United States General Accounting Office

GAO Report to the Chairman, Committee on

the Budget, House of Representatives

February 1998 FINANCIAL

MANAGEMENT

Federal Aviation

Administration Lacked

Accountability for

Major Assets

GAO/AIMD-98-62

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-279015 

February 18, 1998

The Honorable John R. Kasich

Chairman, Committee on the Budget

House of Representatives

Dear Mr. Chairman:

This letter responds to your request that we analyze the Department of

Transportation (DOT) Inspector General’s (IG) audit report on the Federal

Aviation Administration’s (FAA) fiscal year 1996 Statement of Financial

Position, which reports FAA’s assets and liabilities. As financial statements

provide accountability for the expenditure of appropriated funds, this

analysis is important to understanding the reliability of reported financial

information and the possible consequences of unreliable information.

Specifically, you asked us to consider the possible program and budgetary

implications of the questions raised about financial statement data

deficiencies identified in the audit report.

Background FAA’s primary mission is to ensure safe, orderly, and efficient air travel

throughout the United States. FAA’s ability to fulfill this mission depends

on the adequacy and reliability of the nation’s air traffic control (ATC)

system, a vast network of computer hardware, software, and

communications equipment. Sustained growth in air traffic and aging

equipment has strained the current system, limiting the efficiency of ATC

operations. To combat these trends, in 1981 FAA embarked on a

multibillion dollar, mission-critical capital investment program aimed at

modernizing its aging ATC infrastructure.

This modernization program includes over 200 separate projects estimated

to cost over $34 billion through the year 2003. It includes the acquisition of

new radars and automated data processing, navigation, and

communications equipment as well as new facilities and support

equipment. As these items are placed in service, FAA is required to report

them as property and equipment assets in its financial statements. In

addition, related spare parts necessary to support the operation and

maintenance of this equipment are reported as operating materials and

supplies inventory. In its fiscal year 1996 financial statements, FAA

reported assets of $18.2 billion, including approximately $9.2 billion of

operating materials and supplies (such as mission-critical spare parts),

property and equipment (such as land, buildings, and air traffic control

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equipment), and work-in-process (which consists of facilities and

equipment acquired but not yet put in service). It also reported expenses

of $10.1 billion.

Problems in the reporting of operating materials and supplies and property

and equipment (including work-in-process) were cited by the DOT IG in its

audit report on FAA’s fiscal year 1996 financial statement. The IG is

responsible for auditing FAA’s financial statements under the Chief

Financial Officers Act of 1990, as expanded by the Government

Management Reform Act of 1994, to determine whether those financial

statements are reliable. The IG audited FAA’s fiscal year 1996 Statement of

Financial Position, which reports the agency’s assets and liabilities, but

disclaimed (did not express) an opinion primarily because of internal

control weaknesses that precluded the IG from determining if FAA’s

operating materials and supplies and property and equipment were fairly

presented. This is significant since at September 30, 1996, operating

materials and supplies and property and equipment represented

approximately 51 percent of FAA’s total reported assets. Similar conditions

resulted in the IG issuing disclaimers of opinion on FAA’s fiscal years 1993

through 1995 financial statements.

Among the more serious deficiencies cited in the IG’s report on FAA’s fiscal

year 1996 financial statement were the following:

• The reported $432 million for operating materials and supplies could not

be verified because physical inventory counts were not adequately

performed, documentation to verify operating materials and supplies

valuation was not available, and certain spare parts were not included in

the reported total. For example, FAA did not include one category of spare

parts, which includes disk drives, modems, and card assemblies, estimated

at $245 million in the financial statement because the field spare parts

inventory records were unreliable.

• The reported $5.5 billion for property and equipment was unreliable

because FAA records for such assets contained significant errors and

omissions and did not accurately reflect property and equipment owned

by FAA. For example, $198 million of property that no longer existed, such

as fuel storage tanks and buildings, was included in the financial statement

as assets.

• The reported $3.3 billion of work-in-process could not be verified because

FAA did not maintain sufficient details to support what was in the account,

and the total was not completely reconciled to other FAA records.

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Results in Brief The deficiencies concerning operating materials and supplies and property

and equipment cited by the IG impair FAA’s ability to efficiently and

effectively manage programs that use these assets and expose the agency

to waste, fraud, and abuse. Four examples follow.

