and Army and Air Force budgets do not adequately identify the costs of materials consumed with the programs to which related. In all three departments it would appear highly desirable to identify military personnel costs with the primary function to which related. WORKING CAPITAL FUNDS Industrial funds 1. The industrial fund system permits the installation of improved comprehensive cost accounting for operations, products, and services supplied by industrial- and commercial-type activities. This in turn facilitates and clarifies budgeting, budgetary control, and accounting for the cost of goods or services furnished by the ordering agencies and identifies to management areas of inefficiency which require corrective action. However, the number of Army and Navy activities in which the industrial fund system is presently operating is insufficient to make much of an impact on the fiscal management of these departments and the assignment of a reasonable number of qualified personnel properly organized to do the job is necessary for rapid implementation of the system. Air Force has taken no action to use the industrial fund system and it must become more receptive to the industrial fund concept and take immediate steps to organize a staff to install this system in major overhaul facilities, the Military Air Transport Service, and other Air Force industrial- and commercial-type activities. 2. The cost systems at activities using industrial funds are generally of a job order type but further work is required toward inclusion of comparisons of actual costs with standards and budgets, together with the accounting for variances, so that management can take effective action to reduce costs that are out of line. Stock funds 1. In general, Navy use of the stock-fund principle has been satisfactorily developed over many years of utilization of this principle. Army and Air Force had their origin in the former War Department which never had satisfactory financial accounting for inventories and, as a result, these two military departments are now faced with a tremendous task of installing adequate stock fund systems. 2. Air Force has made real progress in developing financial accounting for inventories, including extension of the stock-fund principle to base and station stocks, but it still needs to establish a satisfactory accounting for mobilization reserves and excess stocks. Moreover, as the use of stock funds is extended by the Air Force, development of adequate supply classifications is required. 3. Army has been slow to appreciate the benefits of the stock-fund principle from the standpoint of supply management as well as financial management. The first use of the stock-fund principle (for clothing and equipage) was a pilot operation which illustrated the need for the control of inventories at posts, camps, and stations, and in overseas depots. Moreover, it became apparent that adequate financial data for supply and fiscal management required decentralization of accounting and separate identification of mobilization reserves and excess stocks. Implementation by Army of the stock-fund principle requires establishment of an integrated service-wide supply system with control of inventories at posts, camps, and stations, together with the selection and assignment of qualified logistics and supply personnel for its management and operation. This involves establishment and clarification of lines of authority and responsibility in the supply system and recognition of the importance of the problems of receipt, storage, and issue, and control of consumption by the Department of the Army. MANAGEMENT FUNDS 1. The use of management funds is adequately controlled by the Assistant Secretary of Defense (Comptroller) and provides an effective method of integrating operating and financial management of joint projects. Accounting and financial reporting of joint projects is simplified by the use of management funds and, in the one instance in which a management-fund project was found to be deficient (Ordnance consolidated procurement account) the major faults related to operations and the accounting system rather than to any basic defect in the management fund principle. Corrections of these deficiencies have been inaugurated. ACCOUNTING (FUNDS AND PROPERTY) Appropriation accounting 1. While an adequate accounting system has been Installed to control obligations and expenditures and to prevent overobligation or overexpenditure, the system is not being policed satisfactorily. Improvement in this respect is required. 2. Further development of reporting for all obligations and expenditures in relation to budget estimates for management purposes requires: (a) Fundamental improvements in account classifications, including budget activities, budget project accounts, and activity expense accounts; (&) more complete funding of expenses at station level along direct command or management lines. (This in turn depends upon further development of financial accounting for Inventories of property and installation of working capital funds.) 3. While numerous technical improvements have been made in transactions accounting, there are a number of important further improvements which require direction from the Office of the Secretary of Defense. These include improved accounting procedures for single-service procurement, extension of definitions of commitments and obligations for procurement, and improvements in disbursements accounting at station level, including integration of expenditure accounting under allotments with accounts of disbursing offices. Industrial funds and stock funds (See section of Conclusions under "Working Capital Funds.") Financial accounting for property {other than stock funds) 1. Navy has financial accounting for property other than that which is included in stock funds. While no thorough independent appraisal has been made, it is known that Navy accounting for Government-furnished machine tools and equipment in contractors' plants is in arrears, and that simpler methods of accounting for such assets should be installed. Financial accounting for consumable materials and supplies not included in stock funds is not adequately integrated with accounting for appropriations and, although data is available, the consumption of such supplies is not under complete budgetary control. 