DoD RESPONSE: Partially concur.

* The fact that the USO's independent auditors will perform their annual 
audit in accordance with the Single Audit Act would meet the 
requirement to test internal controls over federal funds to assess 
control risk. The DoD Inspector General will provide periodic oversight 
of the Single Audits performed for the USO.

[End of section]

Appendix IV: Staff Acknowledgments:

Claudia J. Dickey, Stephen P. Donahue, Johnny R. Bowen, Wayne A,. 
Ekblad, Kenneth E. Patton, M. Jane Hunt, Nancy L. Benco, and Julio A. 
Luna made significant contributions to this report.

FOOTNOTES

[1] Honoraria are daily allowances paid for celebrity and noncelebrity 
performers, as well as tour managers and producers.

[2] Pub. L. No. 96-165, § 8, 93 Stat. 1267 (1979) (codified as amended 
at 36 U.S.C. § 220107 (2002)); DOD/USO Memorandum of Understanding, 
November 9, 1987; DOD Directive 1330.12, United Services Organizations, 
Inc., November 9, 1987; DOD Directive 1330.12, United Services 
Organizations, Inc., November 1, 2000; and DOD Instruction 1330.13, 
Armed Forces Professional Entertainment Program Overseas, September 8, 
1985.

[3] Department of Defense Appropriations Act, 2000, Pub. L. No. 106-79, 
§ 8143, 113 Stat. 1212, 1270 (1999); Department of Defense 
Appropriations Act, 2001, Pub. L. No. 106-259, § 8112, 114 Stat. 656, 
699 (2000); Department of Defense and Emergency Supplemental 
Appropriations for Recovery From and Response to Terrorist Attacks on 
the United States Act, 2002, Pub. L. No. 107-117, § 8111, 115 Stat. 
2230, 2272 (2002); and Department of Defense Appropriations Act, 2003, 
Pub. L. No. 107-248, § 8129, 116 Stat. 1519, 1567 (2002).

[4] This type of contract does not specify a firm quantity of supplies 
or services (other than a minimum or maximum quantity) and provides for 
the issuance of orders for the delivery of supplies or the performance 
of tasks during the period of the contract. 

[5] According to AFEO officials, USO generally does not produce 
noncelebrity tours. However, USO provides the funds to pay those who 
are not celebrities about 70 percent of their honoraria just prior to 
tour commencement. USO requests reimbursement for the payments plus a 
19 percent fee, after the tours are completed.

[6] 31 U.S.C. § 7501-7507; Office of Management and Budget (OMB) 
Circular A-133, Audits of States, Local Governments, and Non-Profit 
Organizations.

[7] Federal awards include grants, loans, loan guarantees, property, 
cooperative agreements, interest subsidies, insurance, food 
commodities, direct appropriations, and federal cost reimbursement 
contracts. 

[8] According to GAO standards, management and employees should 
establish and maintain a control environment throughout the 
organization that sets a positive and supportive attitude toward 
internal control. See GAO's Standards for Internal Control in the 
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999).

[9] Invitational travel orders are prepared for individuals not 
employed by the U.S. government who are traveling for official 
government business. Individuals taking part in the entertainment 
program are authorized to tour based on these orders. These orders 
contain guidance governing the conditions under which the individual or 
group is touring.

[10] The Joint Federal Travel Regulations apply to uniformed service 
members and the Joint Travel Regulations applies to DOD civilian 
personnel. 

[11] The monthly administrative fee was $3,647 from fiscal years 1999 
through 2002. It increases incrementally through fiscal year 2007. The 
fiscal year 2003 fee is $3,868 per month.

[12] The contractor performed additional tasks for USO, but her primary 
role was to prepare invoice packages. According to USO, this comprised 
the majority of the individual's work.

[13] DOD activities use centrally billed accounts for transportation 
purchases such as airline tickets, train tickets, and other travel-
related items.

[14] The Joint Travel Regulations authorize travel and transportation 
allowances for non-DOD employees on the same basis as DOD employees.

[15] 41 C.F.R. Parts 300-304.

[16] As part of the reconciliation process, AFEO includes the 
travelers' itineraries to match the airline ticket transactions in the 
summary statement. The itinerary document identifies the type of 
airline fare taken by the traveler (i.e., first-class, business-class, 
or coach). 

[17] The commercial travel office is the travel agent contracted by 
AFEO and is authorized to issue tickets for commercial transportation.

[18] Standards for Internal Control in the Federal Government (GAO/
AIMD-00-21.3.1).

[19] U.S. General Accounting Office, Department of Defense: Status of 
Financial Management Weaknesses and Progress Toward Reform, GAO-03-931T 
(Washington, D.C.: June 25, 2003); U.S. General Accounting Office, DOD 
Financial Management: Important Steps Underway But Reform Will Require 
a Long-term Commitment, GAO-02-784T (Washington, D.C.: June 4, 2002); 
U.S. General Accounting Office, DOD Financial Management: Integrated 
Approach, Accountability, Transparency, and Incentives Are Keys to 
Effective Reform, GAO-02-537T (Washington, D.C.: Mar. 20, 2002). 

[20] U.S. General Accounting Office, Travel Cards: Internal Control 
Weaknesses at DOD Led to Improper Use of First and Business Class 
Travel, GAO-04-88 (Washington, D.C.: Oct. 24, 2003); U.S. General 
Accounting Office, Purchase Cards: Control Weaknesses Leave the Air 
Force Vulnerable to Fraud, Waste, and Abuse, GAO-03-292 (Washington, 
D.C.: Dec. 20, 2002); U.S. General Accounting Office, Travel Cards: 
Control Weaknesses Leave Army Vulnerable to Potential Fraud and Abuse, 
GAO-03-169 (Washington, D.C.: Oct. 11, 2002); U.S. General Accounting 
Office, Purchase Cards: Navy Vulnerable to Fraud and Abuse but Is 
Taking Action to Resolve Control Weaknesses, GAO-03-154T (Washington, 
D.C.: Oct. 8, 2002).

[21] We derived the estimated coach fares from an online Web site, 
www.expedia.com.

[22] JTR ¶2204 A3 - A5.

[23] DOD Directive 4500.9, December 29, 1993.

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