• Lack of physical controls over inventory and equipment could result in the

costly, unnecessary acquisition of additional assets already on hand,

shortages of critical parts, delays in ordering needed assets erroneously

shown to be on hand, or misuse of assets. In addition, unnecessary costs

could be incurred to manage and maintain excess assets.

• Spare parts, such as disk drives, modems, and circuit card assemblies, may

not be adequately safeguarded. Since many of these items are portable,

inaccurate inventory records may increase the risk of undetected theft or

loss due to unauthorized acquisition and use or disposition.

• Mission-critical equipment, such as radars and other air traffic control

equipment, may be difficult to locate when needed, which could

exacerbate an emergency situation.

• Problems in accounting for significant investments in property may affect

FAA’s ability to properly maintain these assets, including estimating future

maintenance funding needs.

In addition, while not a specific focus of the IG report, GAO and others have

identified the lack of a reliable cost accounting system as a weakness that

prevents FAA from reliably determining costs. The lack of cost accounting

information impairs FAA’s ability to make effective decisions about

resource needs, to adequately control major projects such as the ATC

modernization program, and to identify and avoid waste. For example,

without good cost information FAA cannot reliably measure the ATC

modernization program’s actual cost performance against established

baselines, and cannot reliably use information relating to actual cost

experiences to improve future cost estimating efforts. The lack of cost

accounting information also limits the ability of FAA management and

other decisionmakers to develop a system of user fees based on the cost of

services provided. Finally, the lack of reliable cost information also limits

FAA’s ability to meaningfully evaluate performance measures in terms of

efficiency and cost-effectiveness.

Overall, the lack of accountability over physical assets means that FAA and

the Congress may not have accurate financial management information to

help make informed decisions about future funding. The lack of

accountability is of particular concern in situations such as FAA’s where

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billions of dollars of assets are being acquired in connection with the ATC

modernization program.

FAA advised us that since the IG report was issued on March 27, 1997, it has

made significant progress and expended significant resources toward

correcting the problems reported by the IG. According to FAA, it has taken

or plans corrective actions in three principal areas: (1) operating materials

and supplies, (2) property and equipment, and (3) cost systems. FAA

informed us that it has counted a major portion of operating materials and

supplies and property, identified excess items, adjusted its records, and

created a Cost Accounting Division.

We have not assessed the current status or sufficiency of these actions.

The audit of FAA’s fiscal year 1997 financial statement is currently nearing

completion, and we will report the results of our assessment of that audit

and the effectiveness of FAA’s remedial actions at a later date.

Objectives, Scope,

and Methodology

Our objectives were to analyze the IG audit report on FAA’s fiscal year 1996

Statement of Financial Position and to consider the possible program and

budgetary effects of reported financial statement data deficiencies. To

fulfill our objectives, we analyzed the IG’s report on the audit of the FAA

fiscal year 1996 Statement of Financial Position and reviewed selected IG

workpapers related to the audit. We focused on the areas of operating

materials and supplies and property and equipment because these were

the areas cited in the IG’s report as causing the disclaimer of opinion. We

also interviewed IG personnel to obtain more details about the issues

raised in the report and to gain an understanding of the work performed

and its results. In addition, we accessed historical IG program reports for

the last 10 years and reviewed financial statement audits of FAA for the

fiscal years 1993 through 1995 statements. We also obtained and reviewed

information from the FAA Chief Financial Officer and other FAA personnel

about the current status of corrective actions on the reported issues.

In addition, because many of the problems identified by the IG were the

result of the lack of a reliable system to accumulate costs, we reviewed

several reports concerning FAA’s financial and cost accounting systems.

These included the Department of Transportation’s Federal Managers’

Financial Integrity Act reports for fiscal years 1993 through 1996, an April

1996 consultant report by Arthur Andersen on FAA’s cost accounting

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system problems and needs,1 and a December 1997 report issued by the

National Civil Aviation Review Commission that provides insights into and

recommends improvements to FAA’s cost accounting system.2

 We

performed our review from October 1997 through January 1998 in

accordance with generally accepted government auditing standards.

