more money, can pay more and help carry their share, to go with their ability to pay, in accordance with rank.

To me, this is just dead wrong, and I think that these fellows, these junior officers over there in Europe, thanks to all this combination of circumstances, and the devaluation of the dollar, we're going to lose those guys right and left if we don't start doing a few things for them. This is one of the things that could be done.

General BENADE. I appreciate your concern and share it, Mr. Gubser. I do want to point out, first of all, it is common practice for a graduated scale of dues in our clubs, and junior officers usually pay less than the senior officers.

Mr. GUBSER. That's not my understanding in that area.

General BENADE. It might happen to be the exception, but in most clubs that is the rule.

The other thing, sir, I'm glad to be able to report is that the pay now for a second lieutenant we consider to be generally competitive. The pay increases that the Congress has been providing in recent years, and the effect of the pay increase last November added to the increase this last January, places the compensation of the second lieutenant and the first lieutenant on what we consider a pretty competitive basis. Mr. GUBSER. Well, wasn't a lot of that wiped out with the devaluation?

General BENADE. Not that much, no. Certainly the devaluation hurt, but not that much. And, as you say, $9.00 a month is a pretty good buy. There aren't very many young men in civil life, college graduates, who have such facilities available for $9 a month.

I fully agree that we must try to minimize the adverse impact of all these things, and to do everything we can to try to retain young officers. I don't mean to sound unsympathetic. I'm only saying it's recognized. And we hope, through other things, to offset the cost here.

Even with the increase that would be necessary in some club because of the loss of slot machine revenue, everything is relative. If the price of a steak has to go up from $2.50 to $2.75, or even $2.95, it's not all that bad compared to competitive rates.

Mr. GUBSER. I must say, I've never known a man who has such a complete understanding of personnel problems as you have, and I'm so darned glad you're where you are, and I trust you.

General BENADE. Thank you, sir.

Mr. NICHOLS, General, you submitted for the committee a DOD Auditing Nonappropriated Fund Activities in the Department of Defense report, which I would like to submit with the other insertions in the record at this time.

(The following information was received for the record:)

OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE,
Washington, D.C.

AUDITING NONAPPROPRIATED FUND ACTIVITIES IN THE DEPARTMENT OF DEFENSE, APRIL 1972

INTRODUCTION

During the past two and one-half years, there have been significant changes in the policies and responsibilities for auditing nonappropriated fund (NAF) activities. Under policy guidance issued by the Secretary of Defense and the Assistant Secretary (Comptroller), each of the Military Departments and the

Defense Supply Agency have updated their regulations and strengthened their procedures and surveillance with respect to these audits. As a part of the responsibility of the ASD (Comptroller) for establishing audit policies and monitoring audit activities in the Department of Defense, this paper has been prepared to summarize the changes which have been made to upgrade the NAF audits and to describe the current audit programs

The Military Departments and the Defense Supply Agency furnished summaries of findings and recommendations from audits of NAF activities which highlight the most significant patterns and trends of deficiencies disclosed by the audits and relate, to the extent practicable, the management actions taken on audit findings and recommendations. In addition, the Military Departments and the Defense Supply Agency were requested to evaluate audits conducted by any auditors other than those of the central internal audit organization. These would include audits made by independent public accountants, audit boards, internal reviewers, and internal auditors paid from nonappropriated funds (such as exchange system auditors).

BACKGROUND

Prior to the fall of 1969, the Services were permitted considerable latitude in prescribing policies and procedures for auditing nonappropriated funds. Department of Defense audit policies set forth in DoD Directive 7600.2 provide that DoD components may delegate to lower levels the responsibility for performing audits of nonappropriated fund activities rather than requiring that the audits be performed by the central audit organizations. However, where this is done, the audits are subject to the technical guidance, supervision and review of the central audit organizations. Within this general guidance, the systems of the Services for auditing nonappropriated funds were different in several respects. While flexibility is still permitted, many actions have been taken since 1969 to upgrade the NAF audit programs and prescribe standards and criteria for uniform application.

