AGENCY FINANCIAL

REPORT

FISCAL YEAR 2017
FOREWORD

Agency Financial Report 

This United States Department of Defense (DoD) Agency Financial Report (AFR) for 

fiscal year (FY) 2017, provides the Department’s financial and summary-level performance results 

to the Congress, the President, and the public in order to demonstrate its accountability and 

stewardship over the resources entrusted to it. FY 2017 covers the reporting period lasting from

October 1, 2016 through September 30, 2017. 

In accordance with the Office of Management and Budget (OMB) Circular A-136, 

“Financial Reporting Requirements,” the Department has chosen to publish an AFR and an Annual 

Performance Report (APR) in lieu of a combined Performance and Accountability Report. The 

AFR is intended to simplify and summarize information while providing transparent financial and 

performance reporting.

The Department previously published a Summary of Performance and Financial 

Information (also known as the Citizens Report); however, it is no longer a required report. Prior 

year publications are available on the Under Secretary of Defense (Comptroller) public website.

Annual Performance Report 

Published with the Department’s annual budget submission in February 2018, the Annual 

Performance Report will provide a detailed description of performance measures and FY 2017 

results.

Secretary of Defense Jim Mattis meets with Marines at the U.S. embassy in Riyadh, Saudi Arabia, April 19, 2017.

Photo by Tech. Sgt. Brigitte N. Brantley
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About the Department of Defense 

Agency Financial Report 

The DoD AFR is required by law, including the Chief Financial Officers Act of 1990, the 

Government Management and Reform Act of 1994, and the Accountability of Tax Dollars Act of 2002. 

This report includes four main sections.

The Management’s Discussion and Analysis (MD&A) Section is required supplementary 

information and provides an executive-level overview of the Department and its use of taxpayer resources 

in FY 2017. The MD&A includes a DoD Overview that describes the Department’s mission, major 

programs, strategic priorities, and organizational structure; a Performance Overview that provides 

summary-level reporting on select accomplishments, key performance measures and key initiatives through 

the third quarter of FY 2017; a Financial Overview that reports on highlights from the FY 2017 agency-wide 

consolidated financial statements and provides updates on the Department’s financial management 

improvement initiatives; and an Internal Controls Overview that describes the Department’s enterprise risk 

management and internal controls program, business and financial management systems improvement 

strategy, and improper payments reporting. 

The Financial Section, introduced by the Chief Financial Officer, includes the FY 2017 DoD 

agency-wide consolidated financial statements (the Balance Sheet, Statement of Net Cost, Statement of 

Changes in Net Position, and Statement of Budgetary Resources) and the accompanying explanatory notes 

to the financial statements. Additionally, this section provides required supplementary information and the 

Independent Auditor’s report on the financial statements, accompanying notes, and the Department’s 

internal controls over financial reporting.

The Other Information Section reports detailed information on the Department’s identified 

material weaknesses in internal controls, improper payments and recoveries, efforts to “reduce the 

footprint” of DoD real property, compliance efforts in response to fraud reduction and grant oversight 

regulations, and DoD Inspector General-identified management and performance challenges facing the

Department.

The Appendices Section includes the Defense Security Cooperation Agency – Security Assistance 

Accounts financial statements and explanatory notes – accounts the Department executes on behalf of the 

Executive Office of the President. The Appendices section also includes a list of acronyms and 

abbreviations, useful websites, and an index of figures and tables included throughout this report.

The estimated cost of this report or study for the 

Department of Defense is approximately $351,000 

in Fiscal Years 2017 – 2018. This includes 

$159,700 in expenses and $191,300 in DoD labor.

Generated on 2017Nov09 RefID: F-9087870
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Members of a Joint Service Color Guard prepare to participate in a parade before the 2016 Military Bowl at the Navy – Marine 

Corps Memorial Stadium in Annapolis, Md., Dec. 27, 2016. The Wake Forest Demon Deacons defeated the Temple Owls 34-26.

Photo by Sgt. James K. McCann
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U.S. Department of Defense Agency Financial Report for FY 2017 

Table of Contents

v

Table of Contents

About the Department of Defense Agency Financial Report ..................................................................i

MANAGEMENT’S DISCUSSION AND ANALYSIS

Department of Defense Overview...........................................................................................................1

 Resources......................................................................................................................................3

 Looking Forward ..........................................................................................................................9

 Organization................................................................................................................................10

Performance Overview .........................................................................................................................18

Financial Overview...............................................................................................................................25

 Financial Highlights and Analysis..............................................................................................25

 Financial Management Improvement Initiatives ........................................................................31

 Financial Improvement and Audit Readiness Initiative....................................................31

 Financial Management Certification Program..................................................................32

 Institutional Reform..........................................................................................................33

Internal Controls Overview...................................................................................................................37

 Enterprise Risk Management and Internal Control Program......................................................37

 Statement of Assurance...............................................................................................................39

 Business and Financial Management Systems............................................................................46

 Improper Payment Reporting......................................................................................................50

FINANCIAL SECTION

Message from the Under Secretary of Defense (Comptroller)/Chief Financial Officer.......................53

Principal Financial Statements and Notes.............................................................................................55

Required Supplementary Stewardship Information............................................................................136

Required Supplementary Information.................................................................................................139

Independent Auditor’s Report.............................................................................................................150

OTHER INFORMATION

Summary of Financial Statement Audit and Management Assurances..............................................161

Payment Integrity................................................................................................................................182

Fraud Reduction Report......................................................................................................................210

Reduce the Footprint...........................................................................................................................211

Civil Monetary Penalty Adjustment for Inflation...............................................................................212

Grants Oversight & New Efficiency Act Requirements.....................................................................213

Summary of DoD Inspector General’s Top Management and Performance Challenges....................214

APPENDICES

Appendix A: Defense Security Cooperation Agency – Security Assistance Accounts Financial 

Statements and Notes......................................................................................................................... A-1

Appendix B: List of Acronyms and Abbreviations.............................................................................B-1

Appendix C: Useful Web Sites...........................................................................................................C-1

Appendix D: Index of Figures and Tables......................................................................................... D-1

Appendix E: DoD Inspector General: “Top Management Challenges – Fiscal Year 2018” ..............E-1
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AGENCY FINANCIAL REPORT

MANAGEMENT’S

DISCUSSION AND

ANALYSIS

UNITED STATES DEPARTMENT OF DEFENSE

FISCAL YEAR 2017
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Management’s Discussion and Analysis

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MANAGEMENT’S DISCUSSION AND ANALYSIS

DEPARTMENT OF DEFENSE OVERVIEW

The mission of the Department of Defense (DoD) is to provide the military forces needed 

to deter war and to protect the security of our country. The Department is firmly committed to 

safeguarding the national security of the United States and to ensuring that the U.S. military 

remains the best prepared and most lethal warfighting force in the world.

Today, the United States 

faces a dynamic and unpredictable 

security environment – one that is 

marked by the continued 

provocations of rogue states, the 

proliferation of violent extremist 

organizations, and the return of 

competition for global power. 

North Korea's pursuit of nuclear 

weapons and the means to deliver 

them has increased in pace and 

scope, presenting a threat to all, 

while the actions of an assertive 

China and a resurgent Russian 

Federation have placed the 

international order under assault. 

Moreover, the breakdown of the 

broader Mideast order has enabled 

the continued rise of terrorist 

groups, including Al-Qaeda and the Islamic State of Iraq and Syria, and produced security 

vacuums that have allowed a revolutionary Iranian regime to sow violence, provoke wider SunniShia confrontation, and pursue regional hegemony.

In addition to these concerning geopolitical developments, we are confronted with rapid 

advances in commercial technologies such as big data analytics, artificial intelligence, robotics, 

and additive manufacturing that will assuredly shape the character of future wars and erode the 

conventional overmatch to which our nation has grown so accustomed. The resultant security 

environment is one that is more volatile than any experienced over the last four decades. Under 

such circumstances, the Department of Defense cannot afford to be complacent. 

Indeed, the complexities of this security environment require a thorough and deliberate 

examination of the U.S. military’s capabilities, capacity, posture, and readiness as well as the 

articulation of an effective strategy to address emerging challenges and provide for the common 

defense. To this end, the National Defense Strategy (NDS), which the Department is currently 

formulating and will submit to the Congress in early 2018, will outline the Department’s 

Secretary of Defense Jim Mattis and Danish Minister of Defence Claus Hjort 

Frederiksen welcome Ine Eriksen Soreide, Norway’s Minister of Defence, to a 

Global Coalition on the Defeat of ISIS meeting at Eigtveds Pakhus in Copenhagen, 

Denmark, May 9, 2017.

Photo by Staff Sgt. Jette Carr
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assessment of the threats facing our nation and serve as the key strategic document driving the 

Department’s priorities, investments, and programmatic decisions. Consistent with the President’s 

National Security Strategy, the NDS will guide the Department as it builds a larger, more capable, 

and more lethal joint force. 

Despite the onerous budgetary limits imposed by the Budget Control Act of 2011, the 

Department will seek to strengthen the military by improving readiness, increasing force capacity, 

and enhancing key warfighting capabilities to address the known risks the United States faces as a 

nation while also preparing for the demands of an uncertain future. In addition, the Department

will place a greater emphasis on investments in research and development, leveraging innovation 

from both the traditional defense industry and the commercial sector to assist us in maintaining 

our competitive advantage well into the future. As a result of these measures, we will be better 

postured to execute the National Defense Strategy and uphold critical national security objectives, 

in turn leaving us with a stronger, more secure America.

 

Marines with the 11th Marine Expeditionary Unit conduct the 

obstacle course during Martial Arts Instructors Course 

(MAIC) 1-17 aboard Marine Corps Base Hawaii, May 1, 

2017. The MAIC is a three week long course that puts 

applicants through rigorous training designed to instill 

teamwork and develop leadership abilities necessary for a 

Marine Corps Martial Arts Program instructor to teach classes. 

The Makin Island Amphibious Ready Group/11th MEU is 

currently underway on their Western Pacific 16-2 deployment.

Photo by Cpl. Aaron S. Patterson

An MQ-9 Reaper remotely piloted aircraft from the 163d 

Attack Wing performs a touch and go March 24, 2017, at 

March Air Reserve Base, California. A week earlier, the wing 

made its first successful touch and go at the base, marking a 

milestone in the effort to relocate the wing’s flight operations 

to March ARB from Southern California's high desert.

Photo by Airman 1st Class Crystal Housman
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RESOURCES

In Fiscal Year (FY) 2017, the Department had discretionary budget authority of 

$606 billion. Figure 1 displays the DoD FY 2017 budget authority by appropriation type. The 

Department’s priorities outlined in the National Security Presidential Memorandum on Rebuilding 

the U.S. Armed Forces were built and sustained through program and resources in the FY 2017 

budget.

Key themes were:

• Seeking a balanced force,

• Managing enduring readiness 

challenges,

• Pursuing investments in military 

capabilities,

• Taking care of our people, and

• Supporting overseas contingency 

operations.

Appropriation Categories

Military Personnel – Stopped the 

decrease in overall troop levels by supporting 

increases to the three components of the Army 

and adding Air Force personnel in critical 

mission areas of intelligence, surveillance, and 

reconnaissance and cyber. It also supported 

member’s ability to move between duty stations 

as manning levels required.

Operation and Maintenance – Provided additional training and readiness options including 

upgrades to Opposing Force (OPFOR) equipment to enable OPFOR to replicate the tactics and 

capabilities of potential adversaries; provide combat support operations funds; provide 

maintenance, equipment, and repair parts for the Navy’s expeditionary forces service in theaters 

of operation; increasing ship depot maintenance funding; and increasing flying hours to support 

tactical training.

Procurement – Included acquisition of equipment including unmanned aerial systems, Air 

and Missile Defense systems across the operational force, additional aircraft to replace combat 

worn strike fighters, ammunition, spare parts for existing equipment to maintain combat readiness, 

and individual personal protective gear to support the warfighter.

Figure 1. DoD FY 2017 Budget Authority
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Research, Development, Test, and Evaluation – Provided basic and applied research to 

ensure the United States maintains it technological edge including the development of tools 

required by the Cyber Mission Force to accomplish its mission.

Family Housing – Provided funding for care and maintenance of existing housing to 

include support services such as refuse collection and utility services.

Military Construction – Improved existing infrastructure and to provide new and improved 

facilities including airfields for all services, barracks, and other buildings to support the DoD 

mission around the world. This includes Planning and Design funding for European Reassurance 

Initiative projects.

Seeking a Balanced Force

The United States continues to face a rapidly changing security environment as warfare 

evolves across all domains. The Department must maintain ready forces with superior capabilities 

to deter potential adversaries and defeat attacks across the full spectrum of conflict while 

addressing a wide range of security challenges. In addition, the Department must sustain robust 

investments in science, technology, and research and development in areas most critical to meeting 

future challenges, including areas with the potential for game-changing advances.

Secretary of Defense James Mattis defined three lines of effort: To restore military 

readiness as the Department builds a more lethal force, to strengthen alliances and attract new 

partners, and business reforms. The FY 2017 budget reflected the choices made to achieve a 

modern, ready, and balanced force to meet the full range of potential military requirements. As 

directed in the “National Security Memorandum on Rebuilding the U.S. Armed Forces,” dated 

January 27, 2017, the Department identified resources to (1) accelerate the defeat of the ISIS, al 

Qaeda, and their affiliated groups, (2) increase warfighting readiness, and (3) cover all known 

must-pay shortfalls. The FY 2017 budget is the vital first step in growing and maintaining a higher 

state of warfighting readiness in the future.

Reserve Components are an important element of the Total Force, and the Department is 

focused on optimizing the Active/Reserve force mix while sustaining readiness at appropriate 

levels. The reserves are trained, ready, and cost-effective forces that can be deployed on a periodic 

operational basis while ensuring strategic surge capabilities for large-scale contingencies or other 

unanticipated national crises. The Guard and Reserve maintained a total end strength of 

approximately 809,000 at the end of FY 2017. The National Guard and Reserves consistently 

demonstrate their readiness and ability to make sustained contributions to national security 

challenges.

Maintaining this balance is essential to the warfighting capabilities needed to maintain the 

military forces and to send U.S. personnel into combat with the best possible training and 

equipment.
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Managing Enduring Readiness Challenges

The DoD recognizes the importance of and commitment to maintaining ready and capable 

forces. The Department continued initiatives to transition from a force largely focused on current 

operations to one capable of meeting a broader mission portfolio. In FY 2017, U.S. Military Forces 

were postured globally to conduct counterterrorism, stability, and deterrence operations; maintain 

a stabilizing presence; conduct bilateral and multilateral training to enhance U.S. security 

relationships; and provide the crisis response capabilities required to protect U.S. interests. 

Readiness investments in training technologies; force protection; command and control; and 

intelligence, surveillance and reconnaissance systems strengthened the U.S. to stand as the most 

formidable military force in the world. 

Since the enactment of the Budget Control Act of 2011, the Department has absorbed 

significant budget reductions from the FY 2012 baseline while threats against U.S. vital interests 

have been growing. Terrorist organizations like ISIS as well as the actions of North Korea, China, 

and Russia threaten the United States and its friends and allies around the world. The first step in 

rebuilding the U.S. Armed Forces is increasing warfighting readiness. This means ensuring that 

the current forces are adequately manned, trained, and equipped to fight. The request for additional 

appropriations covered all of these areas – manning, training, and equipping – to produce 

improvements in near-term warfighting readiness.

U. S. Marine Corps Capt. Geoffrey Irving, legal assistant attorney, and his wife, Anna Chou, practice their Marine Corps 

Martial Arts techniques during J. Wayne Day on Camp Pendleton, Calif., April 28, 2017. J. Wayne Day is an event where 

spouses or loved ones have a chance to participate in multiple activities such as the Marine Corps Martial Arts, Pistol Range

and the Fire Crash and Rescue followed by various demonstrations and displays.

Photo by Lance Cpl. Betzabeth Y. Galvan
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Pursuing Investments in Military Capabilities

The Department’s research and development efforts are conducted by government 

laboratories, nonprofit research institutions, and defense companies both large and small. The 

FY 2017 resources included $13.7 billion in science and technology to support groundbreaking 

work in the Military Services, DoD laboratories and engineering centers across the country, and 

the Defense Advanced Research Projects Agency to develop and advance technologies and 

capabilities. These investments in technologically advanced capabilities are designed to yield a 

military force that achieves the nation’s security objectives and ensure that the United States 

remains a technologically superior global force to promote peace and security. Additionally, the 

Department leads a continuing effort to identify and invest in unique ways to advance U.S. military 

superiority by incentivizing industry and government productivity and innovation in: 1) a longrange research and development program designed to identify new technologies and their uses and 

push the envelope in new technologies like data science, biotech, cyber, and electronic warfare; 

2) leadership practices; 3) war-gaming; 4) operational concepts; and 5) business practices. The 

Department continues to invest in new strategic approaches and capabilities, such as advancing 

undersea capabilities and developing new hypersonic missiles, artificial intelligence, and 

autonomy and robotics, to prevent and win conflicts against 21st century threats.

Moreover, the Department is investing in innovation by developing new partnerships with 

the private sector and technology communities across the country through collaborative outreach 

efforts such as that provided by the Defense Innovation Unit-Experimental (DIUx). In FY 2017, 

the Department directed $60.5 million to support DIUx activities. Additional resources were

provided to the Strategic Capabilities Office for their efforts to off-set the technological advances 

of U.S foes through the identification and development of game-changing applications of existing 

and near-term technology to shape and counter emerging threats.

Taking Care of Our People

America asks much of its All-Volunteer Force (AVF) and the civilians who support that 

force. The Department must preserve the quality of its most prized asset, the AVF, which is 

comprised of high quality, educated, motivated personnel who are committed to excellence in the 

defense of the nation. The FY 2017 budget kept faith with the men and woman in uniform and 

their families.

Comprising nearly half of the DoD budget, military and civilian personnel costs are the 

Department’s single largest expense category. To meet the needs of our diverse workforce and 

mission set, the Department provides not only highly competitive monetary compensation but also 

manages the Military Health System (MHS); operates schools, commissaries, restaurants, and 

childcare facilities; and a myriad of other programs to support Service members and their families 

worldwide. The MHS is a complex system that incorporates health care delivery, medical 

education, public health, private sector partnerships, and cutting edge medical research and 

development. The MHS provides health care for 9.4 million eligible beneficiaries including all 
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Service members, retirees and their families, dependent survivors, and certain eligible Reserve 

Component members and their families.

The Department is vigilant 

in its efforts to ensure these costs 

are appropriately balanced against 

the Department’s strategic goals.

Specifically, the Department 

cannot allow its personnel costs to 

crowd out investments in readiness 

and modernization that are essential 

to providing the training and 

equipment needed to accomplish 

the vast array of missions 

undertaken around the globe. 

Balancing resources is essential as 

the Department reshapes the forces 

needed to remain effective, and 

providing a robust pay and benefits 

package must be sustained to 

execute the nation’s defense 

strategy.

Against the backdrop of a competitive military compensation and health benefit package, 

the Department has done a significant amount of work to explore how it can balance the rate of 

growth in military pay, benefit costs, and individual compensation incentives in a way that is both 

responsible and fair.

With the NDAA for FY 2016, Congress enacted the Blended Retirement System, a 

modified retirement system for military members that will be effective as of January 1, 2018. The 

system combines the traditional defined benefit of monthly retired pay with a defined contribution 

benefit through contributions to a member’s Thrift Savings Plan account. While all currently 

serving members are grandfathered under the current retirement system, those with fewer than 

12 years of service as of January 1, 2018 will have the opportunity to choose whether to remain 

under the current system or to opt into the Blended Retirement System. Members who join the 

military on or after January 1, 2018 will be automatically covered by the Blended Retirement 

System. Although only 19 percent of military members entering service today serve the full 

20 years necessary to receive a retirement benefit under the current retirement system, under the 

Blended Retirement System a member will have the opportunity to achieve retirement benefits 

that are transferable if full retirement is not reached.

The military life cycle is complex, dynamic, and key to military readiness. The Department 

must attract nearly 250,000 qualified new recruits to replenish the military workforce each year. 

In addition, the Department is committed to combatting suicides and sexual assaults by dedicating 

resources to Department-wide training and prevention programs. Despite global and fiscal 

Capt. Manisha Mills, a 49th MDOS pediatrician, checks her patient's heart 

rate March 29, 2017 at Holloman Air Force Base, N.M. Mills' framework 

consists of about 20-23 appointments per day and in between those 

appointments, she takes walk-in clients.

Photo by Airman 1st Class Ilyana A. Escalona
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challenges, the Department stands with Service members, their families, retirees, and the civilian 

workforce. However, 16 years of war have taken a toll on the All-Volunteer Force. Multiple 

deployments with less respite between them, extensive use of the Guard and Reserves, and force 

reductions all contribute to a more complex and demanding environment. Declining budgets make 

it harder to reset the Force while sustaining the readiness needed for requirements such as deterring 

the Islamic State of Iraq and Syria. Caring for the Department’s people remains a top priority for 

the Department, Congress, and the Administration.

Supporting Overseas Contingency Operations

The Department requested $69.7 billion of OCO funds primarily to conduct Operation 

Freedom's Sentinel and other missions outside of Afghanistan, such as those in the Horn of Africa

and Operation Inherent Resolve against ISIS. These funds were also used to train and equip Iraqi 

security forces and vetted Syrian opposition forces, support European partners, and respond to 

terrorist threats. Additionally, Congress increased the Department's FY 2017 OCO funding

request to fund certain readiness requirements transferred from the base budget request, National 

Guard and Reserve Equipment, and improve intelligence, surveillance, and reconnaissance.

A U.S. Army M109A6 Paladin deployed in support of Combined Joint Task Force – Operation Inherent Resolve, assigned to 

Bravo Battery, 2-82nd Field Artillery, 3rd Brigade, 1st Calvary Division fires during training operation at Camp Manion Iraq, 

March 10, 2017. Bravo Battery provides base security in support of Combined Joint Task Force – Operation Inherent Resolve, 

the global Coalition to defeat ISIS in Iraq and Syria.

Photo by Spc. Christopher Brecht
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LOOKING FORWARD

The Department’s first priority is continuing to improve military readiness as it builds a 

more lethal force. This will be accomplished through the execution of a multi-year plan to fill in 

the holes caused by trade-offs made during 16 years of war, nine years of continuing resolutions, 

and Budget Control Act caps as well as to prepare for sustained future investment. This effort 

prioritizes a safe and secure nuclear deterrent and the fielding of a decisive conventional force, 

while also retaining irregular warfare as a core competency. The Department is focused on 

strengthening the Military Forces to ensure that the American military edge remains and endures

well into this century and beyond. 

The Department’s second priority is 

strengthening and attracting new partners. 

Alliances and multinational partnerships, such 

as the North Atlantic Treaty Organization and 

the Defeat-ISIS Coalition, provide avenues for 

peace and foster the conditions for economic 

growth with countries sharing the same vision. 

Strong alliances also serve to temper the plans 

of those who would attack other nations or try 

to impose their will over the less powerful. 

The Department must seek to engage and 

collaborate with nation states choosing to be 

strategic competitors, such as Russia and 

China, while also being prepared to confront 

inappropriate behavior should they choose to 

act contrary to American interests or threaten 

the security of U.S. allies.

The Department’s third priority is bringing business reforms to the Department of Defense. 

This effort focuses on instilling budget discipline and effective resource management, developing 

a culture of rapid and meaningful innovation, streamlining requirements and acquisition processes, 

and promoting responsible risk-taking and personal initiative. Examples of current and upcoming 

business reform initiatives include the Department’s preparations for its first full-scope financial 

statement audit in Fiscal Year 2018, the efforts to modernize the defense travel system, and the 

efforts to improve the efficiency of information technology business operations. With these and

other efforts, the Department demonstrates its devotion to gaining full value from every taxpayer 

dollar spent on defense, thereby earning the trust of the Congress and the American people. 

In the pursuit of these efforts, the Department recognizes that it is critical to preserve its

most enduring and competitive advantage – the Department’s people. The Department is fully 

committed to improving the recruitment and retention of the brightest and most committed young 

men and women to make the Department the most rewarding environment it can be for those who 

choose to serve.

A U.S. Air Force member cooks a snake during Cope North 17 

survival training at Andersen Air Force Base, Guam, 

Feb. 17, 2017. Cope North is a long-standing Pacific Air Forcesled exercise designed to enhance multilateral air operations 

between the U.S. Air Force, U.S. Navy, Japan Air Self-Defense 

Force and Royal Australian Air Force.

Photo by Airman 1st Class Christopher Quail
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ORGANIZATION

The Department of Defense (DoD) maintains and uses military forces to support and 

defend the Constitution and protect the security of the United States, its possessions, and areas 

vital to its interest. This mission depends on our military and civilian personnel and equipment 

being in the right place, at the right time, with the right capabilities, and in the right quantities to 

protect our national interests. This has never been more important as the United States fights 

terrorists who plan and carry out attacks outside the traditional boundaries of the battlefield.

The Department is one of 

the nation’s largest employers, 

with approximately 1.3 million 

personnel in the Active 

Component, more than 800,000 

personnel serving in the National 

Guard and Reserve forces, and 

about 750,000 civilians. The 

Department’s military Service 

members and civilians operate in 

every time zone and in every 

climate. There are also 

approximately 2.3 million military 

retirees and survivors receiving

retirement payments.

The Department manages 

a worldwide real property 

portfolio that spans all 50 states, 

U.S. territories and many foreign 

countries. The Department's real 

property infrastructure includes more than 568,000 facilities (buildings, structures and linear 

structures) located in more than 4,800 sites worldwide. These sites represent more than 

27.1 million acres that individually vary in size from training ranges with over 4 million acres, 

such as the White Sands Missile Range, to single weather towers or navigational aids isolated on 

sites of less than one one-hundredth (0.01) of an acre. Of the land the Department manages, only

about 31 percent is held by the Department in fee interest. The remaining acres are controlled 

through other legal means such as leases, licenses, permits, public land orders, treaties, and 

agreements. Beyond the mission-specific areas of installations such as runways, training areas, 

and industrial complexes, DoD installations also contain many facilities and operations found in 

municipalities or on university campuses such as hospital and medical facilities, public safety 

facilities, community support complexes, housing and dormitories, dining facilities, religious 

facilities, utility systems, and roadways. To protect the security of the United States, the 

Department operates over 14,000 aircraft and approximately 275 Battle Force ships.

Secretary of Defense Jim Mattis speaks with representatives of key military and 

veteran support organizations at the Pentagon in Washington, D.C., 

April 12, 2017. To his left is Dana White, assistant to the Secretary of Defense for 

Public Affairs (ATSD), and to his right is U.S. Air Force Lt. Col. Kristi Beckman, 

director of community and public outreach for the Office of the ATSD. 

Photo by Air Force Tech. Sgt. Brigitte N. Brantley
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The Secretary of Defense isthe principal assistant and advisor to the President in all matters 

relating to the Department, and he exercises authority, direction, and control over the Department. 

The Department (as seen in Figure 2) is currently composed of the Office of the Secretary of 

Defense (OSD), Joint Chiefs of Staff, Joint Staff, DoD Office of the Inspector General (OIG), 

Military Departments, Defense Agencies, DoD Field Activities, Combatant Commands, and other 

offices, agencies, activities, organizations, and commands established or designated by law, the 

President, or the Secretary of Defense.

The operational chain of command runs from the President to the Secretary of Defense to 

the Commanders of the Combatant Commands. The Chairman of the Joint Chiefs of Staff 

functions within the chain of command by transmitting to the Commanders of the Combatant 

Commands the orders of the President or the Secretary of Defense.

Figure 2. Department of Defense Organizational Structure
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The Office of the Secretary of Defense

The function of the OSD is to assist the Secretary of Defense in carrying out his duties and 

responsibilities and other duties as prescribed by law. The OSD is composed of the Deputy 

Secretary of Defense, who also serves as the Chief Management Officer and Chief Operating 

Officer; the Under Secretaries of Defense; the Deputy Chief Management Officer; the 

Department of Defense Office of the General Counsel; the Assistant Secretaries of Defense; the 

Assistants to the Secretary of Defense; the OSD Directors, and their equivalents; the Inspector 

General, Department of Defense; and other staff offices within OSD established by law or by the 

Secretary.

The OSD Principal Staff Assistants are responsible for the oversight and formulation of 

defense strategy, policy, and resource allocation, as well as for overseeing and managing the 

Defense Agencies and DoD Field Activities (Figure 3).

Figure 3. Office of the Secretary of Defense Principal Staff Assistants
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The Joint Chiefs of Staff and the Joint Staff

The Joint Chiefs of Staff (JCS), supported by the Joint Staff under the direction of the Chairman, 

constitute the immediate military staff of the Secretary of Defense. The Joint Chiefs of Staff 

consist of the Chairman (CJCS), the Vice Chairman (VCJCS), the Chief of Staff of the

Army (CSA), Chief of Naval Operations (CNO), the Chief of Staff of the Air Force (CSAF), the 

Commandant of the Marine Corps (CMC), and the Chief of the National Guard Bureau (CNGB). 

The Joint Chiefs of Staff function as the military advisors to the President, the National Security 

Council, the Homeland Security Council, and the Secretary of Defense.

Office of the Inspector General

The DoD OIG is an independent unit within the Department that conducts and supervises 

audits and investigations relating to the Department’s programs and operations. The DoD 

Inspector General serves as the principal advisor to the Secretary of Defense on all audit and

criminal investigative matters relating to the prevention and detection of fraud, waste, and abuse 

in the programs and operations of the Department.

Military Departments

The Military Departments consist 

of the Departments of the Army, the Navy

(of which the Marine Corps is a 

Component), and the Air Force. Upon 

the declaration of war, if Congress so 

directs in the declaration or when the 

President directs, the U.S. Coast Guard

becomes a special Component of the 

Navy; otherwise, it is part of the 

Department of Homeland Security. The 

four Services and the U.S. Coast Guard 

are collectively referred to as the U.S. 

Armed Forces per title 10, United States 

Code, section 101(a)(4). The three 

Military Departments organize, staff, 

train, equip, and sustain America’s 

military forces and are composed of four 

Military Services (Army, Navy, Marine 

Corps, and Air Force) or five when 

including the U.S. Coast Guard, when directed. These trained and ready forces are assigned or 

allocated to a Combatant Command responsible for maintaining readiness to conduct military 

operations.

U.S. Marines with Lima Company, 3rd Battalion, 8th Marine Regiment, 

take cover after setting off a donut charge for an urban assault breaching 

range during a deployment for training exercise at Fort Pickett, 

Blackstone, Va., Dec. 9, 2016. The range was an opportunity for the 

Marines to practice the fundamentals of their job to better prepare them 

for deployment.

Photo by Sgt. Clemente C. Garcia
U.S. Department of Defense Agency Financial Report for FY 2017 

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Military Departments include Active and Reserve Components. The Active Component is 

composed of units under the authority of the Secretary of Defense manned by active duty Military 

Service members. The Reserve Component includes the Reserve Forces of each Military Service 

and the National Guard, which has a unique dual mission with both Federal and State 

responsibilities (Figure 4). When commanded by the governor of each state or territory, the 

National Guard can be called into action during local, statewide, or other emergencies such as 

storms, drought, civil disturbances, and in some cases supporting federal purposes for training or 

other duty (non-federalized service).

When ordered to active duty for national emergencies or other events, units of the National 

Guard or Reserve Forces of the Military Services are placed under operational control of the 

appropriate Combatant Commander or provide support to a Military Service. The National Guard 

and Reserve forces are recognized as indispensable and integral parts of the Nation’s defense and 

fully part of the applicable Military Department.

Defense Agencies and DoD Field Activities

Defense Agencies and DoD Field Activities (Figure 5) are established as DoD Components 

by law, the President, or the Secretary of Defense to provide, on a Department-wide basis, a supply 

or service activity common to more than one Military Department when it is more effective, 

economical, or efficient to do so. Although both Defense Agencies and DoD Field Activities fulfill 

similar functions, the former tend to be larger, normally provide a broader scope of supplies and 

services, and can be designated as Combat Support Agencies to support the Combatant Commands 

directly. Each of the 19 Defense Agencies and 8 DoD Field Activities operate under the authority, 

direction, and control of the Secretary of Defense through an OSD Principal Staff Assistant.

Figure 4. Reserve Components: Reserves and National Guard
U.S. Department of Defense Agency Financial Report for FY 2017 

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Figure 5. Defense Agencies and DoD Field Activities
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Combatant Commands

The Commanders of the Combatant Commands (Figure 6) are responsible for 

accomplishing the military missions assigned to them. Combatant Commanders exercise 

command authority over assigned and/or allocated forces, as directed by the Secretary of Defense. 

The operational chain of command runs from the President to the Secretary of Defense to the 

Commanders of the Combatant Commands. The Chairman of the Joint Chiefs of Staff functions 

within the chain of command by transmitting the orders of the President or the Secretary of Defense 

to the Commanders of the Combatant Commands.

The U.S. Strategic Command (USSTRATCOM), U.S. Transportation Command,

(USTRANSCOM), and U.S. Special Operations Command (USSOCOM) are functional Combatant 

Commands, each with unique functions as directed by the President in the Unified Command Plan. 

Among Combatant Commands, the USSOCOM has additional responsibilities and authorities 

similar to a number of authorities exercised by the Military Departments and Defense Agencies, 

including programming, budgeting, acquisition, training, organizing, equipping, and providing 

Special Operations Forces (SOF), and developing SOF’s strategy, doctrine, tactics, and 

Figure 6. Combatant Commands
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procedures. The USSOCOM is reliant upon the Military Services for common support and base 

operating support.

In addition to supplying assigned and allocated forces and capabilities to the Combatant 

Commands, the Military Departments provide administrative and logistics support by managing 

the operational costs and execution of these commands. The USSOCOM is the only Combatant 

Command directly receiving congressional appropriations.

U.S. Air Force Airman 1st Class Christian Williams, 36th Airlift Squadron loadmaster, releases cargo from a U.S. Air Force C-130 

Hercules during an airdrop operation during Cope North 2017, Feb. 22, 2017. The exercise includes 22 total flying units and more 

than 2,700 personnel from three countries and continues the growth of strong, interoperable relationships within the Indo-Asia 

Pacific region through integration of airborne and land-based command and control assets.

Photo by Senior Airman Keith James
U.S. Department of Defense Agency Financial Report for FY 2017 

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PERFORMANCE OVERVIEW

The Deputy Secretary of Defense, as the Department of Defense’s (DoD) Chief 

Management Officer and Chief Operating Officer, is responsible for performance management 

and improvement within the Department. Each year, in accordance with the 

Government Performance and Results Act of 1993 and Office of Management and Budget 

Circular No. A-11, the Department develops and tracks performance goals and measures to meet 

DoD strategic priorities. 

The Government Performance and Results Modernization Act of 2010 requires the 

development of a DoD Agency Strategic Plan (ASP). The Department’s Fiscal Years (FY) 2015 –

2018 ASP strategic goals were: 

• Strengthen and enhance the 

health and readiness of the total 

force; 

• Defeat our adversaries, deter 

attacks, deny enemy objectives, 

and defend the nation; and 

• Achieve dominant capabilities 

through innovation, technical 

excellence, and defense 

institution reform. 

The Department will publish 

and submit to Congress the FY 2018 –

2022 DoD Agency Strategic Plan with 

the FY 2019 President’s Budget 

Request in February 2018. This plan 

will align to Secretary of Defense 

priorities and support the 

administration’s management agenda.

This section provides an 

executive level overview of DoD’s 

performance through Quarter 3, 

FY 2017, ending June 30, 2017. 

Complete FY 2017 results will be 

published in the Annual Performance 

Report (APR) section of the 

Department’s FY 2019 President’s 

Budget Request in February 2018.

Sailors assigned to Explosive Ordnance Disposal Mobile Unit (EODMU) 

11 ascend a rope to an MH-60S Sea Hawk helicopter, from the 

"Eightballers" of Helicopter Sea Combat Squadron (HSC) 8, while 

conducting helicopter, visit, board, search, and seizure (HVBSS) training 

during a composite training unit exercise (COMPTUEX) with the Nimitz 

Carrier Strike Group in preparation for an upcoming deployment. 

COMPTUEX tests the mission readiness of the strike group's assets 

through simulated real-world scenarios and their ability to perform as an 

integrated unit.

Photo by Mass Communication Specialist 3rd Class Deanna C. Gonzales
U.S. Department of Defense Agency Financial Report for FY 2017 

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Summary of Performance Results

At the end of Quarter 3, FY 2017, 50 percent of DoD quarterly performance measures were 

on track to meet the annual goals, while 50 percent did not meet third quarter targets and could be 

considered at risk of not achieving annual targets. Of the remaining performance measures, 

36 measures will be reported after the close of FY 2017. A selection of Departmental successes 

and areas for improvement are highlighted below. 

Transition to Veterans

Our Nation should provide the best support possible to those who keep our country free 

and strong as they transition to civilian life. The Department remains focused on how to achieve 

lasting success for transitioning Service members both in preparing them for careers beyond the 

military and ensuring a smooth transition from active duty. To effectively address these issues, 

the Department continues to implement policies and practices that focus on readiness and 

supporting Service members and their families.

The Department and other 

critical federal partners are working 

to ensure that all eligible Service 

members participate in an effective 

program of pre-separation planning 

and education through evidencebased learning. This support is 

delivered through curriculum, the

“Transition GPS (Goals, Plans, 

Success)” within the DoD 

Transition Assistance Program 

(TAP), which is comprised of both 

core instructional blocks and 

individually selected tracks for 

accessing higher education, for 

obtaining career technical training,

and for entrepreneurship. Through 

Quarter 3, FY 2017, more than 

90 percent of known eligible active 

duty and Reserve Component 

Service members have met the TAP 

performance objectives.

Since 2007, the Department of Defense and the Department of Veterans Affairs (VA) have 

operated the Integrated Disability Evaluation System (IDES) to provide both DoD and VA 

disability benefits to Service members discharged due to medical disability. For the IDES

performance goals, during Quarter 3, FY 2017, the equally weighted goal components of the 

average of IDES process timeliness; Service member customer service satisfaction; accuracy and 

U.S. Army veteran, David Iuli, throws a discus during the Warrior Care and 

Transition's Army Trials, competing for a chance to go to the Department of 

Defense level 2017 Warrior Games, at Fort Bliss, Texas, April 5, 2017. The 

Warrior Games is an annual event allowing wounded, ill and injured Service 

members and veterans to compete in Paralympic sports including archery, 

cycling, shooting, sitting volleyball, track and field, swimming and wheelchair 

basketball.

Photo by Spc. Fransico Isreal
U.S. Department of Defense Agency Financial Report for FY 2017 

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consistency of Military Department IDES dispositions; and Military Department compliance with 

case processing administrative requirements resulted in an overall 85 percent score for DoD IDES 

performance measure, which exceeded the third quarter target (80 percent). The Department will 

continue to evaluate the Military Departments' performance against all measures that comprise the 

IDES Performance Goal.

Reform the DoD Acquisition Process 

As the 2016 Annual Report on the Performance of the Defense Acquisition System

illustrates, cost growth for Major Defense Acquisition Programs is at a 30-year low. The 

Department has achieved this success by observing several key tenets: setting reasonable 

requirements, putting trained professionals in charge, giving them the resources that they need, 

and providing strong incentives for success. With some exceptions, performance requirements 

and schedules are generally stable across major programs and the United States continues to field 

the most capable warfighting systems in the world.

Since the Weapons System Acquisition Reform Act of 2009, major programs baselined 

reflect cumulative underruns in excess of $30 billion. All three Military Departments are showing 

net improvements across their portfolios of programs with original baselines since 2009. This 

result comports with analysis indicating that cost growth has improved recently and that it is the 

programs started before 2009 that have higher cost growth. The Department has seen success in 

ensuring it is paying reasonable prices by tying contractor performance and risk to profit/fee. The 

Department has been monitoring operating margins of prime contractors to ensure that the net 

effect of these efforts – combined with other issues, such as sequestration – is not undermining the 

health of the defense industrial base. Results for the six largest prime contractors since 2009 show 

that they have performed consistently or slightly better, providing evidence that our efforts have 

not hurt the profit margins of these companies.

The annual report also describes the Department’s significant progress in rebuilding the 

acquisition workforce. Congress made this success possible by enacting legislation for the 

Defense Acquisition Workforce Development Fund, Acquisition Demonstration Project 

(AcqDemo), and other special hiring authorities. The Department has rebuilt workforce size, 

reshaped the workforce to strengthen early and mid-career year groups, significantly improved 

certification and education levels, and expanded participation in the contribution-based AcqDemo 

personnel management system. 

The Department has had many successes but will continue to review and improve work in 

delivering capability to the warfighter and protecting the American people. Average development 

timelines for major programs must be reduced to be more responsive to the force. Defense 

manufacturing costs continue to increase at rates greater than those of the larger economy. To 

some extent this is the result of the increasing complexity and performance requirements of the 

systems themselves, but the overall trends are unaffordable.
U.S. Department of Defense Agency Financial Report for FY 2017 

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Innovation

The Department-wide focus 

on technology innovation seeks to 

identify and invest in unique 

capabilities to sustain and advance 

the Department's military 

superiority for the 21st Century. 

The Department's research and 

engineering enterprise plays a vital 

role in maintaining the U.S. 

technological advantage despite the 

increased rate of investment in 

military research and development 

(R&D) from near-peers and easy 

proliferation of knowledge and 

technology that has eroded U.S. 

historic advantages. The 

Department's research and 

engineering enterprise is focused 

on providing the technologies to 

address current and future threats, 

reducing the cost of current systems 

while increasing their capability, and creating technological surprise for our adversaries. In the 

process of delivering capabilities into the warfighter's hands, we have leveraged all sources of 

innovation, both internal and external to the Department, and we used prototyping and 

experimentation to inform, evaluate, and accelerate technology development. The Department's 

continued R&D efforts contribute to the fielding of capabilities to the warfighter to ensure the 

Department is able to win today's fight and any future fights.

Audit and Audit Remediation

The National Defense Authorization Act for FY 2014 mandates that the Secretary of 

Defense ensures a full audit is performed on the DoD financial statements beginning in FY 2018. 

The DoD Consolidated Audit will likely be the largest audit ever undertaken. It comprises more 

than 24 standalone audits and an overarching consolidated audit. The Department has notified the 

Department of Defense Inspector General and congressional committees that it has the necessary 

capabilities to start the full financial statement audit in FY 2018. The Department expects to 

receive a variety of audit findings and recommendations, which will help to establish the baseline 

and provide a benchmark against which progress can be measured.

Remediating audit findings from the full financial statement audits is at the core of the 

Department’s audit strategy and is the most certain and cost-effective path to achieving a positive

audit opinion. The audit assesses our financial process and systems and will bring to light areas 

where the Department can improve. Over the next year, the Department must support a number 

U.S. Army Sgt. Justin Carrington, an unmanned aircraft system repairer with 

Delta Company, 9th Engineer Battalion, 2nd Brigade Combat Team, 3rd 

Infantry Division, prepares to launch an RQ-7 Shadow unmanned aerial vehicle 

(UAV) at Evans Army Airfield near Fort Stewart, Ga., Jan. 25, 2017. Soldiers 

with Delta Company supported the battalion field training exercises with 

surveillance from UAVs.

Photo by Spc. Efren Rodriguez
U.S. Department of Defense Agency Financial Report for FY 2017 

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of concurrent activities, including supporting the ongoing audits, addressing issues identified in 

earlier audits, and planning for future audits. This all directly supports the Department’s strategic 

priority to transform business processes. 

In order to standardize how audit results are reported and tracked, the Department has 

developed a common tool with standardized categories of deficiencies in order to capture critical 

elements of audit findings to drive change and accountability and to measure progress. The tool 

will support accountability of remediation activities across the Components. The FY 2017 Annual 

Performance Plan (APP), which will be published as part of the Department’s FY 2019 President’s 

Budget Request in February 2018, will represent self-reported progress against performance 

measures identified in prior years. In FY 2018, these performance measures and targets will be

changed in response to expected feedback and Notifications of Findings and Recommendations 

received from the audit results.

Energy 

The Services and Combatant Commands have made strides in including the risks of energy 

disruptions in planning activities. Experiential learning through including operational energy in 

wargames, exercises, and operation plans allows the industrial base to bring capabilities they have 

developed and truly test them with the warfighter. This benefits the government-industry 

partnership and allows Concepts of Operation and new warfighting strategies to be developed. 

The earlier we consider energy in the development process, the more we are able to 

effectively influence the design and capability of future systems. Underpinned by an analysis of 

how a system will be supported in a future warfighting scenario, the energy key performance 

parameter helps the Department make holistic decisions about future combat forces and the energy 

logistics and infrastructure needed to support those forces. The needs of the Combatant 

Commands will inform Department investments in people, equipment, and installations. Joint and 

Service wargames and scenario analyses will identify long-term risks to our combat capability that 

can be remedied through changes in how we consume and distribute energy in operations. These 

“demand signals” for operational energy improvements will then be integrated across 

requirements, acquisition, and innovation decision-making to quickly and effectively meet 

warfighter needs.

Competitively Awarded Contract Obligations

When viable, competition is, perhaps, the single best way to motivate contractors to 

provide the best value (i.e., the best performance at the lowest price). To this end, the Department 

continues to set and strives to achieve competition goals. The Military Departments each analyze 

projections of future acquisitions to identify opportunities and creative strategies for future 

competitive awards.

Competition achievement by contracting organizations varies widely based upon the 

missions and type of supply or service being procured. Challenges to improving competition

include high-value sole-source Foreign Military Sales, large on-going shipbuilding and aviation 

programs, and sustainment for major weapon systems that have already moved past the stage in 
U.S. Department of Defense Agency Financial Report for FY 2017 

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the lifecycle where competition is economically viable. Another challenge can be industry bidprotests of source selections results, which may require the Department to award sole-source 

bridge contracts for goods and services in the interim until the protests are resolved and the new 

contracts can be awarded. 

Despite these challenges, the Department is continuing to pursue various approaches for 

breaking out system components for competition and take steps to increase competition for major 

systems by introducing competition during the sustainment phase of a product’s life cycle through 

the use of open systems and open architectures. Beyond this kind of head-to-head competition, 

the Department is also expanding the types and use of other competitive environments to drive 

performance and cost savings. For example, the Navy’s evolving Profit-Related-to-Offer 

techniques adjust profits and production share between two captive shipyards based on bidding 

and cost control. Finally, analysis is being used to continue to set goals based on what is achievable 

rather than on simply setting goals based on prior actuals. 

U.S. Navy Flight Demonstration Squadron, The Blue Angels fly over Cinderella's Castle at Walt Disney 

World's Magic Kingdom en route to the Sun n' Fun Air Show in Lakeland, Florida. The Blue Angels are 

scheduled to perform more than 60 demonstrations across the U.S. in 2017.

Photo by Petty Officer 2nd Class Ian Cotter
U.S. Department of Defense Agency Financial Report for FY 2017 

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Civilian Hiring End-to-End Timeline

As reflected in the establishment of this performance goal, the capacity to hire quality 

candidates in a timely manner is critical in the Department’s ability to build a larger, more capable, 

and more lethal joint force. Factors both within and beyond the control of the Department have 

contributed to the overall increase of time to hire for the previous quarters of FY 2017. Simply, 

there has been no single factor that can be identified as the sole contributor.

Some areas of ongoing assessment influencing the time to hire (TTH) include 

inconsistency in communications across Components, differences in Human Resources (HR) 

Information Technology systems, lack of consistent process execution, varying degrees of 

interpretations of the law, HR span of control in the hiring process, budget, and/or seasonality 

affects. Multiple internal and external forces can complicate both analysis in understanding and 

determining root causes, and in implementing successful action plans.

