On February 3, 1986, you requested that we undertake a study of the Department of Defense (DOD) Foreign Currency Fluctuations, Defense(FCF,D) account. Specifically, you requested that we review the accounts history, analyze the need for and justifications of transactions involving this account, and determine the source and type of funds being transferred into the account. Your staff also asked us to determine the impact of the Gramm-Rudman-Hollings act on the FCF,D account. In summary, we found that, because DOD used budgeting records rather than the services accounting records as a basis for managing and reporting on the FCF,D account and because of DOD's interpretation of Public Law 96-38, it (1) was able to retain the use of $669.7 million of funds that appropriately should have been returned to the Treasury, and (2) in effect circumvented a congressionally imposed ceiling on the FCF,D account. We believe that DOD'S handling of the FCF,D account exemplifies the problems with federal financial management that we previously reported in our Managing the Cost of Government (GAO/AFMD-8635,35A, February 1985.) For fiscal year 1986, the Congress recognized the substantial amount of funds-$1.32 billion-that DOD had accumulated in the FCF,D account and took action to reduce it. The Congress may wish to further clarify how it wants the FCF,D account to be used.