In October 1969, Secretary Laird directed increased emphasis on the audits of officers' and noncommissioned officers' clubs and open messes. He required the Military Departments and Defense Agencies to take action to assure that clubs and messes are audited annually by independent certified or licensed public accountants. In June 1970 this directive was modified to provide for annual audits by public accountants on either an individual or system basis. Audits on an individual basis were required to include at least 25 percent of clubs and messes annually. If audits were to be conducted on a system basis, it was required that an adequate sample of individual clubs be audited to permit the auditors to issue properly certified financial statements.

In addition, the Assistant Secretary of Defense (Comptroller) developed policy guidance covering the audit of all nonappropriated fund activities. This resulted in issuance of DoD Instruction 7600.6, "Audit of Nonappropriated Funds and Related Activities," dated November 3, 1970. For the purposes of regulating the audits of the diverse activities involved, the Instruction categorizes nonappropriated funds as follows:

1. Revenue-producing funds. These are activities which sell goods or services to authorized personnel and which normally donate a part of their revenues to separate funds which support morale, welfare and recreation programs of the DoD components. Examples of "revenue-producing funds" are the post exchanges, book departments, restaurants, etc.

2. Clubs and messes.-These are generally activities which sell goods or services to members and other authorized personnel and which use their revenues for the direct benefit of the members. Examples are officers' open messes, noncommissioned officers' open messes, aero clubs, rod and gun clubs, etc. Army, Air Force and Defense Supply Agency call this type of activity "Sundry Funds." 3. Welfare and recreation funds.-These are separate fund accounts established to supplement appropriated funds for the support of morale, welfare and recreation programs. These include unit funds, composite recreation funds, central base funds, commandant welfare funds, etc.

DoD Instruction 7600.6 provides standards and criteria for audits of the above categories of nonappropriated funds whether the audits are performed by Departmental auditors or by public accountants.

CURRENT SYSTEMS FOR AUDITING NAF ACTIVITIES

Under the criteria established by DoD Directive 7600.2 and DoD Instruction 7600.6, the Military Departments and Defense Supply Agency use somewhat different approaches in auditing NAF activities. A brief description of each follows. Army

The Army and Air Force Exchange Service (AAFES) is audited annually by a certified public accountant (CPA) firm. Internal audits are performed by employees of the exchange system paid from nonappropriated funds. During the period from January 1 through August 31, 1971, the Headquarters AAFES Inspection and Audit Division completed 55 planned inspections and audits and 2 special examinations. Army Audit Agency auditors, with assistance from the Air Force Audit Agency, are currently reviewing the AAFES audit system.

Other revenue-producing funds having gross annual revenues in excess of $100,000 also are audited by independent public accountants. Revenue-producing funds with revenues under $100,000 are audited by internal review personnel of the commands involved.

Prior to FY 1971, clubs and open messes also were audited by internal review personnel. During that fiscal year, the responsibility for internal audits of open messes was transferred to U.S. Army Audit Agency (USAAA) to upgrade the quality of the audits. In accordance with DoD instructions 25 percent of the Army open messes are now audited annually by public accountants. The remainder are the responsibility of USAAA. During FY 1971 USAAA completed 135 open mess audits. Two hundred and fifteen additional audits are scheduled to be completed in FY 1972. Through February 1972, public accountants had completed 137 audits and are scheduled to complete 73 more by June 30, 1972. Other sundry funds with gross annual revenue of $100,000 or more are audited by independent public accountants. These funds with gross revenues under $100.000 are audited by internal review personnel of the command responsible for the activity.

Army welfare and recreation funds consist of thousands of activities ranging from small unit funds to central welfare funds at Department of Army (DA) level. The USAAA conducts audits of NAFS maintained at DA level except that responsibility for audit of the Army and Air Force Civilian Welfare Fund alternates annually between USAAA and the U.S. Air Force Audit Agency and the audit of the Army Central Welfare Fund is performed by public accountants. Welfare funds below DA level are audited by internal review personnel of the commands involved except that disinterested officers are used to audit unit funds which generally are small and may use a single entry cash basis accounting system.