The Department has continued to work through these challenges and uncertainties through 

increased engagement with the Office of Personnel Management. The buildup of analytical 

capabilities and competency models in USA Staffing as well as the reestablishment of a DoD TTH 

Civilian Hiring working group have allowed for enhanced communications, sharing of best 

practices, and strengthening of targeted training and professional development opportunities 

within the HR community. Additionally, reemphasizing the importance of communication 

between the HR advisors and the hiring managers will continue to be a priority effort to improve 

TTH processes. To ensure progress in achieving timely hiring practices, objectives and targets 

that contribute to program success will be captured and monitored as part of the Human Capital 

Operating Plan. The Department will continue to review and assess the TTH process in order to 

minimize negative impacting factors, while seeking to achieve its ultimate goal of timely hiring.

Summary 

As outlined in the DoD Annual Performance Report, the Department is a performancebased organization. The Department is committed to managing towards specific, measurable goals

derived from a defined mission, using performance data to continually improve operations. These 

measurable goals include supporting veterans transitioning into the civilian workforce; reforming

the DoD acquisition process; and pursuing improvement opportunities related to audit support and

remediation, encouraging competition in the contract award process, and civilian TTH. The 

Department looks forward to working with the Administration and Congress to meet the challenge 

of creating more effective and efficient operations, while delivering a high-value return for the 

American taxpayers in carrying out its mission of protecting the country and its interests.
U.S. Department of Defense Agency Financial Report for FY 2017 

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FINANCIAL OVERVIEW

The preceding sections of this report provide a description of the Department of Defense’s

(DoD) operations in Fiscal Year (FY) 2017 and a high-level overview of the Department’s 

performance against objectives as of Quarter 3, FY 2017. The FY 2017 final results for all 

Department performance measures will be reported in the Department’s Annual Performance 

Report, which will be available in February 2018. The Financial Overview will cover financial 

highlights and significant financial improvement initiatives.

FINANCIAL HIGHLIGHTS AND ANALYSIS

The principal financial statements have been prepared to report the financial position and 

results of operations of the Department of Defense (DoD), pursuant to the requirements of Title 31, 

United States Code, section 3515(b). The statements have been prepared from the accounting 

records of the Department in accordance with Office of Management and Budget

Circular No. A-136, “Financial Reporting Requirements,” and, to the extent possible, U.S. 

Generally Accepted Accounting Principles for Federal Entities, and the 

DoD Financial Management Regulation. The statements, in addition to supporting financial 

reports, are used to monitor and control budgetary resources. The statements should be read with 

the realization that they are for a component of the U.S. Government, a sovereign entity.

The Defense Finance and 

Accounting Service prepared the 

consolidated financial statements and 

explanatory notes, located in the Financial 

Information section of this report. The 

principal financial statements include:

• Statement of Budgetary Resources

• Balance Sheet

• Statement of Net Cost

• Statement of Changes in Net 

Position

Statement of Budgetary Resources

The Statement of Budgetary Resources (SBR) presents the Department’s total budgetary 

resources, their status at the end of the year, and the relationship between the budgetary resources 

and the outlays made against them. In accordance with federal statutes and implementing 

regulations, obligations may be incurred and payments made only to the extent that budgetary 

resources are available to cover such items. As discussed in the Resources section of this report 

and as depicted in Figure 7, the Department’s Fiscal Year (FY) 2017 budget authority total is 

$606 billion.

Figure 7. Trend in DoD Budget Authority
U.S. Department of Defense Agency Financial Report for FY 2017 

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In FY 2017, the Department reported $1.1 trillion in total budgetary resources (as shown 

in Figure 8). The total amount of “Appropriations (discretionary and mandatory” ($777.0 billion) 

reported on the SBR consists of appropriations enacted for the Department, contributions for DoD 

military retirement and health benefits made by the U.S Treasury from the U.S. Treasury’s general 

fund, and appropriations to finance civil works projects managed by the U.S. Army Corps of 

Engineers. The Department also receives 

appropriations to finance civil work projects 

managed by the U.S. Army Corps of 

Engineers. Current year Trust Fund receipts, 

including the Military Retirement Fund and 

the Medicare Eligible Retiree Health Care 

Fund, are also included in the SBR “Total 

Budgetary Resources” line. Trust fund 

receipts, labeled “Temporarily not available,” 

represent budget authority the Department 

will execute in future years to pay the current 

unfunded liabilities carried in these large 

funds.

Additional budgetary resources 

include $181.0 billion of unobligated 

balances stemming from prior year budget 

authority, $105.7 billion in spending 

authority from offsetting collections, and 

$76.5 billion of contract authority.

Of the $1.1 trillion in total budgetary 

resources, $981.5 billion was obligated and 

$899.8 billion of obligations were disbursed. The remaining unobligated budgetary resources 

balance relates primarily to appropriations available to cover multi-year investment projects, 

which require additional time for completion. In addition, expired appropriations remain available 

for valid upward adjustments to prior year obligations but are not available for new obligations.

Balance Sheet

The Balance Sheet, which reflects the Department’s financial position as of 

September 30, 2017, reports probable future economic benefits obtained or controlled by the 

Department (Assets), claims against those assets (Liabilities), and the difference between them 

(Net Position).

The $2.6 trillion in assets shown in Figure 9 represent amounts the Department owns and 

manages. Investments; General Property, Plant, and Equipment; and Fund Balance with Treasury

represent 89 percent of the Department’s assets. General Property, Plant, and Equipment is largely 

comprised of military equipment and buildings, structures, and facilities used to support the 

Department’s mission requirements.

Description FY 2017

($ in Billions)

DoD Enacted Appropriations * $606.0

U.S. Treasury contribution for Military 

Retirement and Health Benefits 94.3

Civil Works Projects executed by the 

USACE 5.8

Trust Fund Receipts 153.2

Trust Fund Resources Temporarily not 

Available (82.3)

Total Appropriations (discretionary 

and mandatory) Reported on SBR $777.0

Unobligated Balances from Prior Year 

Budget Authority 181.0

Spending Authority from Offsetting 

Collections 105.7

Contract Authority 76.5

Total Budgetary Resources $1,140.2

* DoD FY 2017 Budget Authority from Figure 1

Figure 8. Composition of DoD Total Budgetary 

Resources
U.S. Department of Defense Agency Financial Report for FY 2017 

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Total Assets increased $162.4 billion (7 percent) from FY 2016, largely due to increases 

in Investments in U.S. Treasury securities ($81.1 billion) and General Property, Plant, and 

Equipment ($50.0 billion). As displayed in Figure 9, the Department has realized growth in 

Investments over the last several years. The Investments increase was primarily due to normal 

growth in the Military Retirement Fund that resulted from investment of contributions from the 

U.S. Treasury and the Uniformed Services, net of benefits paid. Under the Department’s current 

strategy, invested balances will continue to grow to cover unfunded portions of future benefits. 

Funds not needed to cover current benefits were invested in U.S. Treasury Securities. The increase 

in General Property, Plant and Equipment was the result of the Department's continued effort to 

establish opening balances and the revaluation of military equipment associated with the recently 

published Statement of Federal Financial Accounting Standards (SFFAS) 50, “Establishing 

Opening Balances for General Property, Plant, and Equipment.” The Department expects 

additional changes in its beginning balance in future years as components continue to refine their 

accounting and valuation efforts in this area based on feedback from the Independent Auditors.

As seen in Figure 10, the Department’s total liabilities increased $75.1 billion during 

FY 2017, largely due to adjustments in the estimated actuarial liability associated with military 

retirement benefits. This change is primarily attributable to changes in expected interest costs, 

normal costs, and changes in actuarial assumptions, net of benefit outlays. The Department’s 

$2.5 trillion of liabilities reported in FY 2017 are backed by the full faith and credit of the U.S. 

Government.

Figure 9. Summary of Total Assets
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

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Figure 11 shows $2.5 trillion total liabilities with $1.6 trillion in liabilities not covered by 

budgetary resources (unfunded) that will require future resources. The U.S. Treasury is 

responsible for funding the $1.2 trillion actuarial liability that existed at the inception of the 

military retirement pension and Medicare-eligible health care programs which is approximately 

78 percent of the $1.6 trillion. 

Figure 10. Summary of Total Liabilities

Figure 11. Liabilities Covered/Not Covered by Budgetary Resources
U.S. Department of Defense Agency Financial Report for FY 2017 

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Statement of Net Cost

The Statement of Net Cost presents the net cost of all the Department’s programs, including 

military retirement benefits. The statement reports total expenses incurred less revenues earned 

from external sources to finance those expenses. Generally, the resulting balance of net cost is 

equivalent to the outlays reported on the SBR, plus (minus) the change in accrued liabilities, less 

the amount of assets purchased and capitalized on the Balance Sheet. The differences between 

reported outlays of the budgetary resources and reported net cost generally arise from when 

expenses are recognized.

The Department’s costs incurred relate primarily to operations, readiness, and support

activities, military personnel cost, and costs related to the Department’s procurement programs. 

These costs were offset with investment earnings and contributions to support retirement and 

health benefit requirements, as well as earnings from reimbursed activities. This activity resulted 

in $637.9 billion in net cost of operations during the fiscal year.

Statement of Changes in Net Position

The Statement of Changes in Net Position (SCNP) presents the total cumulative results of 

operations since inception and unexpended appropriations at the end of the fiscal year. The SCNP 

displays the components of net position separately to enable the financial statement user to better 

understand the nature of changes to net position as a whole. The statement focuses on how the net 

cost of operations as presented on the Statement of Net Cost is financed, as well as displaying the 

Figure 12. Summary of Net Cost of Operations
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

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other sources financing the Department’s operations. The Department’s ending net position 

increased $87.3 billion during FY 2017. The increase reflects primarily the increase in assets due 

to the normal growth in investments in the Military Retirement Fund. The growth results from 

investment of contributions from the U.S. Treasury and the Uniformed Services, net of benefits 

paid. Under the Department’s current strategy, invested balances are expected to continue growing 

to cover unfunded portions of future benefits. 

Financial Performance Summary

The Department’s financial performance is summarized in Figure 13. This table represents 

the Department’s condensed financial position, results of operations, and budgetary resources, and 

includes comparisons of financial balances from the current year to the prior year. The lack of 

auditable financial data is a limiting factor in the ability of the Department to explain all material 

variances presented in the comparative statements. Nevertheless, the data underlying the amounts 

is used to manage the Department’s operations successfully.

Dollars in Billions FY 2017 FY 2016 Change % Change

ASSETS

Fund Balance with Treasury $ 501.6 $ 474.3 $ 27.3 5.8%

Investments 995.2 914.1 81.1 8.9%

Accounts Receivable 7.3 8.8 (1.5) (17.0%)

Other Assets 33.1 39.2 (6.1) (15.6%)

Inventory and Related Property, Net 266.8 255.3 11.5 4.5%

General Property, Plant and Equipment, 

Net 761.7 711.7 50. 7.0%

TOTAL ASSETS $ 2,565.7 $ 2,403.4 $ 162.3 6.8%

LIABILITIES

Accounts Payable $ 28.0 $ 20.2 $ 7.8 38.6%

Other Liabilities 44.8 42.1 2.7 6.4%

Military Retirement and Other Federal 

Employment Benefits 2,356.9 2,297.9 59.0 2.6%

Environmental and Disposal Liabilities 68.3 62.7 5.6 8.9%

TOTAL LIABILITIES $ 2,498.0 $ 2,422.9 $ 75.1 3.1%

TOTAL NET POSITION (ASSETS 

MINUS LIABILITIES) $ 67.7 $ (19.5) $ 87.2 447.2%

Total Financing Sources $ 680.0 $ 699.4 $ (19.4) (2.8%)

Less: Net Cost (637.9) (589.6) (48.3) 8.2%

NET CHANGE OF CUMULATIVE 

RESULTS OF OPERATIONS $ 42.1 $ 109.8 $ (67.7) (61.7%)

TOTAL BUDGETARY RESOURCES $ 1,140.2 $ 1,101.3 $ 38.9 3.5%

Figure 13. Financial Performance Summary
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

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FINANCIAL MANAGEMENT IMPROVEMENT INITIATIVES

Financial Improvement and Audit Readiness Initiative

In Fiscal Year (FY) 2017, the Department of Defense (DoD) concluded its preparation 

efforts and will undergo a full financial statement audit for FY 2018. The Department has the 

capabilities in place to allow an auditor to scope and perform a full financial statement audit that 

results in actionable feedback. 

Currently, nine DoD Components and funds have positive opinions on their full financial 

statements. Eight DoD Components and funds are sustaining positive opinions on their full

financial statements, i.e., the U.S. Army Corps of Engineers – Civil Works, the Defense 

Commissary Agency, Defense Contract Audit Agency, Defense Finance and Accounting Service, 

Defense Health Agency – Contract Resource Management, Military Retirement Fund, MedicareEligible Retiree Health Care Fund, and the DoD Office of the Inspector General. Additionally, 

the Defense Information System Agency achieved a positive opinion on their financial statements 

for the first time. 

The Army expanded the scope of its audit in FY 2017 to cover additional primary financial 

statements and the Air Force continued to have its schedule of budgetary activities audited. The 

Navy was also under limited-scope audit in FY 2017. Several defense agencies also expanded the 

scope of their audit readiness examinations. 

In FY 2018, the Department will undergo an audit of all four of its principal financial 

statements (i.e., Balance Sheet, Statement of Net Cost, Statement of Changes in Net Position, and 

Statement of Budgetary Resources), including activity for both General Funds and Working 

Capital Funds. The audit of the Department’s full financial statements comprises over

24 standalone audits and an overarching consolidated audit.

When full financial statement audits begin in FY 2018, the Department’s focus will shift 

from preparing for audit to prioritizing and remediating audit findings with the goal of moving 

closer to a positive opinion. In order to standardize how audit findings are reported and tracked, 

the Department has developed a common tool with standardized categories of deficiencies in order 

to capture critical elements of audit findings to drive change. This tool will enable leaders to 

monitor completion of improvements, determine best practices, and identify common and systemic 

issues so that Department-wide solutions can be implemented.

Additional information on the (Financial Improvement and Audit Readiness) FIAR 

initiative is available in the semiannual FIAR Plan Status Report, available on the Under Secretary 

of Defense (Comptroller), Office of the Deputy Chief Financial Officer website.
U.S. Department of Defense Agency Financial Report for FY 2017 

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Financial Management Certification Program

The Department of Defense (DoD) Financial Management 

(FM) Certification Program reached a steady state level of 

maturity in Fiscal Year (FY) 2017. The Certification Program, 

sponsored by the Office of the Under Secretary of Defense 

(Comptroller) (OUSD(C)), was initially implemented in 2014 

with the purpose of increasing the knowledge and competency 

level of the DoD FM workforce. As of September 30, 2017, more 

than 38,000 personnel achieved their required certification. This 

number represents 70 percent of the FM workforce, well above 

the FY 2017 goal of certifying 60 percent of the FM workforce.

The Certification Program is course-based rather than test based, with course hour 

requirements aligned to FM and leadership competencies and other specific courses, namely, audit 

readiness, ethics, and fiscal law. There are three levels of FM Certification, and each level includes 

FM experience requirements. The FM workforce must achieve certification within two years of 

assignment to an FM position. After meeting initial certification requirements, FM personnel must 

meet continuing education and training requirements every two years. The Comptroller team 

developed a comprehensive alignment process and aligned existing training and education courses 

(Federal government and commercial) to FM competencies. To date, 12,789 courses 

(3,528 training courses and 9,261 academic courses) have been aligned.

The biannual continuing education and training (CET) requirements range from 40 CET 

hours for certification level 1, to 60 CET hours for level 2, and 80 CET hours for level 3. In 

addition to existing and prior courses, in 2012, the Comptroller team developed a new set of FM 

web-based training courses. At the end of FY 2017, 80 new courses have been developed to 

support the FM Certification Program and are available to the workforce, resulting in improved, 

cost-free access to training in key FM subject areas. More than 500,000 FM web-based course 

completions have been recorded for the 80 courses and over 63,400 of these course completions 

are in the Financial Improvement and Audit Readiness area. This metric indicates that the 

Department is achieving one of its goals of improving employee knowledge and competency level 

in audit readiness.

The FM Certification Program reinforces the culture of professional development within 

DoD, ultimately increasing proficiency in technical and leadership disciplines and enabling the 

FM workforce to keep pace with evolving warfighter needs. OUSD(C) will continue to mature its 

training and development programs and provide support to warfighters globally.
U.S. Department of Defense Agency Financial Report for FY 2017 

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Institutional Reform

In the January 31, 2017, Implementation Guidance for Budget Directives memorandum to 

the Department of Defense (DoD), Secretary Mattis directed that the Department improve how it 

does business in order to increase the lethality, improve the readiness, and grow the capability and 

capacity of our forces. In support of this direction, the Department developed a comprehensive 

reform agenda, which will be included in the next Agency Strategic Plan to be published in 

February 2018. The focus of the reform agenda is pursuing cross-enterprise consolidation, 

reduction, and where appropriate, elimination of specific business activities or duplication of 

efforts to achieve greater efficiency, effectiveness, and savings. These efforts will free up 

resources for higher priority requirements that will contribute to the lethality of the Department. 

Implementation of the reform agenda and other Department priorities will be tracked through the

DoD Agency Strategic Plan, which is based on the Secretary's priorities; the 

Annual Performance Plan, which sets out specific goals and targets; and the 

Annual Performance Report, which publishes the Department's performance results each year.

Engineering Aide 2nd Class Gabriel Jimenez, a native of Colombia assigned to Construction Battalion Maintenance Unit 

(CBMU) 202, high fives children from a Wayuu tribe in Mayapo, Colombia, during Continuing Promise 2017 (CP-17). CP17 is a U.S. Southern Command-sponsored and U.S. Naval Forces Southern Command/U.S. 4th Fleet-conducted deployment 

to conduct civil-military operations including humanitarian assistance, training engagements, medical, dental, and veterinary 

support in an effort to show U.S. support and commitment to Central and South America.

Photo by Mass Communication Specialist 2nd Class Shamira Purifoy
U.S. Department of Defense Agency Financial Report for FY 2017 

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In Fiscal Year (FY) 2017, the Department continued and expanded its reform efforts to 

reduce the cost of doing business. By identifying opportunities for management improvements

and investments in high priority programs, the Department is striving to maximize the availability 

of its constrained resources for the optimal balance of force structure capacity and technological 

capabilities. This includes divesting lower priority or excess force structure and excess 

infrastructure as well as compensation reforms.

Current initiatives include service contract requirements reviews, reduction of Major DoD

Headquarters Activities (MHA), leased space consolidation, information technology (IT)

optimization, business optimizations including exchanges and commissaries, and military 

healthcare reforms.

Institutional reform will continue over the coming years as initiatives are developed 

through a set of cross-functional teams that have been established to champion the Department’s

reform agenda.

Contract Management

The Department obligates over $250 billion annually to contract for goods and services, 

including acquisition of major weapons systems, support for military bases, implementing new 

information technology, and other mission areas. The Department's leadership has taken 

significant steps to plan and monitor progress regarding the management and oversight of 

contracting techniques and approaches. In FY 2016, the Office of the Secretary of Defense (OSD)

staff, Defense Agencies, and Field Activities institutionalized a requirements review process 

known as Service Requirements Review Boards (SRRB), complementing similar reviews already 

underway in the Military Departments. SRRBs focus on assessing, reviewing, and validating 

service contract requirements by senior leaders. The process requires organizations to review their 

service contract requirements and assess opportunities for efficiencies, to include elimination of 

non-value added services, identification and elimination of duplicative requirements, realignment 

of requirements to better align to mission, and identification of strategic sourcing opportunities. 

In addition, the OSD staff, Defense Agencies, Field Activities, via the SRRB process, were tasked 

with capturing savings of $1.9 billion by 2021 for reinvestment in higher priority requirements. In

FY 2017, 15 senior review panels were conducted for 25 organizations, with savings of 

$141 million identified for FY 2017 alone. The projected savings for FY 2018 is approximately 

$500 million.

Major DoD Headquarters Activities

Section 346(b) of the National Defense Authorization Act (NDAA) for FY 2016 directed a 

25 percent reduction in the cost of MHA from FY 2016 baseline levels by FY 2020. In 

December 2015, the Deputy Secretary of Defense approved programmatic reductions of 

$1.39 billion and 2,350 military and civilian manpower authorizations through FY 2021 to be 

incorporated into the FY 2017 President’s Budget request. At the end of FY 2017, the Department 

of Defense achieved a 20.7 percent reduction in MHA and is on track to an overall 25.9 percent 

reduction by FY 2020. The budget request for FY 2018 is consistent with the plan submitted in 
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

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FY 2017. As the Department implements reform activities, we will continue to seek additional 

cost reduction opportunities in headquarters.

The NDAA for FY 2016 additionally prescribed a new definition for MHA which included 

all activities of the Office of the Secretary of Defense, the Joint Staff, and the offices of the 

Secretaries of the Military Departments, as well as the certain headquarters elements of the 

Combatant Commands, major and component commands of the Military Departments, the Defense 

Agencies, the DoD Field Activities, and the DoD Office of the Inspector General. The new 

definition essentially removes smaller organizations from consideration as MHA while counting 

more of the staff-like activity in the major DoD Components. The definition of MHA prescribed 

in the NDAA for FY 2016 is that used to establish the baseline for the purposes of reporting, 

tracking, and managing the mandated reductions. This baseline includes manpower (military and 

civilian) and operating costs of headquarters, including contractor support.

Leased Space

In FY 2014, the Department started with a baseline of 5.4 million square feet of DoDoccupied space in the National Capital Region (NCR). The Department set forth with a plan to 

reduce this footprint by 1.2 million square feet prior to FY 2020. To date, the Department has 

eliminated 267,000 square feet of leased space used in the NCR by making better use of 

government space, resulting in a savings to the Department of $10 million per year beginning in 

FY 2016. The Department will release an additional 886,000 square feet by FY 2020 for a total 

saving of $43 million per year thereafter. In addition to the FY 2014 planned efforts, the 

Department continues to look for additional leased space savings within the NCR, and will also 

look into opportunities nationwide.

Defense Resale

Recent budget proposals sought to reduce Defense Commissary Agency (DeCA) funding 

by more than 70 percent, or $1 billion per year, beginning in FY 2017. In order to implement a 

phased approach, the Department requested an alternate plan in the FY 2017 President’s Budget 

to achieve DeCA savings of $1 billion per year by FY 2021. Consolidation of defense resale is an 

initiative being pursued through our reform agenda which will be published with the next Agency

Strategic Plan.

Information Technology Optimization

The Department continues to make progress to ongoing efforts that are projected to result 

in approximately $1.5 billion in IT savings in FYs 2017 – 2021. Reviews of the Military Health 

System IT resources have targeted more than $440 million in potential savings. An additional 

$1 billion in savings are expected by taking full advantage of the Department's purchasing power 

and aggressively identifying and pursuing opportunities to further optimize DoD's IT 

infrastructure, NCR and Defense Media Activity IT consolidation, enterprise licensing, and 

application rationalization.
U.S. Department of Defense Agency Financial Report for FY 2017 

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Business Operations Improvements

The Department identified IT net benefits resulting from current Fourth Estate investments 

to develop, modernize, or enhance business systems. These benefits will enable a $310 million 

reduction of business operations costs resulting from IT modernization investments in Fourth 

Estate activities between FYs 2017 – 2021. Although the net benefits analysis and findings do not 

currently capture any Defense health savings, the Department continues to analyze this business 

area to determine if additional potential savings can be achieved in the future. Defense Travel 

Modernization is also underway and will leverage simplified and automated business rules with a 

projected savings of up to $450 million over five years.

Military Healthcare

The Department has proposed various ways to reform TRICARE, and the reforms currently 

reflected in the budget to give beneficiaries more simplicity and choice in how they manage their 

healthcare while also incentivizing the much more affordable use of military treatment facilities. 

These reforms will not only save money but will also maximize the workload and readiness of the 

Department’s medical force; giving the doctors, nurses, medics, and corpsmen the experience they 

need to be effective in their mission. These reforms have the potential to generate over $3 billion 

in savings over the Future Years Defense Program that can be reinvested in operational 

requirements without sacrificing quality, accessible health care for our people.

U.S. Soldiers, assigned to Public Health Command Europe, load a simulated causality onto a UH-60 Blackhawk, operated 

by U.S. Soldiers, assigned to 12th Combat Aviation Brigade, as they conduct different types of Medical Evacuations, at the 

7th Army Training Command’s Grafenwoehr Training Area, Germany, Mar. 20, 2017. The Soldiers conducted MEDEVAC 

training to develop the ability to team up with flight medics to safely transport patients by a helicopter.

Photo by Sgt. Sara Stalvey
U.S. Department of Defense Agency Financial Report for FY 2017 

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INTERNAL CONTROLS OVERVIEW

ENTERPRISE RISK MANAGEMENT AND INTERNAL CONTROL PROGRAM

The Office of the Under Secretary of Defense (Comptroller) (OUSD(C)) Office of the 

Deputy Chief Financial Officer and the Office of the Deputy Chief Management Officer, in 

compliance with the Federal Managers’ Financial Integrity Act of 1982, lead the Department’s 

effort in fulfilling the Department’s Enterprise Risk Management (ERM) and Internal Control 

Program (ICP) responsibilities. The Department of Defense (DoD) is committed to ensuring an 

effective system of internal controls for business processes to provide reasonable assurance that 

the Department’s mission is met and to support the DoD Component objectives. The DoD 

ERM/ICP holds both operational and financial managers accountable to ensure they are effectively 

managing risks and internal controls in their areas of responsibility. In accordance with the Office 

of Management and Budget (OMB) Circular No. A-123, “Management’s Responsibility for 

Enterprise Risk Management and Internal Control,” and the Government Accountability Office 

(GAO) Standards for Internal Control in the Federal Government (“Green Book”), the Department 

continuously strives to integrate risk management and effective internal control into existing 

business activities. All Components are required to conduct a robust programmatic approach to 

establish and assess internal controls for the conduct of all financial and non-financial missionessential operations. DoD Components that produce stand alone financial statements are also 

required to provide financial reporting assurance.

U.S. Air Force Maj. Ryan Schenk, 621st Mobility Support Operations Squadron air mobility liaison officer assigned to the 

101st Airborne Division at Fort Campbell, Ky., reviews the transfer of authority checklist with Capt. U.S. Army Capt. Travis 

Seale, a 101st Abn. Div. soldier, while waiting for the airfield to be cleared during a mobility exercise called WAREX at Joint 

Base McGuire-Dix-Lakehurst, N.J., March 13, 2017. AMLOs advise supported units on safe, effective use of air mobility assets 

from the tactical to strategic level, bridge the communication gap between supported units and U.S. Air Force air mobility 

command and control agencies, conduct landing zone feasibility analyses, act as landing zone safety officers, and liaison 

between supported units and deployed mobility forces to ensure supported unit objectives are met.

Photo by Tech. Sgt. Gustavo Gonzalez
U.S. Department of Defense Agency Financial Report for FY 2017 

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The goal of the ICP is to support the DoD’s mission by implementing appropriate 

operational controls to identify, prioritize, and mitigate operational and financial risk before it 

negatively impacts the mission. The Department advocates a “tone-at-the-top” approach, with 

emphasis on the importance of the internal control program, which permeates the entire DoD 

culture. Per DoD Instruction (DoDI) 5010.40, each DoD Component uses its leadership’s mission 

requirements as a baseline for executing assessments of key functional, operational and financial 

areas. DoD Components rely upon appointed assessable unit managers for each key operational 

and financial area to identify and report internal control opportunities for improvement as well as

deficiencies for review and comment by leadership. Another goal of ICP is to integrate the audit 

and remediation teams to improve the Department’s ability to effectively respond and mitigate 

risks.

The Department’s ICP works to ensure that Department-wide deficiencies are reported 

timely and monitors the corrective action plan efforts through the DoD Components. The status 

of deficiencies are aggregated and reported in the DoD Statement of Assurance. This process 

leverages OMB Circular No. A-123 and ensures that the Department has the appropriate oversight 

to prioritize and mitigate the Department’s systemic, operational, and financial risks.

Types of Material Weaknesses

The Department’s management uses the following criteria to classify conditions as material 

weaknesses:

• Merits the attention of the Executive Office of the President and the relevant Congressional 

oversight committees;

• Hinders management’s ability to prevent or detect a material misstatement of the financial 

statements;

• Impairs fulfillment of essential operations or mission;

• Identified as a “high risk” by GAO or as a “management and performance challenge” by 

the DoD Inspector General;

• High impact of occurrence in terms of loss of dollars and/or loss of life;

• Significantly weakens established safeguards against waste, loss, unauthorized use or 

appropriation of funds, property, other assets, or conflicts of interest;

• Constitutes noncompliance with laws and regulations;

• Nonconformance with government-wide, financial management system requirements; or

• Identified by independent public accountants as material weaknesses. 
U.S. Department of Defense Agency Financial Report for FY 2017 

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U.S. Department of Defense Agency Financial Report for FY 2017 

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Fiscal Year 2017 Improvements in Internal Controls

Strong internal controls are essential to achieving and sustaining a cost-effective, efficient, 

and effective organization. Despite many challenges, the Department is steadily improving 

internal controls. Some challenges and accomplishments are highlighted below.

Intragovernmental Transactions

The Intragovernmental Transaction (IGT) Initiative implements several internal controls 

to allow the Department to eliminate IGTs. The Department is mandating the use of the Treasury’s 

G-Invoicing system. The G-Invoicing system will be the front-end application for users to 

originate General Terms and Conditions to ensure trading partners are in agreement on buy/sell 

roles and responsibilities. G-Invoicing will operate as broker between trading partners for 

reimbursable orders, invoices, receipt and acceptance, and funds transfer. This will give the 

Federal Government a single source of truth for supporting documentation and allow for a common 

data standards between trading partners. It will ensure that all steps in the process are followed by 

leveraging preventative controls to reject transactions or data that do not align to requirements. 

Further, DoD is working hand-in-hand with the Treasury to ensure G-Invoicing requirements are 

incorporated into the commercial off-the-shelf (COTS) software packages. This will ensure 

internal controls are consistent across the Federal Government and drive down cost and time 

associated with implementation.

U.S. Marines fire the FGM-148 Javelin missile during a live-fire range for exercise Platinum Lion at the Novo Selo Training 

Area, Bulgaria, Dec. 15, 2016. The exercise brought together eight NATO Allies and partner nations for a live-fire exercise 

aimed to strengthen security and regional defenses in Eastern Europe.

Photo by Sgt. Michelle Reif
U.S. Department of Defense Agency Financial Report for FY 2017 

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Critical Accounting Policies

The Department issued critical policies that represent practical and Generally Acceptable 

Accounting Principles-compliant solutions to address long-standing issues and to optimally 

position the Department for the full-scope financial audit. The policies provided standardization 

and consistency of reporting for the Department’s various service providers. The policies also 

established the framework for the Department to develop an auditable, end-to-end process and 

streamline our efforts to improve internal controls around the supportability of transactions. 

During Fiscal Year (FY) 2017, the Department’s policies addressed the following key areas:

• New Deposit Fund Accounts for Thrift Savings Plan (TSP) Contributions – The new 

deposit accounts will ensure appropriate accounting and reporting of TSP contributions 

and resolve the audit findings related to TSP contributions.

• Cash Accountability Initiative: Standard Processes, Systems Identification, and Data 

Standardization – Requires daily cash reporting with Treasury using common data 

standards and processes.

• U.S. Army Corps of Engineers Single Auditor Approach – Provides an efficient and 

effective mechanism for auditing funds sub-allotted to the U.S. Army Corps of Engineers.

• Opening Balance Valuation of Inventory and Related Property using Statement of Federal 

Financial Accounting Standards (SFFAS) 48 – Addresses allowable valuation 

methodologies, required supporting documentation, and required accounting treatment of 

Inventory and Related Property and associated footnote disclosures.

• Opening Balance Valuation of General Property, Plant and Equipment using SFFAS 50 –

Addresses allowable valuation methodologies, required supporting documentation, and 

required accounting treatment of General Property, Plant, and Equipment and associated 

footnote disclosures.

• Estimating and Supporting Useful Life and Placed in Service Date for General Property, 

Plant, and Equipment (GPP&E) – Provides guidance on deriving and supporting Placed in 

Service date for GPP&E; also provides updated useful life tables that are more supportable 

than previous useful life guidance for the Department.

• Valuation and Reporting of Environmental Liabilities – Defines reporting responsibility, 

key inputs and assumptions, and validation procedures for calculating Environmental 

Liability Estimates, as well as revises Note 14 to achieve a more streamlined presentation.

In addition to the above policy changes developed in response to new Federal Accounting 

Standards Advisory Board (FASAB) Standards 48 and 50, the Department has participated in 

several FASAB-led working groups and Task Forces to provide input into future Accounting 

Standards and Technical guidance in the general area of property. The Department anticipates 

several FASAB pronouncements related to property in the upcoming year, and has begun the 

process of developing additional or updated guidance to supplement current policy.
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Service Organization Integration

The Department relies on a significant number of internal (DoD) and external (commercial 

and other federal agency) service organizations – entities that perform a business function or 

process on behalf of a DoD Component. In many cases, service organizations engage other 

organizations, known as subservice organizations, to provide specified support services. Because 

service and subservice organizations collectively perform or support key parts of the Department’s 

business processes, their internal controls have a direct and material bearing on the Department’s 

internal control over financial reporting and financial statement audits and examinations. In turn, 

service organization customers, known as user entities, typically have responsibility for certain 

aspects of the business functions or processes performed by service organizations and must 

implement effective controls to address them. Controls that are in place at service organizations 

and subservice organizations along with the customers’ own internal controls collectively 

comprise the DoD internal control catalogue.

To help strengthen the integration of service/subservice organization controls with DoD 

Components’ internal controls so that the objectives of both can be achieved simultaneously, the 

Department issued three policy memorandums. The memorandums covered:

• Implementing ten requirements to increase the reliance and usefulness of the Service 

Organization Controls (SOC) 1 report for user entities and customer auditors which would 

reduce redundant yearly testing,

• Addressing new American Institute of Certified Public Accountants Statement on 

Standards for Attestation Engagements (SSAE) 18 requirements and standards for SOC 

reports for Service Organizations and Subservice Organizations which links their controls 

with the user entities controls, and

• Establishing an infrastructure to support customer audits and examinations.

The Department continues to conduct tri-annual service organization working group 

meetings between service organizations and their Component customers to identify audit relevant 

dependencies, clarify roles and responsibilities, and report audit readiness progress, deficiencies, 

and corrective actions. For FY 2017, the Department achieved 12 positive opinions of service 

organization examinations whose controls are relevant to the customer’s control environment. The 

Department is expanding service organization integration by:

• Helping service organizations identify and explain to Component customers the 

complementary user entity controls (CUECs) expected to be included in the SSAE 18 

examinations so that customers can implement controls needed to rely on SOC 1 reports.

• Proactively identifying dependencies on non-DoD service organizations, including other 

federal agencies and commercial organizations, and integrating CUECs and 

Complementary Subservice Organization Controls (CSOCs) into the existing internal 

control framework.
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• Developing templates to assist the service organizations addressing the new SSAE 18 

requirements, including updating baseline control descriptions and test plans to address 

CUECs and CSOCs.

• Reviewing service organization control examination reports to determine whether the 

examination scope was sufficient or additional examinations are needed to have complete 

coverage of audit relevant business processes and systems.

• Reviewing Notifications of Findings and Recommendations (NFRs) from SSAE No. 16/18 

examinations to identify common issues and areas of enterprise-wide impact.

• Obtaining findings and recommendations from existing SSAE No. 16/18 examinations 

with modified opinions and tracking service provider corrective actions and testing to 

ensure the findings and recommendations are remediated.

Treasury Index-97 Internal Control Management

The Department continues to make progress in internal controls amongst the Treasury 

Index (TI)-97 entities. The TI-97 entities are DoD Components, such as Defense Agencies, that 

execute Defense-wide appropriations rather than appropriations to and for the Military 

Departments. During FY 2017 the OUSD(C)/Financial Improvement and Audit Readiness (FIAR)

continued testing the audit infrastructure, key supporting documentation, and internal controls for 

select processes on a monthly basis. OUSD(C)/FIAR also maintains a NFR tracking tool which 

serves as a centralized database for monitoring the progress of remediation activities and corrective 

action plans for TI-97 entities. The tool allows increased visibility into the Department’s audit 

readiness progress and overall risk. To support the goal of enhancing the Department’s internal 

controls, OUSD(C)/FIAR also continues to provide the foundation for the audit of the 

Department’s financial statements. This groundwork includes documenting Entity-Level Controls 

(ELCs) in accordance with the GAO Green Book’s 17 principles of internal controls. 

OUSD(C)/FIAR maintains an ELC matrix for Components to use in documenting ELCs as part of 

the OMB Circular A-123 compliance effort to highlight deficient areas, improve cross 

communication, share best practices/lessons learned, and drive continuous process improvements.

The Department’s ongoing efforts to improve internal controls amongst the TI-97 entities 

have achieved significant milestones to include remediation of issues identified during monthly 

testing, development of end-to-end documentation, and greater accountability towards corrective 

action plan remediation.

Standard Financial Information Structure and Standard Line of Accounting

The Standard Financial Information Structure (SFIS) and Standard Line of Accounting 

(SLOA) structure our financial data to improve financial information accuracy, transaction posting 

logic, general ledger balances, trial balances structure, and drive down the cost associated with 

audit. SFIS improves our systems’ ability to interoperate through a common business language 

leveraging standard business rules which drive common usage, and relationships. This facilitates 

the reconciliation process by reducing crosswalks and removing gaps between individual 
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Component structures. SFIS leverages a complete internal control design by including 

preventative, detective, and compensating controls. SFIS provides system configuration guidance 

to prevent systems from supplying inaccurate data at the point of entry. It provides detective 

controls that validates financial data exchanges between business feeder systems and accounting 

systems in real-time and periodic system configuration reviews by the Joint Interoperability Test 

Command. Further, for legacy systems, it provides compensating control by cross-walking 

nonconforming data to reduce noncompliance and improve legacy systems to the maximum extent 

possible. 

Cash Accountability (Fund Balance with Treasury)

The Cash Accountability initiative implements several internal controls for Fund Balance 

with Treasury. The Cash Accountability initiative standardizes the entire cash process from fund 

distribution through to cash reporting. Cash Accountability will move the Department to daily 

cash reporting to decrease the Fund Balance with Treasury differences that are the result of the 

current process. It will move the Department to Treasury shared services for disbursements, 

collections, and debt management. This ensures these processes and Treasury reporting are one in 

the same. This greatly reduces Fund Balance with Treasury differences. It provides common data 

standards for all critical information exchanges through the End-to-End Processes. Further, the 

Cash Accountability initiative drives down audit cost by leveraging commercial off-the-shelf

software and the Treasury as a shared service provider (e.g. SSAE 16/18 costs).

U.S. Air Force 1st Lt. Brittany Trimbel, 36th Fighter Squadron pilot, secures her helmet before takeoff, Feb. 15, 2016, at 

Korat Royal Thai Air Force Base, Thailand. Trimbel has been flying F-16 Fighting Falcons actively since October 2015.

Photo by Staff Sgt. Amber E. Jacobs
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Information Technology System Initiatives

To strengthen the IT internal controls environment and streamline the management of 

multiple concurrent financial statement audits/examinations and compliance assessments, the 

Department has taken the following actions:

• Developed and deployed a centralized database to automate and standardize the collection 

and reporting of information about material IT systems, establishing a “single source of 

truth” about systems relevant to DoD financial statement audits and exams;

• Utilized information from the centralized database to assist the Components and nonSSAE 18 service organizations in identifying the portfolio of systems relevant to the 

Department’s financial statement audits, enabling a thorough understanding of systems 

interdependencies and the internal controls that must be implemented;

• Required all Components to maintain detailed information and milestones for material IT 

systems in the database throughout the year to monitor and track various metrics used to 

measure the status of internal controls over the Department’s IT systems;

• Developed a baseline rule set and guidance to address multiple audit findings about crossapplication segregation of duties for 12 End-to-End business processes;

• Updated previously issued Risk Management Framework supplemental guidance to 

address changes to authorization and accreditation activities that impact audit and 

compliance requirements;

• Required Components and Service Providers to undergo SFIS Compliance Assessments 

for key accounting systems and DoD service provider systems;

• Implemented the Defense Agencies Initiative (DAI) at 20 Defense Agencies/Field 

Activities. The DAI is the target financial management enterprise resource planning 

system for the majority of the 4th Estate. The mission of DAI is to eliminate redundant and 

duplicative systems as well as to transform the budget, finance, and accounting operations 

for the Defense Agencies. 

• Developed a Universe of Transactions (UoT) solution that is a secure big data platform that 

can ingest massive amounts of structured and unstructured financial data. The current 

scope is Defense Wide Appropriation General Fund which includes 19 accounting systems 

and 24 business feeder systems. Once ingested, the solution can apply business rules to 

standardize and tabulate the data in a format that any authorized data consumer can use. 

Using standard queries, visualization, or dashboards, a Component would be able to 

establish existence and completeness with the UoT solution and an auditor would be able 

to sample data for material accounts.
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

46

BUSINESS AND FINANCIAL MANAGEMENT SYSTEMS

The Department of Defense (DoD) is improving its business systems to successfully 

achieve and sustain improvements in our internal controls, financial management, and auditable 

financial reports. Modernization and improved interoperability of DoD business systems is critical 

to efficiently respond to Warfighter needs and sustain public confidence in our stewardship of 

taxpayer funds.

After section 2222 of title 10, United States Code was amended by the National Defense 

Authorization Act (NDAA) for Fiscal Year 2012, the Department significantly changed the 

requirements for investment reviews and the certification of defense business systems, which now 

must occur before funds are obligated (appropriated or non-appropriated). The Department’s 

investment review process ensures that decisions on investments in business systems align with 

the Defense-wide integrated business strategy (Figure 14). These decisions also include retirement 

plans for legacy and non-target financial systems and ensure that systems eliminate redundant 

activity and maximize operating efficiency through streamlining business processes and the 

availability of timely, accurate, and useful business information. (A legacy system has a retirement 

plan and date; a target system does not.)

The Department’s Financial Management (FM) Functional Strategy provides the 

Department’s vision, initiatives, goals, target environment, and expected outcomes over the next 

five years. The strategy is designed to ensure the Department achieves and sustains auditability 

and financial management improvement objectives.

The key components of the FM Functional Strategy include establishing data and data 

exchange standards, standard business processes, and system controls and enhancements that 

support improved processes, and leveraging technology across the Department’s end to-end 

Figure 14. The Department’s Integrated Business Framework
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

47

processes. The primary objectives of the FM Functional Strategy are to achieve a fully integrated 

environment linked by standard processes and standard data with the fewest number of systems 

and interfaces. Ultimately, this strategy will lead to stronger internal controls impacting financial 

reporting and auditability, and improve end-to-end funds traceability and linkage between budget 

and expenditures. Current enterprise-level initiatives include the Standard Financial Information

Structure (SFIS) the Department’s first ever Standard Line of Accounting to improve funds 

traceability and financial reporting. The Department also participates in federal government-wide 

process improvement initiatives, such as the President’s transparency and open government 

initiatives, Treasury’s government-wide accounting and Direct-to-Treasury disbursing initiatives. 

The Department also promotes the use of business analytics and maximizing existing Enterprise 

Resource Planning (ERP) systems.

Enterprise Resource Planning Systems

The ERP systems are integral to implementing the strategic FM business process 

improvements, achieving the planned target environment and reductions in the number of legacy 

systems, and better enabling a sustainable audit environment. The ERPs provide a broad range of 

functionality to support DoD business operations in financial management, supply chain 

management, logistics, and human resource management. Some ERPs are fully fielded while 

others are in a state of development and deployment.

Figure 15. DoD Financial Management Improvement Initiatives
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

48

Army ERPs

General Fund Enterprise Business System (GFEBS) is the General Fund accounting, asset 

management, and financial system used to standardize, streamline, and share critical data across 

the active Army, Army National Guard, and Army Reserve. GFEBS is a web based ERP solution 

that uses commercial off-the-shelf (COTS) business enterprise software to compile and share 

accurate, up-to-date financial and accounting data.

Logistics Modernization Program (LMP) is one of the world’s largest, fully integrated 

supply chain, maintenance, repair and overhaul, planning, execution, and financial management 

systems. The LMP mission is to sustain, monitor, measure, and improve the modernized, nationallevel logistics support solution. By modernizing both the systems and the processes associated 

with managing the Army’s supply chain at the national and installation levels, LMP will permit 

planning, forecasting, and rapid order fulfillment to supply lines. It will also improve distribution, 

reduce theater footprint, and ensure a warfighter who is equipped and ready to respond to present 

and future threats.

Global Combat Support System – Army (GCSS-A) is an acquisition system that provides 

enterprise-wide visibility into various logistic areas and is a key enabler for the Army in achieving 

auditability. The GCSS-A provides the tactical warfighter with supply, maintenance, property 

accountability, integrated materiel management center, management functionality, and support to 

tactical financial processes.

Integrated Personnel Pay System – Army (IPPS-A) is a hybrid solution using ERP software 

to deliver an integrated personnel and pay capability. The IPPS-A will provide the Army with an 

integrated, multi-component personnel and pay system that streamlines Army Human Resources 

processes, enhances the efficiency and accuracy of Army personnel and pay procedures, and 

supports soldiers and their families. The IPPS-A will improve internal controls to prevent 

erroneous military payments and loss of funds.

Navy ERPs

Navy Enterprise Resource Planning (Navy ERP) is an integrated business system that 

provides streamlined financial, acquisition, and supply chain management to the Navy’s major 

systems commands.

Global Combat Support System – Marine Corps (GCSS-MC) is the core web-enabled, 

centrally managed ERP for the Marine Corps. The GCSS-MC is focused on the acquisition and 

implementation of the initial set of logistics capabilities to deliver improved supply and 

maintenance management services. As the technology centerpiece of the Marine Corps’ overall 

logistics modernization effort, GCSS-MC will provide advanced expeditionary logistics 

capabilities to ensure future combat efficiency.

Air Force ERPs

Defense Enterprise Accounting and Management System (DEAMS) is an automated 

accounting and financial management execution system for the Air Force and U.S. Transportation 
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

49

Command. DEAMS is the core accounting and financial management solution for the 

Transportation Working Capital Fund and General Fund. It serves as the financial foundation for 

all enterprise business system modernization across the Department. DEAMS provides accurate 

and timely financial information using standardized business processes and complies with 

applicable federal laws, regulations, and policies.

Air Force Integrated Personnel and Pay System (AF-IPPS) is a comprehensive, selfservice, web-based solution currently in development that integrates personnel and pay processes 

into one system and maintains an official member record throughout the airman’s career. A 

Federal Financial Management Improvement Act of 1996 (FFMIA)-compliant system, AF-IPPS 

functionality will support audit readiness general and application controls.

Other Defense Organization ERPs

Defense Agencies Initiative (DAI) is a system dedicated to address financial management 

improvements through standard end-to-end business processes delivered by COTS software. 

Currently DAI provides Budget to Report, Proposal to Reward, Cost Management, Order to Cash, 

Procure to Pay, Acquire to Retire, and Hire to Retire capabilities for 22 of 26 Defense Agencies.

Enterprise Business System (EBS) uses a COTS product to manage the Defense Logistics 

Agency’s (DLA) supply chain management business. EBS also includes Electronic Procurement, 

Real Property, Inventory Materiel Management and Stock Positioning, and Energy Convergence 

modules, providing DLA leadership with the tools to respond to new challenges and trends.

Sailors assigned to the littoral combat ship USS Coronado (LCS 4) swim in the South China Sea. Coronado is a fast and agile 

warship tailor-made to patrol the region's littorals and work hull-to-hull with partner navies, providing the U.S. 7th Fleet with 

the flexible capabilities it needs now and in the future.