We requested oral comments on a draft of this report from the Secretary of

Transportation or his designee. On February 3, 1998, the FAA Associate

Administrator for Administration and his staff provided us with oral

comments.

Operating Materials

and Supplies Were

Not Accurately

Tracked

The IG was unable to determine whether operating materials and supplies

with a reported value of $432 million were fairly stated because adequate

inventory counts were not performed to determine actual items on hand,3

excess inventory was not identified, documentation was not available to

verify the correct cost of items, and accurate detailed records were not

maintained for spare parts kept in the field (field spares).

Operating materials and supplies consist of spare parts located at the

Logistics Center and in the field for ATC and other equipment, FAA facilities,

and aircraft. The Logistics Center is the central warehouse for operating

materials and supplies and uses an automated inventory system, which is

continually updated (perpetual inventory) to account for inventory. Field

spares are parts that to meet operational needs, are maintained at

locations near the facility that they support. FAA facilities responsible for

field spares generally maintain their own manual or automated inventory

lists. The IG was unable to verify the reported balance of operating

materials and supplies stocked at the Logistics Center because of

numerous errors and omissions. Further, because FAA concluded that its

records for field spares were not reliable and field spares were expensed

when issued, no amount for field spares was included in the reported

operating materials and supplies asset total. Available FAA records showed

a balance of $245 million for field spares.

1

Cost Accounting System Recommendations and Proposal Project Plan and Cost Estimate, April 1996.

Arthur Andersen, Washington, D.C.

2

Avoiding Aviation Gridlock & Reducing the Accident Rate, A Consensus for Change, December 1997.

National Civil Aviation Review Commission, Washington, D.C.

3

For fiscal years 1994 through 1996, FAA inventoried less than 8 percent of the Logistics Center

inventory for each year and, in 1996, inventoried only 26 percent of field spares.

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Some of the IG’s specific findings were that

• 20 percent of the Logistics Center inventory counts did not agree with the

amounts on perpetual inventory system listings,

• 27 percent of the field spare line items that were test counted did not

match lists of stocked items,

• 48 percent of the Logistics Center parts did not have invoices or other

documentation to verify the unit price of items, and

• 106 disk drives recorded at $3.6 million were kept in stock related to a

system that was being decommissioned, some of which potentially could

be identified as excess inventory.

The lack of accurate inventory information may result in program officials’

inability to make prudent business decisions and to safeguard assets

adequately, as shown in the following examples.

• Because of inaccurate inventory information, funding requests may not be

based on actual needs, unnecessary purchases may be made, and

inventory may be overstocked or hoarded due to availability concerns. In

turn, this resulting excess, as well as spare parts for equipment no longer

in service, would require storage, inventory control, and other activities

that consume operating resources.

• Spare parts, such as disk drives, modems, and circuit card assemblies, may

not be adequately safeguarded. Since many of these items are portable,

inaccurate inventory records may increase the risk of undetected theft or

loss due to unauthorized acquisition and use or disposition.

The lack of accurate inventory information may also impair operational

effectiveness, as shown in the following examples.

• Inaccurate inventory information may result in a shortage of or the

inability to locate essential parts necessary to repair mission-critical

systems. This could result in repair delays due to unscheduled outages and

failures of FAA equipment.

• Inaccurate information about the location and quantities of spare parts

may cause a failure to make necessary modifications or updates to these

items. Complex systems may require modifications to reflect functional

design changes and to eliminate failure-prone parts. Since these parts

could be used to repair operational systems, it is important that these

parts, especially circuit card assemblies, subassemblies, and similar items,

receive required modifications to ensure system design integrity.

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Finally, the lack of accurate inventory information affects the reliability of

financial management information. Operating materials and supplies

inventory is recorded as an asset until it is issued or consumed in

operations when the cost is charged to operating expenses. Therefore, if

inventory assets are understated, operating expenses would be overstated.

The misstatement of operating expenses distorts historical maintenance

cost amounts that may be used to project and budget for future costs.