Navy

The Navy and Marine Corps exchange systems, like the Army and Air Force Exchange Service, are audited annually by independent CPA firms and, internally, by personnel employed by the exchange system. The Field Service Division of the Navy Resale System Office (NRSO) performs operational audits of Navy exchanges on an 18-month cycle. Internal audits of the Marine Corps Exchange System are made by the Marine Corps Exchange Internal Audit Office, which operates under the direct supervision of the Assistant Quartermaster General of the Marine Corps (Facilities and Services).

Navy officer and petty officer messes are audited annually on a system basis by an independent CPA firm. The first CPA audit was completed recently and the Audit report was issued in February 1972. The commercial audit of Marine Corps messes also is being made on a system basis. The first audit of the Marine Corps mess system was completed in March 1972.

Internal audits of Navy clubs and messes are made on a quarterly basis by local audit boards appointed by the responsible commander. Also, these clubs and messes are inspected annually by the Immediate Superior in Command and reviewed on a 24-month cycle by the recently created Field Services Branch of the Special Services Division of the Bureau of Naval Personnel (BUPERS). In addition, Navy's central internal audit organization. Naval Audit Service, performs special audits at the request of a commanding officer where he has reason to suspect fraud or malfeasance and performs a limited number of audits as part of a regular activity audit under special arrangements with BUPERS.

Internal audits of Marine Corps clubs and messes are performed by military auditors in the Field Audit Service of the Marine Corps Inspector General. These

personnel are stationed at major Marine Corps installations, but are responsible to the Inspector General. Activities on bases where auditors are resident are audited on a periodic basis. Other activities are examined semiannually on a TDY basis.

Recreation funds in Navy are audited semiannually by local review boards and inspected annually by the Immediate Superior in Command. These funds also are reviewed by the Field Services Branch of BUPERS and Naval Audit Service to the same extent as clubs and messes. Marine Corps welfare and recreation funds are audited by the Field Audit Service of the Marine Corps Inspector General. In addition to performing audits of selected NAF activities the Director, Naval Audit Service in November 1971 notified the Naval Area Audit Service Directors to:

1. During each periodic audit, appraise the reviews made by management of all NAF activities for which the audited activity is responsible.

2. At all continuous audit sites other than Marine Corps, to conduct annually an in-depth audit of Commissioned Officers' Messes (open and closed), Chief Petty Officers' Messes, and Petty Officers' messes operated under the jurisdiction of the activities for which the continuous audit site team has cognizance.

3. Appraise the management reviews of all other types of NAF activities at all continuous audit sites.

Air Force

The audit system for the Army and Air Force Exchange System (AAFES), a joint departmental activity, was described earlier. The Air Force Audit Agency is accomplishing its responsibility for evaluating the adequacy of exchange auditing procedures by participating with U.S. Army Audit Agency in a review of exchange audits which is currently in progress.

All audits of other nonappropriated funds in the Air Force, except those required to be audited by public accountants, have been assigned to the Air Force Audit Agency.

Like Army, the Air Force is having its public accountants' audits of clubs and open messes (25 percent annually) performed on an individual basis. During 1971. 119 of the 478 Air Force open meses were audited by independent certified public accountants while 43 CPA audits were performed on other types of nonappropriated funds. Contract awards are being made now to CPA firms for the 1972 audit of 161 individual nonappropriated fund activities and 2 nonappropriated fund system activities.

Through December 31, 1971, audits had been completed for all nonappropriated fund activities subject to audit excepting a few funds in Thailand. A list of the Air Force Audit Agency summary reports of audit issued or in process for nonappropriated fund through the period December 31, 1971 follows:

1. An audit of the management of nonappropriated funds and servicing fiscal control offices covered 73 activities at 13 CONUS and 6 oversea bases. The report summarized individual activity audits performed through the period ending December 31, 1970.

2. An audit of the management of 232 open messes through the period ending August 1971 was issued in December 1971.

3. An audit of the management of nonappropriated fund activities in SEA, including those funds currently being audited in Thailand, is scheduled for release in October 1972.