Photo by Mass Communication Specialist 2nd Class Amy M. Ressler
U.S. Department of Defense Agency Financial Report for FY 2017 

Management’s Discussion and Analysis

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IMPROPER PAYMENT REPORTING

The Department of Defense (DoD) Financial Management Regulation (FMR) 7000-14-R, 

Volume 4, Chapter 14, “Improper Payments,” defines improper payments as any payment that 

should not have been made or that was made in an incorrect amount (i.e., overpayment or 

underpayment) to an eligible recipient. It also includes any payment that was made to an ineligible 

recipient or for an ineligible good or service, or payments for goods or services not received, or 

when an agency's review is unable to discern whether a payment was proper as a result of 

insufficient or lack of documentation.

In accordance with the Improper Payments Information Act of 2002 (IPIA), as amended 

by the Improper Payments Elimination and Recovery Act of 2010 (IPERA); the Improper Payment

Elimination and Recovery Improvement Act of 2012 (IPERIA); and the Office of Management 

and Budget Circular No. A-123, Appendix C, “Requirements for Effective Estimation and 

Remediation of Improper Payments,” DoD Components are required to report the status and 

recovery of improper payments to the President and the Congress in the following categories:

• Civilian Pay

• Commercial Pay

• Military Health Benefits

• Military Pay

• Military Retirements

• Travel Pay

Each DoD disbursing activity is committed to identifying the root causes of improper 

payments, establishing an appropriate sampling methodology, developing and implementing 

corrective action plans, and monitoring to ensure future improper payments are reduced and/or 

eliminated.

Several accomplishments during Fiscal Year (FY) 2017 include: revising the Defense 

Finance and Accounting Service sampling plans for their Civilian Pay, Military Pay, and Travel 

Pay programs from simple random sample designs to stratified random sample designs; revising 

the United States Army Corps of Engineers sampling plans for their Commercial Pay and Travel 

Pay programs from simple random sample designs to stratified random sample designs; and 

implementing the revised Travel Pay Remediation Plan by identifying Senior Accountable 

Officials for travel improper payments in each of the Military Services and major defense agencies, 

holding quarterly progress meetings, distributing detailed travel error reports for action, and 

developing corrective action plans. The Department’s remediation efforts resulted in a positive 

reduction in travel improper payments.

As the Department moves towards the congressional mandate to be audit ready by FY 2017 

and undergo a full financial statement audit for FY 2018, the reduction and prevention of improper 

payments will help ensure the Department achieves Congress’ established goal. Detailed 

information regarding improper payments is located in the Other Information section of this report.
U.S. Department of Defense Agency Financial Report for FY 2017 

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Sergeant Major Matthew R. Hackett, Marine Barracks Washington D.C. sergeant major, assumes the position of attention during 

Friends and Family Evening Parade at the Barracks, Apr. 28, 2017. The guest of honor for the parade was the Commandant of the

Marine Corps Gen. Robert B. Neller and the hosting official was the Barracks’ commanding officer, Col. Tyler J. Zagurski.
52

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AGENCY FINANCIAL REPORT

FINANCIAL SECTION

UNITED STATES DEPARTMENT OF DEFENSE

FISCAL YEAR 2017
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U.S. Department of Defense Agency Financial Report for FY 2017

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U.S. Department of Defense Agency Financial Report for FY 2017

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PRINCIPAL FINANCIAL STATEMENTS AND NOTES

The principal financial statements have been prepared to report the financial position and 

results of operations of the Department, pursuant to the requirements of title 31 U.S. Code,

section 3515(b). The statements are prepared from accounting records of the Department in 

accordance with Office of Management and Budget (OMB) Circular No. A-136 and, to the extent 

possible, U.S. Generally Accepted Accounting Principles (GAAP). The statements, in addition to

other financial and accounting reports, are used to monitor and control budgetary resources, which 

are prepared from the same records. The statements should be read with the realization that they 

are for a component of the U.S. Government, a sovereign entity.

The financial statements of the Department include four principal statements listed in the 

table below. 

The financial statements reflect the aggregate financial position of the Department and

include both the proprietary (Federal accounting standards) and budgetary resources of the 

Department. The Department is large and complex with an asset base of $2.6 trillion, and 

approximately 1.3 million personnel in the active component, more than 809,000 personnel serving 

in the National Guard and Reserve forces, and about 750,000 civilians employees on installations 

in every state and around the world.

Four Principal Financial Statements

Statement What Information It Provides

Balance Sheet

Reflects the Department’s financial position as of the statement date 

(September 30, 2017). The assets are the amount of future economic benefits owned or 

managed by the Department. The liabilities are amounts owed by the Department. The 

net position is the difference between the assets and liabilities.

Statement of Net Cost

Shows separately the components of the net cost of the Department’s operations for the 

period. Net cost is equal to the gross cost incurred by the Department less any exchange 

revenue earned from its activities.

Statement of Changes 

in Net Position

Presents the sum of the cumulative results of operations since inception and unexpended 

appropriations provided to the Department that remain unused at the end of the fiscal year. 

The statement focuses on how the net cost of operations is financed. The resulting 

financial position represents the difference between assets and liabilities as shown on the 

consolidated balance sheet.

Statement of 

Budgetary Resources

Provides information about how budgetary resources were made available as well as their 

status at the end of the period. It is the only financial statement exclusively derived from 

the Department’s budgetary general ledger in accordance with budgetary accounting rules. 

The Statement of Budgetary Resources is the only principal financial statement prepared 

on a combined versus consolidated basis. As such, all intra-entity transactions are included 

in the balances reported in the statement. 
U.S. Department of Defense Agency Financial Report for FY 2017

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56

Department of Defense Consolidated Balance Sheet

Agency Wide Dollars in Millions

As of September 30, 2017 and 2016

2017

Consolidated

2016

Consolidated 

ASSETS (Note 2)

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 501,620.4 $ 474,289.0

Investments (Note 4) 991,733.9 910,567.9

Accounts Receivable (Note 5) 2,055.0 1,907.6

Other Assets (Note 6) 927.2 1,253.4

Total Intragovernmental Assets $ 1,496,336.5 $ 1,388,017.9

Cash and Other Monetary Assets (Note 7) 1,119.7 1,152.3

Accounts Receivable, Net (Note 5) 5,244.1 6,920.1

Loans Receivable (Note 8) 1,644.2 1,603.9

Inventory and Related Property, Net (Note 9) 266,760.5 255,289.9

General Property, Plant and Equipment, Net (Note 10) 761,707.8 711,717.2

Investments (Note 4) 3,511.6 3,521.7

Other Assets (Note 6) 29,390.0 35,130.6

TOTAL ASSETS $ 2,565,714.4 $ 2,403,353.6

Stewardship Property, Plant & Equipment (Note 10)

LIABILITIES (Note 11)

Intragovernmental:

Accounts Payable (Note 12) $ 1,573.8 $ 1,922.4

Debt (Note 13) 1,630.8 1,630.7

Other Liabilities (Note 15) 7,017.8 8,083.6

Total Intragovernmental Liabilities $ 10,222.4 $ 11,636.7

Accounts Payable (Note 12) 26,426.8 18,263.6

Loan Guarantee Liability (Note 8) 65.2 70.9

Military Retirement and Other Federal Employment Benefits 

(Note 17) 2,356,869.6 2,297,837.3

Environmental and Disposal Liabilities (Note 14) 68,318.1 62,670.3

Other Liabilities (Note 15) 36,071.9 32,421.6

TOTAL LIABILITIES $ 2,497,974.0 $ 2,422,900.4

Commitments & Contingencies (Note 16)

NET POSITION

Unexpended Appropriations – Other Funds $ 457,849.4 $ 450,026.1

Cumulative Results of Operations – Funds From Dedicated 

Collections (Note 23) 16,149.7 15,493.7

Cumulative Results of Operations – Other Funds (406,258.7) (485,066.6)

TOTAL NET POSITION $ 67,740.4 $ (19,546.8)

TOTAL LIABILITIES AND NET POSITION $ 2,565,714.4 $ 2,403,353.6

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017

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57

Department of Defense Consolidated Statement of Net Cost

Agency Wide Dollars in Millions

For the Years Ended September 30, 2017 and 2016

2017

Consolidated

2016

Consolidated 

Program Costs

Gross Costs $ 728,117.7 $ 730,745.2

Military Retirement Benefits 96,630.1 102,514.8

Civil Works 9,168.2 9,876.8

Military Personnel 139,512.6 138,720.9

Operations, Readiness & Support 302,022.8 285,650.9

Procurement 85,881.3 107,864.2

Research, Development, Test & Evaluation 84,380.8 73,771.0

Family Housing & Military Construction 10,521.9 12,346.6

(Less: Earned Revenue) (114,295.5) (83,528.9)

Net Cost before Losses/(Gains) from Actuarial Assumption Changes 

for Military Retirement Benefits $ 613,822.2 $ 647,216.3

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits 24,069.0 (57,582.7)

Net Cost of Operations (Note 18) $ 637,891.2 $ 589,633.6

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017

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58

Department of Defense Consolidated Statement of Changes in Net Position 

Agency Wide Dollars in Millions

For the Years Ended September 30, 2017 and 2016

2017

Consolidated

2016

Consolidated

Cumulative Results Of Operations

Beginning Balances (Includes Funds from Dedicated Collections of $15,493.7 

in FY 2017 and $14,674.7 in FY 2016 – See Notes 19 and 23) $ (469,572.9) $ (609,246.1)

Prior Period Adjustments:

Changes in accounting principles (+/-) 37,345.0 (1,498.9)

Corrections of errors (+/-) 0.0 31,383.3

Beginning balances, as adjusted (Includes Funds from Dedicated Collections

of $15,493.7 in FY 2017 and $14,674.7 in FY 2016– See Notes 19 and 23) (432,227.9) (579,361.7)

Budgetary Financing Sources:

Other adjustments (rescissions, etc.) 612.5 9.0

Appropriations used 680,590.0 685,350.9

Nonexchange revenue 1,460.8 1,738.4

Donations and forfeitures of cash and cash equivalents 179.1 246.8

Transfers in/out without reimbursement 1,286.4 1,251.5

Other (2,543.8) (6,134.5)

Other Financing Sources

Donations and forfeitures of property 2.4 1.8

Transfers in/out without reimbursement 139.7 94.1

Imputed financing 3,673.9 4,573.4

Other (5,390.9) 12,291.0

Total Financing Sources $ 680,010.1 $ 699,422.4

Less: Net Cost of Operations 637,891.2 589,633.6

Net Change $ 42,118.9 $ 109,788.8

Cumulative Results of Operations (Includes Funds from Dedicated 

Collections of $16,149.7 in FY 2017 and $15,493.7 in FY 2016 – See Notes 19 

and 23)

$ (390,109.0) $ (469,572.9)

Unexpended Appropriations

Beginning Balances (Includes Funds from Dedicated Collections of $0.0 in 

FY 2017 and $0.0 in FY 2016 – See Notes 19 and 23) $ 450,026.1 $ 474,792.9

Budgetary Financing Sources:

Appropriations received 710,705.3 683,343.5

Appropriations transferred in/out 487.7 289.4

Other adjustments (22,779.7) (23,048.8)

Appropriations used (680,590.0) (685,350.9)

Total Budgetary Financing Sources (Includes Funds from Dedicated 

Collections of $0.0 in FY 2017 and $0.0 in FY 2016 – See Note 23) $ 7,823.3 $ (24,766.8)

Unexpended Appropriations (Includes Funds from Dedicated Collections of 

$0.0 in FY 2017 and $0.0 in FY 2016 – See Notes 19 and 23) $ 457,849.4 $ 450,026.1

Net Position $ 67,740.4 $ (19,546.8)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017

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Department of Defense Combined Statement 

of Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2017 and 

2016

Page 1 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2017

Combined

2016

Combined

2017

Combined

2016

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 155,556.4 $ 149,462.3 $ 79.7 $ 66.6

Adjustment to unobligated balance brought forward, 

Oct 1 (+or-) 0.0 2,083.9 0.0 0.0

Unobligated balance, brought forward, October 1, as 

adjusted $ 155,556.4 $ 151,546.2 $ 79.7 $ 66.6

Recoveries of prior year unpaid obligations 49,713.3 50,516.5 0.0 0.0

Other changes in unobligated balance (24,285.7) (21,673.4) 0.0 0.0

Unobligated balance from prior year budget 

authority, net 180,984.0 180,389.3 79.7 66.6

Appropriations (discretionary and mandatory) 776,981.7 745,655.2 0.0 0.0

Borrowing authority (discretionary and mandatory) 0.0 0.0 58.1 27.0

Contract authority (discretionary and mandatory) 76,540.2 69,749.9 0.0 0.0

Spending authority from offsetting collections 

(discretionary and mandatory) 105,705.9 105,509.3 76.6 74.7

Total Budgetary Resources $ 1,140,211.8 $ 1,101,303.7 $ 214.4 $ 168.3

Status of Budgetary Resources

New obligations and upward adjustments (total) $ 981,481.5 $ 945,747.3 $ 129.4 $ 88.6

Unobligated balance, end of year:

Apportioned, unexpired accounts 116,449.6 108,698.3 0.0 0.0

Exempt from Apportionment, unexpired accounts 6,759.2 6,437.7 0.0 0.0

Unapportioned unexpired accounts 1,910.5 3,321.0 85.0 79.7

Unexpired unobligated balance, end of year 125,119.3 118,457.0 85.0 79.7

Expired unobligated balance, end of year 33,611.0 37,099.4 0.0 0.0

Unobligated balance, end of year (total) $ 158,730.3 $ 155,556.4 $ 85.0 $ 79.7

Total Budgetary Resources $ 1,140,211.8 $ 1,101,303.7 $ 214.4 $ 168.3

Change in Obligated Balance

 Unpaid obligations:

Unpaid obligations, brought forward, October 1 $ 406,769.4 $ 407,118.1 $ 284.2 $ 410.5

New obligations and upward adjustments 981,481.5 945,747.3 129.4 88.6

Outlays (Gross) (899,834.4) (895,579.5) (185.6) (214.9)

Recoveries of prior year unpaid obligations (49,713.3) (50,516.5) 0.0 0.0

Unpaid obligations, end of year 438,703.2 406,769.4 228.0 284.2

 Uncollected payments:

Uncollected payments, Federal sources, brought 

forward, October 1 (74,181.3) (72,850.2) (58.9) (72.4)

Change in uncollected payments, Federal sources (4,307.2) (1,331.1) 5.9 13.5

Uncollected payments, Federal sources, end of year (78,488.5) (74,181.3) (53.0) (58.9)

 Memorandum (non-add) Entries:

Obligated balance, start of year $ 332,588.1 $ 334,267.9 $ 225.3 $ 338.1

Obligated balance, end of year $ 360,214.7 $ 332,588.1 $ 175.0 $ 225.3

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017

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Department of Defense Combined Statement of 

Budgetary Resources 

Agency Wide

For the Years Ended September 30, 2017 and 

2016

Page 2 of 2

Dollars in Millions

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

2017

Combined

2016

Combined

2017

Combined

2016

Combined

Budgetary Authority and Outlays, Net:

Budget authority, gross (discretionary and 

mandatory) $ 959,227.8 $ 920,914.4 $ 134.7 $ 101.7

Actual offsetting collections (discretionary and 

mandatory) (167,915.5) (167,332.7) (190.6) (105.4)

Change in uncollected customer payments from 

Federal sources (discretionary and mandatory) (4,307.2) (1,331.1) 5.9 13.5

Recoveries of prior year paid obligations 

(discretionary and mandatory) 2,766.9 1,548.3 0.0 0.0

Budget Authority, net (discretionary and 

mandatory) $ 789,772.0 $ 753,798.9 $ (50.0) $ 9.8

Outlays, gross (discretionary and mandatory) $ 899,834.4 $ 895,579.5 $ 185.6 $ 214.9

Actual offsetting collections (discretionary and 

mandatory) (167,915.5) (167,332.7) (190.6) (105.4)

Outlays, net (discretionary and mandatory) 731,918.9 728,246.8 (5.0) 109.5

Distributed offsetting receipts (97,963.0) (92,078.2) 0.0 0.0

Agency Outlays, net (discretionary and 

mandatory) $ 633,955.9 $ 636,168.6 $ (5.0) $ 109.5

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017

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List of Notes to the Financial Statements

Note 1. Significant Accounting Policies ............................................................................... 62

Note Disclosures Related to the Balance Sheet

Note 2. Nonentity Assets....................................................................................................... 75

Note 3. Fund Balance With Treasury .................................................................................... 76

Note 4. Investments and Related Interest .............................................................................. 78

Note 5. Accounts Receivable................................................................................................. 80

Note 6. Other Assets.............................................................................................................. 81

Note 7. Cash and Other Monetary Assets.............................................................................. 82

Note 8. Direct Loan and Loan Guarantees............................................................................ 83

Note 9. Inventory and Related Property ................................................................................ 89

Note 10. General PP&E, Net................................................................................................. 93

Note 11. Liabilities Not Covered by Budgetary Resources................................................... 96

Note 12. Accounts Payable.................................................................................................... 97

Note 13. Debt......................................................................................................................... 98

Note 14. Environmental and Disposal Liabilities.................................................................. 99

Note 15. Other Liabilities.................................................................................................... 103

Note 16. Commitments and Contingencies......................................................................... 106

Note 17. Military Retirement and Other Federal Employment Benefits............................. 107

Note 18. General Disclosures Related to the Statement of Net Cost ................................. 115

Note 19. Disclosures Related to the Statement of Changes in Net Position...................... 119

Note 20. Disclosures Related to the Statement of Budgetary Resources .......................... 122

Note Disclosures Not Pertaining to a Specific Statement

Note 21. Reconciliation of Net Cost of Operations to Budget ............................................ 126

Note 22. Disclosures Related to Incidental Custodial Collections...................................... 129

Note 23. Funds from Dedicated Collections ....................................................................... 130

Note 24. Fiduciary Activities............................................................................................... 134

Note 25. Other Disclosures.................................................................................................. 135

Required Supplementary Stewardship Information ......................................................... 136

Required Supplementary Information................................................................................ 139
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

1.A. Basis of Presentation

These financial statements have been prepared to report the financial position and results 

of operations of DoD, as required by the Chief Financial Officers Act of 1990, expanded by the 

Government Management Reform Act of 1994, and other appropriate legislation. The financial 

statements have been prepared from the books and records of the Department in accordance with, 

to the extent possible, U.S. GAAP promulgated by the Federal Accounting Standards Advisory 

Board; the OMB Circular No. A-136, “Financial Reporting Requirements”; and the DoD Financial 

Management Regulation (FMR). The accompanying financial statements account for all resources 

for which the Department is responsible unless otherwise noted. Information relative to classified 

assets, programs, and operations is excluded from the statements or otherwise aggregated and 

reported in such a manner that it is not discernible.

The Department is not yet fully compliant with all elements of U.S. GAAP and OMB

Circular No. A-136, due to limitations of financial and nonfinancial management processes and 

systems supporting the financial statements. The Department derives reported values and 

information for major asset and liability categories largely from nonfinancial systems, such as 

inventory and logistics systems. These systems were designed to support reporting requirements 

for maintaining accountability over assets and reporting the status of federal appropriations rather 

than preparing financial statements in accordance with U.S. GAAP. The Department continues to 

implement process and system improvements addressing these limitations.

The Department has material weaknesses from internal assessments: (1) Fund Balance 

with Treasury, (2) Financial Reporting Compilation, (3) Health Care Liabilities, (4) Military Pay,

(5) Contracts/Vendor Pay, (6) Reimbursable Work Orders (Budgetary), (7) Transportation of 

Things, (8) Equipment Assets, (9) Real Property Assets, (10) Environmental Liabilities,

(11) Inventory, (12) Operating Materials & Supplies, and (13) Military Standard Requisitioning 

and Issue Procedures.

1.B. Mission of the Reporting Entity 

The Department was established by the National Security Act of 1947. The Department 

provides the military forces needed to deter war and protect the security of our country. Since the 

creation of America’s first army in 1775, the Department and predecessor organizations have 

evolved into a global presence with a worldwide infrastructure dedicated to defending the United 

States by deterring and defeating aggression and coercion in critical regions. 

The Department includes the Military Departments and the Defense Agencies. The 

Military Departments consist of the Army, the Navy (of which the Marine Corps is a component), 

and the Air Force. The Defense Agencies provide support services commonly used throughout 

the Department.
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1.C. Appropriations and Funds 

The Department receives appropriations and funds as general, working capital (revolving), 

trust, and special funds. The Department uses these appropriations and funds to execute its 

missions and subsequently report on resource usage.

General funds are used for financial transactions funded by congressional appropriations, 

including personnel, operation and maintenance, research and development, procurement, and 

military construction. 

Working Capital Funds (WCF) received funding to establish an initial corpus through an 

appropriation or a transfer of resources from existing appropriations or funds. The corpus finances 

operations and transactions flowing through the fund. Each WCF obtains the goods and services 

sold to customers on a reimbursable basis and maintains the corpus. Reimbursable receipts fund 

future operations and generally are available in their entirety for use without further congressional 

action. At various times, Congress provides additional appropriations to supplement the WCF as 

an infusion of cash when revenues are inadequate to cover costs within the corpus.

Trust funds contain receipts and expenditures of funds held in trust by the government for 

use in carrying out specific purposes or programs in accordance with the terms of the donor, trust 

agreement, or statute. Special fund accounts are used to record government receipts reserved for 

a specific purpose. Certain trust and special funds may be designated funds from dedicated 

collections. Funds from dedicated collections are financed by specifically identified revenues, 

required by statute to be used for designated activities, benefits or purposes, and remain available 

over time. The Department is required to separately account for and report on the receipt, use and 

retention of revenues and other financing sources for funds from dedicated collections.

Deposit funds are used to record amounts held temporarily until paid to the appropriate 

government or public entity. They are not Department funds, and as such, are not available for the 

Department’s operations. The Department is acting as an agent or custodian for funds awaiting 

distribution.

The Department is a party to allocation transfers with other federal agencies as a 

transferring (parent) entity or receiving (child) entity. An allocation transfer is an entity’s legal 

delegation of authority to obligate budget authority and outlay funds on its behalf. A separate fund 

account (allocation account) is created in the U.S. Treasury as a subset of the parent fund account 

for tracking and reporting purposes. All allocation transfers of balances are credited to this 

account, and subsequent obligations and outlays incurred by the child entity are charged to this 

allocation account as they execute the delegated activity on behalf of the parent entity. Generally, 

all financial activity related to allocation transfers (e.g., budget authority, obligations, outlays) is 

reported in the financial statements of the parent entity. Exceptions to this general rule apply to 

specific funds for which OMB has directed that all activity be reported in the financial statements 

of the child entity. These exceptions include U.S. Treasury Managed Trust Funds, Executive 

Office of the President (EOP), and all other funds specifically designated by OMB.
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The Department receives allocation transfers from the following agencies: Departments of 

Agriculture, Interior, Energy, and Transportation; the Appalachian Regional Commission; and the 

Federal Highway Administration.

Additionally, the Department also receives allocation transfers from certain funds meeting 

the OMB exception and all related activity is included in the Department’s financial statements. 

These funds include South Dakota Terrestrial Wildlife Habitat Restoration, Inland Waterways and 

Harbor Maintenance. The Department receives allocation transfers for the Security Assistance 

programs meeting the OMB exceptions for EOP funds. These funds are reported separately from 

the DoD financial statements based on an agreement with OMB. (See Appendix A for information 

regarding Security Assistance programs.)

As a parent entity, the Department reports in these financial statements funds allocated to 

the Departments of Transportation and Agriculture.

1.D. Basis of Accounting 

Due to the limitations of various systems, and the sensitive nature of Departmental 

activities, the Department is not fully compliant with U.S. GAAP for the accrual method of 

accounting. 

The Department’s financial statements and supporting trial balances are compiled from the 

underlying financial data and trial balances of the Military Services and Defense Agencies and 

their sub-entities. The underlying data is largely derived from budgetary transactions (obligations, 

disbursements, and collections), from nonfinancial feeder systems, and accruals made for major 

items such as payroll expenses, accounts payable, and environmental liabilities. Some of the subentity level trial balances may reflect known abnormal balances resulting largely from business 

and system processes. An abnormal balance occurs when the general ledger account balance 

reported is opposite of its normal balance, as it is defined by the United States Standard General 

Ledger (USSGL) “Accounts and Definitions” guidance in the U.S. Treasury Financial Manual. 

At the consolidated level these abnormal balances may not be evident. Disclosures of abnormal 

balances are made in the applicable footnotes, but only to the extent that the abnormal balances 

are evident at the consolidated level. 

The Department is continuing the actions required to bring financial and nonfinancial 

feeder systems and processes into compliance with U.S. GAAP. One such action is the current 

revision of accounting systems to record transactions based on the U.S. Standard General Ledger 

(USSGL). Until all of the Department’s financial and nonfinancial feeder systems and processes 

are able to collect and report financial information as required by U.S. GAAP, there will be 

instances when the Department’s financial data is derived from budgetary transactions or data from 

nonfinancial feeder systems.

1.E. Revenues and Other Financing Sources 

The Department receives congressional appropriations as financing sources for general 

funds, and on occasion, will also receive congressional appropriations for WCFs. These funds 

either expire annually, some on a multi-year basis, or do not expire. When authorized by 
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legislation, these appropriations are supplemented by revenues generated by sales of goods or 

services. The Department recognizes revenue as a result of costs incurred for goods and services 

provided to other federal agencies and the public. Full-cost pricing is the Department’s standard 

policy for services provided as required by OMB Circular No. A-25, “User Charges.” The 

Department recognizes revenue when earned within the constraints of its current system 

capabilities. In some instances, revenue is recognized when bills are issued. 

Depot Maintenance and Ordnance WCF activities recognize revenue according to the 

percentage of completion method. Supply Management WCF activities recognize revenue from 

the sale of inventory items.

The Department does not include nonmonetary support provided by U.S. allies for common 

defense and mutual security in amounts reported in the Statement of Net Cost and Note 21, 

Reconciliation of Net Cost of Operations to Budget. The U.S. has cost sharing agreements with 

countries having a mutual or reciprocal defense agreement, where U.S. troops are stationed, or 

where the U.S. Fleet is in a port.

In compliance with Statement of Federal Financial Accounting Standards (SFFAS) 7,

“Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary 

and Financial Accounting”, the Department recognizes nonexchange revenue when there is a 

specifically identifiable, legally enforceable claim to the cash or other assets of another party that 

will not directly receive value in return.

1.F. Recognition of Expenses

For financial reporting purposes, the Department’s policy requires the recognition of 

operating expenses in the period incurred. Current financial and nonfinancial feeder systems were 

not designed to collect and record financial information on the full accrual accounting basis. 

Estimates are made for major items such as payroll expenses, accounts payable, environmental 

liabilities, and expenses related to unbilled revenue. In the case of Operating Materiel and Supplies 

(OM&S), operating expenses are generally recognized when the items are purchased. The 

Department has issued guidance under which Federal entities may expense OM&S using the 

purchases method of accounting rather than the consumption method. Under the consumption 

method, OM&S would be expensed when consumed. However, in some instances, expenditures 

for capital and other long-term assets may be recognized as operating expenses. The Department 

continues to implement process and system improvements to address these limitations.

1.G. Accounting for Intragovernmental Activities

Accounting standards require an entity to eliminate intra-entity activity and balances from 

consolidated financial statements to prevent overstatement for business with itself. However, the 

Department cannot accurately identify intragovernmental transactions by customer because the 

Department’s systems do not track buyer and seller data at the transaction level. Generally, seller 

entities within the Department provide summary seller side balances for revenue, accounts 

receivable, and unearned revenue to the buyer-side internal accounting offices. In most cases, the 

buyer side records are adjusted to agree with the Department seller side balances and are then 
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eliminated. The Department is implementing replacement systems and a standard financial 

information structure incorporating the necessary elements to enable the Department to correctly 

report, reconcile, and eliminate intragovernmental balances. 

The Treasury Financial Manual, Part 2, Chapter 4700, Agency Reporting Requirements 

for the Financial Report of the United States Government, provides guidance for reporting and 

reconciling intragovernmental balances. The Department is able to reconcile balances pertaining 

to investments in federal securities, borrowings from the U.S. Treasury and the Federal Financing 

Bank, Federal Employees’ Compensation Act transactions with the Department of Labor, and 

benefit program transactions with the Office of Personnel Management. The Department is taking 

actions to fully reconcile intragovernmental transactions with all federal agencies.

Imputed financing represents the cost paid on behalf of the Department by another Federal 

entity. The Department recognizes imputed costs for (1) employee pension, post retirement health, 

and life insurance benefits; (2) post employment benefits for terminated and inactive employees 

to include unemployment and workers compensation under the Federal Employees’ Compensation 

Act; and (3) losses in litigation proceedings.

The Department’s proportionate share of public debt and related expenses of the Federal 

Government is not included. The Federal Government does not apportion debt and related costs 

to federal agencies. The Department’s financial statements do not report public debt, interest, or 

source of public financing, whether from issuance of debt or tax revenues. 

Generally, financing for the construction of the Department facilities is obtained through 

appropriations. To the extent this financing ultimately may have been obtained through the 

issuance of public debt, interest costs have not been capitalized since the U. S. Treasury does not 

allocate such costs to the Department..

1.H. Transactions with Foreign Governments and International Organizations 

Each year, the Department sells defense articles and services to foreign governments and 

international organizations under the provisions of the Arms Export Control Act of 1976. Under 

the provisions of the Act, the Department has authority to sell defense articles and service to 

foreign countries and international organizations generally at no profit or loss to the Federal 

Government. Payment in U.S. dollars is required in advance.

1.I. Funds with the U.S. Treasury 

The Department’s monetary resources are maintained in U.S. Treasury accounts and are 

often referred to as “Fund Balance with Treasury”. The disbursing offices of Defense Finance and 

Accounting Service (DFAS), the Military Departments, the U.S. Army Corps of Engineers 

(USACE), and the Department of State’s financial service centers process the majority of the 

Department’s cash collections, disbursements, and adjustments worldwide. Each disbursing 

station reports to the U.S. Treasury on checks issued, electronic fund transfers, interagency 

transfers, and deposits.
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In addition, DFAS and the USACE Finance Center report to the U.S. Treasury by 

appropriation on interagency transfers, collections received, and disbursements issued. The U.S. 

Treasury records these transactions to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the Department's FBWT is reviewed and adjusted, as required, to 

agree with the U.S. Treasury accounts.

1.J. Cash and Other Monetary Assets

Cash is the total of cash resources under the control of the Department including coins, 

paper currency, negotiable instruments, and amounts held for deposit in banks and other financial 

institutions. Foreign currency consists of the total U.S. dollar equivalent of both foreign currency 

exchanged for U.S. dollars and foreign currency received as payment for goods or services. 

Foreign currencies are held in foreign currency fund accounts. Foreign currency is valued using 

the U.S. Treasury prevailing rate of exchange.

The majority of cash and all foreign currency is classified as “nonentity” and is restricted. 

Amounts reported consist primarily of cash and foreign currency held by disbursing officers to 

carry out their paying, collecting, and foreign currency accommodation exchange missions.

The Department conducts a significant portion of operations overseas. Congress 

established a special account to handle the gains and losses from foreign currency transactions for 

five general fund appropriations: (1) operations and maintenance, (2) military personnel,

(3) military construction, (4) family housing operation and maintenance, and (5) family housing 

construction. The gains and losses are calculated as the variance between the exchange rate current 

at the date of payment and a budget rate established at the beginning of each fiscal year. Foreign 

currency fluctuations related to other appropriations require adjustments to the original obligation 

amount at the time of payment. The Department does not separately identify foreign currency 

fluctuation transactions.

1.K. Accounts Receivable

Accounts receivable from other federal entities or the public include: accounts receivable, 

claims receivable, and refunds receivable. Allowances for uncollectible accounts due from the 

public are based upon an analysis of collection experience. The Department does not recognize 

an allowance for estimated uncollectible amounts from other federal agencies, as receivables from 

other federal agencies are considered to be inherently collectible. Claims for accounts receivable 

from other federal agencies are to be resolved between the agencies in compliance with the

business rules published in Appendix 10, “Intragovernmental Transaction Guide,” of Treasury 

Financial Manual, Part 2, Chapter 4700.

The Department has fuel exchange agreements with foreign countries. These agreements 

allow the Department to periodically offset the accounts receivable by the amount the Department 

owes to the same foreign country. 
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1.L. Direct Loans and Loan Guarantees

The Department operates a direct loan and loan guarantee program authorized by the 

National Defense Authorization Act (NDAA) for FY 1996. The Act includes a series of authorities 

allowing the Department to work with the private sector to renovate military housing. The 

Department’s goals are to obtain private capital to leverage government dollars, make efficient use 

of limited resources, and use a variety of private sector approaches to build and renovate military 

housing faster and at a lower cost to the American taxpayers.

The Act also provides the Department with a variety of authorities to obtain private sector 

financing and expertise to improve military housing. The Department uses these authorities 

individually or in combination. They include guarantees (both loan and rental), conveyance/leasing 

of existing property and facilities, differential lease payments, investments (both limited 

partnerships and stock/bond ownership), and direct loans.

The NDAA for FY 2005 provided permanent authorities to the Military Housing 

Privatization Initiative (MHPI). The Department administers the Foreign Military Financing

program on behalf of the EOP. This program is authorized by sections 23 and 24 of the Arms 

Export Control Act of 1976, as amended, and provides loans to help countries purchase U.S. 

produced weapons, defense equipment, services, or military training. The direct loans and loan 

guarantees related to Foreign Military Sales are not included in these financial statements, per 

Department’s agreement with OMB; this information is provided separately as other information.

1.M. Inventories and Related Property

The Department values approximately 98 percent of resale inventory using the moving 

average cost method. Additionally, the Department reports the remaining 2 percent of resale 

inventories at an approximation of historical cost using latest acquisition cost adjusted for holding 

gains and losses. The Department, when applicable, will continue to implement the adoption of 

SFFAS 48, “Opening Balances for Inventory, Operating Materials and Supplies, and Stockpile 

Materials”, permitting alternative methods in establishing opening balances. 

The Department manages only military or government-specific materiel under normal 

conditions. Materiel is a unique term that relates to military force management, and includes items 

such as ships, tanks, self propelled weapons, aircraft, etc., and related spares, repair parts, and 

support equipment. Items commonly used in and available from the commercial sector are not 

managed in the Department’s materiel management activities. Operational cycles are irregular 

and the military risks associated with stock-out positions have no commercial parallel. The 

Department holds materiel based on military need and support for contingencies. 

Related property includes OM&S and stockpile materiel. The OM&S, including munitions 

not held for sale, are valued at standard purchase price. The Department uses both the consumption 

method and the purchase method of accounting for OM&S. Centrally managed and stored items, 

such as ammunition and engines, are generally recorded using the consumption method and are 

reported on the Balance Sheet as OM&S. When current systems cannot fully support the 

consumption method, the Department uses the purchases method. Under this method, materiel 
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and supplies are expensed when purchased. This is a material weakness for the Department and 

long term system corrections are in process. Once the proper systems are in place, these items will 

be accounted for under the consumption method of accounting.

Many high-dollar items, such as aircraft engines, are categorized as OM&S rather than 

general equipment. The Department determined the recurring high dollar-value of OM&S in need 

of repair is material to the financial statements and requires a separate reporting category. 

The Military Services recognize excess, obsolete, and unserviceable inventory and OM&S 

at a net realizable value of zero, pending development of an effective means of valuing such 

materiel. 

Inventory available and purchased for resale includes consumable spare and repair parts, 

and repairable items owned and managed by the Department. This inventory is retained to support 

military or national contingencies. Inventory held for repair is damaged inventory requiring repair 

to make it suitable for sale. Often, it is more economical to repair these items rather than to procure 

them. The Department often relies on weapon systems and machinery no longer in production. 

As a result, the Department supports a process encouraging the repair and rebuilding of certain 

items. This repair cycle is essential to maintaining a ready, mobile, and armed military force. 

Work in process balances include: (1) costs related to the production or servicing of items, 

including direct material, labor, and applied overhead; (2) the value of finished products or 

completed services yet to be placed in service; and (3) munitions in production and depot 

maintenance work with associated costs incurred in the delivery of maintenance services.

1.N. Investments in U.S. Treasury Securities

The Department reports investments in U.S. Treasury securities at cost, net of amortized 

premiums or discounts. Premiums or discounts are amortized over the term of the investments 

using the effective interest rate method or another method yielding similar results. The 

Department’s intent is to hold investments to maturity unless they are needed to finance claims or 

otherwise sustain operations. Consequently, a provision is not made for unrealized gains or losses 

on these securities.

The Department invests in nonmarketable market-based U.S. Treasury securities issued to 

federal agencies by Treasury’s Bureau of the Fiscal Service. These securities are not traded on 

any financial exchange but are priced consistently with publically traded U.S. Treasury securities.

The Department’s net investments are held by various trust and special funds. These funds 

include the Military Retirement Fund; Medicare-Eligible Retiree Health Care Fund; Support for 

U.S. Relocation to Guam Activities; donations (gift funds); and Treasury managed trust funds 

reported by USACE including the South Dakota Terrestrial Habitat Restoration, Inland 

Waterways, and Harbor Maintenance Trust Fund accounts.

Other investments represent joint ventures with private developers constructing or 

improving military housing on behalf of the Department under the authority of MHPI, authorized 

by section 2801 of the NDAA for FY 1996. These investments do not require market value 
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disclosure. The Department’s potential losses on these ventures are limited to the amounts 

invested.

1.O. General Property, Plant and Equipment

In some instances, the Department uses the estimated historical cost for valuing equipment. 

To establish a baseline, the Department accumulated information relating to program funding and 

associated equipment, equipment useful life, program acquisitions, and disposals. The equipment 

baseline was updated using expenditure, acquisition, and disposal information. The Department, 

when applicable, will continue to implement the adoption of SFFAS 50, “Establishing Opening 

Balances for General Property, Plant, and Equipment”, permitting alternative methods in 

establishing opening balances. 

The USACE Civil Works General Property, Plant, and Equipment (PP&E) is capitalized 

at acquisition cost plus capitalized improvements when an asset has a useful life of two or more 

years and the acquisition cost exceeds $25 thousand. The exception is buildings and structures 

related to hydropower projects, which are capitalized regardless of cost.

In addition, the Departments of the Air Force and Navy General Funds capitalize General 

Equipment acquisitions that are $1 million and greater. The remainder of the Department’s 

General PP&E capitalization threshold is $250 thousand. These capitalization thresholds apply to 

asset acquisitions and modifications/improvements placed into service after September 30, 2013. 

General PP&E assets acquired prior to October 1, 2013, were capitalized at prior thresholds 

($100 thousand for equipment and $20 thousand for real property).

With the exception of USACE Civil Works, General PP&E assets are capitalized at 

historical acquisition cost when an asset has a useful life of two or more years and when the 

acquisition cost equals or exceeds the Department’s capitalization threshold. The Department 

capitalizes improvements to existing General PP&E assets if the improvements equal or exceed 

the capitalization threshold and extend the useful life or increase the size, efficiency, or capacity 

of the asset. The Department depreciates all General PP&E, other than land, on a straight-line 

basis.

When it is in the best interest of the government, the Department provides government 

property to contractors to complete contract work. The Department either owns or leases such 

property, or it is purchased directly by the contractor for the government based on contract terms. 

When the value of contractor-procured General PP&E meets or exceeds the Department’s 

capitalization threshold, federal accounting standards require it be reported on the Department’s 

Balance Sheet.

The Department developed policy and a reporting process for contractors with government 

furnished equipment providing appropriate General PP&E information for financial statement 

reporting. The Department requires entities maintain, in their property systems, information on all 

property furnished to contractors. These actions are structured to capture and report the 

information necessary for compliance with federal accounting standards. The Department has not 

fully implemented this policy primarily due to system limitations.
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1.P. Advances and Prepayments

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances or prepayments in compliance with U.S. GAAP. As 

such, payments made in advance of the receipt of goods and services should be reported as an asset 

on the Balance Sheet. The Department’s policy is to expense and/or properly classify assets when 

the related goods and services are received. The Department has not fully implemented this policy 

primarily due to system limitations.

1.Q. Leases

Lease payments for the rental of equipment and operating facilities are classified as either 

capital or operating leases. When a lease is essentially equivalent to an installment purchase of 

property (a capital lease), and the value equals or exceeds the current capitalization threshold, the 

Department records the applicable asset as though purchased, with an offsetting liability, and

subsequently records depreciation of the asset. The Department records the asset and liability at 

the lesser of the present value of the rental and other lease payments during the lease term 

(excluding portions representing executory costs paid to the lessor) or the asset’s fair market value. 

The discount rate for the present value calculation is either the lessor’s implicit interest rate or the 

government’s incremental borrowing rate at the inception of the lease. The Department, as the 

lessee, receives the use and possession of leased property, for example real estate or equipment, 

from a lessor in exchange for a payment of funds. An operating lease does not substantially 

transfer all the benefits and risks of ownership. Payments for operating leases are expensed over 

the lease term.

Office space leases entered into by the Department comprise the largest value of operating 

leases and are based on costs gathered from existing leases, General Services Administration bills, 

and interservice support agreements. 

1.R. Other Assets

Other assets include those assets, such as military and civil service employee pay advances, 

travel advances, and certain contract financing payments not reported elsewhere on the 

Department’s Balance Sheet.

The Department conducts business with commercial contractors under two primary types 

of contracts: fixed price and cost reimbursable. To alleviate the potential financial burden to 

contractors from long-term contracts, the Department may provide financing payments. Contract 

financing payments are defined in the Federal Acquisition Regulation, Part 32, as authorized 

disbursements to a contractor prior to acceptance of supplies or services by the Government. 

Contract financing payment clauses are incorporated in the contract terms and conditions and may 

include advance payments, performance-based payments, commercial advances and interim 

payments, progress payments based on cost, and interim payments under certain costreimbursement contracts. It is the Department’s policy to record certain contract financing 

payments as other assets. The Department has not fully implemented this policy primarily due to 

system limitations.
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Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisition Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding and ship conversion, alteration, or repair. Progress payments based on percentage or 

stage of completion are reported as Construction in Progress.

1.S. Contingencies and Other Liabilities

The SFFAS 5, “Accounting for Liabilities of the Federal Government,” as amended by 

SFFAS 12, “Recognition of Contingent Liabilities Arising from Litigation,” defines a contingency 

as an existing condition, situation, or set of circumstances involving an uncertainty as to possible 

gain or loss. The uncertainty will be resolved when one or more future events occur or fail to 

occur. The Department recognizes contingent liabilities when past events or exchange transactions 

occur, a future loss is probable, and the loss amount can be reasonably estimated.

Financial statement reporting is limited to disclosure when conditions for liability 

recognition do not exist, but there is at least a reasonable possibility of incurring a loss or additional 

losses. The Department’s risk of loss and resultant contingent liabilities arise from pending or 

threatened litigation or claims and assessments due to events such as aircraft, ship and vehicle 

accidents; medical malpractice; property or environmental damages; and contract disputes.

Other liabilities also arise as a result of anticipated disposal costs for the Department’s 

assets. Consistent with SFFAS 6, “Accounting for Property, Plant, and Equipment,” recognition 

of an anticipated environmental disposal liability begins when the asset is placed into service.

Based on the Department’s policy, consistent with SFFAS 6, nonenvironmental disposal liabilities 

are recognized when management decides to dispose of an asset. In addition, the Department

recognizes nonenvironmental disposal liabilities for nuclear-powered military equipment when 

placed into service. These amounts are not easily distinguishable and are developed in conjunction 

with environmental disposal costs.

1.T. Accrued Leave 

The Department reports liabilities for military leave and accrued compensatory and annual 

leave for civilians. Sick leave for civilians is expensed when taken. The liabilities are based on 

current pay rates.

1.U. Net Position 

Net position consists of unexpended appropriations and cumulative results of operations. 

Unexpended appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred.

Cumulative results of operations represent the net difference between expenses and losses, 

and financing sources (including appropriations, revenue, and gains), since inception. The 
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cumulative results of operations also include donations and transfers in and out of assets that were 

not reimbursed.

1.V. Treaties for Use of Foreign Bases 

The Department has the use of land, buildings, and other overseas facilities obtained 

through various international treaties and agreements negotiated by the Department of State. The 

Department purchases capital assets overseas with appropriated funds; however, the host country 

retains title to the land and capital improvements. Treaty terms generally allow the Department 

continued use of these properties until the treaties expire. In the event treaties or other agreements 

are terminated, use of the foreign bases is prohibited and losses are recorded for the value of any 

nonretrievable capital assets. The settlement due to the United States or host nation is negotiated 

and takes into account the value of capital investments and may be offset by the environmental 

cleanup cost, if applicable.

1.W. Undistributed Disbursements and Collections 

Undistributed disbursements and collections represent the difference between 

disbursements and collections matched at the transaction level to specific obligations, payables, or 

receivables in the source systems and those reported by U.S. Treasury. 

Supported disbursements and collections have corroborating documentation for the 

summary level adjustments made to accounts payable and receivable. Unsupported disbursements 

and collections do not have supporting documentation for the transaction and most likely would 

not meet audit scrutiny. Both supported and unsupported adjustments may have been made to the 

Department’s accounts payable and receivable trial balances prior to validating underlying 

transactions.

Due to noted material weaknesses in current accounting and financial feeder systems, the 

Department generally cannot determine whether undistributed disbursements and collections 

should be applied to federal or nonfederal accounts payable/receivable at the time accounting 

reports are prepared. Accordingly, the Department’s policy is to allocate supported undistributed 

disbursements and collections between federal and nonfederal categories based on the percentage 

of distributed federal and nonfederal accounts payable and accounts receivable. Unsupported 

undistributed disbursements and collections are also applied to reduce accounts payable and 

receivable accordingly.

1.X. Fiduciary Activities

Fiduciary cash and other assets are not assets of the Department and are not recognized on 

the Balance Sheet. Fiduciary activities are reported on the financial statement note schedules.

1.Y. Military Retirement and Other Federal Employment Benefits

The Department applies SFFAS 33, “Pensions, Other Retirement Benefits, and Other 

Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and 

Selecting Discount Rates and Valuation Dates,” in selecting the discount rate and valuation date 
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used in estimating actuarial liabilities. In addition, gains and losses from changes in long-term 

assumptions used to estimate the actuarial liability are presented separately on the Statement of 

Net Cost. Refer to Note 17, Military Retirement and Other Federal Employment Benefits and 

Note 18, General Disclosures Related to the Statement of Net Cost, for additional information.

The jump master passes final direction to Marines with the 15th Marine Expeditionary Unit Maritime Raid Force before 

conducting a night jump during Realistic Urban Terrain training at Twentynine Palms, March 6, 2017. RUT is a land-based 

exercise that provides an opportunity to integrate unique skills and develop the MEU’s collective proficiency in challenging and 

unfamiliar environments. The 15th MEU’s rapid ability to mobilize people and equipment makes the amphibious force uniquely 

postured to respond to any mission at a moment’s notice.

Photo by Cpl. Timothy Valero
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NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Millions

As of September 30 2017 2016

Intragovernmental Assets

Fund Balance with Treasury $ 2,895.1 $ 2,216.7

Accounts Receivable 55.8 54.1

Total Intragovernmental Assets $ 2,950.9 $ 2,270.8

Non-Federal Assets

Cash and Other Monetary Assets $ 946.2 $ 1,063.5

Accounts Receivable 2,338.9 3,080.2

Other Assets 0.0 0.0

Total Non-Federal Assets $ 3,285.1 $ 4,143.7

Total Nonentity Assets $ 6,236.0 $ 6,414.5

Total Entity Assets $ 2,559,478.4 $ 2,396,939.1

Total Assets $ 2,565,714.4 $ 2,403,353.6

Nonentity assets are not available for use in the Department’s normal operations. The 

Department has stewardship accountability and reporting responsibility for nonentity assets.