Agency Actions Related to

Operating Materials and

Supplies

FAA advised us that it has

• performed a wall-to-wall inventory of operating materials and supplies at

the central warehouse, identified excess items, and adjusted records

accordingly;

• revised policies and procedures to include an inventory count of operating

materials and supplies every 3 years;

• counted 48 percent (dollar value) of field spares and plans to complete the

field spares inventory by the end of fiscal year 1998;

• initiated a new project to provide physical and fiscal management of FAA

assets both centralized at the Logistics Center and in field facilities;

• begun recording field spares as assets rather than expensing them as was

the previous practice;

• revised methods to ensure timely review of excess operating materials and

supplies stored at the Logistics Center; and

• made plans to implement bar coding for the asset tracking process in

July 1998.

Property and

Equipment on Hand

Could Not Be Reliably

Determined

The IG was unable to determine whether $5.5 billion of property and

equipment was correct because records for these assets contained

significant errors and omissions, supporting documentation was often

unavailable, and inventory counts had not been performed to determine

actual items on hand. The $5.5 billion includes reported amounts of almost

$2 billion in property (real estate assets), and $3.5 billion in equipment

(also referred to as personal property). Issues identified by the IG related

to each of these categories of assets are discussed in the following

sections.

Property FAA’s system for keeping track of property, such as land, facilities, and

lease improvements, had significant errors and omissions and could not be

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relied on to determine the actual amount of property owned. The IG found

the following.

• Property estimated at $198 million, which had been disposed of,

destroyed, or physically removed was still included in the property system.

For example,

• at the Air Route Traffic Control Center in Miami, a large fuel storage

tank that had been removed years ago was still on the property list and

• at another control center, several buildings on the property list had been

demolished.

• Limited tests of real property identified about $12 million in assets held by

FAA that could not be located in the property system. For example,

• at the Cleveland Air Route Traffic Control Center, a medical trailer

facility was not recorded and

• at another control center, FAA failed to record a day care center

completed in 1994.

• The IG could not determine if 22 of 65 leases tested should have been

recorded as long-term capital leases4

 because documentation available

was not sufficient to properly classify the leases. If these leases, with

about $4 million in annual payments, were improperly classified as

short-term instead of long-term, assets and liabilities would have been

understated.

These types of errors and omissions affect FAA’s ability to manage its real

estate assets and make decisions about future needs. For example,

long-range planning needs for future facilities are impaired by the lack of

accurate information on the cost and useful lives of existing facilities.

Further, lack of records on revenue-producing properties results in the

inability to analyze the adequacy of fees charged to recover costs.

Equipment As with real property, FAA’s system for tracking equipment, such as ATC

equipment and aircraft, could not be relied on because of a lack of

supporting documentation and numerous errors. The IG found that:

• At various regions, equipment records did not separately identify

individual assets. For example, at one region, three computer

workstations valued at $162,000 were lumped together and could not be

individually identified or located. FAA officials subsequently determined

that the workstations were replaced in 1994.

4

Statement of Federal Financial Accounting Standards No. 5, Accounting for Liabilities of the Federal

Government provides criteria for a capital lease. If a lease meets the criteria, it is reported as an asset

with a corresponding liability for payments to be made over the life of the lease.

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• Documentation did not always exist to support reported equipment costs.

For example, at one location, documentation to support the cost of

mission-critical equipment, such as the Backup Emergency

Communications system and the Voice Switching Control system, could

not be located.

• Equipment costs totaling $325 million (out of $473 million tested by the IG)

were improperly reported as operating expenses instead of assets. Based

on the results of this sample test, the IG indicated that for fiscal years 1995

and 1996, an undetermined portion of the estimated $4.5 billion in major

system equipment acquisitions using facilities and equipment funding was

inappropriately charged as operating expenses rather than recorded as

assets.

The unreliability of the equipment information system affects FAA’s ability

to properly manage these assets, thus giving rise to potential operational

inefficiencies. For example, mission-critical equipment, such as radars and

other air traffic control equipment, may be difficult to locate when needed,

which could exacerbate an emergency situation. Also, as with inventory,

asset theft could go undetected, and funds could be spent unnecessarily to

acquire equipment that is already on hand.

Problems in accounting for both property and equipment also affect FAA’s

ability to properly maintain these assets, including estimating future

maintenance and deferred maintenance funding needs. Effective in fiscal

year 1998, FAA will be required under federal accounting standards to

estimate deferred maintenance costs.5

 Such estimates will provide

information to FAA and the Congress that will be useful in making

decisions about maintenance priorities and future funding. However,

without accurate property records, FAA and the Congress may not have

sufficient information to make reliable estimates of maintenance and

deferred maintenance needs.