4. An Air Force Audit Agency summary of the management of the remaining nonappropriated funds subject to audit through the period ending December 31, 1971 is scheduled for release in June 1972.

Defense Supply Agency (DSA)

DSA has delegated responsibility for internal audits of all NAF activities, except those at the headquarters' level, to commanders of field activities. The Auditor General, DSA, is responsible for technical supervision over the NAF audits performed by field activity personnel and by independent public accountants. The number and size of NAF activities in DSA are rather small in comparison to their counterparts in the Military Departments. In the period from January 1 through August 31, 1971, 36 NAF activities in DSA were audited. Five of these were open messes audited by CPA firms. One, the Civilian Welfare Fund was audited by the DSA Auditor General. The other 30 audits were made by internal review personnel and included 8 post restaurants, 6 open messes and 16 welfare funds.

AUDIT FINDINGS-EXCHANGE SYSTEMS

Audits conducted by both the independent public accountants and exchange system internal auditors showed the need for improvement in controls and operating procedures in certain areas. The most frequently mentioned audit findings had to do with cash and inventory controls, procurement policies and procedures, fixed asset records, and payroll procedures. In general, the procedures as prescribed in current directives were adequate to provide satisfactory internal control systems, but the deficiencies found by the auditors occurred because existing directives were not being followed.

In the area of cash controls, examples were found where required surprise verifications were not being made; cash receipts not turned in daily or deposited promptly; cash register readings were being made by the operators; and accountability had not been established for cash register operations.

In AAFES, reports of findings are furnished to management for corrective action and also provided to headquarters' staff elements for action in their areas of responsibility. Within CONUS, replies to reports are submitted by chiefs of exchange regions. At offshore exchanges and oversea exchange systems, replies are submitted by exchange management and may be reviewed by intermediate and major military commanders.

In Navy, NRSO furnishes to all commanders of Naval activities operating exchanges separate summaries of the findings of the CPA firm's annual audit and of the operational audits conducted by NRSO personnel. Addressees are required to review the findings and take appropriate action to prevent or eliminate similar discrepancies.

ACTIONS TAKEN BY EXCHANGES TO IMPROVE MANAGEMENT

Army and Air Force Exchange Service (AAFES)

A number of special reviews of AAFES operations have been made over the past four years. These include studies initiated internally within DoD and externally by the Congress. Recommendations in reports emanating from those reviews contributed to improved management and control of AAFES operations. The principal reports were:

"Evaluation of the Management of Exchange and Motion Picture Services." Report to the Committee on Appropriations, House of Representatives, by the Comptroller General of the United States, March 1971.

"Report on Military Exchanges" by Logistics Management Institute, July 1968.

"Military Exchange Facilities Funding Practices" by Logistics Management Institute, November 1969.

"Review of the Military Exchanges and Commissaries and Related Activities." Report by the Special Subcommittee on Exchanges and Commissaries of the Committee on Armed Services, House of Representatives, December 1970. "Review of the Army and Air Force Exchange Service Accounting System" by the Department of the United States Army and United States Air Force Joint Audit Team, February 1970.

"Fraud and Corruption in Management of Military Club Systems." Report of the Committee on Government Operations, United States Senate. 1971.

"Review of the Army and Air Force Exchange Service Procurement Policies and Practices," by U.S. Army, U.S. Air Force, and AAFES Joint Team, July 1971.

On January 24, 1972, the Assistant Secretary of Defense (Comptroller) requested the Departmental Assistant Secretaries for Financial Management to review and evaluate the corrective actions taken in consideration of the findings and recommendations contained in the various reports. Some of the more significant actions related to AAFES follow:

1. Two findings reported by a Department of the Army and Department of the Air Force Joint Audit Team which stated that:

a. The AAFES internal audit program should be balanced to provide a reasonable mixture of management and compliance audits.

b. The audit system should be organized to establish the total audit function under the central control of Headquarters, AAFES. Both actions have been accomplished by AAFES.

2. A finding by the GAO which states that the scope of the work agreement with the AAFES Public Accountants needs to include inquiries into management