 

Abnormal Balance

In FY 2017, Total Entity Assets includes a $7.2 million abnormal balance in 

USSGL 159100, Other Related Property. In FY 2016 the abnormal balance was $5.4 million. The 

issue has been identified and the Department is in the process of correcting in FY 2018.

Other Disclosures

Intragovernmental Fund Balance with Treasury (FBWT) consists primarily of deposit 

funds and receipt accounts. Deposit funds represent amounts held temporarily until paid to the 

appropriate party. Receipt accounts represent amounts collected on behalf of the U.S. Treasury 

General Fund.

Non-Federal Cash and Other Monetary Assets consist primarily of cash held by Disbursing 

Officers to carry out payment, collection, and foreign currency exchanges. 

Non-Federal Accounts Receivable consists of amounts associated with canceled year 

appropriations, and interest, fines and penalties due on debt. Generally, the Department cannot 

use the collections and must remit them to the U.S. Treasury.
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

76

NOTE 3. FUND BALANCE WITH TREASURY

Fund Balance with Treasury Dollars in Millions

As of September 30 2017 2016

Fund Balance

Appropriated Funds $ 481,302.8 $ 457,587.2

Revolving Funds 13,132.2 10,065.0

Trust Funds 3,082.3 3,304.7

Special Funds 1,477.2 1,368.9

Other Fund Types 2,625.9 1,963.2

Total Fund Balance $ 501,620.4 $ 474,289.0

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 501,987.0 $ 474,480.0

Less: Fund Balance per Agency (501,620.4) (474,289.0)

Reconciling Amount $ 366.6 $ 191.0

Other Fund Types primarily consist of deposit funds and receipt accounts. These funds 

represent receipts held temporarily for distribution to another fund or entity or held as an agent for 

others.

In FY 2017 the Department shows a reconciling net difference of $366.6 million with the 

U.S. Treasury between the Department’s financial statement records and Treasury. This includes 

net allocation transfers of $288.8 million as well as fiduciary activities of $77.8 million. In 

FY 2016 the Department’s reconciling net difference was $191.0 million and consisted of 

allocation transfers of $108.0 million, fiduciary activities of $80.1 million, and other reconciling 

items of $2.9 million. The Department received allocation transfers as the "child entity." As 

"parent entity," the Department issued allocation transfers to other Federal Government agencies 

for execution on behalf of the Department. For additional information, refer to Note 1, Significant 

Accounting Policies, Section 1C. Additionally, Fiduciary Activities are not reported in FBWT in 

accordance with SFFAS 31, “Accounting for Fiduciary Activities.”

Beginning in FY 2017, the Department is disclosing the amount of undistributed collection 

and disbursement adjustments. The amount reported in Fund Balance per Agency includes 

undistributed collection adjustments of $2.7 billion, $2.3 billion are unsupported. Undistributed 

disbursement adjustments totaled $2.9 billion, $968.2 million are unsupported.

Status of Fund Balance with Treasury Dollars in Millions

As of September 30 2017 2016

Unobligated Balances

Available $ 123,203.5 $ 115,130.6

Unavailable 924,233.1 846,765.2

Total Unobligated Balance 1,047,436.6 961,895.8

Obligated Balance not yet Disbursed 438,931.2 407,053.7

Non-Budgetary FBWT 2,956.1 2,809.4

Non-FBWT Budgetary Accounts (987,703.5) (897,469.9)

Total Fund Balance $ 501,620.4 $ 474,289.0
U.S. Department of Defense Agency Financial Report for FY 2017

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Other Disclosures

The Status of FBWT, as presented in the table above, reflects the budgetary resources to 

support FBWT and is a reconciliation between budgetary and proprietary accounts. It primarily 

consists of unobligated and obligated balances. The balances reflect the budgetary authority 

remaining for disbursements against current or future obligations.

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority set aside to cover future obligations. The unavailable balance 

consists primarily of funds invested in U.S. Treasury securities and are temporarily precluded from 

obligation by law. Certain unobligated balances are restricted for future use and are not 

apportioned for current use. Unobligated balances for trust fund accounts are restricted for use by 

public laws establishing the funds.

Obligated Balance not yet Disbursed represents funds obligated for goods and services but 

not paid. 

Non-Budgetary FBWT includes accounts without budgetary authority, such as deposit 

funds, unavailable receipt accounts, clearing accounts, and nonentity FBWT.

Non-FBWT Budgetary Accounts reduce the Status of FBWT and consist of investments in 

U.S. Treasury securities, unfilled customer orders without advance, contract and borrowing 

authority, and receivables.

Members of U.S. Pacific Fleet Band's Pipeline roll through a Jazz standard during a concert at Universiti Malaysia Sarawak as

part of a music exchange during Pacific Partnership 2017 Kuching, Malaysia, April 17. Pacific Partnership is the largest annual 

multilateral humanitarian assistance and disaster relief preparedness mission conducted in the Indo-Asia-Pacific and aims to 

enhance regional coordination in areas such as medical readiness and preparedness for manmade and natural disasters.

Photo by Mass Communication Specialist 1st Class Micah Blechner
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

78

NOTE 4. INVESTMENTS AND RELATED INTEREST

Investments and Related Interest Dollars in Millions

2017

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 755,224.4 See Below $ (31,092.9) $ 724,131.5 $ 779,882.2

Medicare-Eligible Retiree 

Health Care Fund 262,142.0 See Below (13,604.4) 248,537.6 280,882.8

US Army Corps of 

Engineers 9,257.2 See Below (67.3) 9,189.9 9,184.1

Other Funds 2,619.5 See Below (114.8) 2,504.7 2,530.4

Total Nonmarketable, 

Market-Based $ 1,029,243.1 $ (44,879.4) $ 984,363.7 $ 1,072,479.5

Accrued Interest 7,370.2 0.0 7,370.2 7,370.3

Total Intragovernmental 

Securities $ 1,036,613.3 $ (44,879.4) $ 991,733.9 $ 1,079,849.8

Other Investments

Total Other Investments $ 3,511.6 See Below $ 0.0 $ 3,511.6 N/A

Amortization Method Used: Effective Interest

Investments and Related Interest Dollars in Millions

2016

As of September 30

Cost Amortization 

Method

Amortized 

(Premium)/ 

Discount

Investments, 

Net

Market Value 

Disclosure

Intragovernmental Securities

Nonmarketable, Market-Based

Military Retirement Fund $ 684,211.3 See Below $ (29,836.4) $ 654,374.9 $ 754,114.1

Medicare-Eligible Retiree 

Health Care Fund 250,500.2 See Below (12,839.8) 237,660.4 284,553.0

US Army Corps of 

Engineers 8,928.9 See Below (60.9) 8,868.0 8,894.7

Other Funds 2,430.1 See Below (135.1) 2,295.0 2,360.7

Total Nonmarketable, 

Market-Based $ 946,070.5 $ (42,872.2) $ 903,198.3 $ 1,049,922.5

Accrued Interest 7,369.6 0.0 7,369.6 7,369.6

Total Intragovernmental 

Securities $ 953,440.1 $ (42,872.2) $ 910,567.9 $ 1,057,292.1

Other Investments

Total Other Investments $ 3,521.7 See Below $ 0.0 $ 3,521.7 N/A

Amortization Method Used: Effective Interest
U.S. Department of Defense Agency Financial Report for FY 2017

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The Department invests primarily in non-marketable, market-based U.S. Treasury 

securities. The value of these securities fluctuates in tandem with the selling price of the equivalent 

marketable security. Securities are purchased with the intent to hold until maturity; thus, balances 

are not adjusted to market value.

The U.S. Treasury securities are issued to authorized funds and are an asset to the 

Department and a liability to the U.S. Treasury. The Federal Government does not set aside assets 

to pay future benefits or other expenditures associated with these funds. Cash generated is 

deposited in the U.S. Treasury and used for general Government purposes. Since the Department 

and the U.S. Treasury are both part of the Federal Government, these assets and liabilities offset 

each other from the standpoint of the Federal Government as a whole. For this reason, they do not 

represent an asset or a liability in the U.S. Governmentwide financial statements.

The U.S. Treasury securities provide the Department with authority to access funds to make 

future benefit payments or other expenditures. When the Department requires redemption of 

securities to make expenditures, the Federal Government will meet the requirement by using 

accumulated cash balances, raising taxes or other receipts, borrowing from the public or repaying 

less debt, or curtailing other expenditures. The Federal Government uses the same method to 

finance all other expenditures.

In FY 2017, Other Funds primarily consists of $1.2 billion in investments of the Support 

for U.S. Relocation to Guam Activities Trust Fund and $1.1 billion in investments of the DoD 

Education Benefits Trust Fund. In FY 2016 Other Funds primarily consisted of $1.3 billion in 

investments of the DoD Education Benefits Trust Fund and $778.2 million in investments of the 

Support for U.S. Relocation to Guam Activities Trust Fund.

Other Investments consists of Military Housing Privatization Initiative limited 

partnerships. The Department invests in nongovernmental entities involved in the acquisition or 

construction of family housing and supporting facilities at Army, Air Force, Navy, and Marine 

Corps installations. The Department provides cash, land, or facilities as equity, but has no 

management role. A limited partnership arrangement operates purely as a private business and 

does not require Market Value Disclosure.
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

80

NOTE 5. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Millions

2017

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts Receivable, 

Net

Intragovernmental Receivables $ 2,055.0 N/A $ 2,055.0

Non-Federal Receivables 

(From the Public) 6,061.9 (817.8) 5,244.1

Total Accounts Receivable $ 8,116.9 $ (817.8) $ 7,299.1

Accounts Receivable Dollars in Millions

2016

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts Receivable, 

Net

Intragovernmental Receivables $ 1,907.6 N/A $ 1,907.6

Non-Federal Receivables 

(From the Public) 7,278.9 (358.8) 6,920.1

Total Accounts Receivable $ 9,186.5 $ (358.8) $ 8,827.7

Accounts receivable represent the Department’s claim for payment from other entities. The 

Department only recognizes an allowance for uncollectible amounts from the public. Allowances 

for uncollectible accounts due from the public are based on an analysis of collection experience. 

Claims with other Federal agencies are resolved in accordance with the Intragovernmental 

Business Rules.
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 6. OTHER ASSETS

Other Assets Dollars in Millions

As of September 30 2017 2016

Intragovernmental Other Assets

Advances and Prepayments $ 798.6 $ 1,116.0

Other Assets 128.6 137.4

Total Intragovernmental Other Assets $ 927.2 $ 1,253.4

Non-Federal Other Assets

Outstanding Contract Financing Payments $ 25,397.3 $ 31,560.8

Advances and Prepayments 3,980.0 3,556.9

Other Assets (With the Public) 12.7 12.9

Total Non-Federal Other Assets $ 29,390.0 $ 35,130.6

Total Other Assets $ 30,317.2 $ 36,384.0

Contract terms and conditions for certain types of contract financing payments convey 

rights to the Department, protecting the contract work from state or local taxation, liens or 

attachment by contractors’ creditors, transfer of property, or disposition in bankruptcy. However, 

these rights should not be misconstrued to mean that ownership of contractors’ work has 

transferred to the Department. The Department does not have the right to take the work, except as 

provided for in contract clauses related to termination or acceptance. The Department is not 

obligated to make payment to contractors until delivery and acceptance.

Intragovernmental Other Assets are largely related to the Department’s right to 

approximately 6.4 million barrels of crude oil, net book value of $123.3 million, held by the 

Department of Energy. The value for this asset remains unchanged from FY 2016.

The Other Assets (With the Public) balance includes liquidated damages, asset donations, 

and assets awaiting disposal.

In FY 2017, Outstanding Contract Financing Payments includes $20.0 billion in contract 

financing payments and an additional $5.4 billion in estimated future payments to contractors upon 

delivery and government acceptance. In FY 2016 Outstanding Contract Financing Payments 

included $26.2 billion in contract financing payments and an additional $5.4 billion in estimated 

future payments to contractors upon delivery and government acceptance. The Department is 

currently implementing the requirements for properly reporting Contract Financing Payments and 

Construction in Progress in accordance with existing internal guidance. Refer to Note 15, Other 

Liabilities, for additional details.
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 7. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets Dollars in Millions

As of September 30 2017 2016

Cash $ 462.7 $ 384.2

Foreign Currency 657.0 768.1

Total Cash, Foreign Currency, and Other Monetary Assets $ 1,119.7 $ 1,152.3

The majority of Cash and all Foreign Currency represent nonentity assets and are restricted 

and unavailable to fund the Department's mission. In FY 2017, cash includes unrestricted entity 

assets of $172.3 million comprised of undeposited collections and other cash. In FY 2016, cash 

included unrestricted entity assets of $87.2 million comprised of undeposited collections and other 

cash.

A U.S. Army Ranger fast ropes out of a UH-60 Black Hawk helicopter during the Best Ranger Competition 2017 in Fort Benning, 

Ga., April 7, 2017. The 34th annual David E. Grange Jr. Best Ranger Competition 2017 is a three-day event consisting of 

challenges to test competitor's physical, mental, and technical capabilities.

Photo by Staff Sgt. Marianique Santos
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

83

NOTE 8. DIRECT LOAN AND LOAN GUARANTEES

The Department operates loan guarantee programs for MHPI. 

The Federal Credit Reform Act of 1990 governs all new and amended direct loan 

obligations and loan guarantee commitments made after FY 1991. 

Direct loans are reported at the net present value (NPV) of the following projected cash 

flows:

• Loan disbursements;

• Repayments of principal; and

• Payments of interest and other payments over the life of the loan after adjusting for 

estimated defaults, prepayments, fees, penalties, and other recoveries.

Loan guarantee liabilities are reported at the NPV. The cost of the loan guarantee is the 

NPV of the following estimated projected cash flows:

• Payments by the Department to cover defaults and delinquencies, interest subsidies, or 

other payments; offset by payments to the Department including origination and other fees, 

penalties, and recoveries.

Military Housing Privatization Initiative

The MHPI includes both direct loan and loan guarantee programs. The programs are 

authorized by section 2801 of the National Defense Authorization Act for FY 1996 and includes a 

series of authorities allowing the Department to work with the private sector to renovate and build 

military family housing. The MHPI accelerates the construction of new housing built to market 

standards and obtains private sector capital to leverage government funds. The Department 

provides protection to private sector partners against specific risks, such as base closure or member 

deployment.

Summary of Direct Loans and Loan Guarantees Dollars in Millions

As of September 30 2017 2016

Loans Receivable

Direct Loans:

Military Housing Privatization Initiative $ 1,644.2 $ 1,603.9

Total Direct Loans $ 1,644.2 $ 1,603.9

Total Loans Receivable $ 1,644.2 $ 1,603.9

Loan Guarantee Liability

Military Housing Privatization Initiative $ 65.2 $ 70.9

Total Loan Guarantee Liability $ 65.2 $ 70.9
U.S. Department of Defense Agency Financial Report for FY 2017

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84

Direct Loans Obligated Dollars in Millions

As of September 30 2017 2016

Direct Loans Obligated After FY 1991 (Present Value Method):

Military Housing Privatization Initiative

Loans Receivable Gross $ 1,704.6 $ 1,667.4

Allowance for Subsidy Cost (Present Value) (60.4) (63.5)

Value of Assets Related to Direct Loans, Net 1,644.2 1,603.9

Total Direct Loans Receivable $ 1,644.2 $ 1,603.9

Direct Loans Receivable does not represent proceeds the Department would expect to 

receive from selling the loans, and includes interest receivable. Interest receivable is calculated 

using the interest earned method.

Total Amount of Direct Loans Disbursed Dollars in Millions

As of September 30 2017 2016

Direct Loan Programs

Military Housing Privatization Initiative $ 56.3 $ 126.3

Total $ 56.3 $ 126.3

Subsidy Expense for Direct Loan by Program Dollars in Millions

2017 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing 

Privatization Initiative $ 1.0 $ 11.8 $ 0.0 $ 0.0 $ 12.8

Total $ 1.0 $ 11.8 $ 0.0 $ 0.0 $ 12.8

2016 Interest 

Differential Defaults Fees Other Total

New Direct Loans Disbursed

Military Housing 

Privatization Initiative $ (2.4) $ 15.9 $ 0.0 $ 0.0 $ 13.5

Total $ (2.4) $ 15.9 $ 0.0 $ 0.0 $ 13.5
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

85

2017 Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing 

Privatization Initiative $ 0.0 $ 6.1 $ (20.3) $ (14.2)

Total $ 0.0 $ 6.1 $ (20.3) $ (14.2)

2016 Modifications Interest Rate 

Reestimates

Technical 

Reestimates Total

Direct Loan Modifications and Reestimates

Military Housing 

Privatization Initiative $ 0.0 $ 19.4 $ 6.6 $ 26.0

Total $ 0.0 $ 19.4 $ 6.6 $ 26.0

2017 2016

Total Direct Loan Subsidy Expense:

Military Housing 

Privatization Initiative $ (1.4) $ 39.5

Total $ (1.4) $ 39.5

Subsidy Rates for Direct Loan by Program

As of September 30, 2017

Interest 

Differential Defaults Fees Other Total

Budget Subsidy Rates for Direct Loans

Military Housing Privatization Initiative 0.0% 0.0% 0.0% 0.0% 0.0%

Subsidy rates pertain to loan agreements contracted during the current fiscal year. There 

were no new loan agreements. 

These rates cannot be applied to direct loans disbursed during the current reporting year to 

yield the subsidy expense. Subsidy expense for new loans disbursed in the current year results 

from disbursements of loans from current and prior year loan agreements. Subsidy expense 

reported in the current year also includes reestimates.
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

86

Schedule for Reconciling Subsidy Cost Allowance Balances

for Post-FY 1991 Direct Loans Dollars in Millions

As of September 30 2017 2016

Beginning Balance, Changes, and Ending Balance:

Beginning Balance of the Subsidy Cost Allowance $ 63.5 $ 31.2

Add: Subsidy Expense for Direct Loans Disbursed during the 

Reporting Years by Component

Interest Rate Differential Costs 1.0 (2.4)

Default Costs (Net of Recoveries) 11.8 15.9

Total of the above Subsidy Expense Components $ 12.8 $ 13.5

Adjustments

Subsidy Allowance Amortization (1.7) (7.2)

Total of the above Adjustment Components $ (1.7) $ (7.2)

Ending Balance of the Subsidy Cost Allowance before Reestimates $ 74.6 $ 37.5

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimates $ 6.1 $ 19.4

Technical/Default Reestimate (20.3) 6.6

Total of the above Reestimate Components (14.2) 26.0

Ending Balance of the Subsidy Cost Allowance $ 60.4 $ 63.5

Guaranteed Loans Outstanding Dollars in Millions

As of September 30

Outstanding 

Principal of 

Guaranteed 

Loans, Face 

Value

Amount of 

Outstanding 

Principal 

Guaranteed

2017

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 1,074.2 $ 1,074.2

Total $ 1,074.2 $ 1,074.2

2016

Guaranteed Loans Outstanding

Military Housing Privatization Initiative $ 958.9 $ 958.9

Total $ 958.9 $ 958.9

2017

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 115.3 $ 115.3

Total $ 115.3 $ 115.3

2016

New Guaranteed Loans Disbursed

Military Housing Privatization Initiative $ 84.2 $ 84.2

Total $ 84.2 $ 84.2
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

87

Liabilities for Loan Guarantees Dollars in Millions

As of September 30 2017 2016

Liabilities for Loan Guarantee from Post- FY 1991 

(Present Value)

Military Housing Privatization Initiative $ 65.2 $ 70.9

Total Loan Guarantee Liability (Post-FY 1991) $ 65.2 $ 70.9

Total Loan Guarantee Liability $ 65.2 $ 70.9

Subsidy Expense for Loan Guarantees by Program

As of September 30 Dollars in Millions

2017 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization 

Initiative $ 0.0 $ 12.0 $ 0.0 $ 0.0 $ 12.0

Total $ 0.0 $ 12.0 $ 0.0 $ 0.0 $ 12.0

2016 Interest 

Differential Defaults Fees Other Total

New Loan Guarantees Disbursed

Military Housing Privatization 

Initiative $ 0.0 $ 12.0 $ 0.0 $ 0.0 $ 12.0

Total $ 0.0 $ 12.0 $ 0.0 $ 0.0 $ 12.0

2017 Modifications Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization 

Initiative $ 0.0 $ (3.3) $ (16.5) $ (19.8) $ (19.8)

Total $ 0.0 $ (3.3) $ (16.5) $ (19.8) $ (19.8)

2016 Modifications Interest Rate 

Reestimates

Technical 

Reestimates

Total 

Reestimates Total

Modifications and Reestimates

Military Housing Privatization 

Initiative $ 0.0 $ (2.0) $ (7.7) $ (9.7) $ (9.7)

Total $ 0.0 $ (2.0) $ (7.7) $ (9.7) $ (9.7)

2017 2016

Total Loan Guarantee

Military Housing Privatization 

Initiative $ (7.8) $ 2.3

Total $ (7.8) $ 2.3
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

88

Subsidy Rates for Loan Guarantees by Program

As of September 30, 2017

Interest 

Supplements Defaults

Fees and 

other 

Collections

Other Total

Budget Subsidy Rates for Loan Guarantees

Military Housing Privatization 

Initiative 0.0% 0.0% 0.0% 0.0% 0.0%

Subsidy rates pertain to loan agreements contracted during the current fiscal year. There 

were no new loan agreements.

These rates cannot be applied to loan guarantees agreed to during the current reporting year 

to yield the subsidy expense. Subsidy expense reported in the current year also includes 

reestimates.

Schedule for Reconciling Loan Guarantee Liability Balances

for Post-FY 1991 Loan Guarantees Dollars in Millions

As of September 30 2017 2016

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Loan Guarantee Liability $ 70.9 $ 66.5

Add: Subsidy Expense for Guaranteed Loans Disbursed during the 

Reporting Years by Component

Default Costs (Net of Recoveries) 12.0 12.0

Total of the above Subsidy Expense Components $ 12.0 $ 12.0

Adjustments

Interest Accumulation on the Liability Balance 2.1 2.1

Total of the above Adjustments $ 2.1 $ 2.1

Ending Balance of the Loan Guarantee Liability before Reestimates $ 85.0 $ 80.6

Add or Subtract Subsidy Reestimates by Component

Interest Rate Reestimate $ (3.3) $ (2.0)

Technical/Default Reestimate (16.5) (7.7)

Total of the above Reestimate Components $ (19.8) $ (9.7)

Ending Balance of the Loan Guarantee Liability $ 65.2 $ 70.9

Administrative Expenses

Administrative Expenses are limited to separately identified expenses for administering

pre-FY 1992 and post-FY 1991 Direct Loans and Loan Guarantee Programs. 
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

89

NOTE 9. INVENTORY AND RELATED PROPERTY

Inventory and Related Property Dollars in Millions

As of September 30 2017 2016

Inventory, Net $ 94,904.0 $ 94,832.4

Operating Materiel & Supplies, Net 171,049.9 159,304.7

Stockpile Materiel, Net 806.6 1,152.8

Total Inventory and Related Property $ 266,760.5 $ 255,289.9

Abnormal Balance

FY 2017 Inventory Available and Purchased for Resale includes a $7.2 million abnormal 

balance in USSGL 159100, Other Related Property. In FY 2016 the abnormal balance was 

$5.4 million. The issue has been identified and the Department is in the process of correcting in 

FY 2018.

Inventory, Net Dollars in Millions

2017

Valuation 

Method As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance

Inventory, 

Net

Inventory Categories

Available and Purchased for Resale $ 61,251.2 $ (49.2) $ 61,202.0 MAC, LAC

Held for Repair 35,051.3 (4,473.4) 30,577.9 MAC, LAC

Excess, Obsolete, and Unserviceable 869.3 (388.6) 480.7 NRV

Raw Materiel 1,083.4 0.0 1,083.4 MAC, LAC

Work in Process 1,560.0 0.0 1,560.0 MAC

Total Inventory, Net $ 99,815.2 $ (4,911.2) $ 94,904.0

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses MAC = Moving Average Cost

NRV = Net Realizable Value

Inventory, Net Dollars in Millions

2016 Valuation 

Method As of September 30

Inventory, 

Gross Value

Revaluation 

Allowance

Inventory, 

Net

Inventory Categories

Available and Purchased for Resale $ 61,871.8 $ 50.3 $ 61,922.1 MAC, LAC

Held for Repair 33,765.6 (3,646.6) 30,119.0 MAC, LAC

Excess, Obsolete, and Unserviceable 1,087.2 (646.1) 441.1 NRV

Raw Materiel 1,188.4 0.0 1,188.4 MAC, LAC

Work in Process 1,161.8 0.0 1,161.8 AC

Total Inventory, Net $ 99,074.8 $ (4,242.4) $ 94,832.4

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

AC = Actual Cost

MAC = Moving Average Cost

NRV = Net Realizable Value
U.S. Department of Defense Agency Financial Report for FY 2017

Financial Section

90

Inventory Restrictions

The following are the categories of inventory which are subject to restrictions on use, sale, 

or disposition: 

• War reserve materiel valued at $2.6 billion in FY 2017 ($2.5 billion in FY 2016);

• Defense Commissary Agency inventory valued at $365.8 million in FY 2017

($404.0 million in FY 2016), consisting of grocery, meat, and produce items, limited for 

resale to authorized commissary patrons; and

• Dispositions pending litigation or negotiation valued at $ 134.3 million in FY 2017

($119.1 million in FY 2016).

There are no known restrictions on inventory disposition related to environmental or other 

liabilities.

General Composition of Inventory

Inventory includes spare and repair parts, clothing and textiles, and fuels held for sale. 

Inventory is tangible personal property such as:

• Raw materials to be consumed in the production of goods for sale or in the provision of 

service for a fee. 

• Work in process awaiting completion. 

• Finished goods held for sale, or held for repair and eventual sale. 

The Department assigns inventory items to a category based on asset type and condition.

Items awaiting sale, disposal, or reuse are valued at $480.7 million in FY 2017 and 

$441.1 million in FY 2016.

Operating Materiel and Supplies, Net Dollars in Millions

2017

Valuation 

Method As of September 30

OM&S, 

Gross Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 140,300.4 $ 0.0 $ 140,300.4 LAC, MAC

Held for Repair 30,749.5 0.0 30,749.5 LAC, MAC

Excess, Obsolete, and Unserviceable 2,458.3 (2,458.3) 0.0 NRV

Total OM&S $ 173,508.2 $ (2,458.3) $ 171,049.9

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

MAC = Moving Average Cost

NRV = Net Realizable Value
U.S. Department of Defense Agency Financial Report for FY 2017

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OM&S Restrictions

Some munitions included in OM&S are restricted due to condition. Restricted munitions 

are considered obsolete or unserviceable when they cannot meet performance requirements. 

However, obsolete and unserviceable OM&S may be used in emergency combat situations when 

no other suitable munitions are immediately available.

General Composition of OM&S

OM&S include spare and repair parts, ammunition, tactical missiles, aircraft configuration 

pods, and centrally managed aircraft engines held for consumption. The Department assigns 

OM&S items to a category based on asset type and condition.

Other Disclosures

The Federal Accounting Standards Advisory Board issued Statement of Federal Financial 

Accounting Standards (SFFAS) 48, “Opening Balances for Inventory, Operating Materials and 

Supplies, and Stockpile Materials” permitting alternative methods in establishing opening 

balances. SFFAS 48 is effective for periods beginning after September 30, 2016 with early 

implementation allowed. Some activities within the Department used the deemed cost measures 

from this standard for FY 2016; additional components used the deemed cost measures from the 

standard in FY 2017 using a combination of standard price (selling price), latest acquisition cost, 

estimated historical cost, and historical cost as the basis for valuation.

Operating Materiel and Supplies, Net Dollars in Millions

2016

Valuation 

Method As of September 30

OM&S, 

Gross Value

Revaluation 

Allowance OM&S, Net

OM&S Categories

Held for Use $ 104,985.0 $ 25.3 $ 105,010.3 LAC, MAC

Held for Repair 54,294.4 0.0 54,294.4 LAC, MAC

Excess, Obsolete, and Unserviceable 2,149.6 (2,149.6) 0.0 NRV

Total OM&S $ 161,429.0 $ (2,124.3) $ 159,304.7

Legend for Valuation Methods:

LAC = Latest Acquisition Cost, adjusted for holding gains and losses

MAC = Moving Average Cost

NRV = Net Realizable Value
U.S. Department of Defense Agency Financial Report for FY 2017

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Stockpile Materiel Restrictions

Materiel held by the National Defense Stockpile (NDS) is restricted unless released by 

congressional action and made available for sale on the open market. Stockpile materiel may not 

be disposed except for: (1) necessary upgrading, refining, or processing; (2) necessary rotation to 

prevent deterioration; (3) determination as excess with potential financial loss if retained; or 

(4) authorization by law. 

Before selling any materiel, Congress must enact specific enabling legislation (e.g., the 

National Defense Authorization Act). When authorized to offer materiel for sale, NDS reclassifies 

from Materiel Held in Reserve to Materiel Held for Sale. 

General Composition of Stockpile Materiel

Due to statutory requirements, the Department holds strategic and critical stockpile 

materiel for use in national defense, conservation, or national emergencies. The estimated market 

price of stockpile materiel as of September 30, 2017, is $1.1 billion ($1.2 billion in FY 2016).

Stockpile Materiel, Net Dollars in Millions

2017

Valuation 

Method

As of September 30

Stockpile, 

Materiel 

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel, 

Net

Stockpile Materiel Categories

Held for Sale $ 19.6 $ 0.0 $ 19.6 AC, LCM

Held for Reserve for Future Sale 787.0 0.0 787.0 AC, LCM

Total Stockpile Materiel $ 806.6 $ 0.0 $ 806.6

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or 

Market

Stockpile Materiel, Net Dollars in Millions

2016

Valuation 

Method

As of September 30

Stockpile, 

Materiel 

Amount

Allowance for 

Gains 

(Losses)

Stockpile, 

Materiel, 

Net

Stockpile Materiel Categories

Held for Sale $ 4.2 $ 0.0 $ 4.2 AC, LCM

Held for Reserve for Future Sale 1,148.6 0.0 1,148.6 AC, LCM

Total Stockpile Materiel $ 1,152.8 $ 0.0 $ 1,152.8

Legend for Valuation Methods:

AC = Actual Cost LCM = Lower of Cost or 

Market
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 10. GENERAL PP&E, NET

General PP&E, Net Dollars in Millions

2017

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book 

Value

Major Asset Classes

Land N/A N/A $ 10,615.4 N/A $ 10,615.4

Buildings, Structures, and 

Facilities S/L 35, 40 or 

451 407,135.0 (248,252.3) 158,882.7

Leasehold Improvements S/L Lease 

term

560.2 (293.2) 267.0

Software S/L 2 – 5 or 

10 9,069.5 (4,787.3) 4,282.2

General Equipment S/L Various 1,103,474.6 (637,223.7) 466,250.9

Assets Under Capital Lease S/L Lease 

term

353.7 (242.7) 111.0

Construction-in-Progress N/A N/A 109,992.1 N/A 109,992.1

Other N/A N/A 11,306.8 (0.3) 11,306.5

Total General PP&E $ 1,652,507.3 $ (890,799.5) $ 761,707.8

1 Based on a periodic reevaluation of useful lives, DoD management adjusted the Estimated Useful Lives of

Buildings, Structures, and Facilities as follows: 45 years (Buildings), 35 Years (Structures), and 40 Years ( Linear 

Structures).

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable

General PP&E, Net Dollars in Millions

2016

As of September 30

Depreciation/

Amortization 

Method

Service 

Life

Acquisition 

Value

(Accumulated 

Depreciation/

Amortization)

Net Book 

Value

Major Asset Classes

Land N/A N/A $ 10,658.7 N/A $ 10,658.7

Buildings, Structures, and 

Facilities S/L 20 or 40 384,144.7 (230,145.3) 153,999.4

Leasehold Improvements S/L Lease 

term

584.9 (265.3) 319.6

Software S/L 2 – 5 or 

10 9,464.5 (6,043.5) 3,421.0

General Equipment S/L 5 or 10 1,054,528.7 (639,666.1) 414,862.6

Assets Under Capital Lease S/L Lease 

term

353.7 (226.0) 127.7

Construction-in-Progress N/A N/A 118,089.1 N/A 118,089.1

Other N/A N/A 10,250.1 (11.0) 10,239.1

Total General PP&E $ 1,588,074.4 $ (876,357.2) $ 711,717.2

Legend for Valuation Methods: S/L = Straight Line N/A = Not Applicable
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Assets Under Capital Lease Dollars in Millions

As of September 30 2017 2016

Entity as Lessee, Assets Under Capital Lease

Land and Buildings $ 0.7 $ 0.7

Equipment 353.0 353.0

Accumulated Amortization (242.7) (226.0)

Total Capital Leases $ 111.0 $ 127.7

Other Disclosures

The Department has use of overseas land, buildings, and other facilities obtained through 

international treaties and agreements negotiated by the Department of State. Treaty covenants 

restrict the Department’s use and disposal of real property (land and buildings) located outside the 

United States.

The Department does not have acquisition value for all General Property, Plant, and 

Equipment (PP&E) and uses several cost methodologies to provide General PP&E values for 

financial statement reporting purposes. The Federal Accounting Standards Advisory Board issued 

SFFAS 50, “Establishing Opening Balances for General Property, Plant and Equipment”

permitting alternative methods in establishing opening balances for General PP&E. Some 

activities in the Department used the alternative valuation methods from this standard for FY 2016; 

additional components used the alternative valuation methods under the standard in FY 2017 using 

historical records such as expenditure data, contracts, budget information, and engineering 

documentation as the method of valuation. Extensive efforts are underway resulting in changes in 

asset values to include the exclusion of land and land rights from opening balances in FY 2018. 

Other General PP&E includes Real Property held in Caretaker Status. Caretaker Status is 

defined as the Department’s property being held awaiting disposition, sale, or transfer.

Heritage Assets and Stewardship Land 

The Department’s policy is to preserve its heritage assets including items of historical, 

cultural, educational, or artistic importance. The Department, with minor exceptions, uses the 

buildings and stewardship land in its daily activities and includes the buildings on the Balance 

Sheet as multi-use heritage assets. 

Heritage assets within the Department consist of buildings and structures, archeological 

sites, and museum collections. The Department defines these as follows:

• Buildings and Structures are listed, or eligible for listing, on the National Register of 

Historic Places, including multi-use heritage assets. 

• Archeological Sites are listed, or eligible for listing, on the National Register of Historic 

Places in accordance with Section 110 of the National Historic Preservation Act.

• Museum Collection Items are considered unique due to historical, natural, cultural, 

educational, artistic, technical, or architectural significance.
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The Department is unable to identify which of the heritage assets and stewardship land 

were added through donation or devise due to limitations of the Department’s systems. 

Differences in heritage assets quantities between the previously reported FY 2016 ending 

and the FY 2017 beginning unit counts reported in the table below resulted from periodic reviews.

Heritage Assets 

Categories Measure 

Quantity

Beginning 

Balance Additions Deletions Ending Balance

Buildings and Structures Each 51,772 564 391 51,945

Archeological Sites Each 31,319 701 703 31,317

Museum Collection Items 

(Objects, not including fine art) Each 1,245,099 22,406 14,012 1,253,493

Museum Collection Items (Objects, 

fine art) Each 96,348 811 209 96,950

Stewardship land includes both land and land rights owned by the Department, but not 

acquired for, or in connection with, items of General PP&E. All land provided to the Department 

from the public domain at no cost, regardless of its use, is classified as Stewardship Land.

Stewardship land is categorized and reported in acres based on the predominant use of the 

land. The three categories of Stewardship land held in public trust are: State Owned Land, 

Withdrawn Public Land, and Public Land. The other categories of Stewardship land are not held 

in public trust.

The Department’s stewardship land consists mainly of mission essential land. Differences 

in the stewardship land quantities between the previously reported FY 2016 ending and the 

FY 2017 beginning unit counts reported in the table below resulted from periodic reviews.

Stewardship Land Acres in Thousands

Facility 

Code Predominant Land Use Categories Beginning Balance Additions Deletions Ending Balance 

9110 Government Owned Land 6,542 0 1 6,541

9111 State Owned Land 6 0 1 5

9120 Withdrawn Public Land 15,455 1 227 15,229

9130 Licensed and Permitted Land 945 3 0 948

9140 Public Land 16 0 0 16

9210 Land Easement 378 1 0 379

9220 In-leased Land 124 0 1 123

9230 Foreign Land 297 1 0 298

Grand Total 23,539

Total – All Other Lands 8,289

Total – Stewardship Lands 15,250
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NOTE 11. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Millions

As of September 30 2017 2016

Intragovernmental Liabilities Not Covered by Budgetary Resources

Accounts Payable 0.0 0.1

Debt 0.8 1.0

Other Liabilities 1,875.0 1,929.9

Total Intragovernmental Liabilities Not Covered by Budgetary 

Resources $ 1,875.8 $ 1,931.0

Non-Federal Liabilities Not Covered by Budgetary Resources

Accounts Payable $ 1,150.2 $ 762.2

Military Retirement and Other Federal Employment Benefits 1,477,502.2 1,500,390.0

Environmental and Disposal Liabilities 65,032.9 59,466.8

Other Liabilities 14,971.8 12,439.6

Total Non-Federal Liabilities Not Covered by Budgetary Resources $ 1,558,657.1 $ 1,573,058.6

Total Liabilities Not Covered by Budgetary Resources $ 1,560,532.9 $ 1,574,989.6

Total Liabilities Covered by Budgetary Resources $ 937,441.1 $ 847,910.8

Total Liabilities $ 2,497,974.0 $ 2,422,900.4

Liabilities Not Covered by Budgetary Resources includes liabilities requiring 

congressional action before budgetary resources can be provided.

Non-Federal Accounts Payable primarily represents liabilities in canceled appropriations, 

when paid, will be disbursed using current year funds.

Debt consists primarily of borrowing from the U.S. Treasury for capital improvements to 

the Washington Aqueduct Project expected to be completed by 2023. The related reimbursement 

to the Department from Arlington County and Falls Church, Virginia, is recorded as non-Federal 

accounts receivable. 

Environmental and Disposal Liabilities represents the Department’s liability for existing 

and anticipated environmental clean-up and disposal. Refer to Note 14, Environmental and 

Disposal Liabilities, for additional details.

Intragovernmental Other Liabilities consists primarily of unfunded liabilities for Federal 

Employees Compensation Act, Judgment Fund, and Unemployment Insurance.

Non-Federal Other Liabilities consists primarily of unfunded annual leave, contingent 

liabilities, and expected expenditures for disposal of conventional munitions.

Military Retirement and Other Federal Employment Benefits consists of various employee 

actuarial liabilities not due and payable during the current fiscal year. In FY 2017, these liabilities 

primarily consist of $913.6 billion in pension liabilities and $556.2 billion in health benefit 

liabilities. In FY 2016, the Department reported $906.1 billion in pension liabilities and 

$586.5 billion in health benefit liabilities. Refer to Note 17, Military Retirement and Other Federal 

Employment Benefits, for additional details.
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NOTE 12. ACCOUNTS PAYABLE

Accounts Payable Dollars in Millions

2017

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,573.8 N/A $ 1,573.8

Non-Federal Payables

(To the Public) 26,402.8 24.0 26,426.8

Total Accounts Payable $ 27,976.6 $ 24.0 $ 28,000.6

Accounts Payable Dollars in Millions

2016

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 1,922.4 N/A $ 1,922.4

Non-Federal Payables

(To the Public) 18,239.7 23.9 18,263.6

Total Accounts Payable $ 20,162.1 $ 23.9 $ 20,186.0

Other Disclosures

Accounts Payable include amounts owed to Federal and non-Federal entities for goods and 

services received by the Department. Buyer-side accounts payable are adjusted to agree with 

interagency seller-side accounts receivable by: (1) reclassifying amounts between Federal and 

non-Federal accounts payable, (2) accruing additional accounts payable and expenses, and 

(3) applying both supported and unsupported undistributed disbursements at the reporting entity 

level.
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NOTE 13. DEBT

Debt Dollars in Millions

2017

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 1,630.7 $ 0.1 $ 1,630.8

Total Agency Debt $ 1,630.7 $ 0.1 $ 1,630.8

Debt Dollars in Millions

2016

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt (Intragovernmental)

Debt to the Treasury $ 1,508.6 $ 122.1 $ 1,630.7

Total Agency Debt $ 1,508.6 $ 122.1 $ 1,630.7

The Department’s debt consists of interest and principal payments due to the 

U.S. Treasury. The Department borrows funds from the U.S. Treasury for MHPI and the 

Washington Aqueduct Capital Improvements Project. See Note 8 for more information pertaining 

to the Departments Direct Loan and Loan Guarantee programs related to MHPI.

U.S. Air Force Pararescuemen with the 38th Rescue Squadron jump from the back of an HC-130J Combat King II aircraft over 

Moody Air Force Base, Georgia, April 13, 2017. Pararescuemen are qualified experts in Airborne and Military Free Fall 

operations, to include high-altitude, low opening techniques.

Photo by Staff Sgt. Ryan Callaghan
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NOTE 14. ENVIRONMENTAL AND DISPOSAL LIABILITIES

Environmental and Disposal Liabilities Dollars in Millions

As of September 30 2017 2016

Environmental Liabilities–Non-Federal

Accrued Environmental Restoration Liabilities

Active Installations – Installation Restoration Program (IRP) and 

Building Demolition and Debris Removal (BD/DR) $ 13,063.8 $ 12,422.2

Active Installations – Military Munitions Response Program 

(MMRP) 3,354.3 3,677.4

Formerly Used Defense Sites – IRP & BD/DR 2,967.8 3,019.4

Formerly Used Defense Sites – MMRP 7,968.3 7,699.4

Other Accrued Environmental Liabilities – Non-BRAC

Environmental Corrective Action $ 917.9 $ 829.5

Environmental Closure Requirements 3,916.7 4,203.7

Environmental Response at Operational – Ranges 76.1 62.4

Asbestos 4,510.4 2,014.6

Non-Military Equipment 5.5 0.4

Other 1,786.5 2,220.7

Base Realignment and Closure Installations (BRAC)

Installation Restoration Program $ 3,732.9 $ 3,664.0

Military Munitions Response Program 713.5 730.5

Environmental Corrective Action/Closure Requirements 251.6 201.3

Asbestos 9.7 14.2

Environmental Disposal for Military Equipment/Weapons Programs

Nuclear Powered Military Equipment/Spent Nuclear Fuel $ 15,807.0 $ 14,562.2

Non-Nuclear Powered Military Equipment 137.0 0.0

Other Weapons Systems 354.6 202.4

Chemical Weapons Disposal Program

Chemical Demilitarization – Chemical Materials Agency (CMA) $ 2,671.4 $ 2,658.0

CAMD Demilitarization – Assembled Chemical Weapons 

Alternatives (ACWA) 6,073.1 4,488.0

Total Environmental Liabilities $ 68,318.1 $ 62,670.3

Other Accrued Environmental Liabilities, Non-Base Realignment and Closure (NonBRAC), Other consists primarily of Formerly Utilized Sites Remedial Action Program (FUSRAP) 

remediation of radiological contamination. The FUSRAP is a shared program between the 

Department and the Department of Energy’s U.S. Atomic Energy and Weapons Program.

The unrecognized portion of the estimated total cleanup costs associated with disposal of 

General Property, Plant, and Equipment (PP&E) is being reevaluated. 
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Types of Environmental Liabilities and Disposal Liabilities Identified

The Department has cleanup requirements for the Defense Environmental Restoration 

Program (DERP) for active installations, BRAC installations, and Formerly Used Defense Sites. 

The Department has additional cleanup requirements for active installations not covered by DERP, 

weapon systems programs, and chemical weapons disposal programs. The weapons systems 

program consists of chemical weapons disposal, nuclear powered aircraft carriers, nuclear powered 

submarines, and other nuclear ships. All cleanup efforts are performed in coordination with 

regulatory agencies, other responsible parties, and current property owners.

Applicable Laws and Regulations for Cleanup Requirements

The Department is required to clean up contamination from past waste disposal practices, 

leaks, spills, and other activity resulting in public health or environmental risk. The Department 

accomplishes this effort in coordination with regulatory agencies and, if applicable, other 

responsible parties and current property owners. The Department is also required to recognize 

closure and post-closure costs for its General PP&E and environmental corrective action costs for 

current operations. Each of the Department's major reporting entities is responsible for tracking 

and reporting all required environmental information related to environmental restoration costs, 

other accrued environmental costs, disposal costs of weapon systems, and environmental costs 

related to BRAC actions.

The Department follows the Comprehensive Environmental Response, Compensation, and 

Liability Act of 1980 (CERCLA), Superfund Amendments and Reauthorization Act of 1986 

(SARA), Resource Conservation and Recovery Act of 1976 (RCRA) or other applicable federal or 

state laws to clean up contamination. The CERCLA and RCRA require the Department to clean 

up contamination in coordination with regulatory agencies, current owners of property damaged 

by the Department, and third parties with partial responsibility for environmental restoration. 

Failure to comply with agreements and legal mandates puts the Department at risk of incurring 

fines and penalties.

Laws concerning cleanup requirements for nuclear-powered naval vessels govern the 

Department’s environmental policy and regulations. The Atomic Energy Act of 1954, as amended, 

assures the proper management of source, special nuclear, and byproduct materiel. The 

Department coordinates nuclear power actions with the Department of Energy. The 

Nuclear Waste Policy Act of 1982 requires owners and generators of high-level nuclear waste and 

spent nuclear fuel to pay their share of the cost of the program. The 

Low-Level Radioactive Waste Policy Amendments Act of 1985 provides for the safe and efficient 

management of low-level radioactive waste.

The Chemical Weapons Disposal Program is based on the National Defense Authorization 

Act (NDAA) for FY 1986 directing the Department to destroy the unitary chemical stockpile in 

accordance with the Chemical Weapons Convention Treaty.
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Methods for Assigning Total Cleanup Costs to Current Operating Periods

The Department uses engineering estimates and independently validated models to project 

environmental costs. The models include the Remedial Action Cost Engineering Requirements 

application and the Normalization of Data System. The Department validates the models in 

accordance with DoD Instruction 5000.61, “DoD Modeling and Simulation Verification, 

Validation, and Accreditation,” and estimates liabilities based on data received during preliminary 

assessment and site investigation. The Department primarily uses engineering estimates after 

obtaining extensive data during the remedial investigation/feasibility phase of the environmental 

project.

Once the environmental cost estimates are complete, the Department complies with 

accounting standards to charge costs to current operating periods. The Department expensed 

cleanup costs for General PP&E placed into service prior to October 1, 1997, unless costs are to

be recovered through user charges. As costs are recovered, the Department expenses cleanup costs 

associated with the asset life that has passed since the General PP&E was placed into service. The 

Department systematically recognizes the remaining cost over the life of the assets.

For General PP&E placed into service after September 30, 1997, the Department expenses 

associated environmental costs using two methods: physical capacity for operating landfills and 

life expectancy in years for all other assets. The Department expenses the full cost to clean up 

contamination for Stewardship PP&E when the asset is placed into service.

Nature of Estimates and the Disclosure of Information Regarding Possible Changes Due to 

Inflation, Deflation, Technology, or Applicable Laws and Regulations

The Department revised estimates resulting from previously unknown contaminants, reestimation based on different assumptions, and other changes in project scope. Although the 

Department is unaware of pending changes, environmental liabilities are subject to changes in laws 

and regulations, agreements with regulatory agencies, and advances in technology.

Uncertainty Regarding the Accounting Estimates Used to Calculate the Reported Environmental 

Liabilities

Accounting estimates for environmental liabilities use reasonable judgments and 

assumptions based on available information. Actual results may materially vary if agreements 

with regulatory agencies require remediation to a different degree than anticipated when 

calculating the estimates. Liabilities can be further affected if investigation of the environmental 

sites reveals contamination levels differing from estimate parameters.