Agency Actions Related to

Property and Equipment

FAA advised us that for property it

• has counted 70 percent (dollar value) of real property and plans to count

the remaining property by July 31, 1998;

• has made adjustments to detailed property and financial records based on

property validations (computer match of database) taken;

5

Statement of Federal Financial Accounting Standards No. 6, Accounting for Property, Plant, and

Equipment, defines maintenance as the act of keeping fixed assets in an acceptable condition. The

deferred maintenance estimate is the amount of future funding required to bring property and

equipment to its acceptable operating condition.

Page 9 GAO/AIMD-98-62 FAA Asset Accountability
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• plans to develop procedures by June 30, 1998, to (1) ensure detailed

property records are adjusted when property is acquired, disposed of, or

destroyed and (2) reconciled property records to the general ledger; and

• has published guidelines for identifying capital leases and has directed a

complete evaluation of leases.

FAA advised us that for equipment it

• has validated (computer match of database) 100 percent of equipment

records greater than $25,000;

• has developed a system modification to record equipment acquisitions as

individual items rather than as an aggregate amount and has issued written

guidance about managing equipment effectively;

• is revising procedures and plans to train personnel in 1998 to properly

identify equipment purchase costs that should be recorded as assets; and

• has worked with the IG to develop an approach for determining the value

of fiscal years 1996 and 1997 transactions (individual items) that should be

recognized as assets.

FAA Lacked a Reliable

System to Account for

Project Costs

Many of the problems the IG identified in operating materials and supplies

and property and equipment result from the lack of a reliable system for

accumulating project cost accounting information. When FAA acquires

facilities and equipment, some project costs are accumulated in an

account called work-in-process. The work-in-process account is a key

component of FAA’s system used to account for project costs. When the

acquired items are placed in service, the accumulated costs are to be

removed from work-in-process and recorded in appropriate asset or

expense accounts. However, the IG was unable to determine whether the

$3.3 billion reported as work-in-process was correct because FAA did not

maintain sufficient details to support what was in the account, and the

total was not completely reconciled to other FAA records. Without a

reliable system to accumulate project costs, and to transfer out the

appropriate amount when assets are placed in service, the asset and

expense accounts relating to operating materials and supplies and

property and equipment will continue to be misstated.

The inadequacy of FAA’s cost accounting system has been identified by GAO

and others as a weakness that prevents FAA from reliably determining

project and other costs. For example, with regard to the ATC modernization

program, we previously reported that FAA does not have a cost accounting

Page 10 GAO/AIMD-98-62 FAA Asset Accountability
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system capable of reliably accumulating full project cost information.6 Our

report concluded that without a system to capture and report the full cost

of ATC projects, FAA cannot reliably measure the ATC projects’ actual cost

performance against established baselines, and cannot reliably use

information relating to actual cost experiences to improve future cost

estimating efforts. Further, we reported that the Congress does not have

reliable cost information to use in making funding decisions about FAA.

In April 1996, an FAA consultant reported on FAA’s cost accounting needs

and options. Among other conclusions, the consultant stated that “none of

the (existing FAA) systems evaluated can provide cost data to support

management needs. . . .” Others have discussed some of these needs. For

example, in December 1997, the National Civil Aviation Review

Commission reported that “only with this effective management tool (cost

accounting system) can a substantial improvement in cost accuracy and

service be obtained by FAA.” Among the Commission findings was that

“[m]odern business tools, such as a cost accounting system, that tie

specific costs to services, and measurement tools that assess how well

services are provided are not yet available.” Among the recommendations

made by the Commission were that FAA’s revenue must be based on the

cost of services provided. “Using such a (cost-based) system, in and of

itself, will bring about a very significant management improvement. The

questions that could be answered in a cost-based environment cannot be

answered today.”

