Management Costs Associated With the Defense Enterprise Fund
Department of Defense
Office of the Inspector General — Audit
Management Costs Associated With the Defense Enterprise Fund — Report No. D-2002-033
Date: December 31, 2001
Introduction. This report is being issued to provide lessons learned for managing enterprise funds. The Cooperative Threat Reduction Program was initiated in FY 1992 to reduce the threat posed by weapons of mass destruction remaining in the former Soviet Union. In June 1994, DoD established the Defense Enterprise Fund to assist Belarus, Kazakhstan, Russia, and Ukraine in the privatization of defense industries and conversion of military technologies and capabilities for civilian use.
The National Defense Authorization Act for fiscal year 1994, section 1204 (22 U.S.C. 5953), authorized the President to designate Demilitarization Enterprise Funds to receive grants and use those grants for financially supporting demilitarization of industries and converting military technologies and capabilities to civilian activities. The law required that the President consult with the Department of State and the U.S. Agency for International Development to ensure that the terms of any such grants were consistent, to the maximum extent practicable, with grants awarded to enterprise funds established under the Support for East European Democracy Act of 1989 (Public Law 101-179 [22 U.S.C. 5421]). The authority and requirements established under the National Defense Authorization Act for fiscal year 1994, section 1204, were subsequently delegated to the Secretary of Defense. The Defense Enterprise Fund was created under the authority delegated to the Secretary of Defense.
The DoD and Department of State provided funding of $66.7 million to the Defense Enterprise Fund through a grant. Inspector General, DoD, Report No. D-2000-176, "Defense Enterprise Fund," August 15, 2000, discusses reasons why the value of investments decreased from $38.3 million to $31.3 million* as of March 2000. As of September 30, 2000, the total value of the Defense Enterprise Fund was $15.2 million, including $11.0 million of investments.
Office of Management and Budget Circular No. A-122, "Cost Principles for Non-Profit Organizations," is a regulation used by Government agencies to determine which expenses incurred by non-profit organizations can be charged to Government awards. That regulation was not included as a requirement in the grant to the Defense Enterprise Fund to be consistent with grants awarded to enterprise funds established under the Support for East European Democracy Act of 1989. Those grants did not include Office of Management and Budget Circular No. A-122 as a grant requirement. To be chargeable to Government grants based on Office of Management and Budget Circular No. A-122, expenses must be reasonable, allocable to the grant, consistent with organization policies and procedures, and accorded consistent treatment. Expenses are allocable if they were incurred for the award, benefit both the award and other work, and can be distributed in reasonable proportion to the benefits received, or were necessary to the overall operation of the organization.
Objectives. Our overall audit objective was to evaluate how the Defense Enterprise Fund and its fund manager, Global Partner Ventures, LLC, used grant funds for managing the grant. In addition, we evaluated whether the terms of the grant provided to the Defense Enterprise Fund were consistent with grants awarded to enterprise funds established under the Support for East European Democracy Act of 1989.
Results. Through FY 2000, the Defense Enterprise Fund and Global Partner Ventures, LLC, used at least $35.6 million of grant funds and income from grant funds for management costs and expenses in conformance with the grant agreement. That amount included $32.4 million expended by the Defense Enterprise Fund and Global Partner Ventures, LLC, between FY 1994 and FY 1999, the period covered by our review. As required by National Defense Authorization Act for fiscal year 1994, the terms of the grant to the Defense Enterprise Fund were generally consistent with the terms of grants awarded under the Support for East European Democracy Act of 1989. As a lessons learned, had statutory authority allowed DoD to incorporate cost principles for Federal grants into the grant agreement, the grants officer could have determined that management costs and expenses totaling at least $2.2 million to be unallocable, unallowable, or unreasonable.
Management Actions. Because DoD was required to follow the terms of grants awarded under the Support for East European Democracy Act of 1989 and the Defense Enterprise Fund subsequently awarded a firm-fixed-price contract in October 1999 valued at $2 million a year, to manage its investments, this report contains no recommendations.
Management Comments. The Defense Threat Reduction Agency comments to the draft report emphasized that DoD does not control the Defense Enterprise Fund and stated that Congress declined to impose Federal regulations on the Defense Enterprise Fund. In addition, the Defense Threat Reduction Agency noted that it prepared the grant according to specific legislative requirements. Also, the Defense Threat Reduction Agency stated that the Defense Enterprise Fund was chartered to use grant funds to organize its management company and raise private capital. The Defense Threat Reduction Agency suggested that the lead sentence in the Executive Summary of this report state that the Defense Enterprise Fund used funds according to the terms of the grant.
A discussion of management comments is in the Finding section of the report and the complete text is in the Management Comments section.
To obtain copies of Office of the Assistant Inspector General for Auditing Reports, contact the Secondary Reports Distribution Unit of the Analysis, Planning and Technical Support Directorate at (703) 604-8937 or FAX (703) 604-8932.
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