The Department is responsible for environmental restoration and corrective action for 

buried chemical munitions and agents; however, it is unable to provide a reasonable estimate 

because the extent of the buried chemical munitions and agents is unknown. The Department also 

cannot provide a complete estimate for FUSRAP. The Department has ongoing studies and will 
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update its estimate as additional information is identified. In addition, the Department is in the 

process of evaluating completeness of its environmental liabilities. 

The Department may incur costs for restoration initiatives in conjunction with returning 

overseas Defense facilities to host nations. The Department is unable to provide a reasonable 

estimate because the extent of required restoration is unknown.

U.S. Army Sgt. Tyler Brady, with the 372nd Engineer Company, flattens gravel for the foundation at the St. Matthews School 

during exercise Beyond the Horizon 2017, in Pamona, Belize, May 1, 2017. Beyond the Horizon is a U.S. Southern Commandsponsored, Army South-led exercise designed to provide humanitarian and engineering services to communities in need, 

demonstrating U.S. support for Belize.

Photo by Spc. Gary Silverman
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NOTE 15. OTHER LIABILITIES

Other Liabilities Dollars in Millions

2017

As of September 30 Current Liability Noncurrent Liability Total

Intragovernmental

Advances from Others $ 1,418.0 $ 0.0 $ 1,418.0

Deposit Funds and Suspense 

Account Liabilities (141.4) 0.0 (141.4)

Disbursing Officer Cash 1,009.2 0.0 1,009.2

Judgment Fund Liabilities 562.1 0.0 562.1

FECA Reimbursement to the 

Department of Labor 518.2 620.6 1,138.8

Custodial Liabilities 191.1 2,119.3 2,310.4

Employer Contribution and 

Payroll Taxes Payable 519.7 0.0 519.7

Other Liabilities 201.0 0.0 201.0

Total Intragovernmental 

Other $ 4,277.9 $ 2,739.9 $ 7,017.8

Non-Federal

Accrued Funded Payroll and 

Benefits $ 5,961.9 $ 0.0 $ 5,961.9

Advances from Others 5,149.8 11.0 5,160.8

Deposit Funds and Suspense 

Accounts 3,007.5 0.0 3,007.5

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 1,136.7 58.5 1,195.2

Excess/Obsolete Structures 0.0 0.0 0.0

Conventional Munitions 

Disposal 0.0 6.0 6.0

Accrued Unfunded Annual 

Leave 10,433.7 0.0 10,433.7

Capital Lease Liability 0.0 0.0 0.0

Contract Holdbacks 540.2 6.2 546.4

Employer Contribution and 

Payroll Taxes Payable 629.9 0.0 629.9

Contingent Liabilities 619.5 8,215.1 8,834.6

Other Liabilities 295.9 0.0 295.9

Total Non-Federal Other 

Liabilities $ 27,775.1 $ 8,296.8 $ 36,071.9

Total Other Liabilities $ 32,053.0 $ 11,036.7 $ 43,089.7
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Other Disclosures

Advances from Others represent liabilities for collections received to cover future expenses 

or acquisition of assets.

Other Liabilities Dollars in Millions

2016

As of September 30 Current Liability Noncurrent Liability Total

Intragovernmental

Advances from Others $ 800.6 $ 0.0 $ 800.6

Deposit Funds and Suspense 

Account Liabilities 497.4 0.0 497.4

Disbursing Officer Cash 1,128.0 0.0 1,128.0

Judgment Fund Liabilities 530.4 0.0 530.4

FECA Reimbursement to the 

Department of Labor 538.5 662.1 1,200.6

Custodial Liabilities 916.3 2,138.7 3,055.0

Employer Contribution and 

Payroll Taxes Payable 658.8 0.0 658.8

Other Liabilities 212.8 0.0 212.8

Total Intragovernmental 

Other $ 5,282.8 $ 2,800.8 $ 8,083.6

Non-Federal

Accrued Funded Payroll and 

Benefits $ 5,813.0 $ 0.0 $ 5,813.0

Advances from Others 4,953.8 2.1 4,955.9

Deposit Funds and Suspense 

Accounts 2,223.8 0.0 2,223.8

Nonenvironmental Disposal 

Liabilities

Military Equipment 

(Nonnuclear) 154.7 47.0 201.7

Excess/Obsolete Structures 0.0 0.0 0.0

Conventional Munitions 

Disposal 0.0 6.0 6.0

Accrued Unfunded Annual 

Leave 10,242.4 0.0 10,242.4

Capital Lease Liability 0.0 0.0 0.0

Contract Holdbacks 783.3 0.8 784.1

Employer Contribution and 

Payroll Taxes Payable 529.6 0.0 529.6

Contingent Liabilities 313.2 7,121.4 7,434.6

Other Liabilities 230.5 0.0 230.5

Total Non-Federal Other 

Liabilities $ 25,244.3 $ 7,177.3 $ 32,421.6

Total Other Liabilities $ 30,527.1 $ 9,978.1 $ 40,505.2
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Deposit funds and Suspense Accounts represent liabilities for receipts held in suspense 

temporarily for distribution to another fund or entity or held as an agent for others and paid at the 

direction of the owner.

Disbursing Officer Cash represents liabilities for currency on hand, cash on deposit at 

designated depositories, cash in the hands of deputy disbursing officers, cashiers and agents, 

negotiable instruments on hand, etc.

Custodial Liabilities represents liabilities for collections reported as non-exchange 

revenues where the Department is acting on behalf of another Federal entity.

Intragovernmental Other Liabilities primarily consists of unemployment compensation 

liabilities.

Nonfederal Other Liabilities primarily consist of estimated costs for services provided; 

accrued liabilities for inventory owned and managed on behalf of foreign governments; and 

undistributed international tariff receipts.

The Department currently has no capital lease liability. However, the Department is part 

of an arrangement for Indefeasible Right of Use agreements allowing the Department access to 

portions of fiber optic, undersea cables. These agreements called for an upfront payment which 

cannot be refunded. Therefore, there are no future minimum lease payments. However, there are 

payments due annually for maintenance expenses. If the Department discontinues the agreement 

in accordance with the contract terms, it would no longer be responsible for future annual 

maintenance expenses.

Contingent Liabilities in both FYs 2016 and 2017 include $5.4 billion related to contracts 

authorizing progress payments based on cost as defined in the 

Federal Acquisition Regulation (FAR). In accordance with contract terms, specific rights to 

contractors’ work vests with the Federal Government when a specific type of contract financing 

payment is made. This action protects taxpayer funds in the event of contract nonperformance. 

These rights should not be misconstrued as rights of ownership. The Department is under no 

obligation to pay contractors amounts in excess of progress payments until delivery and 

government acceptance. Due to the probability the contractors will complete their efforts and 

deliver satisfactory products, and because the amount of contractor costs incurred but yet unpaid 

are estimable, the Department has recognized a contingent liability for the estimated unpaid costs 

that are considered conditional for payment pending delivery and government acceptance.

Total contingent liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under progress payments based on cost provisions within the FAR. Estimated contractor-incurred 

costs are calculated by dividing the cumulative unliquidated progress payments based on cost by 

the contract-authorized progress payment rate. The balance of unliquidated progress payments 

based on cost is deducted from the estimated total contractor-incurred costs to determine the 

contingency amount.
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NOTE 16. COMMITMENTS AND CONTINGENCIES

Legal Contingencies

The Department is a party in various administrative proceedings and legal actions related 

to claims for environmental damage, equal opportunity matters, and contractual bid protests. The 

Department has accrued contingent liabilities for legal actions where the Office of General Counsel 

(OGC) considers an adverse decision probable and the amount of loss is measurable. In the event 

of an adverse judgment against the Government, some of the liabilities may be payable from the 

U.S. Treasury Judgment Fund. The Department reports contingent liabilities in Note 15, Other 

Liabilities.

The Department reports 43 legal actions with individual claims greater than the 

Department’s FY 2017 materiality threshold of $152.3 million. These actions total approximately 

$1.5 trillion. Of this amount, the OGC classified claims totaling approximately $1.3 billion as 

“probable,” $5.8 billion as “reasonably possible,” $100.0 billion as “remote,” and $1.4 trillion as 

“unable to determine the probability of loss.” The Department also has 119 actions at 

approximately $6.6 billion above the individual Components’ thresholds, but below the 

Department’s materiality threshold.

Other Commitments and Contingencies

The Department is a party in numerous individual contracts containing clauses, such as 

price escalation, award fee payments, or dispute resolution, potentially resulting in a future outflow 

of budgetary resources. Currently, the Department's automated system processes have limited 

capability to capture these potential liabilities; therefore, the amounts reported may not fairly 

present the Department’s commitments and contingencies. Contingencies considered both 

measurable and probable have been recognized as liabilities. Refer to Note 15, Other Liabilities, 

for additional details.
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NOTE 17. MILITARY RETIREMENT AND OTHER FEDERAL EMPLOYMENT BENEFITS

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2017

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liabilities

Pension and Health Actuarial Benefits

Military Retirement Pensions $ 1,567,689.2 $ (654,078.5) $ 913,610.7

Military Pre Medicare-Eligible 

Retiree Health Benefits 252,512.9 0.0 252,512.9

Military Medicare-Eligible 

Retiree Health Benefits 526,986.1 (223,306.2) 303,679.9

Total Pension and Health 

Actuarial Benefits $ 2,347,188.2 $ (877,384.7) $ 1,469,803.5

Other Benefits

FECA $ 5,936.0 $ 0.0 $ 5,936.0

Voluntary Separation Incentive 

Programs 321.5 (130.4) 191.1

DoD Education Benefits Fund 998.7 (998.7) 0.0

Other 2,425.2 (853.6) 1,571.6

Total Other Benefits $ 9,681.4 $ (1,982.7) $ 7,698.7

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,356,869.6 $ (879,367.4) $ 1,477,502.2

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $1.1 trillion
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Military Retirement and Other Federal Employment Benefits Dollars in Millions

2017

As of September 30

Military 

Retirement 

Pensions

Military 

PreMedicare 

Eligible 

Retiree 

Health 

Benefits

Military 

MedicareEligible 

Retiree 

Health 

Benefits

Voluntary 

Separation 

Incentive 

Programs

DoD 

Education 

Benefits 

Fund

Beginning Actuarial Liability $ 1,490,292.5 $ 239,734.7 $ 557,806.2 $ 380.4 $ 1,215.9 

Normal Cost 27,428.0 9,384.3 11,152.7 0.0 144.4

Interest Cost 57,530.9 9,751.5 22,546.3 8.6 40.7

Plan Amendments (858.2) 0.0 0.0 0.0 0.0

Experience Losses (Gains) (1,610.8) (6,274.1) (14,310.7) (1.8) (81.3)

Other Factors 0.0 0.0 0.0 0.0 0.0

Subtotal: Expenses before Losses 

(Gains) from Actuarial 

Assumption Changes

82,489.9 12,861.7 19,388.3 6.8 103.8

Actuarial (Gain)/Loss due to:

Changes in Trend Assumptions 0.0 1,109.1 (53,632.9) 0.0 0.0

Changes in Assumptions Other 

than Trend 52,910.5 9,575.9 14,134.1 4.9 (32.6)

Subtotal: Losses (Gains) from 

Actuarial Assumption Changes 52,910.5 10,685.0 (39,498.8) 4.9 (32.6)

Total Expenses 135,400.4 23,546.7 (20,110.5) 11.7 71.2

Less Benefit Outlays 58,003.7 10,768.5 10,709.6 70.6 288.4

Total Changes in Actuarial 

Liability $ 77,396.7 $ 12,778.2 $ (30,820.1) $ (58.9) $ (217.2) 

Ending Actuarial Liability $ 1,567,689.2 $ 252,512.9 $ 526,986.1 $ 321.5 $ 998.7
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Military Retirement and Other Federal Employment Benefits Dollars in Millions

2016

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded Liabilities

Pension and Health Actuarial Benefits

Military Retirement Pensions $ 1,490,292.5 $ (584,180.9) $ 906,111.6

Military Pre Medicare-Eligible 

Retiree Health Benefits 239,734.7 0.0 239,734.7

Military Medicare-Eligible 

Retiree Health Benefits 557,806.2 (210,970.9) 346,835.3

Total Pension and Health 

Actuarial Benefits $ 2,287,833.4 $ (795,151.8) $ 1,492,681.6

Other Actuarial Benefits

FECA $ 5,931.9 $ 0.0 $ 5,931.9

Voluntary Separation Incentive 

Programs 380.4 (153.3) 227.1

DoD Education Benefits Fund 1,215.9 (1,215.9) 0.0

Other 2,475.7 (926.3) 1,549.4

Total Other Actuarial Benefits $ 10,003.9 $ (2,295.5) $ 7,708.4

Total Military Retirement and 

Other Federal Employment 

Benefits

$ 2,297,837.3 $ (797,447.3) $ 1,500,390.0

Actuarial Cost Method Used: Aggregate Entry-Age Method 

Assumptions: Effective Interest 

Market Value of Investments in Market-based and Marketable Securities: $1.0 trillion
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The Department complies with Statement of Federal Financial Accounting Standards

(SFFAS) 33, “Pensions, Other Retirement Benefits, and Other Postemployment Benefits: 

Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and 

Valuation Dates.” The standard requires the separate presentation of gains and losses from 

changes in long-term assumptions used to estimate liabilities associated with pensions, other 

retirement and postemployment benefits. SFFAS 33 also provides a standard for selecting the 

discount rate and valuation date used in estimating these liabilities.

Military Retirement Pensions

The Military Retirement Fund is a defined benefit plan authorized by the National Defense 

Authorization Act (NDAA) for FY 1984 to provide funds used to pay annuities and pensions to 

retired military personnel and their survivors. The DoD Board of Actuaries approves the longterm economic assumptions for inflation, salary, and interest. The actuaries calculate the actuarial 

Military Retirement and Other Federal Employment Benefits Dollars in Millions

2016

As of September 30

Military 

Retirement 

Pensions

Military 

PreMedicare 

Eligible 

Retiree 

Health 

Benefits

Military 

MedicareEligible 

Retiree 

Health 

Benefits

Voluntary 

Separation 

Incentive 

Programs

DoD 

Education 

Benefits 

Fund

Beginning Actuarial Liability $ 1,558,518.6 $ 220,876.2 $ 508,194.0 $ 453.1 $ 1,137.3 

Normal Cost 31,243.9 8,709.5 10,690.2 0.0 102.3

Interest Cost 63,367.2 9,208.4 21,074.3 11.5 37.9

Plan Amendments (18,677.2) (657.3) (5,184.3) 0.0 (31.1)

Experience Losses (Gains) (25,452.1) 11,118.0 29,782.8 (7.6) (31.0)

Other Factors 0.0 0.0 0.0 0.0 241.6

Subtotal: Expenses before Losses 

(Gains) from Actuarial 

Assumption Changes

50,481.8 28,378.6 56,363.0 3.9 319.7

Actuarial (Gain)/Loss due to:

Changes in Trend Assumptions 0.0 1,057.2 (9,522.1) 0.0 0.0

Changes in Assumptions Other 

than Trend (61,248.7) (497.4) 12,623.0 5.2 0.0

Subtotal: Losses (Gains) from 

Actuarial Assumption Changes (61,248.7) 559.8 3,100.9 5.2 0.0

Total Expenses (10,766.9) 28,938.4 59,463.9 9.1 319.7

Less Benefit Outlays 57,459.2 10,079.9 9,851.7 81.8 241.1

Total Changes in Actuarial 

Liability $ (68,226.1) $ 18,858.5 $ 49,612.2 $ (72.7) $ 78.6 

Ending Actuarial Liability $ 1,490,292.5 $ 239,734.7 $ 557,806.2 $ 380.4 $ 1,215.9
U.S. Department of Defense Agency Financial Report for FY 2017

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liabilities annually using economic assumptions and actual experience (e.g., mortality and 

retirement rates). The Blended Retirement System (BRS) is a new retirement benefit merging 

aspects of both a defined benefit annuity with a defined contribution account, through the Thrift 

Savings Plan (TSP). Military personnel with a start date on or after January 1, 2018 are 

automatically enrolled in BRS. Although all members serving as of December 31, 2017 are 

grandfathered under the existing retirement system, Active Duty, National Guard and Reserve 

personnel meeting established criteria may opt into BRS during calendar year 2018. Retiring 

members are given the option to receive a portion of their retired pay annuity in the form of a lump 

sum distribution.

The actuaries used the following assumptions to calculate the FY 2017 roll-forward 

amount:

Military Retirement Pensions Inflation Salary Interest

Fiscal Year 2017 0.3% (actual) 2.1% (actual) 3.9%

Fiscal Year 2018 2.0% (estimated) 2.1% (estimated) 3.7%

Long Term 1.7% 2.1% 3.7%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $785.0 billion

Assumed Interest Rate: 3.7%

Historically, the initial unfunded liability of the program was amortized over a 50-year 

period. Effective FY 2008, the initial unfunded liability is amortized over a 42-year period to 

ensure annual payments cover interest on the unfunded actuarial liability, with the last payment 

expected October 1, 2025. All subsequent gains and losses experienced by the system are 

amortized over a 30-year period. 

Military Retirement Health Benefits (MRHB) 

The MRHB are post-retirement benefits the Department provides to non-Medicare-eligible 

military retirees and other eligible beneficiaries through private sector health care providers and 

the Department’s medical treatment facilities. The actuaries calculate actuarial liabilities annually 

using assumptions and actual experience. For the FY 2017 actuarial liability calculation, actuaries 

used the following assumptions:

MRHB Medical Trend FY 2016 –

FY 2017

Ultimate Rate 

FY 2041

Non-Medicare Inpatient (Direct Care) 4.45% 4.20%

Non-Medicare Outpatient (Direct Care) 6.00% 4.20%

Non-Medicare Prescriptions (Direct Care) 5.80% 4.20%

Non-Medicare Inpatient (Purchased Care) 1.95% 4.20%

Non-Medicare Outpatient (Purchased Care) 3.30% 4.20%

Non-Medicare Prescriptions (Purchased Care) 3.91% 4.20%

U.S. Family Health Plan (USFHP) (Purchased Care) 4.03% 4.20%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Assumed Interest Rate: 3.8%
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Medicare-Eligible Retiree Health Care Fund (MERHCF) Benefits 

In accordance with National Defense Authorization Act (NDAA) for FY 2001, MERHCF 

accumulates funds to finance the health care program liabilities of Medicare-eligible retirees for 

all the Uniformed Services and specific Medicare-eligible beneficiaries. The DoD Board of 

Actuaries approves the long-term assumptions for medical trends and interest. The actuaries 

calculate the actuarial liabilities annually using actual experience (e.g., mortality and retirement 

rates, direct care costs, purchased care). The actuaries used the following assumptions to calculate 

the FY 2017 roll-forward amount:

MERHCF Benefits – Medical Trend FY 2016 –

FY 2017

Ultimate Rate 

FY 2041

Medicare Inpatient (Direct Care) 2.00% 4.20%

Medicare Outpatient (Direct Care) 4.00% 4.20%

Medicare Prescriptions (Direct Care) 4.00% 4.20%

Medicare Inpatient (Purchased Care) 1.00% 4.20%

Medicare Outpatient (Purchased Care) 3.00% 4.20%

Medicare Prescriptions (Purchased Care) 3.42% 4.20%

Medicare USFHP (Purchased Care) 2.56% 4.20%

Actuarial Cost Method Used: Aggregate Entry-Age Normal Method

Market Value of Investments in Market-Based and Marketable Securities: $283.1 billion

Assumed Interest Rate: 3.8%

The FY 2017 MERHCF liability includes Medicare liabilities for all Uniformed Services. 

The $527.0 billion liability includes $514.5 billion for the Department, $11.1 billion for the Coast

Guard, $1.3 billion for the Public Health Service, and $83.3 million for National Oceanic and 

Atmospheric Administration (NOAA). The FY 2016 $557.8 billion liability included 

$544.6 billion for the Department, $11.7 billion for the Coast Guard, $1.4 billion for the Public 

Health Service, and $87.0 million for NOAA. The FY 2017 contributions from each of the 

Uniformed Services were $7.0 billion from the Department, $175.5 million from the Coast Guard, 

$27.9 million from the Public Health Service, and $1.4 million from NOAA. The FY 2016 

contributions from each of the Uniformed Services were $6.6 billion from the Department, 

$169.0 million from the Coast Guard, $26.0 million from the Public Health Service, and 

$1.0 million from NOAA.

Federal Employees Compensation Act (FECA) 

The Department of Labor (DOL) annually determines the liability for future workers’ 

compensation benefits including the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases, plus a component for incurred-but-notreported claims. The liability is determined using historical benefit payment patterns related to a 

specific incurred period to predict the final payment related to that period. Consistent with past 

practice, these projected annual benefit payments have been discounted to present value based on 

interest rate assumptions on the U.S. Department of the Treasury’s Yield Curve for Treasury 
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Nominal Coupon Issues (the TNC Yield Curve) to reflect the average duration of income payments 

and medical payments. An interest rate for wage benefits of 2.7 percent was assumed for year one 

and 2.7 percent for year two and thereafter. An interest rate for medical benefits of 2.2 percent 

was assumed for year one and 2.2 percent for year two and thereafter. 

The DOL calculates this liability using wage inflation factors (cost of living adjustments 

or COLAs) and medical inflation factors (consumer price index medical or CPIM). The actual 

rates for these factors for charge back year (CBY) 2017 were also used to adjust the methodology’s 

historical payments to current year constant dollars. The compensation COLAs and CPIMs used 

in the projections for various charge back years were as follows:

Federal Employees Compensation Act (FECA)

CBY COLA CPIM

2018 1.22% 3.20%

2019 1.35% 3.52%

2020 1.59% 3.80%

2021 1.99% 3.99%

 2022+ 2.26% 3.91%

To test the reliability of the model discussed above, DOL made comparisons between 

projected payments in the last year to actual amounts, by agency. Changes in the liability from 

last year’s analysis to this year’s analysis were also examined by agency, with any significant 

differences by agency inspected in greater detail. DOL concluded that the model has been stable 

and has accurately projected the actual payments by agency.

DoD Education Benefits Fund (EBF)

The EBF was established by National Defense Authorization Act (NDAA) for FY 1985 to 

recruit and retain military members and aid in the readjustment of military members to civilian 

life. The actuaries calculate the actuarial liability annually based on the assumed interest rate of 

3.5 percent as approved by the DoD Board of Actuaries. 

The Market Value of Investments in Market-based and Marketable Securities: $1.1 billion.

Voluntary Separation Incentive (VSI) Program 

The VSI Program was established by National Defense Authorization Act 

(NDAA) for FYs 1992 and 1993 to reduce the number of military personnel on active duty. The 

DoD Board of Actuaries approved the assumed annual interest rate of 2.1 percent used to calculate 

the actuarial liability. Since VSI is no longer offered, the actuarial liability calculated annually is 

expected to continue to decrease with benefit outlays and increase with interest cost. 
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The Market Value of Investments in Market-based and Marketable Securities: 

$138.6 million.

Other Federal Employment Benefits

Other Federal Employment Benefits primarily consists of an estimated liability for 

incurred-but-not-reported medical claims not processed prior to fiscal year-end and accrued 

pensions and annuities.

U.S. Marine Corps Recruits from Platoon 4045, N. Co., 4th Battalion, Recruit Training Regiment, practice sighting in on the range 

at Marine Corps Recruit Depot Parris Island, S.C., Oct. 24, 2016.Qualifying with the M16-A4 Service Rifle teaches recruits to 

understand the weapon system in order to keep with the concept “Every Marine a Rifleman”.

Photo by Lance Cpl. Sarah Stegall
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 18. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET COST

Costs and Exchange Revenue by Program Dollars in Millions

As of September 30 2017 2016

Military Retirement Benefits 

Gross Cost

Intragovernmental Cost $ 3.8 $ 3.6

Non-Federal Cost $ 96,626.3 $ 102,511.2

Total Cost $ 96,630.1 $ 102,514.8

Earned Revenue

Intragovernmental Revenue $ (29,360.3) $ (21,837.1)

Non-Federal Revenue $ 0.0 $ 0.0

Total Revenue $ (29,360.3) $ (21,837.1)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 13,411.6 $ (58,147.7)

Total Net Cost $ 80,681.4 $ 22,530.0

Civil Works

Gross Cost

Intragovernmental Cost $ 1,442.6 $ 1,507.1

Non-Federal Cost $ 7,725.6 $ 8,369.7

Total Cost $ 9,168.2 $ 9,876.8

Earned Revenue

Intragovernmental Revenue $ (946.2) $ (930.1)

Non-Federal Revenue $ (645.7) $ (599.4)

Total Revenue $ (1,591.9) $ (1,529.5)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 7,576.3 $ 8,347.3

Military Personnel

Gross Cost

Intragovernmental Cost $ 38,440.3 $ 52,639.3

Non-Federal Cost $ 101,072.3 $ 86,081.6

Total Cost $ 139,512.6 $ 138,720.9

Earned Revenue

Intragovernmental Revenue $ (1,256.3) $ (1,227.9)

Non-Federal Revenue $ (37.7) $ (43.1)

Total Revenue $ (1,294.0) $ (1,271.0)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 138,218.6 $ 137,449.9

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ (58,574.8) $ (59,942.9)

Non-Federal Cost $ 360,597.6 $ 345,593.8

Total Cost $ 302,022.8 $ 285,650.9
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Costs and Exchange Revenue by Program Dollars in Millions

As of September 30 2017 2016

Earned Revenue

Intragovernmental Revenue $ 10,635.1 $ 10,346.6

Non-Federal Revenue $ (68,445.8) $ (51,949.2)

Total Revenue $ (57,810.7) $ (41,602.6)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 10,657.4 $ 565.0

Total Net Cost $ 254,869.5 $ 244,613.3

Procurement

Gross Cost

Intragovernmental Cost $ 35,413.2 $ 24,284.4

Non-Federal Cost $ 50,468.1 $ 83,579.8

Total Cost $ 85,881.3 $ 107,864.2

Earned Revenue

Intragovernmental Revenue $ (2,594.4) $ (2,252.0)

Non-Federal Revenue $ (7,908.7) $ (1,629.5)

Total Revenue $ (10,503.1) $ (3,881.5)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 75,378.2 $ 103,982.7

Research, Development, Test & Evaluation

Gross Cost

Intragovernmental Cost $ 18,398.3 $ 16,802.2

Non-Federal Cost $ 65,982.5 $ 56,968.8

Total Cost $ 84,380.8 $ 73,771.0

Earned Revenue

Intragovernmental Revenue $ (8,331.6) $ (7,649.5)

Non-Federal Revenue $ (270.4) $ (255.6)

Total Revenue $ (8,602.0) $ (7,905.1)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 75,778.8 $ 65,865.9

Family Housing & Military Construction

Gross Cost

Intragovernmental Cost $ 591.0 $ 647.1

Non-Federal Cost $ 9,930.9 $ 11,699.5

Total Cost $ 10,521.9 $ 12,346.6

Earned Revenue

Intragovernmental Revenue $ (5,028.3) $ (4,910.6)

Non-Federal Revenue $ (105.2) $ (591.5)

Total Revenue $ (5,133.5) $ (5,502.1)

Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits $ 0.0 $ 0.0

Total Net Cost $ 5,388.4 $ 6,844.5
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Costs and Exchange Revenue by Source Dollars in Millions

As of September 30 2017 2016

Total Gross Cost

Intragovernmental Cost $ 35,714.4 $ 35,940.8

Non-Federal Cost $ 692,403.3 $ 694,804.4

Total Cost $ 728,117.7 $ 730,745.2

Total Earned Revenue

Intragovernmental Revenue $ (36,882.0) $ (28,460.6)

Non-Federal Revenue $ (77,413.5) $ (55,068.3)

Total Revenue $ (114,295.5) $ (83,528.9)

Total Losses/(Gains) from Actuarial Assumption Changes for Military 

Retirement Benefits for the Deparment $ 24,069.0 $ (57,582.7)

Costs Not Assigned to Programs $ 0.0 $ 0.0

(Less: Earned Revenues) Not Attributed to Programs $ 0.0 $ 0.0

Total Net Cost $ 637,891.2 $ 589,633.6

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of 

the Department supported by appropriations or other means. The intent of the SNC is to provide 

gross and net cost information related to the amount of output or outcome for a given program or 

organization administered by a responsible reporting entity. The Department’s current processes 

and systems capture costs based on appropriation groups as presented in the schedule above. The 

lower level costs for major programs are not presented as required by the Government Performance 

and Results Act of 1993 (GPRA). The Department is in the process of reviewing available data 

and developing a cost reporting methodology required by Statement of Federal Financial 

Accounting Standards (SFFAS) 4, “Managerial Cost Accounting Standards and Concepts,”

amended by SFFAS 30, “Inter-Entity Cost Implementation.”

Intragovernmental costs and revenues represent transactions between two reporting entities 

within the Federal Government. Non-Federal costs and revenues are exchange transactions 

between the reporting entity and a non-Federal entity. 

Buyer side expenses are adjusted to agree with internal seller side revenues. Expenses are 

generally adjusted by reclassifying amounts between Federal and non-Federal expenses. 

Intradepartmental revenues and expenses are then eliminated.

The information presented on the SNC is compiled from many financial systems and 

sources. Newer financial systems record costs based on business events (e.g., receipt of goods or 

services), while many older financial systems record costs based upon financial transactions (e.g., 

invoices). In addition, some costs (e.g., actuarial) are derived from non-financial systems.

Abnormal Balances

An abnormal balance occurs when the general ledger account balance reported is opposite 

of its normal balance, as it is defined by the United States Standard General Ledger (USSGL) 

“Accounts and Definitions” guidance in the U.S. Treasury Financial Manual. Operations, 
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Readiness & Support Intragovernmental Gross Cost and Earned Revenue on the SNC have 

abnormal balances of $58.6 billion and $10.6 billion, respectively in FY 2017, and abnormal 

balances of $59.9 billion and $10.3 billion, respectively in FY 2016. The current business practice 

is to report most eliminations in this program group resulting in the abnormal balance presentation. 

Net Cost of Operations reported on the Statement of Changes in Net Position includes an 

abnormal balance of $67.9 million in USSGL 711000, Gains on Disposition of Assets – Other. 

The abnormal balance is attributable to reversal of an FY 2016 erroneous entry to record Property 

Plant, and Equipment, that was subsequently determined to be fully depreciated.

Other Disclosures

The Department’s military retirement and postemployment costs are reported in 

accordance with SFFAS 33, “Pensions, Other Retirement Benefits, and Other Postemployment 

Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount 

Rates and Valuation Dates.” The standard requires the separate presentation of gains and losses 

from changes in long term assumptions used to estimate liabilities associated with pensions, other 

retirement benefits, and other postemployment benefits on the SNC. 

FY 2017 Nonfederal Cost and Nonfederal Revenue include a $30.2 billion increase due to 

a change in accounting for inventory valuation. Prior to FY 2017, one component recorded the 

net of inventory gains and losses as costs; FY 2017 gains and losses are reported separately as 

revenues and costs.
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NOTE 19. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET POSITION

Abnormal Balances

Budgetary Financing Sources, Other Adjustments on the Statement of Changes in Net 

Position includes an abnormal balance of $612.5 million in USSGL 591900, Revenue and Other 

Financing Sources – Collections. The balance was created from incomplete data conversion 

corrected during the pre-closing process.

Net Cost of Operations reported on the Statement of Changes in Net Position includes an 

abnormal balance of $67.9 million in USSGL 711000, Gains on Disposition of Assets – Other. 

The abnormal balance is attributable to reversal of an FY 2016 erroneous entry to record Property 

Plant, and Equipment, that was subsequently determined to be fully depreciated. 

Other Disclosures

The Federal Accounting Standards Advisory Board issued Statement of Federal Financial 

Accounting Standards (SFFAS) 48, “Opening Balances for Inventory, Operating Materials and 

Supplies, and Stockpile Materials” and SFFAS 50, “Establishing Opening Balances for General 

Property, Plant and Equipment.” These standards permit alternative methods in establishing 

opening balances and are effective for periods beginning after September 30, 2016 with early 

implementation allowed. Some activities within the Department used the principles of these 

standards for FY 2016; additional components used the principles of these standards in FY 2017. 

During FY 2017, the Department increased the beginning Cumulative Results of Operation 

by $37.3 billion through a prior period adjustment, from an FY 2016 ending balance of 

($469.5) billion to an FY 2017 adjusted beginning balance of ($432.2) billion. The Department 

increased the ending balance of Operating Materiel and Supplies by $24.4 billion, and increased 

the ending balance of General Property, Plant and Equipment by $12.9 billion. During FY 2016, 

the Department decreased the beginning Cumulative Results of Operations by $1.5 billion, 

decreased the ending balance of General PP&E by $2.2 billion, and increased the ending balance 

of Stockpile Materials by $0.7 billion.

In FY 2016, the Department increased the beginning Cumulative Results of Operations and 

General Equipment Construction in Progress by $31.4 billion to correct an error in valuation.

Reconciliation Differences

When complying with the Office of Management and Budget and U.S. Treasury guidance, 

Appropriations reported on the Statement of Budgetary Resources will exceed Appropriations 

Received on the Statement of Changes in Net Position. A reconciliation of these amounts is 

presented in the table below.
U.S. Department of Defense Agency Financial Report for FY 2017

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Period Ended September 30, 2017

Reconciliation of Appropriations on the Statement of Budgetary Resources to Appropriations 

Received on the Statement of Changes in Net Position

Dollars in Billions

Total

Appropriations, Statement of Budgetary Resources $ 777.0

Less: Appropriations Received, Statement of Changes in Net Position (710.7)

Total Reconciling Amount $ 66.3

Items Reported as Reductions to Appropriations, Statement of Budgetary Resources

 Permanent and Temporary Reductions $ (87.6)

 Miscellaneous items 0.8

Items Reported in Net Cost of Operations, Statement of Changes in Net Position

 Trust and Special Fund Receipts $ 153.1

Total Reconciling Items $ 66.3

Period Ended September 30, 2016

Reconciliation of Appropriations on the Statement of Budgetary Resources to Appropriations 

Received on the Statement of Changes in Net Position

Dollars in Billions

Total

Appropriations, Statement of Budgetary Resources $ 745.7

Less: Appropriations Received, Statement of Changes in Net Position (683.3)

Total Reconciling Amount $ 62.4

Items Reported as Reductions to Appropriations, Statement of Budgetary Resources

 Permanent and Temporary Reductions $ (79.5)

 Miscellaneous items 0.8

Items Reported in Net Cost of Operations, Statement of Changes in Net Position

 Trust and Special Fund Receipts $ 141.2

Total Reconciling Items $ 62.4

FY 2017 and FY 2016 Funds from Dedicated Collections are presented on a combined 

basis. The following tables summarize the elimination of intradepartmental activity between 

Funds from Dedicated Collections and all Other Fund types to arrive at the consolidated net 

position totals as presented on the Balance Sheet.
U.S. Department of Defense Agency Financial Report for FY 2017

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Period Ended September, 2017

Reconciliation of Combined Dedicated Collections and Other 

Funds to Consolidated Dedicated Collections and Other Funds

Dollars in 

Millions

Consolidating Net Position Combined Consolidating 

Eliminations Consolidated

Unexpended Appropriations – Dedicated Collections $ 0.0 $ 0.0 $ 0.0

Unexpended Appropriations – Other Funds 457,849.4 0.0 457,849.4

Cumulative Results of Operations – Dedicated Collections 14,618.9 (1,530.8) 16,149.7

Cumulative Results of Operations – Other Funds (404,727.9) 1,530.8 (406,258.7)

Total Net Position $ 67,740.4 $ 0.0 $ 67,740.4

Period Ended September, 2016

Reconciliation of Combined Dedicated Collections and Other 

Funds to Consolidated Dedicated Collections and Other Funds

Dollars in 

Millions

Consolidating Net Position Combined Consolidating 

Eliminations Consolidated

Unexpended Appropriations – Dedicated Collections $ 0.0 $ 0.0 $ 0.0

Unexpended Appropriations – Other Funds 450,026.1 0.0 450,026.1

Cumulative Results of Operations – Dedicated Collections 13,938.6 (1,555.1) 15,493.7

Cumulative Results of Operations – Other Funds (483,511.5) 1,555.1 (485,066.6)

Total Net Position $ (19,546.8) $ 0.0 $ (19,546.8)
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 20. DISCLOSURES RELATED TO THE STATEMENT OF BUDGETARY RESOURCES

Disclosures Related to the Statement of Budgetary Resources Dollars in Millions

As of September 30 2017 2016

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period $ 417,855.6 $ 401,966.2

Reconciliation Differences

When complying with the Office of Management and Budget and U.S. Treasury guidance, 

the FY 2017 Appropriations reported on the Statement of Budgetary Resources (SBR) exceed 

Appropriations Received on the Statement of Changes in Net Position by $66.3 billion and 

$62.4 billion in FY 2016. Reference Note 19, Disclosures Related to the Statement of Changes in 

Net Position, for additional details.

Differences exist between the amounts reported on the SBR and on the Budget of the U.S. 

Government (the Budget). The FY 2019 Budget will display the FY 2017 actual values and is 

expected to be published in February 2018. The FY 2018 Budget contains the actual values for 

FY 2016 reporting.

Reconciliation of Combined SBR to President’s Budget Dollars in Billions

Fiscal Year 2016 Actual

As of September 30

Budgetary 

Resources

Obligations 

Incurred

Distributed 

Offsetting 

Receipts

Agency 

Outlays, Net

Combined SBR – Budgetary and 

Non-Budgetary Financing Accounts $ 1,101.5 $ 945.8 $ 92.1 $ 728.4

Differences:

Adjustments to SBR 0.21 0.21 0.0 (0.1)1

Other (0.1)

2 (0.1)2 (0.1) 0.0

Budget of the U.S. Government $ 1,101.63 $ 945.9 $ 92.0 $ 728.3

1. The $0.2 billion difference reported above for Budgetary Resources and New Obligations and Upward 

Adjustments and the $(0.1) billion difference for Agency Outlays, Net are primarily due to late 

adjustments to the SBR not reported in the Governmentwide Treasury Account Symbol Adjusted Trial 

Balance System which flows to the Office of Management and Budget MAX website.

2. The $(0.1) billion difference reported above for Budgetary Resources and New Obligations and Upward 

Adjustments is primarily due to different reporting requirements on the SBR versus the Budget and other 

differences requiring research.

3. The source of the Budgetary Resources figure was the DoD SBR to SF133 Reconciliation Summary on 

the Office of Management and Budget MAX website, as it represents the official 2016 budget.
U.S. Department of Defense Agency Financial Report for FY 2017

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Permanent Indefinite Appropriations

The Department of Defense received the following permanent indefinite appropriations:

Department of the Army General Gift Fund (10 USC 2601(C)(1))

Department of the Navy General Gift Fund (10 USC 2601(C)(2))

Department of the Air Force General Gift Fund (10 USC 2601(C)(3))

Department of Defense General Gift Fund (10 USC 2601)

Disposal of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Lease of Department of Defense Real Property (40 USC 485(h)(2)(A)(B))

Foreign National Employees Separation Pay Account, Defense (10 USC 1581)

United States Naval Academy Gift and Museum Fund (10 USC 6973-4)

Ship Stores Profits, Navy (10 USC 7220, 31 USC 1321)

Burdensharing Contributions (10 USC 2350j) 

Forest Program (10 USC 2665) 

Medicare-Eligible Retiree Health Care Fund (10 USC 1111)

Military Retirement Fund (10 USC 1461)

Education Benefits Fund (10 USC 2006)

Host Nation Support for U.S. Relocation Activities (10 USC 2350k)

Hydraulic Mining Debris Reservoir (33 USC 683)

Maintenance and Operation of Dams and Other Improvements of Navigable Waters (16 USC 810(a))

Payments to States (33 USC 701c-3)

Wildlife Conservation (16 USC 670-670(f))

Ainsworth Bequest (31 USC 1321)

DoD Family Housing Improvement Fund (10 USC 2883 (a))

DoD Military Unaccompanied Housing Improvement Fund (10 USC 2883 (a))

Voluntary Separation Incentive Fund (10 USC 1175(h))

Rivers & Harbors Contributed Funds (33 USC 560, 701h)

Concurrent Receipt Accrual Payments to the Military Retirement Fund (10 USC 1466(b)(1))

Rocky Mountain Arsenal, Restoration (100 Statute, 4003 SEC 1367)

Homeowners Assistance Fund (10 USC 4551-4555; 42 USC 3374(d); Public Law 111-5)

Payments to Military Retirement Fund, Defense (10 USC, 1466)

Payment to Department of Defense Medicare-Eligible Retiree Health Care Fund (10 USC 1116(a))

Medicare-Eligible Retiree Health Fund Contribution, Navy (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Marine Corps (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Navy (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Marine Corps (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Army (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Air Force (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, Reserve Personnel, Air Force (10 USC 1116)

Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Air Force 

(10 USC 1116)

Department of Defense Vietnam War Commemoration Fund, Defense (PL 110-181, 122 Stat. 141 

(Sec. 598))
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The preceding permanent indefinite appropriations cover a wide variety of purposes to help 

the Department accomplish its missions. These purposes primarily include: (1) military retirees’ 

health care benefits, retirement and survivor pay, and education benefits for veterans; (2) wildlife 

habitat restoration and water resources maintenance; (3) relocation of armed forces within a host 

nation; (4) separation payments for foreign nationals; and (5) upkeep of libraries and museums.

Apportionment Categories for New Obligations and Upward Adjustments (Total)

Apportionment categories are determined in accordance with the guidance provided in

Office of Management and Budget (OMB) Circular No. A-11, “Preparation, Submission and 

Execution of the Budget.” Category A relates to appropriations for a specific period of time (e.g., 

Military Personnel appropriation), and Category B relates to appropriations for a specific project 

(e.g., Military Construction appropriation). The Department reported the following amounts of 

new obligations and upward adjustments (total):

Period Ended September 30, 2017 Dollars in Billions

Apportionment 

Category A

Apportionment 

Category B

Exempt From 

Apportionment

Total

Obligations Incurred – Direct $ 409.1 $ 237.9 $ 153.0 $ 800.0

Obligations Incurred –

Reimbursable 16.2 157.0 8.4 181.6

Total Obligations Incurred: $ 425.3 $ 394.9 $ 161.4 $ 981.6

Legal Arrangements Affecting the Use of Unobligated Balances

A portion of the Department’s unobligated balances represent trust fund receipts collected 

in the current fiscal year exceeding the amount needed to pay benefits or other valid obligations. 

These receipts are temporarily precluded from obligation by law due to a benefit formula or other 

limitation. The receipts, however, are assets of the funds and are available for obligation in the 

future. The Department operates within the constraints of fiscal law and has no additional legal 

arrangements affecting the use of unobligated balances.

Period Ended September 30, 2016 Dollars in Billions

Apportionment 

Category A

Apportionment 

Category B

Exempt From 

Apportionment

Total

Obligations Incurred – Direct $ 396.1 $ 227.9 $ 148.8 $ 772.8

Obligations Incurred –

Reimbursable 15.5 149.5 8.0 173.0

Total Obligations Incurred: $ 411.6 $ 377.4 $ 156.8 $ 945.8
U.S. Department of Defense Agency Financial Report for FY 2017

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Other Disclosures

In compliance with OMB guidance, $119.0 billion of FY 2017 General Fund 

appropriations received by the Department are also recognized on the SBR as appropriations 

received for trust and special funds and $115.5 billion in FY 2016. OMB guidance requires

duplicate reporting on the SBR of the Military Services’ contributions and U.S. Treasury’s 

payments to the Military Retirement Trust Fund and Medicare-Eligible Retiree Health Care Fund.

The SBR includes intra-entity transactions because the statements are presented as 

combined.

The Department utilizes borrowing authority for the Military Housing Privatization 

Initiative. Borrowing authority is used in compliance with OMB Circular No. A-129, “Policies for 

Federal Credit Programs and Non-Tax Receivables.”

In FY 2017 the Department received additional funding of $82.8 billion to cover 

obligations incurred above baseline operations in support of contingency operations and 

$58.6 billion in FY 2016.

U.S. Army Maj. Gen. Duane A Gamble, center, the commander of the 21st Theater Sustainment Command, participates in 

improvise explosive device training with U.S. Soldiers, assigned to the 702nd Explosive Ordnance Disposal (EOD) Company, 

16th Sustainment Brigade, during exercise Vanguard Proof at Pocek Range in Postonja, Slovenia, March 22, 2017. Vanguard 

Proof is a combined U.S. and Slovenian tactical military exercise designed to strengthen military relationships and increase 

readiness for both nations.

Photo by Paolo Bovo
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 21. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET

Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2017 2016

Resources Used to Finance Activities

Budgetary Resources Obligated:

Obligations incurred $ 981,610.9 $ 945,835.9

Less: Spending authority from offsetting collections and recoveries (-) (222,120.7) (219,272.4)

Obligations net of offsetting collections and recoveries $ 759,490.2 $ 726,563.5

Less: Distributed Offsetting receipts (-) (97,963.0) (92,078.2)

Net obligations $ 661,527.2 $ 634,485.3

Other Resources:

Donations and forfeitures of property $ 2.4 $ 1.8

Transfers in/out without reimbursement (+/-) 139.7 94.1

Imputed financing from costs absorbed by others 3,673.9 4,573.4

Other (+/-) (5,390.9) 12,291.0

Net other resources used to finance activities $ (1,574.9) $ 16,960.3

Total resources used to finance activities $ 659,952.3 $ 651,445.6

Resources Used to Finance Items not Part of the Net Cost of Operations

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided:

Undelivered Orders (-) $ (15,889.4) $ 30,209.2

Unfilled Customer Orders 3,327.5 1,738.6

Resources that fund expenses recognized in prior Periods (-) (31,928.9) (71,848.0)

Budgetary offsetting collections and receipts that do not affect Net Cost 

of Operations 559.3 929.9

Resources that finance the acquisition of assets (-) (106,271.6) (110,735.2)

Other resources or adjustments to net obligated resources that do not 

affect Net Cost of Operations:

Less: Trust or Special Fund Receipts Related to exchange in the 

Entity’s Budget (-) (255.7) (297.2)

Other (+/-) 5,384.0 (12,398.7)

Total resources used to finance items not part of the Net Cost of 

Operations $ (145,074.8) $ (162,401.4)

Total resources used to finance the Net Cost of Operations $ 514,877.5 $ 489,044.2

Components of the Net Cost of Operations that will not Require or Generate Resources in the Current Period

Components Requiring or Generating Resources in Future Period:

Increase in annual leave liability $ 244.5 $ 59.0

Increase in environmental and disposal liability 1,644.9 2,320.7

Upward/Downward reestimates of credit subsidy expense (+/-) (8.7) 40.3

Increase in exchange revenue receivable from the public (-) (16.9) 371.8

Other (+/-) 97,606.6 71,644.3

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 99,470.4 $ 74,436.1

Components not Requiring or Generating Resources:

Depreciation and amortization $ 14,885.1 $ 34,741.5

Revaluation of assets or liabilities (+/-) 2,170.2 (1,860.9)
U.S. Department of Defense Agency Financial Report for FY 2017

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Reconciliation of Net Cost of Operations to Budget Dollars in Millions

As of September 30 2017 2016

Other (+/-)

Trust Fund Exchange Revenue (51,990.0) (47,295.0)

Cost of Goods Sold 63,126.6 59,210.3

Operating Materiel and Supplies Used 39,100.3 51,872.9

Other (43,748.9) (70,515.5)

Total Components of Net Cost of Operations that will not Require or 

Generate Resources $ 23,543.3 $ 26,153.3

Total components of Net Cost of Operations that will not Require or 

Generate Resources in the current period $ 123,013.7 $ 100,589.4

Net Cost of Operations $ 637,891.2 $ 589,633.6

The Reconciliation of Net Cost of Operations to Budget reconciles the cost reflected on the 

Statement of Net Cost to the budgetary information on the Statement of Budgetary Resources. 

