Although Federal agencies are required by law to maintain internal control systems that safeguard their financial resources, most operate systems that are vulnerable to losses through fraud, waste and abuse. The following agencies were selected for review to provide a representative cross section of federal civil and military financial operations: Department of State, U.S. Military Airlift Command, Health Services Administration, U.S. Pacific Fleet, Department of Labor, Environmental Protection Agency, U.S. Army in Europe and the Seventh Army Department of Housing and Urban Development, Drug Enforcement Administration, Food and Drug Administration, and the U.S. Coast Guard. In performing these reviews, key officials were interviewed, and daily fiscal operations were observed. In most agencies, inadequate procedures for recording accounts receivables and collecting overdue accounts resulted in losses in millions of dollars. Futhermore, the potential for theft and misuse of accounts receivable funds was high because of poor controls. Many fiscal offices had also failed to follow basic control procedures over disbursements. Over half of the offices reviewed had incurred obligations before the availability of funds was established. Widespread deficiencies were also noted in activities involving imprest funds, the cash funds that are advanced to any agency to meet miscellaneous daily demands. Weak physical controls had resulted in considerable losses from theft and robbery. Internal audits could have detected most of these problems, but federal agencies often do not use their auditors to examine internal financial operations, and when they do, they frequently ignore the findings. Although agencies have agreed to correct the weaknesses identified, both GAO and the Office of Management and Budget (OMB) remain concerned over the lack of internal controls. GAO recommends that Congress enact legislation under consideration that would require heads of federal agencies to evaluate internal control systems and report annually to Congress. The appendixes contain a summary of control weakness at the 11 offices reviewed and a memorandum from the OMB on improving internal controls . (Author abstract modified)