The lack of reliable information about the costs of program activities

limits the ability of FAA management and other decisionmakers to estimate

future costs in preparing and reviewing budgets, to control and reduce

costs, and to identify and avoid waste. For example, without reliable cost

information, FAA and other decisionmakers may not be able to effectively

• compare, during the budgeting process, expected costs with expected

benefits, identify activities that add value, and make informed decisions

about whether to expend resources for activities that are not

cost-effective;

• compare and identify the causes of cost changes over time;

• identify and reduce excess capacity costs (the cost to maintain a level of

service that may not be needed), if any;

6

Air Traffic Control: Improved Cost Information Needed to Make Billion Dollar Modernization

Investment Decisions (GAO/AIMD-97-20, January 22, 1997).

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• choose among alternative actions such as whether to perform a project

in-house or contract it out, to accept or reject a proposal, or to continue or

eliminate a product or service; and

• compare costs of similar activities and find causes for cost differences, if

any.

The lack of reliable cost information about program activities also limits

the ability of FAA management and other decisionmakers to establish

fees for services based on the cost of the services provided. For example,

the Federal Aviation Reauthorization Act of 1996 (Public Law

104-264) directed FAA to establish user fees not to exceed $100 million for

selected services, including aircraft overflights, and to directly relate these

fees to the costs of providing the service rendered.

Finally, the lack of reliable cost information limits the ability of FAA

management and other decisionmakers to meaningfully evaluate

performance measures. Measuring costs is an integral part of measuring

performance in terms of efficiency and cost-effectiveness. Efficiency is

measured by relating inputs to outputs and is often expressed by the cost

per unit of output. Effectiveness is measured by the outcome, or the

degree to which a predetermined objective is met, and is commonly

combined with cost information to show “cost-effectiveness.” However,

these measures are meaningless if they are not based on reliable

underlying information.

Agency Actions Related to

Cost Systems

With regard to accounting for costs, FAA advised us that

• it created a Cost Accounting Division and, at the end of fiscal year 1997,

established a baseline cost accounting system for selected pilot

organizations that it plans to implement agencywide by the end of fiscal

year 1998;

• by February 28, 1998, it plans to have policies and procedures developed

for classifying amounts and managing the amounts recorded as

work-in-process;

• it plans to complete development of a detailed transaction database to

support the amounts in the financial records and financial statements; and

• its new cost accounting system will respond to recommendations made by

the National Civil Aviation Review Commission.

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Conclusion Accountability over physical assets is a key step in avoiding waste, fraud,

and abuse, and is essential to efficient and effective budgeting and

management of resources. It is particularly critical in situations such as

FAA’s, in which billions of dollars of assets are being acquired in

connection with the ATC modernization program. Until FAA implements

effective policies and procedures to provide accountability over operating

materials and supplies and property and equipment, it remains vulnerable

to significant mismanagement of appropriated funds used to acquire these

assets.

Agency Comments FAA officials generally concurred with our findings and conclusions. They

emphasized, however, that they have taken significant actions to address

the problems identified in the IG’s audit report on the fiscal year 1996

financial statement. We have added throughout our report a discussion of

actions FAA stated it has taken since the date the IG audit report was

issued. Because neither we nor the IG has yet determined the effectiveness

of these actions, it is not clear whether they are sufficient to address FAA’s

accounting and financial management deficiencies. FAA also provided

some clarifying comments that we incorporated into our report where

appropriate.

We are sending copies of this letter to the Ranking Minority Member of

your Committee, the Secretary of Transportation, the Administrator of the

Federal Aviation Administration, the Acting Chief Financial Officer of the

Federal Aviation Administration, the Director of the Office of Management

and Budget, the Department of Transportation Inspector General, and

other interested parties. Copies will also be made available to others upon

request.

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If you have any questions about this letter, please call me at (202) 512-8341

or John C. Fretwell, Assistant Director, at (202) 512-9382.

Sincerely yours,

Linda M. Calbom

Director, Resources, Community,

 and Economic Development Accounting

 and Financial Management Issues

Page 14 GAO/AIMD-98-62 FAA Asset Accountability
Page 15 GAO/AIMD-98-62 FAA Asset Accountability
Appendix I 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

John C. Fretwell, Assistant Director

Frank S. Synowiec, Jr., Assistant Director

H. Donald Campbell, Senior Auditor

Mary B. Merrill, Senior Auditor

Meg Mills, Communications Analyst

(913817) Page 16 GAO/AIMD-98-62 FAA Asset Accountability
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