This is accomplished by aligning budgetary obligations and non-budgetary resources available 

with the cost of the Department’s operations.

Abnormal Balances

The FY 2017 Revaluation of assets or liabilities (+/-) includes an abnormal balance of 

$67.9 million in USSGL 711000, Gains on Disposition of Assets - Other due to the reversal of a 

gain erroneously recorded in FY 2016. This account balance will close to zero at the end of this 

fiscal year.

The FY 2017 Resources that finance the acquisition of assets includes an abnormal balance 

of $10.1 million in USSGL 880400, Purchases of Assets – Other. The Department is currently 

researching and anticipates correction in FY 2018.

Other Disclosures

Due to the Department’s financial systems limitations, budgetary data does not agree with 

proprietary expenses and capitalized assets. This difference is a previously identified deficiency. 

The following adjustments (absolute value) were made to balance the Reconciliation of 

Net Cost of Operations to Budget:

Adjustment to Reconcile Net Cost of Operations to Budget Dollars in millions

As of September 30 2017 2016

Resources that Finance the Acquisition of Assets $ 5,286.9 $ 8,380.6

Revaluation of Assets or Liabilities $ 2,763.7 $ 1,804.1

Other Components not Requiring or Generating Resources $ 1,950.2 $ 8,386.2

Total Amount $ 10,000.8 $ 18,570.9
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The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated as intra-agency budgetary transactions are not being eliminated:

• Obligations Incurred

• Less: Spending Authority from Offsetting Collections and Recoveries

• Obligations Net of Offsetting Collections and Recoveries

• Less: Offsetting Receipts

• Net Obligations

• Undelivered Orders

• Unfilled Customer Orders

Other Resources, Other primarily consists of non-exchange gains and losses to revalue 

assets, as well as reconcile the proprietary and budgetary amounts. 

Other Resources or Adjustments to Net Obligated Resources that Do Not Affect Net Cost 

of Operations, Other primarily consists of non-exchange gains and losses to revalue assets, as well 

as reconcile the proprietary and budgetary amounts. 

Components Requiring or Generating Resources in Future Period, Other consists primarily 

of future funded expenses.

Components not Requiring or Generating Resources, Other primarily consists of cost 

capitalization offsets, applied overhead, and other expenses not requiring budgetary resources.
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 22. DISCLOSURES RELATED TO INCIDENTAL CUSTODIAL COLLECTIONS

In FY 2017 The Department collected $1.5 million of incidental custodial revenues 

generated primarily from forfeitures of unclaimed money and property and $5.5 million in 

FY 2016. These funds are not available for use by the Department. At the end of each fiscal year, 

the accounts are closed and the balances are relinquished to the U.S. Treasury.

Airmen camouflage themselves during sniper training, Feb. 1, 2017, at Moody Air Force Base, Ga. Airmen had to prove they 

could neutralize a target without giving away their position. Airmen had two hours to crawl to a secluded spot, identify a target 

on a clipboard and fire their weapon without giving away their position.

Photo by Airman 1st Class Janiqua P. Robinson
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NOTE 23. FUNDS FROM DEDICATED COLLECTIONS

Funds from Dedicated Collections (Combined) Dollars in 

Millions

2017

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds

Total Funds 

from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 118.7 $ 1,279.5 $ 2,087.2 $ 3,485.4

Investments 9,095.3 0.0 1,279.3 10,374.6

Accounts and Interest Receivable 509.2 6.4 9.5 525.1

Other Assets 597.4 288.5 742.1 1,628.0

Total Assets $ 10,320.6 $ 1,574.4 $ 4,118.1 $ 16,013.1

Liabilities and Net Position

Accounts Payable and Other Liabilities 6.1 1,324.5 63.6 1,394.2

Total Liabilities $ 6.1 $ 1,324.5 $ 63.6 $ 1,394.2

Cumulative Results of Operations $ 10,314.5 $ 249.9 $ 4,054.5 $ 14,618.9

Total Liabilities and Net Position $ 10,320.6 $ 1,574.4 $ 4,118.1 $ 16,013.1

Statement of Net Cost

Program Costs $ 64.8 $ 318.7 $ 1,079.3 $ 1,462.8

Less Earned Revenue 0.0 (439.5) (282.9) (722.4)

Net Program Costs 64.8 (120.8) 796.4 740.4

Net Cost of Operations $ 64.8 $ (120.8) $ 796.4 $ 740.4

Statement of Changes in Net Position

Net Position Beginning of the Period $ 9,972.2 $ 232.9 $ 3,733.5 $ 13,938.6

Net Cost of Operations (64.8) 120.8 (796.4) (740.4)

Budgetary Financing Sources 407.1 0.0 1,023.3 1,430.4

Other Financing Sources 0.0 (103.8) 94.1 (9.7)

Change in Net Position $ 342.3 $ 17.0 $ 321.0 $ 680.3

Net Position End of Period $ 10,314.5 $ 249.9 $ 4,054.5 $ 14,618.9
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Funds from Dedicated Collections (Combined) Dollars in 

Millions

2016

As of September 30

Harbor 

Maintenance 

Trust Fund

Rivers and 

Harbors 

Contributed 

and Advance 

Fund

Other Funds

Total Funds 

from 

Dedicated 

Collections

Balance Sheet

Assets

Fund Balance with Treasury $ 112.1 $ 1,264.6 $ 2,147.0 $ 3,523.7

Investments 8,773.3 0.0 864.1 9,637.4

Accounts and Interest Receivable 492.4 0.6 7.6 500.6

Other Assets 600.5 260.8 777.4 1,638.7

Total Assets $ 9,978.3 $ 1,526.0 $ 3,796.1 $ 15,300.4

Liabilities and Net Position

Accounts Payable and Other Liabilities 6.1 1,293.1 62.6 1,361.8

Total Liabilities $ 6.1 $ 1,293.1 $ 62.6 $ 1,361.8

Cumulative Results of Operations $ 9,972.2 $ 232.9 $ 3,733.5 $ 13,938.6

Total Liabilities and Net Position $ 9,978.3 $ 1,526.0 $ 3,796.1 $ 15,300.4

Statement of Net Cost

Program Costs $ 86.3 $ 162.9 $ 1,244.9 $ 1,494.1

Less Earned Revenue 0.0 (428.5) (277.0) ( 705.5)

Net Program Costs 86.3 ( 265.6) 967.9 788.6

Net Cost of Operations $ 86.3 $ ( 265.6) $ 967.9 $ 788.6

Statement of Changes in Net Position

Net Position Beginning of the Period $ 9,897.9 $ (14.2) $ 3,339.5 $ 13,223.2

Net Cost of Operations (86.3) 265.6 (967.9) (788.6)

Budgetary Financing Sources 160.6 0.0 1,311.4 1,472.0

Other Financing Sources 0.0 (18.5) 50.5 32.0

Change in Net Position $ 74.3 $ 247.1 $ 394.0 $ 715.4

Net Position End of Period $ 9,972.2 $ 232.9 $ 3,733.5 $ 13,938.6

The Statement of Federal Financial Accounting Standards (SFFAS) 43, “Funds from 

Dedicated Collections: Amending SFFAS 27, Identifying and Reporting Earmarked Funds,”

requires disclosure of Funds from Dedicated Collections separate from All Other Funds on the 

Balance Sheet. Funds must meet three criteria to be classified as funds from dedicated collections: 

(1) a statute committing the use of specifically-identified revenues provided by non-Federal 

sources for designated purposes; (2) explicit authority to retain the revenues; and (3) a requirement 

to separately account and report on the revenues. The Department’s funds from dedicated 

collections are either special or trust funds and use both receipt and expenditure accounts to report 

activity to U.S. Treasury. There has been no legislation significantly altering the purposes of the 

funds.
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The Total column is shown as combined and relates only to Funds from Dedicated 

Collections. The net position amounts in the Total column will not equal the amounts reported as 

Funds from Dedicated Collections on the Balance Sheet, as the Balance Sheet reflects consolidated 

Funds from Dedicated Collections. Reference Note 19, Disclosures Related to the Statement of 

Changes in Net Position, for additional details.

The Department has the following Funds from Dedicated Collections:

Harbor Maintenance Trust Fund, title 26 U.S. Code, section 9505. The United States Army 

Corps of Engineers (USACE) Civil Works mission is funded by the Energy and Water 

Development Appropriations Act. The Water Resources Development Act of 1986 covers a 

portion of USACE operations and maintenance costs for deep draft navigation. The Harbor 

Maintenance Trust Fund is available for making expenditures to carry out the functions specified 

in the Act and for the payment of all administrative expenses incurred by the U.S. Treasury, 

USACE, and the Department of Commerce. Taxes collected from imports, domestics, passengers, 

and foreign trade are deposited into the Trust Fund. The Bureau of the Fiscal Service manages 

and invests for the Trust Fund.

Rivers and Harbors Contributed and Advance Funds, title 33 U.S. Code, 

sections 701h, 702f, and 703. Whenever any state or political subdivision offers to advance funds 

for a flood control project authorized by law, the Secretary of the Army may accept such funds 

and expend them in the immediate performance of such work. The funding is used to construct, 

improve, and maintain levees, water outlets, flood control, debris removal, rectification and 

enlargement of river channels, etc. in the course of flood control and river and harbor maintenance.

Other Funds from Dedicated Collections

Special Recreation Use Fees, title 16 U.S. Code, section 460I-6a note. The USACE 

charges and collects Special Recreation Use Fees at campgrounds located at lakes and reservoirs 

under their jurisdiction. Allowable fees include daily use fees, admission fees, recreational fees, 

annual pass fees, and other permit type fees. Receipts cover operation and maintenance of 

recreational sites.

Hydraulic Mining in California, Debris, title 33 U.S. Code, section 683. Operators of 

hydraulic mines allowing debris to flow to a body restrained by a dam or other work erected by 

the California Debris Commission are required to pay an annual tax as determined by the 

Commission. The USACE collects taxes and expends funds under the direction of the Department 

of the Army. Funds repay advances by the Federal Government or other agencies for construction, 

restraining works, settling reservoirs, and maintenance.

Payments to States, Flood Control Act of 1954, title 33 U.S. Code, section 701c-3. The 

USACE collects receipts for the leasing of lands acquired by the U.S. for flood control, navigation, 

and allied purposes (including the development of hydroelectric power). Funds received are 
U.S. Department of Defense Agency Financial Report for FY 2017

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133

appropriated and made available for use in the following fiscal year with seventy-five percent of 

funds provided to the state where the property is located. States may expend the funds for the 

benefit of public schools and public roads of the counties where the property is located, or for 

defraying county government expenses.

Maintenance and Operation of Dams and Other Improvements of Navigable Waters, 

title 16 U.S. Code, sections 803(f) and 810. The Federal Energy Regulatory Commission (FERC) 

assesses charges against licensees when a reservoir or other improvement is constructed by the 

U.S. All proceeds from Indian reservations are credited to the Indians of the reservations. All 

other proceeds arising from licenses, except those established by the FERC for administrative 

reimbursement, are paid to the U.S. Treasury and allocated for specific uses. The Department of 

the Army is allocated fifty percent of charges from all licenses, except licenses for the occupancy 

and use of public lands and national forests. These funds are deposited in a special fund and used 

for maintenance, operation, and improvement of dams and other navigation structures owned by 

the U.S., or in construction, maintenance, or operation of headwater, or other improvements to 

navigable waters of the U.S.

Fund for Non-Federal Use of Disposal Facilities (for dredged material), title 33 U.S. Code 

section 2326. Non-Federal interests may use dredged material disposal facilities under the 

jurisdiction of, or managed by, the Secretary of the Army if the Secretary determines use will not 

reduce the availability of the facility for project purposes. Fees may be imposed to recover capital, 

operation, and maintenance costs of the disposal facility from which the fees were collected.

Coastal Wetlands Restoration Trust Fund and Coastal Wetlands Planning, Protection, and 

Restoration Act, title 16 U.S. Code, sections 3951-3956. The USACE, Environmental Protection 

Agency, and Fish and Wildlife Service are authorized to work with the State of Louisiana to 

achieve a goal of "no net loss of wetlands" in coastal Louisiana. The USACE is also responsible 

for allocating funds. Federal contributions are 75 percent of project costs or 85 percent if the state 

has an approved Coastal Wetlands Conservation Plan. This Trust Fund receives funding from the 

Sport Fish Restoration and Boating Trust Fund 

Inland Waterways Trust Fund, title 26 U.S. Code, section 9506. Excise taxes from the 

public are used by USACE for navigation, construction, and rehabilitation projects on inland 

waterways. The BFS manages and invests for the Trust Fund.

Defense Commissary Agency Surcharge Trust Fund, title 10 U.S. Code, section 2685.

Surcharge on sales of commissary goods finance the Commissary System operating expenses and 

capital purchases, precluded by law from being paid with appropriated funds. Revenue is 

generated through a five percent surcharge applied to each sale. These funds finance commissaryrelated information technology investments, equipment, advance design modifications to prior 

year construction projects, and maintenance and repair of facilities and equipment.
U.S. Department of Defense Agency Financial Report for FY 2017

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NOTE 24. FIDUCIARY ACTIVITIES

Schedule of Fiduciary Activity Dollars in Millions

As of September 30 2017 2016

Fiduciary net assets, beginning of year $ 80.1 $ 80.9

Contributions 73.5 90.4

Investment earnings 0.3 0.3

Distributions to and on behalf of beneficiaries (76.1) (91.5)

Increase/(Decrease) in fiduciary net assets (2.3) (0.8)

Fiduciary net assets, end of period $ 77.8 $ 80.1

Schedule of Fiduciary Net Assets Dollars in Millions

As of September 30 2017 2016

Fiduciary Assets

Cash and cash equivalents $ 77.8 $ 80.1

Total Fiduciary Net Assets $ 77.8 $ 80.1

Fiduciary activities exist when the Department has collected, received, held, or made 

disposition of assets on behalf of an individual or non-Federal entity. Fiduciary assets are not 

recognized on the Balance Sheet.

Public Law 89-538 authorized the Department, through the Savings Deposit Program, to 

collect voluntary contributions from members of the Armed Forces serving in designated areas.

These contributions and earned interest are deposited in the U.S. Treasury on behalf of the 

members.
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NOTE 25. OTHER DISCLOSURES

Operating leases do not transfer the benefits and risks of ownership as compared to capital 

leases. Payments are expensed over the life of the lease. Future year cost projections use the 

Consumer Price Index. Office space is the largest component of land and building leases. Other 

leases are primarily commercial leases with the general public and include automobile leases.

Other Disclosures Dollars in Millions

2017 – Asset Category

As of September 30

Land and 

Buildings Equipment Other Total

Entity as Lessee – Operating Leases

Future Payments Due

Fiscal Year 2018 $ 732.5 $ 8.8 $ 78.1 $ 819.4

Fiscal Year 2019 531.1 8.5 70.4 610.0

Fiscal Year 2020 530.2 7.7 66.9 604.8

Fiscal Year 2021 532.2 7.6 63.4 603.2

Fiscal Year 2022 506.8 7.4 63.5 577.7

After 5 Years 952.9 4.8 45.1 1,002.8

Total Future Lease Payments Due $ 3,785.7 $ 44.8 $ 387.4 $ 4,217.9
U.S. Department of Defense Agency Financial Report for FY 2017

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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Federal financial reporting requires the Department to report on its stewardship over certain 

resources that cannot be measured in traditional financial reports. These resources do not meet the 

criteria for assets and liabilities required to be reported in the financial statements, but are 

important to understand the operations and financial condition of the Department at the date of the 

financial statements and in subsequent periods.

The Department’s stewardship investments are comprised of, and are measured in terms 

of, expenditures for: (1) Nonfederal Physical Property (federally-financed, but not federally 

owned) and (2) federally-financed Research and Development (R&D). Information on additional 

reporting requirements for Nonfederal Physical Property and R&D follows.

NON-FEDERAL PHYSICAL PROPERTY

The Nonfederal Physical Property investments support the purchase, construction, or major 

renovation of physical property owned by state and local governments. In addition, Nonfederal 

Physical Property investments include federally-owned physical property transferred to state and 

local governments. The Department participates in cost-sharing agreements with nonfederal 

sponsors which are governed under numerous Water Resources Development Acts. The 

Department’s transferred assets include expenditures supporting the design, build, and 

construction services/management for the missions of commercial navigation, flood/storm damage 

reduction, hydropower, regulatory, environmental, recreation and water supply.

Non-Federal Physical Property

Department of Defense Consolidated – Non-Federal Physical Property

Yearly Investments in State and Local Governments

For Fiscal Years 2013 through 2017 Dollars in Millions

Categories 2017 2016 2015 2014 2013

Transferred Assets:

National Defense Mission Related $ 1,011.4 $ 1,265.2 $ 1,307.2 $ 1,113.2 $ 1,376.8

Funded Assets:

National Defense Mission Related $ 15.5 $ 17.2 $ 12.7 $ 12.4 $ 11.8

Total $ 1,026.9 $ 1,282.4 $ 1,319.9 $ 1,125.6 $ 1,388.6

INVESTMENTS IN RESEARCH AND DEVELOPMENT

Investment values included in this report are based on R&D expenditures. The R&D 

programs are classified in the following categories: Basic Research, Applied Research, and 

Development. The amounts reported in the Investments in R&D table show outlays from 

FY 2013 – FY 2017 for all DoD Components. The definition for each type of R&D Category and 

Subcategories are explained below.
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Basic Research is the systematic study to gain knowledge or understanding of the 

fundamental aspects of phenomena and of observable facts without specific applications, 

processes, or products in mind. Basic Research involves the gathering of a fuller knowledge or 

understanding of the subject under study. Major outputs are scientific studies and research papers.

Applied Research is the systematic study to gain knowledge or understanding necessary 

for determining the means by which a recognized and specific need may be met. It is the practical 

application of such knowledge or understanding for the purpose of meeting a recognized need. 

This research points toward specific military needs with a view toward developing and evaluating 

the feasibility and practicability of proposed solutions and determining their parameters. Major 

outputs are scientific studies, investigations, research papers, hardware components, software 

codes, or limited construction of a weapon system component, to include non-system-specific 

development efforts. Development takes what has been discovered or learned from basic and 

applied research and uses it to establish technological feasibility, assessment of operability, and 

production capability. Development consists of the five stages defined in the Investments in R&D 

table.

Advanced Technology Development is the systematic use of the knowledge or 

understanding gained from research and directed toward proof of concept and feasibility rather 

than directed toward the development of hardware for service use. It employs demonstration 

activities intended to test a technology or method.

Advanced Component Development and Prototypes evaluates integrated technologies in 

an operating environment as realistic as possible to assess the performance or cost reduction 

potential of advanced technology. Programs in this phase are generally system specific. Major 

outputs of Advanced Component Development and Prototypes are hardware and software 

components and complete weapon systems ready for operational and developmental testing and 

field use.

System Development and Demonstration concludes the program or project and prepares it 

for production. It consists primarily of preproduction efforts, such as logistics and repair studies.

Major outputs are weapons systems finalized for complete operational and developmental testing.

Research, Development, Test, and Evaluation Management Support bolsters installations 

and operations for general research and development use. This category includes costs associated 

with test ranges, military construction maintenance support for laboratories, operation and 

maintenance of test aircraft and ships, and studies and analyses furthering the Research and 

Development program.

Operational Systems Development finances projects, programs, or upgrades in engineering 

and manufacturing development stages which have received approval for production, including 

production funds that have been budgeted in subsequent fiscal years.
U.S. Department of Defense Agency Financial Report for FY 2017

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Investments in Research and Development (R&D)

Department of Defense Consolidated

Yearly Investments in Research and Development

For the Current and Four Preceding Fiscal Years Dollars in Millions

Categories 2017 2016 2015 2014 2013

Basic Research $ 1,960.3 $ 2,106.8 $ 1,958.0 $ 1,948.2 $ 1,841.5

Applied Research 6,988.6 6,307.5 5,744.7 5,500.6 5,477.4

Development

Advanced Technology 

Development 5,736.5 5,525.8 5,007.6 5,253.3 4,898.3

Advanced Component 

Development and Prototypes 13,965.7 12,517.9 11,954.9 10,947.0 12,464.8

System Development and 

Demonstration 11,487.3 11,037.7 10,733.8 11,459.7 12,524.6

Research, Development, Test 

and Evaluation Management 

Support

5,189.3 5,335.5 5,163.3 5,262.5 4,906.5

Operational Systems 

Development 21,611.1 20,428.8 20,441.9 20,334.3 21,180.9

Totals: $ 66,938.8 $ 63,260.0 $ 61,004.2 $ 60,705.6 $ 63,294.0

The U.S. Air Force’s 45th Space Wing supported NASA’s successful launch of Orbital ATK’s Cygnus spacecraft 

aboard a United Launch Alliance Atlas V rocket from Space Launch Complex 41 here April 18 at 11:11 a.m. ET.
U.S. Department of Defense Agency Financial Report for FY 2017

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REQUIRED SUPPLEMENTARY INFORMATION

This section includes the deferred maintenance and repairs information and Statement of 

Disaggregated Budgetary Resources in accordance with Statement of Federal Financial 

Accounting Standards (SFFAS) 42, “Deferred Maintenance and Repairs: Amending Statements of 

Federal Financial Accounting Standards 6, 14, 29 and 32.”

REAL PROPERTY DEFERRED MAINTENANCE AND REPAIRS

Maintenance and repairs are activities directed toward keeping real property assets in an 

acceptable condition. Activities include preventive maintenance; replacement of parts, systems, 

or components; and other activities needed to preserve or maintain the asset. Maintenance and 

repairs, as distinguished from capital improvements, exclude activities directed towards expanding 

the capacity of an asset or otherwise upgrading it to serve needs different from, or significantly 

greater than, its current use. 

Deferred Maintenance and Repairs (DM&R) are maintenance and repairs that were not 

performed when they should have been or were scheduled to be and which are put off or delayed 

for a future period. DM&R are identified through condition assessment surveys in accordance 

with the September 10, 2013 Under Secretary of Defense for Acquisition Technology and 

Logistics policy memorandum, “Standardizing Facility Condition Assessments.” The real 

property record is the data source for obtaining the total deferred maintenance and repairs for the 

Agency Financial Report. Facility Categories are as follows:

Real Property Deferred Maintenance and Repairs

As of September 30, 2016 Dollars in Millions

Property Type

FY 2017

1. Plant Replacement Value

2. Required Work 

(Deferred Maintenance & 

Repair)

3. Percentage

1. Category 1 $ 1,133,177.7 $ 101,482.3 9%

2. Category 2 $ 85,997.0 $ 10,536.6 12%

3. Category 3 $ 22,227.8 $ 4,756.0 21%

Total $ 1,241,402.5 $ 116,774.9 9%

Property Type

FY 2016

1. Plant Replacement Value

2. Required Work 

(Deferred Maintenance & 

Repair)

3. Percentage

1. Category 1 $ 1,094,166.9 $ 116,366.5 11%

2. Category 2 $ 77,488.1 $ 12,552.8 16%

3. Category 3 $ 33,389.9 $ 6,278.7 19%

Total $ 1,205,044.9 $ 135,198.0 11%
U.S. Department of Defense Agency Financial Report for FY 2017

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• Category 1: Buildings, Structures, and Linear Structures that are enduring and required to 

support an ongoing mission, including multi-use Heritage Assets.

• Category 2: Buildings, Structures, and Linear Structures that are Heritage Assets.

• Category 3: Buildings, Structures, and Linear Structures that are excess to requirements or 

planned for replacement or disposal, including multi-use Heritage Assets.

As of the end of FY 2017, the Department estimates facility maintenance cost of more than 

$116.8 billion for facilities with replacement cost of $1.2 trillion. The totals include $2 billion in 

civil works related maintenance needs under the USACE with replacement cost of more than 

$267.1 billion. The decrease in the Department’s estimate from FY 2016 is primarily attributable 

to the Navy’s implementation of the Facility Condition Index (FCI) to determine DM&R.

Maintenance and Repair Policies

The Department is migrating to the Sustainment Management System (SMS), to perform 

a cyclical assessment of real property facilities and assign a facility condition index, which 

considers an asset’s key life-cycle attributes such as age and material.

Maintenance and Repair Prioritization and Acceptable Condition Standards

The Department considers mission, health and safety, and quality of life when assigning 

priority to maintenance needs and assessing whether a facility is in acceptable condition. 

Generally, an asset is considered acceptable when it is in good condition with an assigned FCI off 

90 percent or above.

Deferred Maintenance and Repair Exclusions

The deferred maintenance and repair information presented relates to all DoD facilities and 

is not restricted to capitalized assets.
U.S. Department of Defense Agency Financial Report for FY 2017

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EQUIPMENT DEFERRED MAINTENANCE AND REPAIRS

Equipment Deferred Maintenance and Repairs

For Fiscal Year Ended September 30 Dollars 

in Millions

Major Categories 2017 2016

1. Aircraft $ 1,003.6 $ 407.3

2. Automotive Equipment 432.7 385.6

3. Combat Vehicles 258.8 190.1

4. Construction Equipment 5.7 10.8

5. Electronics and Communications Systems 351.3 30.7

6. Missiles 127.7 82.6

7. Ships 249.4 301.7

8. Ordnance Weapons and Munitions 50.2 42.1

9. All Other Items Not Identified to above Categories 298.4 278.8

Total $ 2,777.8 $ 1,729.7

Maintenance and Repair Policies 

Depot maintenance requirements for equipment are developed during the annual budget 

process and updated based on work completion, shifts in priorities, work stoppages, or additional 

requirements. Not all unfunded depot maintenance requirements are deferred. Supporting the 

Planning Programming and Budgeting Execution (PPBE) system, the Military Services all have 

fairly detailed and methodical processes for determining their depot maintenance requirements.

During this process, and as more information becomes available, depot requirements are adjusted 

and refined, and the amount of funding determined, based on Military Service priorities and 

assessment of risk.

Eventually, Service depot maintenance requirements and funding amounts are included in 

the baseline budget. In the year of execution, the Military Services may take steps to either

mitigate, or exacerbate the levels of deferred maintenance depending upon the availability of 

resources and Service priorities. The Military Services may take steps to mitigate deferred 

maintenance through the reprogramming of resources from cancelled programs, or from those of 

a lesser priority, or utilize supplemental funding. The Military Services may also cancel 

requirements, direct maintenance be performed at the field-level, or even reduce force structure 

and reprogram those O&M funds.

Maintenance and Repair Prioritization and Acceptable Condition Standards

The Department prioritizes maintenance and repair requirements based on mission and 

health and safety. In addition emerging requirements and real world events drive review and 

reprioritization of maintenance and repair requirements. The Department employs risk-based 

methodologies in determining acceptable levels of equipment operational risk.
U.S. Department of Defense Agency Financial Report for FY 2017

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Deferred Maintenance and Repair Exclusions

The deferred maintenance and repair information presented relates to all DoD equipment 

and is not restricted to capitalized assets.

Significant Changes in Deferred Maintenance and Repair 

The Department’s deferred maintenance and repair work for equipment, platforms, and 

weapon systems increased by $1.0 billion during FY 2017. A large portion of the increase was 

driven by aircraft maintenance deferrals. Other areas with significant increases were individual 

and soldier equipment items and electronic and communications systems maintenance. Newly 

fielded digital technologies that did not exist in previous years also contributed to the increase.

Lt. j.g. Brandon Rivera, assigned to Underwater Construction Team (UCT) 1, dives on a plane wreck during diver-qualification 

training off the coast of Naval Station Guantanamo Bay, Feb. 15, 2017. UCT 1 provides a capability for construction, inspection, 

repair and maintenance of ocean facilities in support of Naval operations.

Photo by Mass Communication Specialist 2nd Class Sean Furey
U.S. Department of Defense Agency Financial Report for FY 2017

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143

Statement of Disaggregated Budgetary 

Resources 2017

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family 

Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2017

Combined

Budgetary Resources

Unobligated balance, brought forward, 

October 1 $ 4,210.3 $ 61,733.3 $ 15,290.9 $ 14,894.8 $ 0.0 $ 9,911.8 $ 49,515.3 $ 155,556.4

Adjustment to unobligated balance brought

forward, Oct 1 (+ or -) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Unobligated balance brought

forward, Oct 1, as adjusted 4,210.3 61,733.3 15,290.9 14,894.8 0.0 9,911.8 49,515.3 155,556.4

Recoveries of prior year unpaid obligations 5,098.8 7,138.6 4,495.6 1,391.1 0.0 331.2 31,258.0 49,713.3

Other changes in unobligated balance (2,072.1) (2,768.6) 78.9 (757.0) 0.0 6.9 (18,773.8) (24,285.7)

Unobligated balance from prior year 

budget authority, net 7,237.0 66,103.3 19,865.4 15,528.9 0.0 10,249.9 61,999.5 180,984.0

Appropriations (discretionary and 

mandatory) 139,378.1 124,108.8 75,852.3 6,818.8 67,652.2 7,625.7 355,545.8 776,981.7

Contract Authority (discretionary and 

mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 76,540.2 76,540.2

Spending Authority from offsetting 

collections (discretionary and mandatory) 1,288.5 3,379.7 9,618.1 4,988.0 0.0 11,929.8 74,501.8 105,705.9

Total Budgetary Resources $ 147,903.6 $ 193,591.8 $ 105,335.8 $ 27,335.7 $ 67,652.2 $ 29,805.4 $ 568,587.3 $ 1,140,211.8

Status of Budgetary Resources:

New obligations and upward adjustments 

(total) 144,236.1 132,572.2 86,162.6 12,995.8 67,652.2 18,261.3 519,601.3 981,481.5

Unobligated balance, end of year:

Apportioned, unexpired accounts 356.2 57,701.9 16,576.9 12,695.8 0.0 9,738.3 19,380.5 116,449.6

Exempt from Apportionment, unexpired 

accounts 0.0 0.0 0.0 0.0 0.0 1,800.6 4,958.6 6,759.2

Unapportioned, unexpired accounts 0.0 (422.4) 9.6 206.7 0.0 0.1 2,116.5 1,910.5

Unexpired unobligated balance, end of 

year

356.2 57,279.5 16,586.5 12,902.5 0.0 11,539.0 26,455.6 125,119.3

Expired unobligated balance, end of year 3,311.3 3,740.1 2,586.7 1,437.4 0.0 5.1 22,530.4 33,611.0

Unobligated balance, end of year $ 3,667.5 $ 61,019.6 $ 19,173.2 $ 14,339.9 $ 0.0 $ 11,544.1 $ 48,986.0 $ 158,730.3

Total Budgetary Resources $ 147,903.6 $ 193,591.8 $ 105,335.8 $ 27,335.7 $ 67,652.2 $ 29,805.4 $ 568,587.3 $ 1,140,211.8
U.S. Department of Defense Agency Financial Report for FY 2017

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144

Statement of Disaggregated Budgetary 

Resources 2017

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2017

Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 8,558.3 $ 140,403.4 $ 47,240.8 $ 18,666.4 $ 736.4 $ 7,492.6 $ 183,671.5 $ 406,769.4

New obligations and upward adjustments 144,236.1 132,570.7 86,162.6 12,995.8 67,652.2 18,261.3 519,602.8 981,481.5

Outlays (gross) (139,270.5) (108,187.2) (79,519.1) (11,082.3) (67,676.3) (18,010.7) (476,088.3) (899,834.4)

Recoveries of prior year unpaid obligations (5,098.8) (7,138.6) (4,495.5) (1,391.1) 0.0 (331.2) (31,258.1) (49,713.3)

Unpaid Obligations, end of year 8,425.1 157,648.3 49,388.8 19,188.8 712.3 7,412.0 195,927.9 438,703.2

Uncollected Payments

Uncollected customer payments from Federal 

Sources, brought forward (263.2) (3,708.8) (5,976.1) (8,567.3) 0.0 (1,766.5) (53,899.4) (74,181.3)

Change in uncollected payments, Federal 

sources (9.7) (5.2) (425.3) (199.8) 0.0 (901.6) (2,765.6) (4,307.2)

Uncollected payments, Federal sources, 

end of year (272.9) (3,714.0) (6,401.4) (8,767.1) 0.0 (2,668.1) (56,665.0) (78,488.5)

Memorandum (non-add) entries:

Obligated balance, start of year $ 8,295.1 $ 136,694.6 $ 41,264.7 $ 10,099.1 $ 736.4 $ 5,726.1 $ 129,772.1 $ 332,588.1

Obligated balance, end of year $ 8,152.2 $ 153,934.3 $ 42,987.4 $ 10,421.6 $ 712.3 $ 4,743.9 $ 139,263.0 $ 360,214.7

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 140,666.6 $ 127,488.5 $ 85,470.4 $ 11,806.8 $ 67,652.2 $ 19,555.5 $ 506,587.8 $ 959,227.8

Actual offsetting collections (discretionary 

and mandatory ) (1,334.1) (3,843.3) (10,189.8) (4,809.6) 0.0 (10,923.2) (136,815.5) (167,915.5)

Change in uncollected customer payments 

from Federal Sources (discretionary and 

mandatory)

(9.7) (5.2) (425.3) (199.8) 0.0 (901.6) (2,765.6) (4,307.2)

Recoveries of prior year paid obligations 

(discretionary and mandatory) 55.3 468.8 997.0 21.6 0.0 6.8 1,217.4 2,766.9

Budget authority, net (discretionary and 

mandatory) $ 139,378.1 $ 124,108.8 $ 75,852.3 $ 6,819.0 $ 67,652.2 $ 7,737.5 $ 368,224.1 $ 789,772.0

Outlays, gross (discretionary and mandatory) $ 139,270.5 $ 108,187.2 $ 79,519.1 $ 11,082.3 $ 67,676.3 $ 18,010.7 $ 476,088.3 $ 899,834.4

Actual offsetting collections (discretionary 

and mandatory) (1,334.1) (3,843.3) (10,189.8) (4,809.6) 0.0 (10,923.2) (136,815.5) (167,915.5)

Outlays, net (discretionary and mandatory) 137,936.4 104,343.9 69,329.3 6,272.7 67,676.3 7,087.5 339,272.8 731,918.9

Distributed offsetting receipts 0.0 0.0 (0.5) 0.0 (96,285.9) (649.2) (1,027.4) (97,963.0)

Agency outlays, net (discretionary and 

mandatory) $ 137,936.4 $ 104,343.9 $ 69,328.8 $ 6,272.7 $ (28,609.6) $ 6,438.3 $ 338,245.4 $ 633,955.9
U.S. Department of Defense Agency Financial Report for FY 2017

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145

Statement of Disaggregated Budgetary 

Resources 2016

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, 

Test and 

Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2016

Combined

Budgetary Resources

Unobligated balance, brought forward, 

October 1 $ 4,481.7 $ 56,162.6 $ 15,375.6 $ 13,952.7 $ 0.0 $ 10,034.7 $ 49,455.0 $ 149,462.3

Adjustment to unobligated balance brought

forward, Oct 1 (+ or -) 0.0 0.0 0.0 0.0 0.0 0.0 2,083.9 2,083.9

Unobligated balance brought

forward, Oct 1, as adjusted 4,481.7 56,162.6 15,375.6 13,952.7 0.0 10,034.7 51,538.9 151,546.2

Recoveries of prior year unpaid obligations 5,919.8 6,715.2 3,107.3 2,110.0 0.0 287.4 32,376.8 50,516.5

Other changes in unobligated balance (1,384.9) (1,260.5) (1,202.1) (37.4) 0.0 9.5 (17,798.0) (21,673.4)

Unobligated balance from prior year 

budget authority, net 9,016.6 61,617.3 17,280.8 16,025.3 0.0 10,331.6 66,117.7 180,389.3

Appropriations (discretionary and 

mandatory) 138,576.0 118,487.6 71,284.1 6,764.8 66,964.2 6,551.6 337,026.9 745,655.2

Contract Authority (discretionary and 

mandatory) 0.0 0.0 0.0 0.0 0.0 0.0 69,749.9 69,749.9

Spending Authority from offsetting 

collections (discretionary and mandatory) 1,253.8 3,695.5 8,543.2 5,250.1 0.0 11,447.6 75,319.1 105,509.3

Total Budgetary Resources $ 148,846.4 $ 183,800.4 $ 97,108.1 $ 28,040.2 $ 66,964.2 $ 28,330.8 $ 548,213.6 $ 1,101,303.7

Status of Budgetary Resources:

New obligations and upward adjustments 

(total) 144,636.1 122,067.1 81,817.2 13,145.4 66,964.2 18,419.0 498,698.3 945,747.3

Unobligated balance, end of year:

Apportioned, unexpired accounts 459.8 57,517.1 12,658.5 12,501.3 0.0 8,281.3 17,280.3 108,698.3

Exempt from Apportionment, unexpired 

accounts

0.0 0.0 0.0 0.0 0.0 1,626.9 4,810.8 6,437.7

Unapportioned, unexpired accounts 0.0 77.2 294.0 294.0 0.0 0.0 2,655.8 3,321.0

Unexpired unobligated balance, end of 

year

459.8 57,594.3 12,952.5 12,795.3 0.0 9,908.2 24,746.9 118,457.0

Expired unobligated balance, end of year 3,750.5 4,139.0 2,338.4 2,099.5 0.0 3.6 24,768.4 37,099.4

Unobligated balance, end of year $ 4,210.3 $ 61,733.3 $ 15,290.9 $ 14,894.8 $ 0.0 $ 9,911.8 $ 49,515.3 $ 155,556.4

Total Budgetary Resources $ 148,846.4 $ 183,800.4 $ 97,108.1 $ 28,040.2 $ 66,964.2 $ 28,330.8 $ 548,213.6 $ 1,101,303.7
U.S. Department of Defense Agency Financial Report for FY 2017

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Statement of Budgetary Resources 2016

For the Years Ended September 30

Dollars in Millions

Military

Personnel Procurement

Research, 

Development, Test 

and Evaluation

Family Housing/ 

Military 

Construction

Military 

Retirement 

Benefits

Civil Works

Operations, 

Readiness & 

Support

2016

Combined

Change in Obligated Balance

Unpaid obligations

Unpaid obligations, brought forward, 

October 1 (Gross) $ 12,049.8 $ 130,935.9 $ 43,235.8 $ 19,433.3 $ 5,126.8 $ 7,593.7 $ 188,742.8 $ 407,118.1

New 0bligations and upward adjustments 144,636.1 122,067.1 81,817.2 13,145.4 66,964.2 18,419.0 498,698.3 945,747.3

Outlays (gross) (142,207.8) (105,884.4) (74,704.9) (11,802.3) (71,354.6) (18,232.7) (471,392.8) (895,579.5)

Recoveries of prior year unpaid obligations (5,919.8) (6,715.2) (3,107.3) (2,110.0) 0.0 (287.4) (32,376.8) (50,516.5)

Unpaid Obligations, end of year 8,558.3 140,403.4 47,240.8 18,666.4 736.4 7,492.6 183,671.5 406,769.4

Uncollected Payments

Uncollected customer payments from 

Federal Sources, end of year (172.4) (3,769.0) (5,760.5) (8,848.6) 0.0 (1,647.8) (52,651.9) (72,850.2)

Change in uncollected payments, Federal 

sources (90.8) 60.2 (215.6) 281.3 0.0 (118.7) (1,247.5) (1,331.1)

Uncollected payments, Federal sources, 

end of year (263.2) (3,708.8) (5,976.1) (8,567.3) 0.0 (1,766.5) (53,899.4) (74,181.3)

Memorandum (non-add) entries:

Obligated balance, start of year $ 11,877.4 $ 128,166.9 $ 37,475.2 $ 10,584.7 $ 5,126.8 $ 5,945.9 $ 136,090.9 $ 334,267.9

Obligated balance, end of year $ 8,295.1 $ 136.694.6 $ 41,264.7 $ 10,099.1 $ 736.4 $ 5,726.1 $ 129,772.1 $ 332,588.1

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary and 

mandatory) $ 139,829.8 $ 122,183.1 $ 79,827.3 $ 12,014.9 $ 66,964.2 $ 17,999.2 $ 482,095.9 $ 920,914.4

Actual offsetting collections (discretionary 

and mandatory ) (1,172.7) (4,148.0) (8,522.8) (5,571.3) 0.0 (11,227.3) (136,690.6) (167,332.7)

Change in uncollected customer payments 

from Federal Sources (discretionary and 

mandatory)

(90.8) 60.2 (215.6) 281.3 0.0 (118.7) (1,247.5) (1,331.1)

Recoveries of prior year paid obligations 

(discretionary and mandatory) 9.8 390.7 195.2 39.9 0.0 9.5 903.2 1,548.3

Budget authority, net (discretionary and 

mandatory) $ 138,576.1 $ 118,486.0 $ 71,284.1 $ 6,764.8 $ 66,964.2 $ 6,662.7 $ 345,061.0 $ 753,798.9

Outlays, gross (discretionary and mandatory) $ 142,207.8 $ 105,884.4 $ 74,704.9 $ 11,802.3 $ 71,354.6 $ 18,232.7 $ 471,392.8 $ 895,579.5

Actual offsetting collections (discretionary 

and mandatory) (1,172.7) (4,148.0) (8,522.8) (5,571.3) 0.0 (11,227.3) (136,690.6) (167,332.7)

Outlays, net (discretionary and 

mandatory) 141,035.1 101,736.4 66,182.1 6,231.0 71,354.6 7,005.4 334,702.2 728,246.8

Distributed offsetting receipts 0.0 (0.2) 0.0 0.0 (89,920.3) (614.7) (1,543.0) (92,078.2)

Agency outlays, net (discretionary and 

mandatory) $ 141,035.1 $ 101,736.2 $ 66,182.1 $ 6,231.0 $ (18,565.7) $ 6,390.7 $ 333,159.2 $ 636,168.6
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Statement of Disaggregated 

Budgetary Resources Non-Budgetary

For the Years ended 

September 30

Dollars in Millions

Other 2017 Combined 2016 Combined

Budgetary Resources

Unobligated balance, brought 

forward, October 1 $ 79.7 $ 79.7 $ 66.6

Borrowing Authority 

(discretionary and mandatory) 58.1 58.1 27.0

Spending Authority from 

offsetting collections 

(discretionary and mandatory)

76.6 76.6 74.7

Total Budgetary Resources $ 214.4 $ 214.4 $ 168.3

Status of Budgetary Resources:

New obligations and upward 

adjustments (total) $ 129.4 $ 129.4 $ 88.6

Unobligated balance, end of year:

Unapportioned unexpired 

accounts 85.0 85.0 79.7

Unexpired unobligated, end 

of year 85.0 85.0 79.7

Expired unobligated, end of 

year

0.0 0.0 0.0

Unobligated balance, end of 

year (total) $ 85.0 $ 85.0 $ 79.7

Total Budgetary Resources $ 214.4 $ 214.4 $ 168.3
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Statement of Disaggregated 

Budgetary Resources Non Budgetary

For the Years ended September 30

Dollars in Millions Other 2017 Combined 2016 Combined

Change in Obligated Balance

Unpaid obligations:

Unpaid obligations, brought forward, 

October 1 (gross) $ 284.2 $ 284.2 $ 410.5

New obligations and upward 

adjustments 129.4 129.4 88.6

Outlays (gross) (185.6) (185.6) (214.9)

Unpaid obligations, end of year 228.0 228.0 284.2

Uncollected payments:

Uncollected payments, Federal 

sources, brought forward, October 1 (58.9) (58.9) (72.4)

Change in uncollected customer 

payments, Federal sources 5.9 5.9 13.5

Uncollected payments, Federal 

sources, end of year (53.0) (53.0) (58.9)

Memorandum (non-add) entries:

Obligated balance, start of year 

(net) $ 225.3 $ 225.3 $ 338.1

Obligated balance, end of year (net) $ 175.0 $ 175.0 $ 225.3

Budget Authority and Outlays, Net:

Budget Authority, gross (discretionary 

and mandatory) 134.7 134.7 101.7

Actual offsetting collections 

(discretionary and mandatory) (190.6) (190.6) (105.4)

Change in uncollected customer 

payments from Federal Sources 

(discretionary and mandatory)

5.9 5.9 13.5

Recoveries of prior year obligations 

(discretionary and mandatory) 0.0 0.0 0.0

Budget authority, net (discretionary 

and mandatory) $ (50.0) $ (50.0) $ 9.8

Outlays, gross (discretionary and 

mandatory) 185.6 185.6 214.9

Actual offsetting collections 

(discretionary and mandatory) (190.6) (190.6) (105.4)

Outlays, net (discretionary and 

mandatory) (5.0) (5.0) 109.5

Agency outlays, net (discretionary 

and mandatory) $ (5.0) $ (5.0) $ 109.5
U.S. Department of Defense Agency Financial Report for FY 2017

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INSPECTOR GENERAL

DEPARTMENT OF DEFENSE 

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

November 15, 2017

MEMORANDUM FOR UNDER SECRETARY OF DEFENSE (COMPTROLLER)/

CHIEF FINANCIAL OFFICER, DOD

SUBJECT: Independent Auditor’s Report on the Department of Defense FY 2017 and FY 2016 

Basic Financial Statements (Report No. DODIG-2018-030)

We are providing the subject report to be published in the Department of Defense FY 2017 

Agency Financial Report in conjunction with the Department of Defense FY 2017 and

FY 2016 Basic Financial Statements. The report includes our disclaimer of opinion on the 

basic financial statements and our required Report on Internal Control Over Financial 

Reporting and Compliance With Applicable Provisions of Laws, Regulations, Contracts, and 

Grant Agreements. We are issuing our disclaimer of opinion to accompany the Department 

of Defense FY 2017 and FY 2016 Basic Financial Statements and, therefore, this audit 

report should not be disseminated separately from those statements.

We appreciate the courtesies extended to the staff. Please direct questions to me at 

(703) 601-5945 or (DSN) 329-5945.

Lorin T. Venable, CPA 

Assistant Inspector General

Financial Management and Reporting
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INSPECTOR GENERAL

DEPARTMENT OF DEFENSE 

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

November 15, 2017

MEMORANDUM FOR ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER)/

CHIEF FINANCIAL OFFICER, DOD

SUBJECT: Independent Auditor’s Report on the Department of Defense FY 2017 and 

FY 2016 Basic Financial Statements (Project No. D2017-D000FE-0124.000, 

Report No. DODIG-2018-030)

Report on the Basic Financial Statements

Public Law 101-576, “Chief Financial Officers Act of 1990,” requires the DoD Inspector 

General to audit the accompanying DoD Agency-Wide consolidated balance sheet as of 

September 30, 2017, and September 30, 2016, and the related consolidated statement 

of net cost, consolidated statement of changes in net position, combined statement of 

budgetary resources, and notes to the basic statements (basic financial statements).

Management’s Responsibility for the Annual 

Financial Statements

DoD management is responsible for the annual financial statements. Specifically, 

management is responsible for: (1) preparing financial statements that conform with 

accounting principles generally accepted in the United States of America (GAAP);

(2) establishing, maintaining, and assessing internal control to provide reasonable 

assurance that they met broad control objectives of Public Law 97-255, “Federal 

Managers’ Financial Integrity Act of 1982” (FMFIA); (3) ensuring that the DoD’s 

financial management systems substantially comply with Public Law 104-208, 

“Federal Financial Management Improvement Act of 1996” (FFMIA) requirements; 

and (4) complying with applicable laws and regulations.

Auditor’s Responsibility

Our responsibility is to express an opinion on the basic financial statements based 

on conducting the audit in accordance with generally accepted government auditing

standards (GAGAS) and the Office of Management and Budget (OMB) Bulletin No. 17-03, 

“Audit Requirements for Federal Financial Statements,” September 29, 2017. However,
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based on the matters described in the Basis for Disclaimer of Opinion paragraph, we 

were unable to obtain sufficient appropriate audit evidence to provide a basis for an 

audit opinion.