2. Because of the immense task of establishing financial accounting for property in Army and Air Force, priority has been given by the Office of the Secretary of Defense to the installation of financial accounting for inventories and material financed by stock funds. General In measuring the progress made in development of accounting in the Department of Defense in the past few years, which has been slow enough in view of the immense task ahead, progress is impressive when one considers the lack of an adequate corps of qualified professional accountants to spearhead the installation of accounting systems and provide operation direction at all levels. It appears that inadequate attention has been given to the employment of qualified accountants from private industry and from colleges of business administration, as well as the in-training development of accountants. In this respect, it was noted that Army is making extensive use of consultants. This is an expensive expedient and will not provide a permanent solution of the Department's need. Preliminary investigation indicates that no real effort has been made by the military departments to examine personnel files and background data of military personnel from which it is believed a number with adequate qualifications could be selected to assist in this work. It is suggested that the military departments take immediate action to select and properly assign such qualified personnel. PROGRESS REPORTS AND STATISTICS 1. There is a need for greater recognition at the secretarial level of the three military departments of the value of timely, objective, analytical reports and for increased use by the Secretaries of the military departments of such reports in evaluating programs and operations. 2. There is need for better control at the secretarial level of the three military departments of reporting from overseas theaters and commands so that there is available to these Secretaries and the Secretary of Defense the timely analytical data required to fulfill their responsibilities. INTERNAL AUDIT 1. No practical means exists for providing Office of Secretary of Defense with Information obtained by departmental audit. This deficiency could be corrected by: (a) Development of a procedure whereby summary reports of audit findings would be submitted by the departments; and (6) augmentation of the internal audit staff under the Assistant Secretary of Defense (Comptroller) to analyze these reports and perform audits on behalf of the Secretary of Defense. 2. Contract audit functions in the Navy, presently performed by the Rureau of Supplies and Accounts and Rureau of Yards and Docks, should be transferred to the Comptroller of the Navy as provided by title IV. 3. The staff responsible for audit of internal activities of the Navy should be augmented as rapidly as capable personnel can be recruited if its audit mission Is to be fulfilled. 4. There appears to be too great a proportion of man-hours spent on the audit of individual property accounts in the Army and Air Force. Expansion of the program for broader coverage of business activities should be expedited as rapidly as installation of improved systems of accounting and internal controls warrants, particularly in the Air Force where this program should result in a reduction of the internal audit staff. INDEX Air Force, Department of the: Pa*e Financial statements, Air Force stock fund, clothing division 36 Letter, commanding general, Far East Air Forces, to subordinate commanders 38 Statement, Hon. H. Lee White, Assistant Secretary of the Air Force (Management 93 Training courses in comptroller specialties 105 Army, Department of the: Advisory Committee on Army Organization: Charter 59 Membership 60 Financial management plan (AR 37-5) 61 Organization and functions: Comptrollers of offices, chiefs of services, and Army Field Estab- Finance and accounting officers of continental armies, the Military (AR 10-216) 138 Statement, Hon. Robert T. Stevens, Secretary of the Army 56,132 Testimony, Lt. Gen. George H. Decker, United States Army, Comp- Biographical data: Anderson, Hon. Robert B., Secretary of the Navy 69 Bordner, H. W., Deputy Comptroller for Accounting Policy, Depart- Decker, Lt. Gen. George H, United States Army, Comptroller of the Army 153 Eberstadt, Ferdinand , 11 Garlock, Lyle S., Deputy Comptroller for Budget, Department of Defense 152 Gates, Hon. Thomas S., Jr., Under Secretary of the Navy, Comptroller of the Navy 155 Hoelscher, Leonard W., Deputy Comptroller of the Army 154 Lovett, Hon. Robert A., former Secretary of Defense 24 McNeil, Hon. Wilfred J., Assistant Secretary of Defense (Comp- Ramsey, George E., Jr., Deputy Comptroller of the Air Force 157 Schneider, Franz 43 Solomons, Rear Adm. E. A., United States Navy, Deputy Comptroller of the Navy 156 Stevens, Hon. Robert T., Secretary of the Army 55 Stone, Lt. Gen. Charles B., Ill, United States Air Force, Comptroller of the Air Force 156 White, Hon. H. Lee, Assistant Secretary of the Air Force (Manage- Wilson, Hon. Charles E., Secretary of Defense 113 Defense, Department of: Advisory Committee on Fiscal Organization and Procedures: Directive, Secretary of Defense Charles E. Wilson, setting forth terms of reference for 58 Membership 59 Testimony, Hon. Charles E. Wilson, Secretary of Defense 114 Testimony, Hon. W. J. McNeil, Assistant Secretary of Defense (Comp- |