Basis for Disclaimer of Opinion

Section 1008(d) of the FY 2002 National Defense Authorization Act limits the DoD 

Inspector General to performing only those audit procedures required by GAGAS that 

are consistent with the representations made by management. DoD management 

asserted to us that DoD FY 2017 and FY 2016 Basic Financial Statements would not 

substantially conform to GAAP and that DoD financial management and feeder systems 

were unable to adequately support material amounts on the basic financial statements 

as of September 30, 2017. We considered this scope limitation in forming our 

conclusions on the basic financial statements. Accordingly, we did not perform all the 

auditing procedures required by GAGAS and OMB Bulletin No. 17-03 to determine 

whether material amounts on the basic financial statements were presented fairly.

Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of 

Opinion paragraph, we could not obtain sufficient appropriate evidence to provide a 

basis for an audit opinion. Accordingly, we do not express an opinion on the DoD

FY 2017 and FY 2016 Basic Financial Statements. Thus, the basic financial statements 

may have undetected misstatements that are both material and pervasive.

Other Information in the Annual Financial Statements

We performed our audit to form an opinion on the basic financial statements as a whole. 

DoD management presented the Management’s Discussion and Analysis, Required 

Supplementary Stewardship Information, Required Supplementary Information, and 

Other Information for additional analysis as part of the annual financial statements.

These elements are not required parts of the basic financial statements. Therefore, 

we do not express an opinion or provide any assurance on the information. We 

reviewed the other information for inconsistencies with the audited basic financial 

statements. Based on our limited review, we did not find any material inconsistencies 

between the information and the basic financial statements and applicable sections

of OMB Circular No. A-136 (Revised), “Financial Reporting Requirements,”

August 15, 2017, and DoD Regulation 7000.14-R, “Financial Management Regulation,” 

volume 6b, “Form and Content of the Department of Defense Audited

Financial Statements.”
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Report on Compliance With Applicable Provisions of Laws, 

Regulations, Contracts, and Grant Agreements

We limited our audit to determining compliance with provisions of applicable laws 

and regulations, contracts, and grant agreements that have a direct and material effect 

on the basic financial statements and compliance with OMB regulations and audit 

requirements for financial reporting. DoD management represented that instances

of noncompliance identified in prior audits continue to exist; therefore, we did not 

determine whether the DoD complied with all applicable laws and regulations, 

contracts, and grant agreements related to financial reporting. It was not our objective 

to provide an opinion on compliance with certain provisions of laws and regulations, 

contracts, and grant agreements and, accordingly, we do not express such an opinion.

See the Attachment for additional details on internal control and compliance with legal 

and other regulatory requirements.

Agency Comments and Our Evaluation

We provided a draft of this report to the Under Secretary of Defense (Comptroller)/ 

Chief Financial Officer, DoD, who provided technical comments which we have 

incorporated as appropriate.

This report will be made publicly available under section 8M, paragraph (b)(1)(A) of 

the Inspector General Act of 1978. However, this report is intended solely for the 

information and use of Congress; the OMB; the U.S. Government Accountability Office; 

the Under Secretary of Defense (Comptroller)/Chief Financial Officer, DoD; DoD 

management; and the DoD Office of Inspector General. This report is not intended for, 

nor should it be used by, any other audience.

We appreciate the courtesies extended to the staff. Please direct questions to me at 

(703) 601-5945 or (DSN) 329-5945.

Lorin T. Venable, CPA 

Assistant Inspector General

Financial Management and Reporting

Attachment:

As stated
U.S. Department of Defense Agency Financial Report for FY 2017

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Report on Internal Control Over Financial Reporting

Internal Control Compliance

In planning our audit, we considered the DoD’s internal control over financial 

reporting. We did this to determine our procedures for auditing the basic financial 

statements appropriate to the circumstances and for expressing our opinion on the 

basic financial statements, but not for expressing an opinion on the effectiveness of the

internal control. Accordingly, we do not express an opinion on internal control over 

financial reporting.

Management Responsibilities

Management is responsible for implementing and maintaining effective internal 

controls to include providing reasonable assurance that DoD personnel recorded, 

processed, and summarized accounting data properly; met the requirements of 

applicable laws and regulations; and safeguarded assets against misappropriation 

and abuse.

Auditor’s Responsibilities

Our purpose was not to express an opinion on internal controls over financial reporting, 

and we do not do so. However, the following material weaknesses continue to exist and 

could adversely affect the DoD’s financial operations.

Previously Identified Material Weaknesses

Management acknowledged that previously identified material weaknesses 

continued to exist. A material weakness is a deficiency, or a combination of

deficiencies, in internal control such that there is a reasonable possibility that a material 

misstatement of the DoD’s financial statements will not be prevented, or detected and 

corrected, on a timely basis. The following material weaknesses continue to exist.

Financial Management Systems. Statement of Federal Financial Accounting 

Concepts (SFFAC) No. 1, “Objectives of Federal Financial Reporting,” requires financial 

management system controls that are adequate to ensure that transactions are 

executed in accordance with budgetary and financial laws and other requirements, 

consistent with the purposes authorized, and recorded in accordance with Federal 

accounting standards. SFFAC No. 1 also requires that financial management system 

controls ensure assets are properly safeguarded to deter fraud, waste, and abuse and 

that performance measurement information is adequately supported.
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The Under Secretary of Defense (Comptroller)/Chief Financial Officer, DoD, 

acknowledged that DoD financial management and feeder systems do not substantially 

comply with Federal financial management system requirements. The DoD financial 

management and feeder systems were not designed to adequately support various 

material amounts on the basic financial statements. These systemic deficiencies in 

financial management and feeder systems and inadequate DoD business processes 

prevent the DoD from collecting and reporting financial and performance information 

that is accurate, reliable, and timely.

Fund Balance With Treasury. Statement of Federal Financial Accounting 

Standards (SFFAS) No. 1, “Accounting for Selected Assets and Liabilities;” the 

Treasury Financial Manual; and DoD Regulation 7000.14-R, “DoD Financial

Management Regulation,” require the DoD to reconcile its Fund Balance with Treasury 

accounts and explain any discrepancies between the accounts and Treasury's records to 

ensure the integrity and accuracy of its internal and Governmentwide financial report 

data. However, the DoD acknowledged that it has ineffective processes and controls for 

reconciling the DoD's Fund Balance with Treasury accounts. The ineffective processes 

and controls result in differences between the DoD and U.S. Treasury recorded balances 

for Fund Balance with Treasury that cannot be resolved in a timely manner, as required 

by SFFAS No. 1, the TFM, and DoD Regulation 7000.14-R.

Accounts Receivable. According to SFFAS No. 1, Federal entities should recognize 

a receivable when they establish a claim to cash or other assets against other 

entities, based on either legal provisions or goods and services provided. The DoD 

acknowledged that it was unable to accurately record, report, collect, and reconcile 

intragovernmental accounts receivable.

Inventory. SFFAS No. 3, “Accounting for Inventory and Related Property,” requires the 

DoD to use historical cost, the latest acquisition cost (adjusted for holding gains and 

losses), or any other valuation method that reasonably approximates historical cost.

However, the DoD acknowledged that it lacks controls to provide assurance that 

inventory recorded in the financial statements exists and is complete. In addition, the 

DoD acknowledged that it lacks clear audit trails to trace transactions from source 

documentation to the reported total dollar values on the inventory line items on the 

financial statements. As a result, the DoD cannot accurately determine historical costs 

of its inventory and, therefore, fails to comply with SFFAS No. 3.
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Operating Materials and Supplies. SFFAS No. 3 states that Operating Materials 

and Supplies generally must be expensed when the items are consumed. The DoD 

acknowledged that significant amounts of Operating Materials and Supplies were

expensed when purchased, instead of when consumed. In addition, the DoD does not 

maintain historical cost data and, therefore, inventory values cannot be reported as 

required by GAAP.

General Property, Plant, and Equipment. SFFAS No. 6, “Accounting for Property, 

Plant, and Equipment,” requires the DoD to record General Property, Plant, and 

Equipment (General PP&E) at acquisition cost, capitalize improvement costs, and 

recognize depreciation expense. However, the DoD acknowledged that it does not have 

acquisition value for all General PP&E and uses several cost methodologies to provide 

General PP&E values for financial statement reporting purposes. In addition, the DoD 

acknowledged that reported values and information for major asset and liability 

categories are derived from nonfinancial systems, such as inventory and logistics 

systems, and these systems were not designed to prepare financial statements in 

accordance with GAAP.

Government Property in Possession of Contractors. SFFAS No. 6 requires that property 

and equipment in the possession of a contractor, acquired on behalf of the Government (in 

other words, the Government will ultimately hold title) for use in accomplishing a contract, 

be considered Government property. Such property should be accounted for based on the 

nature of the item, regardless of who has possession.

The DoD acknowledged that it was unable to comply with these requirements for 

Government Property in Possession of Contractors. As a result, the value of DoD property 

and material in the possession of contractors was not reliably reported.

Accounts Payable. According to SFFAS No. 5, “Accounting for Liabilities of the Federal 

Government,” an entity recognizes a liability when one party receives goods or services 

in return for a promise to provide money or other resources in the future. The DoD 

acknowledged that it did not meet accounting standards for the financial reporting of 

public accounts payable. The DoD cannot support its accounts payable balances 

because it lacks standard procedures for recording, reporting, and reconciling the 

amounts between the financial, accounting, and reporting systems.
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Environmental Liabilities. The DoD acknowledged that its internal controls for 

reporting environmental liabilities did not provide reasonable assurance that cleanup 

costs for all of its ongoing, closed, and disposal operations were identified, consistently 

estimated, and appropriately reported. In addition, guidance and audit trails for 

estimating environmental liabilities were insufficient, and the inventory of ranges and 

operational activities was incomplete. The DoD also acknowledged that it is uncertain 

of the accuracy of the accounting estimates used to calculate the reported 

environmental liabilities.

Statement of Net Costs. SFFAC No. 2, “Entity and Display,” states that the main 

purpose of the Statement of Net Costs is to provide an understanding of the net 

costs of each organization and each program. In addition, the Statement of Net Cost

provides gross and net cost information that can be related to the amounts of outputs 

and outcomes for the programs and organization. The DoD acknowledged that

the information presented on the Statement of Net Costs is compiled from many 

financial systems and sources. Newer financial systems record costs based on 

business events (e.g., receipt of goods or services), while many older financial 

systems record costs based upon financial transactions (e.g., invoices). In addition, 

some costs (e.g., actuarial) are derived from non-financial systems. In addition, the 

oD acknowledged that the current processes and systems capture costs based on 

appropriation groups and lower level costs for major programs are not presented as 

required by the Government Performance and Results Act of 1993 and SFFAC No. 2. 

However, the DoD stated that it is reviewing data and developing a cost reporting 

methodology as required by SFFAS 4, as amended by SFFAS 30.

Intragovernmental Eliminations. The DoD disclosed that it could not accurately 

identify its intragovernmental transactions by customer because its systems do not 

track the buyer and seller data needed to match related transactions. In addition, the 

DoD was unable to fully reconcile intragovernmental transactions with all Federal 

partners. The DoD acknowledged that its inability to reconcile most intragovernmental 

transactions resulted in adjustments that cannot be fully supported.

Accounting Entries. The DoD acknowledged that it continued to enter significant 

unsupported and erroneous accounting entries in its financial management 

systems because of system controls and process weaknesses. In addition, the DoD 

did not always record account entries in accordance with GAAP. The unsupported 

accounting entries present a material uncertainty regarding the reliability of the 

financial statements.
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Reconciliation of Net Cost of Operations to Budget. SFFAS No. 7, “Accounting for 

Revenue and Other Financing Sources,” requires a reconciliation of proprietary and 

budgetary information to assist users in understanding the relationship between the 

net cost of operations and the budgetary resources obligated by the entity during the 

period. The DoD acknowledged that due to system limitations, budgetary data does not

agree with proprietary expenses and capitalized assets. The DoD made a $10 billion 

adjustment to reconcile Net Cost of Operations to Budget in FY 2017.

These financial management control deficiencies may cause inaccurate management 

information. As a result, DoD management decisions based in whole or in part on this 

information may be adversely affected. Financial information reported by the DoD 

may also contain misstatements resulting from these deficiencies. Internal control 

work we conducted as part of our prior audits would not necessarily disclose all 

material weaknesses and significant deficiencies. We did not identify material 

weaknesses that were not reported in the DoD’s FMFIA report.

Report on Compliance with Applicable Provisions of Laws, 

Regulations, Contracts, and Grant Agreements

U.S. generally accepted government auditing standards and OMB guidance requires 

auditors to report on entities’ compliance with selected provisions of laws and 

regulations, contracts, and grant agreements. Management is responsible for 

compliance with existing laws, regulations, contracts, and grant agreements related to 

financial reporting. Management has also acknowledged to us that previously reported 

instances of noncompliance continue to exist. Therefore, we limited our work to 

determining compliance with selected provisions of the applicable laws, regulations, 

contracts, and grant agreements. Other noncompliance may have occurred and not 

been detected, and the results of our limited procedures may not be sufficient for other 

purposes. Our objective was not to, and we do not, express an opinion on compliance 

with applicable laws, regulations, contracts, and grant agreements.

Antideficiency Act

Section 1341, title 31, United States Code (31. U.S.C. §1341 [1990]) limits the DoD and 

its agents to making or authorizing expenditures or obligations that do not exceed the 

available appropriations or funds. Additionally, the DoD or its agents may not contract 

or obligate for the payment of money before an appropriation is made available for that
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contract or obligation unless otherwise authorized by law. As stated in

31 U.S.C §1517 (2004), the DoD and its agents are prohibited from making or 

authorizing expenditures of obligations exceeding an apportionment or the amount 

permitted by prescribed regulations. According to 31 U.S.C. §1351 (2004), if an officer 

or employee of an executive agency violates the Antideficiency Act (ADA), the head of 

the agency must immediately report to the President and Congress all relevant facts 

and a statement of actions taken. During FY 2017, the DoD reported 6 ADA violations 

within 17 completed cases.

DoD Regulation 7000.14-R, “Financial Management Regulation,” volume 14, chapter 7, 

“Antideficiency Act Report,” establishes time-frames for identifying and reporting ADA 

violations. The regulation states that the formal investigation and reporting on ADA 

violations should take no more than 15 months. Of the 15 potential ADA violation 

investigations, 11 have been open for more than 15 months.

Compliance With FFMIA Requirements

The FFMIA requires the DoD to establish and maintain financial management 

systems that comply substantially with the Federal financial management systems 

requirements, applicable Federal accounting standards, and the U.S. Standard General 

Ledger at the transaction level. For areas in which an agency is not in compliance,

OMB Circular No. A-136 requires the agency to identify remediation activities planned 

or underway to bring the systems into substantial compliance with the FFMIA. 

However, the DoD reported in the Financial Improvement and Audit Readiness Plan 

Status Report, May 2017, that information technology systems and documentation 

are the most pervasive challenges to audit readiness. The DoD has hundreds of 

financial and feeder systems affecting the financial statements. It is nearly impossible 

to ensure data are completely and accurately feeding between these various systems. 

Furthermore, the DoD still relies on legacy systems designed and implemented in the 

1960s. These legacy systems lack the basic capabilities required to successfully 

undergo audit. The DoD has stated that it is accelerating legacy systems migration to

Enterprise Resource Planning (ERP) systems in an effort to automate internal controls 

and better support audits. However, the DoD relies on legacy business practices and 

manual work-arounds such as corrections in the form of journal vouchers, in order to 

meet various accountability and reporting requirements.
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For FY 2017, the DoD did not substantially comply with the FFMIA. The Under 

Secretary of Defense (Comptroller)/Chief Financial Officer, DoD, acknowledged to us 

that DoD financial management and feeder systems could not provide adequate 

evidence supporting various material amounts on the financial statements, and that 

previously identified material weaknesses continue. The financial management and 

feeder systems did not substantially comply with the Federal financial management 

systems requirements, Federal accounting standards, or the U.S. Standard General 

Ledger at the transaction level as of September 30, 2017. Therefore, based on the 

representation of the DoD, we did not substantiate whether the DoD complied with 

the FFMIA and OMB implementation guidance.

Recommendations

This report does not include recommendations to correct the material weaknesses 

nd instances of noncompliance with laws and regulations because previous audit reports 

contained recommendations for corrective actions and current audit projects will 

include appropriate recommendations.
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AGENCY FINANCIAL REPORT

OTHER INFORMATION

UNITED STATES DEPARTMENT OF DEFENSE

FISCAL YEAR 2017
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Other Information

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OTHER INFORMATION

SUMMARY OF FINANCIAL STATEMENT AUDIT AND 

MANAGEMENT ASSURANCE

The Department of Defense (DoD) management has a fundamental responsibility to 

develop and maintain effective internal controls to ensure that its programs operate and federal 

resources are used efficiently and effectively to achieve desired objectives. As discussed in the 

Enterprise Resource Management and Internal Controls Program subsection of the Management’s 

Discussion and Analysis, managers throughout the Department are accountable for ensuring 

effective internal controls in their areas of responsibility. All DoD Components are required to 

establish and assess internal controls for financial reporting, mission-essential operations, and 

financial management systems.

Management-identified weaknesses are determined by assessing internal controls, as 

required by the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), the Federal Financial 

Management Improvement Act of 1996 (FFMIA), and Office of Management and Budget (OMB) 

Circular No. A-123, and fall into one of the following categories:

• FMFIA Section 2, Effectiveness of Internal Control over Financial Reporting (see 

Table 2a);

• FMFIA Section 2, Effectiveness of Internal Control over Operations (see Table 2b);

• FMFIA Section 4, Compliance with Federal Financial Management System Requirements

(see Table 2c); or

• FFMIA Section 803(a), Implementation of Federal Financial Management Improvements 

(see Table 3).

Navy Sailors enter a burning building for Firefighter 1 live fire testing at Southside Regional Fire Academy.

Photo by Mass Communication Specialist 3rd Class Jonathan Clay
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Summary of Financial Statement Audit

Table 1 lists the 13 areas of material weakness in the Department’s financial statement 

reporting as identified by the DoD Inspector General (IG) in their auditor’s report. In order to 

support the efficient use of resources in conducting audits, section 1008 of the National Defense 

Authorization Act (NDAA) for FY 2002 requires that the IG limit the performance of audit 

procedures to be consistent with the representations of reliability made by DoD management. As 

such, the DoD IG will not test remediation of these material weaknesses until DoD management 

has represented that they have been remediated.

Table 1. Summary of Financial Statement Audit

Audit Opinion: Disclaimer

Restatement: Yes

Areas of Material Weakness Beginning

Balance New Resolved Consolidated EndingBalance

1 Accounts Payable1 1 1

2 Accounting Entries2 1 1

3 Environmental Liabilities 1 1

4 Government Property in Possession 

of Contractors 1 1

5 Intragovernmental Eliminations2 1 1

6 Operating Materials and Supplies 1 1

7 Reconciliation of Net Cost of 

Operations to Budget2 1 1

8 Statement of Net Cost2 1 1

9 Financial Management Systems 1 1

10 Fund Balance with Treasury 1 1

11 General Property, Plant & 

Equipment 1 1

12 Inventory 1 1

13 Accounts Receivable 1 1

Total Material Weaknesses 13 13

The material weaknesses areas identified by the IG and presented in Table 1 differ from 

those identified by DoD management and presented in Table 2 for two main reasons: 1) DoD 

management reassessed and deemed Accounts Receivable to no longer be a material weakness and 

2) DoD management defines material weakness areas using the “assessable unit” categories used 

in the Department’s internal control program (see the footnotes to Table 1).

 1 Material weakness area includes the following FY 2017 DoD management-identified material weakness areas listed in Table 2: Contract 

Vendor Pay, Reimbursable Work Orders (budgetary), Transportation of Things, Healthcare Liabilities, and Military Pay. 2 Material weakness areas correspond to the FY 2017 DoD management-identified material weakness area Financial Reporting Compilation listed 

in Table 2.
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Summary of Management Assurances

FMFIA Section 2, Effectiveness of Internal Control over Financial Reporting

Under the oversight of the DoD Financial Improvement Audit Readiness (FIAR) 

Governance Board, discussed in the FIAR Plan Status Report, the Department’s assessment of the 

effectiveness of its internal controls over financial reporting identified 40 material weaknesses in 

FY 2017.

Table 2 lists the material weaknesses in internal controls over financial reporting, captured 

by end-to-end process and the assessable unit for the material weakness, and incorporates changes 

from the weaknesses reported in the FY 2016 Agency Financial Report.

A Marine with the Maritime Raid Force, 11th Marine Expeditionary Unit, jumps out of a CH-53E Super Stallion during helocast 

training conducted near the USS Makin Island (LHD 8) while afloat in the Indian Ocean. Helocasting allows an amphibious 

force to use an aircraft to travel long distances and then insert into a body of water where the unit can continue to an objective, 

often times using Combat Rubber Raiding Crafts.

Photo by Cpl. Devan K. Gowans
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 3 In FY 2016, Contract/Vendor Pay was incorrectly calculated as a total of seven weaknesses. The FY 2017 revised beginning balance was 

updated to reflect the correction.

4 In FY 2017, Civilian Pay was reassessed and is no longer reported as a Department-wide area of material weakness. 5 In FY 2017, the weakness in Military Pay related to the reconciliations between the Defense Joint Military Pay System (DJMS) and the general 

ledger was resolved.

6 In FY 2017 Accounts Receivable - Public was reassessed and is no longer reported as a Department-wide area of material weakness. 7 In FY 2017 the descriptions for Real Property Assets was consolidated into one overarching area as the material weaknesses addressed similar 

challenges.

8 In FY 2017 the descriptions for Environmental Liabilities was consolidated into one overarching area as the material weaknesses addressed 

similar challenges.

9 Government Furnished Property was revised to Accountability and Management Property Furnished to Contractors for the Performance of a 

Contract.

10 Military Standard Requisitioning and Issue Procedures (Requisitioning Procedures) was revised to Requisitioning Process (Customer Orders). 11 In FY 2017, the weakness in Military Standard Requisitioning and Issue Procedures (Requisitioning Procedures) related to the reconciliations 

of bulk obligations to transaction-level detail was resolved.

Table 2. Effectiveness of Internal Control over Financial Reporting (FMFIA Section 2)

Statement of Assurance: No Assurance

End-to-End 

Process

Areas of Material 

Weakness

FY 2016 

Ending

Balance

FY 2017 

Revised 

Beginning 

Balance3

New Resolved Reassessed

FY 2017 

Ending

Balance

Budget-to-Report

Fund Balance with Treasury 

(FBWT) 3 3 3

Financial Reporting 

Compilation 6 6 6

Hire-to-Retire

Health Care

Liabilities

2 2 2

Civilian Pay4 2 2 (2) 0

Military Pay 4 4 (1)5 3

Order-to-Cash Accounts Receivable - Public6 1 1 (1) 0

Procure-to-Pay

Contract/Vendor Pay 7 6 6

Reimbursable Work Orders 

(Budgetary) 3 3 3

Transportation of Things 2 2 2

Acquire-to-Retire

Equipment Assets 2 2 2

Real Property Assets7 2 2 (1) 1

Environmental Liabilities8 2 2 (1) 1

Accountability and 

Management Property 

Furnished to Contractors for 

the Performance of a Contract9

1 1 1

Internal Use Software (IUS) 1 1 1

Plan-to-Stock

Inventory 4 4 4

Operating Materials & 

Supplies (OM&S) 3 3 3

Requisitioning Process 

(Customer Orders)10 1 1 2 (1)11 2

Total Financial Reporting Material Weaknesses 46 45 2 (2) (5) 40
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Table 2a provides a brief description of each DoD management-identified material weakness in financial reporting, with 

corrective actions and the target correction year. 

Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Fund Balance with Treasury

• Ineffective processes and controls to reconcile 

transactions posted to the Department’s Fund Balance 

with Treasury (FBWT) accounts with the Treasury’s 

records.

• Collections and disbursements are reported to Treasury 

but are not recorded in the Department’s general ledger.

• Ineffective processes for providing sufficient and 

accurate documentation to support FBWT transactions 

and reconciling items.

FY 2005 Department –

wide

• Track and reconcile collection/disbursement activity from the core 

financial systems and associated feeder systems to the Department’s 

general ledgers and to Treasury accounts.

• Develop an auditable FBWT reconciliation process, to include 

implementation of internal controls that ensure reconciling 

differences are resolved in a timely and accurate manner.

• Analyze and resolve transactions posted to budget clearing accounts 

(“suspense” accounts).

• Analyze and resolve transactions reported on Treasury’s Statement 

of Differences (e.g., deposit in-transit, Intra-Governmental Payment 

and Collection, and check issue differences).

• Perform aging analysis and apply reconciliations back to at least 

FY 2013.

• Perform Statement on Standards for Attestation Engagements 

(SSAE) 16/ SSAE 18, Reporting on Controls on Fund Balance with 

Treasury – Transaction Distribution which includes Defense Cash 

Accountability Systems.

FY 2019

2 Financial Reporting Compilation

• Ineffectively designed processes and controls to prepare 

accurate financial statements supported by general 

ledger balances that align with Department strategic and 

performance plans and to ensure compliance with 

Generally Accepted Accounting Principles and the DoD 

Financial Management Regulation.

• Inability to reconcile detail-level transactions with the 

general ledgers and to provide adequate supporting 

documentation for adjustment entries.

FY 2007 Department –

wide

• Implement a Standard Financial Information Structure (SFIS) to 

standardize financial reporting that aligns with the Department’s 

mission.

• Implement controls that ensure adequate documentation exists to 

validate and support journal entries.

• Obtain population of feeder system data transactions and perform 

reconciliations from feeder systems to the financial statements.

• Implement strategy for obtaining, reconciling and securely storing 

sensitive data.

• Implement G-Invoicing, to include system change request 

requirements.

FY 2022
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

• Accounting balances are unsupported due to inadequate 

financial management systems and related processes and 

procedures.

• Inconsistency between documented processes and 

procedures for performing reconciliations and resolving 

differences and the actual processes in practice.

• Lack of developed approach for performing 

reconciliations and retaining data for sensitive activities.

• Inconsistent procedures for recording Journal Vouchers 

and Standard Business Transactions and supporting 

documentation retention procedures poses a significant 

risk to producing accurate and complete financial 

statements and reports.

• Implement the SFIS Standard Line of Accounting tools to validate 

financial data quality and to build and implement accounting system 

interfaces.

3 Health Care Liabilities

• Insufficient financial reporting and accounting for all 

health care costs and the lack of processes to reconcile 

Medical Expense and Performance Reporting System 

data.

• Inability to obtain sufficient documentation from 

compliant transaction-based accounting systems to 

support the costs of direct care provided by DoDmanaged military treatment facilities.

FY 2003 Department –

wide

• Develop and implement methodology for patient itemized bills to 

address the auditor-identified weakness related to direct care. 

Itemized patient bills for all patients provided care will be attainable 

with the deployment of the new Electronic Health Record scheduled 

for full deployment across the Military Health Services by close of 

FY 2022.

FY 2022

4 Military Pay

• Ineffective processes and controls to record military pay 

transactions and personnel actions in a timely, complete, 

and accurate manner.

• Unreliable and/or lack of supporting documentation for 

personnel actions.

• Outdated military pay and financial management 

information technology systems lack modern capabilities 

to support required auditability framework. Current 

deficiencies require unsustainable manual activities to 

support auditability.

FY 2011 Department –

wide

• Develop and implement a plan for an integrated pay and personnel 

system designed to determine pay and entitlements, report ad hoc 

financial management data, and capture and store key supporting 

documentation.

FY 2020
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

5 Contract/Vendor Pay

• Lack of standard data structure governing purchase 

request format prevents traceability and use of electronic 

transactions from initiation of funding through contract 

execution.

• Need to implement standard processes for recording 

contract obligations electronically in financial systems.

• Insufficient policies governing the recording of accruals 

related to contracts.

• Inability to reconcile contract data to financial data. 

Unable to reconcile buyer and seller intragovernmental 

and intergovernmental transactions.

• Current environment does not enable match of award to 

accounting data for public transparency, (e.g., Data Act).

• Lack of timely contract closeout and de-obligation of 

funds limits Department’s access to capital.

FY 2003 Department –

wide

• Establish and publish DoD Instruction setting policies, procedures, 

and data standards for purchase requests.

• Develop and implement automated pre-award funds validation to 

ensure accounting systems can accurately record proposed contract 

award structure.

• Scorecard all accounting and entitlement systems to track progress 

toward compliance with standard procedures.

• Design and implement controls to ensure contract data can be 

accurately matched to recorded accounting data for public posting.

• Develop department-wide contract closeout standard operating 

procedures to ensure financial systems are in balance and 

deobligation of funds occur, returning available funds back to 

programs in a timely manner.

• Expand the use of accrual recording based on Wide Area Work Flow 

acceptance data to additional accounting systems.

• Develop policies, procedures, and data standards for electronic 

intergovernmental/intragovernmental transactions. Pilot capability to 

obtain contract source data and source documentation for 

reconciliations to the financial records.

FY 2025

6 Reimbursable Work Orders

• Lack of evidence of performance, acknowledgement of 

receipt of intragovernmental goods and services, and 

validity of open obligations.

• Inability to verify the timely and accurate collection of 

disbursements and validate recorded reimbursable 

agreements meet the time, purpose, and amount criteria.

• Ineffective process to collect, exchange and reconcile 

buyer and seller intragovernmental transaction.

FY 2011 Department –

wide

• Treasury has identified G-Invoicing as a solution to 

intragovernmental transaction differences and will develop an online 

portal for conducting Buy/Sell transactions to manage the processing 

and approval of general terms and conditions (GT&C) Agreements, 

Orders, and Invoices.

• Reporting entities will perform gap analyses on key processes, build 

and enter GT&C’s agreements in G-Invoicing system, participate in 

G-Invoicing training, and build orders in accordance with data 

standards.

• Reporting entities will fund, design, and build all accounting system 

interfaces in alignment with Treasury’s G-Invoicing release 

schedule.

• Reporting entities and the Defense Finance and Accounting Service 

will implement training, guidance, and management oversight related 

to Tri-Annual Reviews and identify and implement standard 

enterprise reconciliations that provide for validation of the 

FY 2022
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

seller/buyer-side balances and input of supported journal vouchers 

for timing differences.

7 Transportation of Things

• Effective controls are not in place to prevent 

unauthorized use of Transportation Account Codes or 

unauthorized shipments from occurring.

• The Department does not have a centralized process to 

capture, retain, and retrieve transportation 

documentation required to support Transportation of 

Things (ToT) transactions, management evaluation, and 

future examinations/audits.

• The DoD Components lack sufficient evidence of 

transportation services rendered to support payment to 

Transportation Service Providers.

FY 2014 Department –

wide

• Develop controls, processes, policies and procedures for ToT.

• Continue to identify and implement standard systems and processes 

across the transportation community for Third Party Payment System 

Freight, Defense Personal Property Program, and Transportation 

Working Capital Fund.

• Develop controls, policies, regulation, and procedures that identifies 

evidential matter sufficient to evidence transportation services 

rendered.

FY 2019

8 Equipment Assets

• Ineffective processes and controls to account for the 

quantity and value of military and general equipment.

• Insufficient internal controls and supporting 

documentation requirements to ensure timely recording, 

relief and accuracy of Construction in Progress (CIP).

FY 2006 Department –

wide

• Coordinate with the Federal Accounting Standards Advisory Board 

to develop a Technical Release for the implementation of the 

Statement of Federal Financial Accounting Standards 50 guidance to 

establish the opening balance for Property Plant & Equipment.

• Develop and implement an approach for valuing equipment and 

sustaining these values (including CIP) in accordance with Generally 

Accepted Accounting Principles, as well as modifying their 

Accountable Property System of Records (APSR) to ensure they 

capture the required data.

• Develop policy guidance and update the DoD Financial Management 

Regulation chapters for accounting for military and general 

equipment, as required.

• Validate asset listings and document process and control 

environments.

• Apply controls and procedures to manage property accountability, 

including adequate documentation to support acquisition and 

disposal processes throughout the year.

• Report quarterly on progress in establishing accountable records for 

all capitalized equipment.

• Continue to convene the General Equipment (GE) Working Group to 

highlight policy and guidance gaps impacting the valuation of 

FY 2022
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

General Equipment and using the GE Working Group as a forum for 

sharing lessons learned.

• Implement revised DoD Instruction 5000.64 that addresses internal 

control improvements over property accountability such as 

designating a Component Property Lead, annually assessing APSR 

capabilities, new guidance for transfers and new guidance for “nonfielded” property.

9 Real Property Assets

• Real property processes, controls and supporting 

documentation do not substantiate that (1) all existing 

assets are recorded in an accountable system of record 

(APSR), (2) all assets recorded in the APSR properly 

reflect DoD’s legal interest in the asset, (3) all assets are 

properly valued and, (4) all assets are appropriately 

presented and consistently reported in the financial 

statements. DoD has insufficient internal controls and 

supporting documentation to ensure timely recording, 

relief and accuracy of Construction in Progress (CIP) 

and for real property construction or improvements.

FY 2000 Department –

wide

• Implement and regularly conduct a lifecycle process for a real 

property physical inventory

o Include validation of information for those data elements 

required in the calculation of Plant Replacement Value for 

alternative valuation in accordance with Statement of Federal 

Financial Accounting Standards 50.

• Implement lifecycle process for regular reconciliation of real 

property assets, to include CIP, between the APSR and the financial 

statements.

• Ensure adequate documentation is available to support existence and 

completeness and placed in service dates.

• Ensure adequate documentation is available to support rights and 

obligations for financial statement reporting, specifically real 

property use agreements outlining responsibilities of each party, to 

include but not limited to, responsibility for financial reporting.

• Implement processes and controls to support DoD policies related to 

financial reporting of fee, leased, or real property owned by host 

nations at enduring locations, the reporting of land, stewardship 

land/heritage assets, and deferred maintenance and repair liabilities.

• Complete floor-to-book and book-to-floor baseline reconciliation of 

real property assets with adequate documentation to support 

existence and completeness and rights and obligations assertions.

• Document and implement go-forward processes and control 

environment for all lifecycle processes to include, acquisition (and 

CIP), inventory, reconciliation with financial statements, and 

disposal.

• Establish systems to properly account for and value real property 

assets, including CIP.

FY 2019
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

• Implement periodic evaluations over the quality of real property data 

by making comparisons with physical assets and annual 

reconciliations with tenant organizations.

10 Environmental Liabilities

• Inability to provide assurance that clean-up costs for all 

of its ongoing, closed, and disposal operations are 

identified, consistently estimated, and appropriately 

reported. Unable to consistently report environmental 

liability disclosures and supporting documentation is not 

properly maintained and readily available for all 

environmental sites.

FY 2001 Department –

wide

• Implement systems, processes, and controls to ensure the accuracy of 

environmental liabilities identification, valuation, documentation and 

reporting.

• Continue to implement new DoD strategy for Environmental and 

Disposal Liabilities (E&DL), providing guidance on capturing the 

environmental liability universe, estimation and modeling practices 

for developing the cost estimates, documenting and supporting those 

estimates, and roll-forward procedures for ensuring that estimates are 

up to date.

• Identify systemic issues with reporting asset-related environmental 

liabilities (e.g., equipment, asbestos), to fully identify the asset 

universe, and value the associated disposal liabilities.

• Develop documentation for E&DL cost estimating models to validate 

estimates and centralize common documentation where feasible.

• Implement systems, processes, and controls to (1) establish, maintain 

, and update the complete universe of E&DL, (2) identify E&DL a 

retain proper support for cost estimate, and (3) establish correct rollforward procedures for ensuring that estimates are up to date.

FY 2018

11 Accountability & Management of Property Furnished to 

Contractors for the Performance of a Contract

• Lack of guidance and training on required policies and 

procedures for appropriately managing property 

provided to contractors resulting in incomplete DoD 

accountability records.

FY 2011 Department –

wide

• Implement electronic solutions utilizing DoD enterprise level tools 

such as the Invoicing, Receipt, Acceptance, and Property Transfer 

(iRAPT) system and Defense Logistics Management Standards to 

accomplish government furnished property (GFP) transactions (e.g. 

shipping, receiving).

• Review metrics, assertion packages, and Accountable Property 

Systems of Record for each Component and provide analysis of 

progress toward accountability.

• Evaluate current processes and existing contracts to ensure 

accountability of GFP.

• Conduct working Group meetings to share lessons learned, resolve 

identified problems and understand current status of corrective action 

plans.

FY 2019
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

• Continue to train Components on the GFP accountability 

requirements.

• Leverage audit and examination results to validate corrective actions 

resolved the internal control problem.

12 Internal Use Software

• The Department has not properly addressed the 

management and financial reporting of internal use 

software (IUS), which is required by the Financial 

Management Regulation.

FY 2015 Department –

wide

• Evaluate and improve business processes to comply with new 

accounting standard providing flexibility for DoD on reporting 

beginning balance of IUS assets.

• Identify existing IUS systems and applications to establish 

accountability over IUS assets, in accordance with DoD Instruction 

5000.76.

• Identify and establish IUS in development projects to begin 

capturing IUS capital costs in accordance with Generally Accepted 

Accounting Principles.

• Implement processes and system changes to accountable property 

systems of record to sustain the accounting and accountability of 

IUS.

• Leverage audit and examination results to validate corrective actions 

resolved the internal control problem.

FY 2020

13 Inventory

• DoD does not have sufficient policies and procedures in 

place to support inventory transactions and related 

journal vouchers (JV).

• Lack of controls to provide assurance that inventory 

recorded in the financial statements exist and is 

complete.

• Lack of clear audit trails to trace transactions from 

source documentation to the reported total dollar values 

on the inventory line item on the financial statements.

• Material-in-transit is reported at the summary level 

instead of detail level and there is a lack of adequate 

processes and controls to assure the amount reported is 

correct.

FY 2005 Department –

wide

• Develop methodology and inventory condition code reports to 

support monthly JV related to inventory, including retention of 

supporting documentation for all inventory transactions and related 

JVs.

• Ensure periodic inventories and reconciliation of inventory accounts 

to the systems of record is performed.

• Implement methodology to value inventory in the absence of 

historical costs (for baseline of asset inventory).

• Develop and implement processes and controls to support the 

valuation of inventory on a “go-forward” basis.

• Modify systems to account for Material-in-transit at the detailed 

level.

FY 2019
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Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

14 Operating Materials & Supplies (OM&S)

• Historical cost data is not maintained and therefore 

inventory values cannot be reported as required by 

Generally Accepted Accounting Principles.

• Inability to perform and document annual physical 

inventories of OM&S and maintain clear audit trails to 

permit the tracing of transactions from source 

documentation.

• Government-owned / Contractor managed and 

Government Furnished Material (GFM) inventories are 

not accounted for in DoD accountable property systems.

FY 2005 Department –

wide

• Develop and document adequate business and financial processes 

and controls to include establishing a baseline and “go forward” 

approach to track inventory values for newly acquired OM&S.

• Develop interim and go forward auditable solutions for Government 

owned/Contractor managed and GFM inventories.

• Identify and document the current inventory reconciliation processes, 

including key controls and financial transactions.

FY 2019

15 Requisitioning Process (Customer Orders)

• Insufficient controls to validate effectiveness of Visual 

Inter-fund System Transaction Accountability (VISTA) 

system functionality for Line of Accounting to interfund bills.

• Off-line requisition systems lack interfaces with the 

supply and financial automated systems to ensure timely 

recording of obligations.

FY 2013 Department –

wide

• Validate VISTA system control implementation.

• Implement system interfaces based on approved Defense Logistics 

Management Standards for requisitioning and internal ordering.

• Conduct testing to validate system interfaces.

FY 2020
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FMFIA Section 2, Effectiveness of Internal Control over Operations

DoD Components use an entity-wide, risk-based, self-assessment approach to establish and 

assess internal controls for mission-essential operations. The material weaknesses in operational 

areas are categorized in separate reporting categories.

Table 2b lists the FY 2017 material weaknesses in the internal controls over operations.

Table 2b. Effectiveness of Internal Controls over Operations (FMFIA § 2)

Statement of Assurance: Modified

Areas of Material Weakness

FY 2017 

Beginning

Balance

New Resolved Reassessed

FY 2017

Ending

Balance

Acquisition 0 2 2

Comptroller and/or

Resource Management 1 1

Contract Administration 3 3

Information Technology 0 2 2

Force Readiness 2 (1)12 1

Personnel and/or Organizational 

Management 1 2 (1)13 2

Security 0 1 1

Support Services 0 2 2

Supply Operations 1 1 (1)14 1

Total Operations Material

Weaknesses 8 10 (2) (1) 15

 12 USSOCOM has resolved a lack of diversity within the Special Operations forces. 13 USAFRICOM and USEUCOM resolved inadequate maintenance of civilian workforce critical skills. 14 GAO cited inventory management as resolved.
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Table 2b-1. FY 2017 Effectiveness of Internal Controls over Operations (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1 Acquisition

• Many DoD acquisition programs fall short of cost, 

schedule, and performance expectations resulting in 

unanticipated cost overruns, reduced buying power, 

and/or in some cases resulting in a delay or reduction in 

the capability ultimately delivered to the warfighter.

• Lack of Program Executive Office Program Manager 

acquisition lifecycle oversight mandated by the DoD 

5000 series of policies and regulations and 

organizational structure is non-compliant with DoD 

5000 series. Lack of effective process to support 

mission by identifying, assessing, and providing

oversight of development and procurement solutions. 

Inadequate documentation and filing of acquisition 

records.

FY 2011

FY 2017

Department –

wide

Defense 

Health 

Agency, 

Defense 

Threat 

Reduction 

Agency, Joint 

Improvised 

Threat 

Reduction 

Agency

• Implement DoD 5000 series policy mandates and guidance to 

properly align acquisition with Agency Mission and Needs which 

reduces risk and impacts to cost, schedule and performance.

• Continue to improve implementation of Better Buying Power 3.0 and 

clarification of DoD Instruction 5000.02.

• Develop and implement Procedural Instruction for Acquisition 

Approval and Governance. Create supporting tools to aid and inform 

decisions, reduce the staff effort to review the programs, and 

improve the monitoring and forecasting of potential trouble or risk 

areas.

• Conduct Systems Reviews, Capability Portfolio Reviews, 

Configuration Steering Boards and Cost Reviews to identify process 

inefficiencies and improve the acquisition management process.

• Develop additional procedures to establish oversight controls for 

programs, including procedures to report cost, schedule and 

performance variances, and to address reported variances.

• Establish a system of tracking to report acquisition program 

performance and highlight variances.

Reassessed 

annually

FY 2019

2 Comptroller and Resource Management

• Ineffective internal controls and management oversight 

for processes such as management of improper payments 

and use of government travel charge cards, Internal Use 

Software, and property furnished to contractors.

FY 2013 Department –

wide

• Brief leadership, appoint and train staff, develop risk profiles, 

conduct initial, quarterly and annual validation and assessment, and 

automate as appropriate.

• Implement instructions from the October 2016 DoD memorandum 

“Preventing Travel Pay Improper Payments and Enforcing 

Recovery” including:

o Implement sufficient controls to verify that all required receipts 

and substantiating documents are provided and uploaded into 

travel systems,

o Verify that claimed amounts match documents and receipts,

FY 2018
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Table 2b-1. FY 2017 Effectiveness of Internal Controls over Operations (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

o Implement adequate segregation of duties in payment approvals, 

and

o Maintain continuous monitoring over improper payments and 

take appropriate action to mitigate instances of improper 

payments.

3 Contract Administration

• The Department must strategically manage Services 

Acquisition, define outcomes, and capture data to do so.

• The Department continues to face challenges meeting 

fiscal year competition goals and needs to address illsuited contract arrangements and utilize incentives.

• The Acquisition workforce is not appropriately sized, 

trained, and equipped to meet the Department’s needs.

FY 2009 Department –

wide

• Continue to track and monitor training requirements for Acquisition 

workforce including new training for Mid/High Level Requirements 

and Contracting Professionals.

• Continue to implement the April 2016 DoD publication, “Guidance 

on Using Incentive and Other Contract Types” when selecting and 

negotiating a contract type.

Reassessed 

annually

4 Force Readiness

• Independent and internal reviews of DoD's nuclear 

enterprise identified problems and recommendations 

needed for a safe, reliable, and credible nuclear 

deterrent. These included internal control related items 

such as a need for increased managerial oversight, for an 

improved self-assessment program, for increased 

oversight capability, and for useful nuclear inspection 

reports. The reviews also made recommendations to 

address these problems.

FY 2016 Department –

wide Nuclear 

Enterprise

• Develop corrective action plans that align with the recommendations 

from the independent reviews.

Reassessed 

annually

5 Information Technology

• DoD financial and business management systems and 

processes do not provide reliable, timely, accurate 

information.

• Systemic shortfalls in implementing cybersecurity 

measures to guard the data protection environment. 

Gaps in cybersecurity access controls including 

privileged user authentication and public key 

infrastructure and device hardening/encryption 

FY 2010

FY 2010

Department –

wide

Department -

wide

• Expand review and analysis of proposed information technology (IT) 

systems. Update the DoD Instruction (DoDI) 5000.73 and increase 

Investment Review Board oversight. The target date to correct this 

material weakness coincides with the full deployment schedule of the 

core business systems.

• Establish processes to ensure stakeholder participation in the 

Cybersecurity Scorecard meetings and alignment of service 

scorecard metrics to audit findings.

• Revise current user system access policy, to include clear guidance 

on requirements for privileged user access authorization and 

FY 2020

Reassessed 

annually
U.S. Department of Defense Agency Financial Report for FY 2017

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Table 2b-1. FY 2017 Effectiveness of Internal Controls over Operations (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

contributing to data protection vulnerabilities. Issues 

exist in policy compliance with cybersecurity measures, 

oversight, and accountability.

credential revocation, user access and control training certification, 

user monitoring and Public Key Infrastructure-based 

authentication/credentials.

• Revise current acquisition and IT purchase contracts and policy to 

require the adoption of established user access controls and 

encryption/hardening standards.

• Revise current policy on shared file and drive protection, to include 

requirements for encryption use and stringent password protection 

that at a minimum meets password requirements specified in 

DoDI 8520.03 for stronger authentication.

6 Personnel and Organizational Management

• Identified high-level undesirable trends in personnel 

systems, processes and organization to include 

inefficient alignment of roles and responsibilities and 

organizational structure as well as a lack of 

comprehensive operating procedures. Insufficient 

standard formal training opportunities and certifications 

for personnel.

• Significant delays in adjudicating personnel matters of 

up to >18 months are impacting personnel morale and 

potentially reenlistment.

FY 2017

FY 2017

Department –

wide

Department -

wide

• Update current policy to delineate roles and responsibilities of 

organizations responsible for personnel and pay service delivery, 

auditability, and internal controls. Conduct formal training 

concerning new processes and instructions.

• Implement process to improve personnel and pay service delivery 

model and integrate automated personnel and pay information 

system, and validate corrective action resolve internal control 

deficiencies.

• Continue to seek manpower funding to temporarily supplement 

manpower resources.

FY 2020

FY 2018

7 Security

• DoD facilities may not have sufficient trained/qualified 

physical security personnel and infrastructure funding 

resources necessary to adequately protect assets, 

facilities, personnel, and mission. Issues regarding 

policy/contract sufficiency and compliance regarding 

security force training and accountability are involved.

FY 2017 Department 

of the Navy

• Revise security personnel contracts to include clear guidance on 

training completion, monitoring, and documentation requirements, 

including weapons qualifications.

• Revise current security policy to include documentation retention 

and training requirements.

• Revise security policy to require the completion and maintenance of 

security plans at the regional level.

• Review access to approved DoD weapons qualification facilities and 

opportunities, require planning requirements and ensure policy 

compliance enforcement and accountability.

Reassessed 

annually
U.S. Department of Defense Agency Financial Report for FY 2017

Other Information

177

Table 2b-1. FY 2017 Effectiveness of Internal Controls over Operations (FMFIA § 2)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

8 Support Services

• Insufficient Component/assessable unit (AU) audit or 

review of internal operations: Lack of evidence 

showing sufficient leadership actions regarding internal 

audit or review results. Excessive Government 

Accountability Office and DoD Inspector General (IG) 

findings. IG report indicates 37 percent of DoD internal 

audit organizations have deficiencies or fail in 

effectively monitoring Component/AU activities, 

several DoD Components/ AUs do not seem to have an 

internal audit/review function. Systemic deficiencies 

exist across the audit and review services.

• Business Transformation: The Department spends 

billions of dollars each year to maintain key business 

functions intended to support the warfighter. Lack of 

support for transformation. DoD continues to confront 

decades-old management weaknesses related to its 

business functions that support these forces.

FY 2005

FY 2005

Department –

wide

Department –

wide

• Generate requirements for internal audit/review of operations 

performance and law, regulation, and policy compliance and 

document in DoD instruction.

• Generate and deliver training in audit objectives and techniques to 

Department leadership and entire global DoD audit/review and 

managements’ internal control program communities.

• Form Office of the Secretary of Defense-level audit function 

reviewing the audit performance of DoD entity audit/review 

functions and reporting to Department senior leadership routinely.

• Adopt a reorganization under the new Chief Management Officer in 

accordance with the National Defense Authorization Act for FY 

2018. Initiate expanded Department-wide continuous process 

improvement (CPI) training, develop CPI experts, and promote 

continuous and visible leadership support for transformation.

FY 2020

FY 2020

9 Supply Operations

• Government Accountability Office identified several 

Department-wide weaknesses in the areas of asset 

visibility and materiel distribution.

FY 2011 Department –

wide

• Improve Supply Chain Management operations through better 

demand forecasting, asset visibility, and distribution processes. 

Establish executive level reform initiative to address supply chain 

improvement in FY 2018.

Reassessed 

annually
U.S. Department of Defense Agency Financial Report for FY 2017

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178

FMFIA Section4, Compliance with Federal Financial Management System Requirements

The Department requires financial system compliance with federal requirements and 

reports. The Department reported one weakness that includes a wide range of pervasive problems 

related to financial systems.

Table 2c. Compliance with Federal Financial Management System Requirements (FMFIA § 4)

Statement of Assurance: Systems do not conform to financial management system requirements

Non-Conformances

FY 2017 

Beginning

Balance

New Resolved Reassessed15

FY 2017

Ending

Balance

1. Financial Management Systems 4 0 0 (1) 3

Total System Conformance 

Material Weaknesses 4 0 0 (1) 3

 15 Two of the material weaknesses reported in FY 2017 related to lack of controls in place for legacy, core, and ERP (replacement) systems. One 

of the material weaknesses cited a lack of entity-level technology general controls, application-level general controls and automated application 

controls and the other cited a lack of internal controls for access, segregation of duties, configuration management, system interfaces and audit 

trails. These are all control domains addressed by FISCAM and have been combined into one material weakness.

Military Working Dog (MWD) unit Master-at-Arms 1st Class Stephanie M. Durazo instructs Master-at-Arms 2nd Class 

Karen L. Crocker at Naval Support Activity Souda Bay with military working dog Eeverest. The canines with the MWD 

unit are used to apprehend suspects and to detect explosives and narcotics while searching buildings, ships and submarines.

Photo by Heather Judkins
U.S. Department of Defense Agency Financial Report for FY 2017

Other Information

179

Table 2c-1. FY 2017 Compliance with Federal Financial Management System Requirements (FMFIA § 4)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1a Financial Management Systems

Business System Modernization

• The Department has not fully defined and consistently 

implemented the full range of business systems 

modernization management controls. As a result, it may 

not be able to adequately ensure that its business system 

investments are the right solutions for addressing its 

business needs, as indicated by the Government 

Accountability Office 2015 High Risk report.

FFMIA Compliance

• The Department’s financial systems currently do not 

provide the capability to record financial transactions in 

compliance with the Federal Financial Management 

Improvement Act of 1996 (FFMIA), current federal 

financial management requirements, applicable federal 

accounting standards, and the Treasury United States 

Standard General Ledger at the transaction level.

FY 2001 Department –

wide

Business Systems Modernization & FFMIA Compliance

• The Department will reduce the number of not-audit-ready 

information technology systems by 23 by FY 2022.

• To date, a total of 20 Treasury Index (TI)-97 Other Defense 

Organizations (ODOs) have been migrated to a common Enterprise 

Resource Planning (ERP) system, the Defense Agencies Initiative 

(DAI), which represents 91 percent of TI-97 appropriations received. 

There are five additional ODOs scheduled for deployment in 

FY 2018 through FY 2020. The DAI application and the data center 

hosting location (the Defense Information Systems Agency) both 

received unmodified Service Organization Controls (SOC) 1 reports 

for FY 2017. DAI is an FFMIA compliant Oracle ERP commercial 

off-the-shelf solution.

• With the assistance of the Joint Interoperability Test Command, the 

Office of the Under Secretary of Defense (Comptroller) (OUSD(C)) 

has completed Standard Financial Information Structure (SFIS) 

compliance assessments for 16 systems through FY 2017. 

Assessments for an additional 22 systems are currently planned 

through FY 2020. The SFIS requirements are aligned to and 

consistent with FFMIA requirements.

• OUSD(C) updated the Financial Improvement and Audit Readiness 

(FIAR) Guidance in April 2017 to include additional guidance 

related to identifying relevant financial and non-financial systems 

and performing FFMIA assessments. System owners record the 

FFMIA compliance status for their applications in the FIAR Systems 

Database concurrent with audit readiness status.

FY 2025
U.S. Department of Defense Agency Financial Report for FY 2017

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180

Table 2c-1. FY 2017 Compliance with Federal Financial Management System Requirements (FMFIA § 4)

Areas of Material Weakness Year 

Identified

DoD 

Components Corrective Actions

Target 

Correction 

Year

1b Financial Management Systems

General & Application Controls (FISCAM)

• The Department’s information technology systems 

environment includes numerous legacy systems, core 

enterprise systems that support the major end-to-end 

processes, and nine Enterprise Resource Planning (ERP) 

systems. Most of the business legacy systems were 

designed to support functional purposes, such as human 

resource management, property management, and 

logistics management, and not originally for auditable 

financial statement reporting. The current systems 

environment is made up of many legacy, core, and 

newly implemented (feeder and general ledger) systems 

that lack integration and are not in line with the Federal 

Information System Controls Audit Manual (FISCAM) 

requirements with regards to entity-level technology 

general controls, application-level general controls and

automated application controls (including security 

management, access, segregation of duties, 

configuration management, system interfaces, master 

data, and audit trails).

FY 2001 Department –

wide

General & Application Controls (FISCAM)

• In support of the bi-annual Financial Improvement and Audit 

Readiness (FIAR) Plan Status Report (FPSR) submitted to congress, 

the Office of the Under Secretary of Defense (OUSD(C)) has 

established a database, the FIAR Systems Database, to identify 

applications and hosting locations that impact DoD financial 

statement audits and track the auditor feedback regarding system 

controls reliance. As reported in the May 2017 FPSR, OUSD(C) has 

identified 198 applications that are relevant to financial reporting 

46 of which are considered audit ready by financial statement 

auditors, 22 that are considered as not audit ready, and 130 that have 

not yet been evaluated as part of a financial statement audit.

• The Military Departments continue to deploy their ERPs to all 

Commands along with software upgrades, implement system change 

requests and standup formal enterprise monitoring program for 

transitioning to Risk Management Framework along with moving 

commands off of legacy systems onto target systems.

• In 2005, DoD Service Organizations began to obtain Service 

Organization Control (SOC) 1 Reports for systems and hosting 

services. For FY 2017, DoD Service Organizations have obtained 

11 unmodified opinions, 5 modified opinions, and three additional 

SOC 1s are currently planned for FY 2017 – FY 2018. Service 

Organizations have also been instructed to provide plans for SOC 1 

scope expansions and additional SOC 1 reports.

• OUSD(C) has implemented a database to track auditor Notifications 

of Findings and Recommendations (NFRs) for Service Organization 

SOC 1 reports and associated corrective actions. Beginning in 

FY 2018, the NFR tracking will be extended to additional DoD 

entities responsible for systems that impact financial reporting.

FY 2025
U.S. Department of Defense Agency Financial Report for FY 2017

Other Information

181

FFMIA Section 803(a), Implementation of Federal Financial Management

Section 803(a) of the FFMIA requires each Federal agency to implement and maintain 

financial management systems that comply substantially with Federal financial management 

systems requirements, applicable Federal accounting standards, and the United States Government 

Standard General Ledger (USSGL) at the transaction level. The DoD IG and the audit agencies 

within the Military Services have reported on the Department’s noncompliance with FFMIA. The 

Department’s noncompliance is due to its reliance upon legacy financial management systems by 

the various Components. These legacy financial systems, for the most part, do not comply with 

the wide range of requirements for systems compliance, in accordance with FFMIA and therefore 

do not provide the necessary level of assurance that the core financial system data or the mixed 

systems information can be traced to source transactional documentation. Table 3 reflects the 

Department’s compliance with FFMIA.

Table 3. Compliance with Section 803(a) of the Federal Financial Management Improvement Act (FFMIA)

Agency Auditor

1. Federal Financial Management System Requirements Lack of Compliance Noted Lack of Compliance Noted

2. Applicable Federal Accounting Standards Lack of Compliance Noted Lack of Compliance Noted

3. USSGL at Transaction Level Lack of Compliance Noted Lack of Compliance Noted
U.S. Department of Defense Agency Financial Report for FY 2017

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182

PAYMENT INTEGRITY

The Federal Improper Payments Coordination Act of 2015 amended the Improper 

Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) and earlier legislation16

affecting improper payments and requires extension of Departmental reporting of its data analytics 

performance. The intent is to ensure federal and state entities maintain strong financial 

management controls to better detect, prevent, and report improper payments to the President and 

the Congress in the annual Agency Financial Report (AFR).

Office of Management and Budget (OMB) Circular No. A-123, Appendix C defines an 

improper payment as any payment that should not have been made or that was made in an incorrect 

amount under statutory, contractual, administrative, or other legally applicable requirements. 

Incorrect amounts are overpayments or underpayments that are made to eligible recipients 

(including inappropriate denials of payment or service, any payment that does not account for 

credit for applicable discounts, payments that are for an incorrect amount, and duplicate 

payments). An improper payment also includes any payment that was made to an ineligible 

recipient or for an ineligible good or service, or payments for goods or services not received 

(except for such payments authorized by law). In addition, when an agency's review is unable to 

discern whether a payment was proper as a result of insufficient or lack of documentation, this 

payment must also be considered an improper payment.

The Department of Defense (DoD) reports its improper payments and payment recapture 

programs in accordance with applicable laws and regulations. The following subcategories are 

included in this section:

I. Risk Assessment

II. Payment Reporting

A. Root Causes

B. Corrective Actions

III. Recapture of Improper Payments Reporting

IV. Barriers

V. Accountability

VI. Agency Information Systems and Other Infrastructure

VII. Sampling and Estimation

VIII. Significant Accomplishments

The Department reports improper payments for the following nine programs:

1. Military Health Benefits – payments made by the Defense Heath Agency (DHA) to 

private sector contractors for delivery of health care services to TRICARE eligible 

beneficiaries.

 16 Improper Payments Information Act of 2002 (IPIA), as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA) 

and the Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA)
U.S. Department of Defense Agency Financial Report for FY 2017

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183

2. Military Pay – payments made by the Defense Finance and Accounting Service (DFAS) 

to active and reserve/guard service members for salary, benefits, and other compensation 

entitlements.

3. Civilian Pay – payments made by DFAS to civilian employees for salary, benefits, and 

other compensation entitlements.

4. Military Retirement – payments made by DFAS to military retirees and their surviving 

spouses and other family members for pension and/or disability entitlements.

5. DoD Travel Pay – payments made by DFAS, the Army, the Navy, and the Air Force to 

active and reserve/guard service members and civilian employees for temporary and 

permanent travel and/or transportation related expenses.

6. DFAS Commercial Pay – payments made by DFAS, the Army, and the Navy to vendors 

and contractors for goods and services.

7. Commercial Bill Pay Office Naples – payments made by the Navy overseas Naples office 

to vendors and contractors for goods and services.

8. USACE Travel Pay – payments made by the U.S. Army Corps of Engineers (USACE) to 

active and reserve/guard Service Members and civilian employees for temporary and 

permanent travel and/or transportation related incurred expenses.

9. USACE Commercial Pay – payments made by USACE to vendors and contractors for 

goods and services.

I. Risk Assessment

In Fiscal Year (FY) 2017, the Department applied statistical sampling and estimation 

methods to produce and report statistically valid improper payment estimates for each of the nine 

programs described above. In accordance with OMB Circular No. A-123, Appendix C, agencies 

are not required to perform additional risk assessments on programs reporting improper payment 

estimates. However, any new programs identified must be assessed for improper payment risk 

prior to reporting an improper payment estimate.

The Navy Commercial Bill Pay Office (CBPO) Singapore, a new program, performed a 

risk assessment for commercial vendor payments in FY 2017 in coordination with the Department 

of Navy Office of Financial Operations. CBPO Singapore conducted both a quantitative and a 

qualitative risk assessment by using a simple random sampling plan and a questionnaire in 

accordance with OMB Circular No. A-123, Appendix C. The risk assessments indicated that 

strong internal controls are in place and the program is not susceptible to significant improper 

payments. However, CBPO Singapore will perform post-payment reviews and report improper 

payment results in FY 2018.
U.S. Department of Defense Agency Financial Report for FY 2017

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184

II. Payment Reporting

Table 4 reports the estimated amount of payments that were improperly paid and the 

corresponding percent by program for FY 2017. It also reports the estimated amount of improper 

payments that resulted in overpayments or underpayments and the OMB approved reduction 

targets by program for FY 2018

.

USS Hopper (DDG 70) prepares to moor in Homer, Alaska, for a scheduled port visit. Hopper is visiting Homer in conjunction 

with its participation in Northern Edge 2017. Northern Edge is a biennial training exercise conducted in the Joint Pacific Alaska

Range Complex, which is comprised of the area within the Gulf of Alaska, as well as land and airspace within the state, and 

includes participation from units assigned to Alaskan Command, U.S. Pacific Fleet, U.S. 3rd Fleet, Marine Corps Forces Pacific, 

and U.S. Army Pacific.

Photo by Mass Communication Specialist 3rd Class Joseph Montemarano
U.S. Department of Defense Agency Financial Report for FY 2017

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185

Table 4. Improper Payment Reduction Outlook

($ in millions) 12 month Sampling Timeframe for FY 2017 data

Program 

Name

FY2016

Outlays 

($M)

FY2016

IP 

Amount

($M)

FY 

2016

IP Rate

FY2017

Outlays 

($M)

FY2017

IP 

Amount

($M)

FY 

2017

IP Rate

FY2017 

Overpayment $ 

FY2017 

Underpayment $ 

FY2018 Est. 

Outlays 

FY2018 

Est. IP 

%6

FY2018 

Est. IP $ 

Month 

and 

Year 

start 

date for 

data

Month 

and 

Year 

end 

date 

for 

data

Military 

Health 

Benefits1, 2, 3, 4, 

5, 6

$20,461.50 $146.10 0.71% $23,883.30 $150.17 0.63% $128.00 $22.17 $24,862.52 1.40% $349.23 Aug-16 Jul-17

Military Pay7 $114,902.75 $196.23 0.17% $96,777.27 $182.51 0.19% $175.60 $6.91 $81,511.01 0.20% $163.02 Aug-16 Jul-17

Civilian Pay7 $58,088.10 $58.73 0.10% $61,811.17 $68.10 0.11% $68.10 $0.00 $65,772.87 0.10% $65.77 Aug-16 Jul-17

Military 

Retirement7 $59,931.73 $9.46 0.02% $60,353.93 $127.58 0.21% $78.45 $49.13 $54,445.20 0.21% $114.33 Aug-16 Jul-17

DoD Travel 

Pay8, 9 $6,254.67 $451.99 7.23% $5,279.78 $263.34 4.99% $248.64 $14.70 $7,790.60 6.00% $467.44 Jul-16 Jun-17

DFAS 

Commercial 

Pay10

$248,536.45 $110.82 0.04% $259,165.16 $0.86 0.00% $0.16 $0.70 $260,251.35 0.04% $103.94 Jul-16 Jun-17

Commercial 

Bill Pay 

Office 

Naples11

N/A N/A N/A $570.10 $0.01 0.00% $0.01 $0.00 $570.10 0.00% $0.00 Jul-16 Jun-17

Navy ERP 

Commercial 

Pay12

$6,901.27 $0.00 0.00% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

USACE 

Travel Pay13 $188.85 $0.38 0.20% $196.03 $1.58 0.81% $1.13 $0.45 $203.47 0.70% $1.42 Jul-16 Jun-17

USACE 

Commercial 

Pay14, 15

$18,158.00 $0.00 0.00% $8,945.05 $163.20 1.82% $161.17 $2.03 $26,306.71 1.37% $360.40 Jul-16 Dec-16

TOTAL $526,522.05 $973.71 0.18% $516,981.79 $957.35 0.19% $861.26 $96.09 $521,713.83 0.31% $1,625.55
U.S. Department of Defense Agency Financial Report for FY 2017

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186

1 Per OMB direction, the FY 2016 IP rate was revised from .74% to .71% to match information reported by OMB in FY 2016 on the paymentaccuracy.gov website. In FY 2016, DoD reported a .74% IP 

rate because though total outlays for DHA were $20,461.50, the IP rate was based on a total outlays number of $19,681.65, the difference resulting from 1) the TPharm quarterly May15 – Jul15 audit 

was not conducted due to system constraints; 2) the TPharm Oct14 – Sept15 low dollar audit was not conducted due to contractor’s opposition to participate; and 3) the ADDP semi-annual Aug14 –

Jan15 audit was not conducted due to system constraints. 

2 DHA reports data 12 months in arrears. DHA’s audits require 10-12 months to conclude, thus this FY 2017 Agency Financial Report (AFR) includes data from FY 2016 audits.

3 FY 2017 outlays are the sum of the dollars paid by private sector contractors (i.e., TRICARE Managed Care Support Contracts (MCSCs), TRICARE Dual Eligible Fiscal Intermediary Contract 

(TDEFIC), TRICARE Overseas Program (TOP), TRICARE Pharmacy Program (TPharm), and Active Duty Dental Program (ADDP)) and reviewed by an external independent contractor (EIC) on a 

quarterly basis. The Oct15 – Sept16 TPharm low dollar audit, representing $138,057,695 paid dollars, was not performed due to the contractor opting out of the review (with approval by the Contracting 

Officer Representative (COR)). Therefore, these dollars are not included in the FY 2017 outlays. In addition, the FY 2017 outlays also include Administrative payments shared among multiple 

contractors to administer the TRICARE program and other contracts that are not included in DHA EIC audits (i.e., Uniformed Services Family Health Plan, Women, Infants, and Children, TRICARE 

Dental Program, TRICARE Retiree Dental Program, and Mail Order Pharmacy), but which have internal and external pre and post-payment controls. Administrative payments are validated via 

TRICARE Encounter Data (TED) system program edits, COR review/validation procedures, and/or internal/external financial audits.

4 The FY 2017 IP rate of 0.63 percent does not represent a true statistical estimate for DHA because the Oct15 – Sept16 low dollar TPharm audit was not conducted.

5 The FY 2018 estimated outlays were calculated using the Office of Management Budget Consumer Price Index for All Urban Consumers (CPI-U) Annual Averages and Percent Change Table. As 

DHA reports 12 months in arrears, the FY 2017 CPI-U medical percent change was used to calculate the FY 2018 outlay estimates.

6 DHA uses 1.75 percent as its out-year target because that is the contractual claims processing performance requirement. DHA has had contracts with payment accuracy performance standards for 

many years, wherein the contractor is required to meet TRICARE policy or contractual payment accuracy performance standards as a result of the quarterly or semi-annual EIC compliance reviews. 

While the Military Health Benefits target for FY 2018 has increased, DHA lowered the payment accuracy performance standard from 2% to 1.75% therefore DoD is confident that 1.40% is an 

aggressive improper payment reduction target for this program.

7 Over the past five FYs, DoD has reported improper payment rates of less than one percent for the following programs: Civilian Pay, Military Pay, Military Retirement, and DFAS Commercial Pay. 

Since the rates are very low, DoD is unable to measure a statistically valid difference between the improper payment rates and the future year reduction targets for these programs. As such, DoD’s FY 

2018 reduction targets for these programs remain constant or flat to the FY 2017 reported IP rates.

8 DoD Travel Pay does not include Navy WinIATS PCS/TDY payments as the Navy was not able to complete WinIATS reviews in FY 2017 due to resource constraints. Navy is actively working to 

complete their reviews of FY 2017 payments by Dec17 and will either file an addendum to this table or report 24 months of WinIATS data in the FY 2018 AFR. Moreover, this program includes only 

nine months of DFAS Defense Travel System (DTS) data (Jul16 – Mar17). Post-payment reviews were not able to be conducted on DTS vouchers created between Apr17 – Jun17 due to a catastrophic 

data failure by a contract provider resulting in an irrecoverable loss of supporting documentation. As a result, DoD was forced to exclude DTS travel payments between Apr17 – Jun17 from its FY 2017 

sampling population. Furthermore, this program includes only eight months of USMC WinIATS data (Nov16 – Jun17). USMC is actively working to complete their reviews of FY 2017 payments and 

will report 16 months of WinIATS data in the FY 2018 AFR. 

9 The DoD Travel Pay reduction target for FY 2018 is being increased to six percent. The average rate for this program based on the rates reported in FYs 2015, 2016, and 2017 results in 6.7 percent. 

However, DoD is confident that six percent is an achievable target based on the corrective actions implemented to date to reduce travel improper payments.

10 The DFAS Commercial Pay sampling timeframe was Jul16 – Jun17 for the majority of the commercial payment systems, and Jun16 – May17 for the Financial Accounting and Budgetary System, the 

Standard Voucher Examination System, and the Transportation Financial Management System. This program also includes Army OCONUS Commercial Vendor Services payments and payments from 

the Navy Enterprise Resource Planning (ERP) program.

11 Per OMB direction, FY 2016 data for the Commercial Bill Pay Office (CBPO) Naples was removed since DoD did not submit a sampling plan for this program to OMB in FY 2016 and therefore, 

OMB did not report improper payments data for this program on the paymentaccuracy.gov website in FY 2016. Please note, DoD reported the following information for the CBPO Naples in the FY 

2016 AFR: Outlays = $472.03, IP % = 0.01%, IP = $0.06. 

12 Effective FY 2017, the Navy ERP Commercial Pay program was sampled by DFAS, and is reported as part of the DFAS Commercial Pay program.

13 The FY 2018 estimated IP rate for Travel Pay equals the FY 2017 IP rate minus the difference of the FY 2017 IP rate minus the FY 2016 IP rate multiplied by 25 percent.

14 Due to implementation of revised sampling plan USACE was unable to complete a 12-month review of FY 2017 data for Commercial Pay. Commercial Pay FY 2017 outlays equal only the first two 

quarters in the sampling timeframe. Six quarters will be reported in the FY 2018 AFR.

15 The FY 2018 estimated IP rate for Commercial Pay equals the FY 2017 IP rate minus the difference of the FY 2017 IP rate minus the FY 2016 IP rate multiplied by 25 percent.
U.S. Department of Defense Agency Financial Report for FY 2017

Other Information

187

Table 5 reports the amount of improper payments identified in samples by program that 

resulted in actual monetary losses to the government. The purpose of this classification is to 

estimate the monetary loss to the Federal Government due to improper payments. Monetary loss 

to the Government would be an amount that must not have been paid and in theory should/could 

be recovered. This table excludes improper payments resulting from insufficient supporting 

documentation.

Table 5: Improper Payment Classification

($ in millions)

Program or Activity

Actual 

Monetary loss to 

the Government 

identified in 

Sample

Estimated Total 

Monetary loss to the 

Government

Military Health Benefits $ 4.00 $ 74.05 

Military Pay $ 174.24 $ 175.60 

Civilian Pay $ 68.10 $ 68.10 

Military Retirement $ 8.52 $ 78.44 

DoD Travel Pay $ 3.15 $ 151.28 

DFAS Commercial Pay $ 0.00 $ 0.16 

Commercial Bill Pay Office 

Naples $ - $ - 

USACE Travel Pay $ 0.01 $ 1.13 

USACE Commercial Pay $ - $ - 

TOTAL $ 258.03 $ 548.76 
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Table 6 reports the root cause for overpayments and underpayments by amount and by program for FY 2017.

Program Name Payment Type

Inability to

Authenticat

e Eligibility

Administrative 

or

Process Errors 

Made by:

Federal Agency

Administrative 

or

Process Errors 

Made by:

State or Local 

Agency 

Medical 

Necessity

Insufficient 

Documentation

to Determine

Notification of 

death after

monthy payments 

disbursed

for Military 

Retirees

and Annuitants

Other reason (1):

Authorization/

Preauthorization

Needed 

Other reason 

(2):

Development 

Required 

Other reason 

(3):

OHI Payment 

Omitted 

Other reason (4):

DRG 

Reimbursement 

Error 

Other 

reason (5):

Timely 

Filing 

Error 

Other 

reason (6): 

Other

TOTAL

Military Health Benefits Overpayments $ 0.01 $ 49.69 $ - $ 1.57 $ 61.54 $ - $ 4.66 $ 0.20 $ 2.58 $ 0.48 $ 0.01 $ 7.26 $ 128.00 

Military Health Benefits Underpayments $ 0.56 $ 19.14 $ - $ - $ - $ - $ 0.38 $ - $ 0.31 $ 1.44 $ 0.05 $ 0.29 $ 22.17 

Military Pay Overpayments $ 175.60 $ 175.60 

Military Pay Underpayments $ 6.91 $ 6.91 

Civilian Pay Overpayments $ 68.10 $ 68.10 

Civilian Pay Underpayments $ - $ - 

Military Retirement Overpayments $ 70.35 $ 8.10 $ 78.45 

Military Retirement Underpayments $ 49.13 $ 49.13 

DoD Travel Pay Overpayments $ 110.30 $ 138.34 $ 248.64 

DoD Travel Pay Underpayments $ 14.70 $ - $ 14.70 

DFAS Commercial Pay Overpayments $ 0.16 $ 0.16 

DFAS Commercial Pay Underpayments $ 0.70 $ 0.70 

Commercial Bill Pay Office Naples Overpayments $ 0.01 $ 0.01 

Commercial Bill Pay Office Naples Underpayments $ - $ - 

USACE Travel Pay Overpayments $ 1.13 $ 1.13 

USACE Travel Pay Underpayments $ 0.45 $ 0.45 

USACE Commercial Pay Overpayments $ 104.76 $ 56.41 $ 161.17 

USACE Commercial Pay Underpayments $ 2.03 $ 2.03 

TOTAL $ 0.57 $ 564.79 $ 108.37 $ 1.57 $ 256.29 $ 8.10 $ 5.04 $ 0.20 $ 2.89 $ 1.92 $ 0.06 $ 7.55 $ 957.35

Table 6: Improper Payment Root Cause Category Matrix

 ($ in millions)
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A. Root Causes

The following section provides additional information regarding the root causes of 

improper payments for each program reported in Table 6. 

Military Health Benefits

External Independent Contractor (EIC) auditors manually review previously processed 

health care claims to identify improper payments, and to validate claims processing procedures 

utilized by private sector claims processors. Overpayment or underpayment errors can be assessed 

for (but not limited to) payments in the correct amount being sent to the wrong payee, incorrect 

denial of a payable claim, misapplication or calculation of a patient’s deductible or copayment/share liability, or payment of a non-covered service or supply. In FY 2016, EIC 

compliance reviews determined the root cause for overpayment or underpayment error assessment 

was the result of the following:

• Inability to Authenticate Eligibility – DHA purchased care claims processors incorrectly 

paid or denied a healthcare claim as a result of an incorrect patient eligibility determination.

• Administrative or Process Errors – DHA’s EIC determined throughout the course of 

compliance reviews that DHA purchased care claims processors incorrectly processed 

healthcare claims by incorrectly applying a reimbursement determination or methodology 

when processing a healthcare claim; incorrectly calculating the Federal Government’s 

liability after consideration of other health insurance (OHI) payment(s); based on patient 

healthcare claims history, incorrectly made duplicative payments for some or all of 

previously paid healthcare services/supplies; miscalculated the portion of the patient’s 

healthcare responsibility either as a cost-share or benefit deductible; made a payment for 

services or supplies which were not a TRICARE benefit or incorrectly denied payment for 

services or supplies that were a TRICARE benefit; incorrectly calculated the government’s 

reimbursement of healthcare based on a billed amount other than what was being reported 

on a healthcare claim form or itemized medical bill; or incorrectly based its reimbursement 

determination/methodology on an incorrect procedure code.

• Medical Necessity Not Evident– the claims processor failed to follow TRICARE medical 

necessity review policy requirements prior to processing and paying a healthcare claim, or 

failed to provide the medical necessity review documentation needed to support or 

substantiate the adjudication of the claim being reviewed during audit.

• Insufficient Documentation to Determine Payment – the claims processing documentation 

provided during audits by claims processors was insufficient and did not support the 

adjudication of the healthcare claim; as a result the EIC determined the services or 

procedures rendered should not have been paid. 

• Other: In addition to the OMB established root cause error categories listed above, DHA 

established a number of individual payment error categories that can be assessed against 

private sector contractors during a post-payment EIC compliance review. For FY 2016 the 

following individual payment errors were assessed against private sector contractors:
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1) Authorization/Pre-Authorization Needed – the claims processor failed to follow 

TRICARE authorization or pre-authorization requirements prior to processing a 

payment for a healthcare claim, or on audit failed to provide the authorization/priorauthorization documentation needed to support the adjudication of the healthcare 

claim.

2) Claims Development Required – the claims processor processed and paid a 

healthcare claim without obtaining additional or correct information needed to 

support or justify the payment of the healthcare claim, as required by TRICARE 

policy.

3) OHI Payment Omitted – claims documentation submitted for processing contained 

information of OHI payment, however the claims processor failed to consider such 

information when determining Government liability.

4) Diagnosis Related Group (DRG) Reimbursement Error – the claims processor 

made an error in calculating the reimbursement due to an institution based on the 

DRG reimbursement system.

5) Timely Filing Error – the claims processor processed and paid claims for benefit 

dates of service that did not meet TRICARE timely filing requirements, and failed 

to obtain the appropriate timely filing waiver(s) needed to authorize such payments.

6) Other – EIC assesses this error category when a payment error is detected but none 

of the other error code reasons available are applicable to the claim being reviewed. 

In this case the EIC auditor specifies, in its detailed audit comments, the reason for 

the payment error assessment.

Military Pay

The primary reason for Military Pay errors is the combination of units and service members 

untimely submittal of military pay documents for processing. Nearly 100 percent of the improper 

payments identified during this reporting period were recovered, or are in the process of being 

recovered.

Military Pay improper payments typically result from incorrect entitlement allocation. 

These entitlements are:

• Basic allowance for housing;

• Base pay for Active Duty and incorrect Active Duty pay for Reservists;

• Overseas housing allowance;

• Family separation allowance, Active and Reserve;

• Hostile fire/imminent danger pay; and

• Miscellaneous categories, which include over 25 different entitlements.
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Civilian Pay

The Civilian Pay improper payments primarily were overpayments due to administrative 

errors caused by untimely or inaccurate entry of information into pay systems. This is in part due 

to the high turnover rate of civilian payroll clerks. Improper payments identified include:

• Incomplete and/or inaccurate time and attendance records,

• Late personnel actions, and

• Unsupported overseas and other allowances.

The Defense civilian payroll systems, like most government payroll systems, require time 

and attendance submissions occur prior to the end of the actual pay period to meet processing 

deadlines. Therefore, the Department must correct overpayments and underpayments in a 

subsequent pay period. Errors in overseas Civilian Pay accounts often occur due to payment of an 

entitlement that erroneously continued after the employee has returned to the United States. These 

improper payments often result from inaccurate personnel actions generated by human resources 

offices. In general, human resource offices process corrections in subsequent pay periods. These 

corrections result in pay and allowance re-computations and create a collection action to offset the 

overpayment.

Military Retirement

Over 95 percent of actual errors identified in the Death Master Files resulted from 

payments made by DFAS to deceased retirees or annuitants prior to DFAS receiving notification 

of their passing. Untimely notification of a retiree’s or annuitant’s death, by family members or 

other entities, often results in an initial, unavoidable overpayment to a deceased retiree. A review 

of overpayments to deceased retirees in FY 2017 disclosed that the Department recovered 

approximately 95 percent of overpayments within 60 days of initial notification of the retiree’s or 

annuitant’s death.

Other common errors identified through post-payment reviews included:

• Non-compliance with documented procedures,

• No documented procedure in place for retroactive Veterans Affairs award policy changes,

and

• Manual computation errors.

DoD Travel Pay

The DoD Travel Pay improper payments primarily resulted from voucher input errors by 

travelers and/or inadequate reviews of travel vouchers by approving officials (AOs). Travel Pay 

errors identified in the samples can be separated into two distinct categories: administrative errors 

and monetary errors. 
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Administrative errors include missing or invalid receipts (as defined in the Joint Travel 

Regulations) and/or omission of required elements (i.e., dates and/or signatures).

• Receipts: Failure to attach receipts to the travel voucher, invalid or incorrect receipts, and 

illegible receipts.

• Signatures/Dates: Failure of travelers and/or AOs to sign and/or date the DD Form 1351-2, 

Travel Voucher, prior to submission by the Non-DTS Entry Agent into the Defense Travel 

System (DTS).

Monetary errors are payments that may have resulted in an actual loss to the government.

• Meals & Flat Rate Per Diem: Failure to properly calculate flat rate per diem (i.e., partial 

per diem) once a member is on travel for 31 or more days, as well a failure to pay the proper 

meal rate.

• Lodging: The attached receipt for lodging does not reflect the same amount claimed on the 

travel voucher.

• Dual lodging paid incorrectly.

• All other monetary errors, not categorized above, include a combination of 28 additional 

categories.

DFAS Commercial Pay

The DFAS Commercial Pay improper payments resulted from administrative errors. 

Administrative errors included:

• Contract input errors,

• Late payment interest penalty errors, and

• Payment processing and invoice errors.

Commercial Bill Pay Office Naples

The Commercial Bill Pay Office Naples improper payment resulted from a duplicate 

payment made during a reorganization of the program.

USACE Travel Pay

The USACE Travel Pay improper payments resulted from voucher input errors by travelers 

and inadequate reviews of travel vouchers by AOs.

USACE Commercial Pay

The USACE Commercial Pay improper payments resulted from administrative errors on 

contracts and insufficient documentation to support contract payments.
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B. Corrective Actions

The following section describes the corrective actions the Department has implemented or 

is currently in the process of implementing to reduce and prevent improper payments (IP) in the 

five programs determined, in FY 2017, to be susceptible to significant improper payments. 

According to OMB Circular No. A-123, Appendix C, “significant improper payments” are defined 

as gross annual improper payments (i.e., the total amount of overpayments and underpayments) in 

the program exceeding (1) both 1.5 percent of program outlays and $10,000,00 of all program or 

activity payments made during the fiscal year reported or (2) $100,000,000 (regardless of the 

improper payment percentage of total program outlays).

Military Heath Benefits (FY 2017 IP Amount = $150.17M)

DHA private sector contractors are monetarily incentivized or dis-incentivized, through 

payment accuracy performance standards, to reduce and/or eliminate improper payments. The 

fewer improper payments the contractors make, the less money is deducted from their 

reimbursements. Additionally, details of the EIC compliance reviews are shared with the private 

sector contractors, DHA Program Offices, private sector contract Contracting Officers (COs), and 

government Contracting Officer Representatives (CORs) to coordinate appropriate corrective 

action plans with the respective private sector contractor. Moreover:

• Upon completion of an EIC compliance review, respective contractors review results, 

formulate an action plan to mitigate future findings, and derive a process to avoid future 

improper payments; 

• If warranted, contractor claims processing systems are modified to meet the Department’s 

healthcare policy, reimbursement, or benefit requirements; and

• If audit results show a potential error pattern for a certain type of claim, additional claims 

are reviewed to conduct a focused study, and adjustment actions are taken as appropriate.

Each private sector contractor has its own business process for evaluating compliance 

review results, conducting root cause analyses to ensure the accuracy of future claims payment, 

and developing internal corrective action plans. If required, DHA COs and CORs issue contractor 

corrective action plans to resolve and track noncompliance with TRICARE healthcare 

policy/regulations and purchased-care contracts.

Military Pay (FY 2017 IP Amount = $182.51M)

The Department will continue providing comprehensive training and standard desk 

procedures to new payroll clerks to improve accuracy in processing payroll accounts. In addition, 

the Department, primarily through DFAS, will continue advising the Military Services of the 

results of payment reviews and the associated reasons for the errors. Moreover, DFAS will 

continue to provide the Military Services with monthly reports on the results of statistical reviews, 

including the reasons for and dollar value of errors and year-to-date trends, to enhance Service 

training.
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Additionally, DFAS will continue to distribute Personnel Payment Reports to the Military 

Services as a way of providing the most common debts for in-service and out-of-service members. 

Moreover, DFAS and the Military Services will meet on a monthly basis to discuss the reasons for 

the debts and work to resolve them. The Military Pay Service & Business Integration Offices will 

also continue to validate pay and entitlement information by reconciling data between the Defense 

Joint Military Pay System and the Marine Corps Total Force System to Veterans Administration 

data and data in the Defense Enrollment Eligibility Reporting System (DEERS). These 

reconciliations are designed to prevent improper payments by detecting incorrect housing rates, 

member-to-member marriages, departed or separated service members, and “ghost” accounts.

Military Retirement (FY 2017 IP Amount = $127.58M)

The Department’s control processes to prevent, identify, and reduce overpayments to 

deceased retirees and annuitants include:

• Validating the existence of retirees and/or annuitants living outside the United States;

• Certifying annually the existence and entitlement for all annuitants:

o Who are under 55 years of age,

o Who receive hard copy checks in a foreign country, and/or

o Who have a permanent disability (regardless of age);

• Conducting periodic, random certifications for retirees over a certain age; and

• Validating military retiree’s existence if payments are returned and/or if a benefit account 

was suspended for several months due to a bad check or incorrect correspondence address.

Early detection and data mining efforts, along with partnerships with other federal and state 

entities, are also used to detect improper payments. The Department takes a proactive approach 

to ensuring the accuracy of Military retiree payments by routinely comparing retired and annuitant 

payroll master file databases with the Social Security Administration’s Death Master File, and 

periodically comparing records with the Office of Personnel Management’s deceased files, 

Department of Veterans Affairs’ database, and with individual states with sizable retiree and 

annuitant populations (e.g., Texas, California, and Florida). Payments for military retirees 

identified as deceased are suspended pending validation of death.

DoD Travel Pay (FY 2017 IP Amount = $263.34M)

Over the past five FYs, the DoD Travel Pay program has consistently reported the highest 

improper payment error rate among all DoD-reported programs. As a result, reducing travel 

improper payments and enhancing recovery efforts are major priorities of the Office of the Under 

Secretary of Defense (Comptroller) (OUSD(C)). OUSD(C) implemented a revised Travel Pay 

Remediation Plan in FY 2017, and as part of the plan, the Deputy Chief Financial Officer (DCFO) 

was designated as the Senior Accountable Official (SAO) for travel improper payments for the 

Department and the Accounting and Finance Policy (A&FP) Directorate was designated as the 
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Executive Agent of the DoD improper payments program. Moreover, the DCFO and A&FP 

Directorate implemented the revised plan by:

• Identifying SAOs at the Senior Executive Service level for travel improper payments in 

each of the Military Services and seven defense agencies (i.e., U.S. Special Operations 

Command (USSOCOM), the Defense Contract Audit Agency, the Defense Contract 

Management Agency, DFAS, the Defense Logistics Agency, the Defense Information 

Systems Agency, and the Missile Defense Agency);

• Holding quarterly progress meetings;

• Using the new DFAS Postpay Audit Compliance Tool to distribute detailed travel error 

reports to Components for action; and

• Developing Component corrective action plans, which included additional training for 

travelers and AOs, enhancements to DTS, and pre-payment reviews of vouchers by 

independent third-parties.

Through SAO leadership, the Military Services and six defense agencies developed and 

implemented travel remediation plans to improve the DoD Travel Pay program and reduce its 

improper payments rate. The Department’s travel remediation efforts resulted in a positive 

reduction in travel improper payments (see Table 4) and improved metrics. With respect to 

metrics, DFAS overhauled its DTS post-payment review reports to provide significantly more 

actionable data to the applicable Military Services and defense agencies. The monthly DFAS 

reports were presented at the SAO meetings to highlight progress, disclose the most common types 

of errors, recommend corrective actions, and share best practices. The SAO structure and meetings 

will continue and be expanded to provide further oversight and accountability in FY 2018.

In FY 2017, DFAS launched a new post-pay database that consolidated the results of their 

DoD Travel Pay reviews. The database enabled DFAS to provide DoD leadership with timely, 

detailed information on the root causes of travel improper payments, recovery of overpayments,

and other data at the Military Service and activity level by key factors such as: agency, installation, 

traveler and reviewer/AO, and detailed error descriptions. Specifically, the database provided 

information to the Department, which was used on the front-end of travel operations to reduce 

improper payments.

DFAS also produced multiple training videos, articles, and other online resources to inform 

travelers, reviewers, and AOs of the most common errors and mitigating controls to prevent them 

when submitting and/or approving a voucher for payment. These resources have been posted to 

various homepages, websites, and social media pages with the intent of impacting a wide audience

In addition, the Defense Travel Management Office enhanced DTS in July 2017 by 

incorporating a front-end control notification that visually alerts travelers and reviewers/AOs if 

required receipts are missing for certain expenses. This system enhancement should have a 

significant impact on travel errors related to insufficient documentation in FY 2018.
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USACE Commercial Pay (FY 2017 IP Amount = $163.20M)

USACE is putting additional controls in place to improve the management and 

documentation of payments at the Contract Line Item level, where warranted. Additionally, 

USACE is taking corrective actions systemically within the Corps of Engineers Financial 

Management System (CEFMS) to automate the supporting documentation delivery process to 

ensure timely delivery of documentation for audit/review.

III. Recapture of Improper Payments Reporting

Table 7 reports each program or activity that expends $1 million or more annually and 

either conducts a payment recapture audit or recaptures payments outside of a payment recapture 

audit. It also reports the amount recovered through recapture audits and amounts recovered 

through sources other than payment recapture audits.

A Soldier demonstrates hand-to-hand combat on a “volunteer” from the crowd during the 6th Ranger Training Battalion’s open 

house event April 29 at Eglin Air Force Base, Fla. The event was a chance for the public to learn how Rangers train and operate. 

The event displays showed equipment, weapons, a reptile zoo, face painting and weapon firing among others. The demonstrations

showed off hand-to-hand combat, a parachute jump, snake show, and Rangers in action.

Photo by Samuel King Jr.
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1 The amount identified in FY 2017 represents the total extrapolated overpayment dollars in the universe (FY 2017 over-payments from Table 4).

2 The amount recovered in FY 2017 represents negative TRICARE Encounter Data (TED) transactions to DHA (recoupments) for claims in audit 

universes. DHA only included recoupments that occurred after each audit’s end date, as recoupments occurring before an audit concluded should 

not be considered a recoupment due to that audit. In contrast, recoupments that occurred after an audit concluded can reasonably be expected to 

be a result of findings from that audit. DHA chose to report recoupments this way to match the extrapolation methodology for overpayments. 

Overpayments from sample results are extrapolated to represent the entire universe (reported as FY 2017 over-payments in Table 4). Therefore, 

DHA considers any negative payment across the universe to be a recoupment, regardless of whether the claim was randomly selected to be part of 

the sample. The amount recovered in FY 2017 includes recoupments for overpayments identified in audits as well as refunds occurring in the 

course of routine claim adjustments (for claims initially paid in FY 2016 and other fiscal years). DHA has no way to distinguish overpayment 

recoupments from routine claim adjustments.

3 Recoupments for Oct15 – Sept16 TRICARE Pharmacy low dollar claims were not included in the amount recovered in FY 2017 figure because 

this audit was not conducted.

4 The Active Duty Dental Program (ADDP) refunds were calculated differently. The amount recovered in FY 2017 figure for ADDP represents 

refunds shown on contractor invoices to DHA. ADDP data is not included in the TED system, thus contractor invoices were used because TED 

transactions are not available.

5 Military Pay and Civilian Pay include in-service collections for recovery amounts. Military Pay also includes out-of-service debts. Both inservice collections and out-of-service debts continue to be collected beyond the Agency Financial Report period.

6 The amounts identified and recovered for the Military Retirement program are based on a 100 percent review of deceased retired and deceased 

annuitant accounts.

7 The DoD Travel Policy Compliance Program is the formal recapture audit program of the DoD Travel Pay program. It was mandated in the FY 

2012 National Defense Authorization Act to review travel vouchers in a near real-time basis. The program scope is limited to temporary duty 

vouchers processed in the DTS and currently includes 13 queries that identify the most common improper payments. It is reported as part of the 

DoD Travel Pay program on Table 7 and reported separately on Tables 8 and 9.

8 DFAS was not able to determine the total amounts identified and recovered for the Defense Travel System (DTS) payments due to a DTS 

failure and unrecoverable loss of data preventing them from completing post-payment reviews for Apr17 – Jul17, and from completing recovery 

and reconciliation verification for the FY. The amounts reported as recaptured outside of payment recapture audits were reported by the Army 

and the Air Force.

9 The amount recovered in FY 2017 for USACE Travel Pay is greater than the amount identified in FY 2017 because the collected amount was 

recaptured in the current reporting year, however, the actual payment itself may have been processed in a prior reporting year. The collected 

amount also may include administrative fees and late payment interest.

10 The amount recovered in FY 2017 for USACE Commercial Pay was recaptured in the current reporting year only, and does not include 

administrative fees and late payment interest.

Does this include 

funds recaptured 

from a HighPriority Program 

(Y/N)

Program or Activity

Amount

Identified 

in FY 

2017

Amount

Recovered 

in FY 2017

Recapture 

Rate in FY 

2017

FY2018 

Recapture 

Rate Target

Amount

Identified in 

FY 2017

Amount

Recovered in 

FY 2017

 N Military Health Benefits1, 2, 3, 4 $ 128.00 $ 285.59 

 N Military Pay5 $ 212.40 $ 173.60 

 N Civilian Pay5 $ 57.20 $ 57.20 

 N Military Retirement6 $ 8.52 $ 8.09 

 N DoD Travel Pay7, 8 $ 4.14 $ 2.08 50% 55% $ 0.10 $ 0.00 

 N DFAS Commercial Pay $ 64.36 $ 59.95 

 N Commercial Bill Pay Office Naples $ 0.01 $ 0.01 

 N USACE Travel Pay9 $ 0.94 $ 1.08 

 N USACE Commercial Pay10 $ 2.98 $ 2.80 

TOTAL $ 4.14 $ 2.08 50% 55% $ 474.51 $ 588.32 

Overpayments Recaptured 

outside of Payment 

Recapture Audits

($ in millions)

Table 7: Overpayment Payment Recaptures with and without Recapture Audit Programs

Overpayments Recaptured through Payment 

Recapture Audits
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Table 8 reports the disposition of funds recaptured through payment recapture audit 

programs.

Table 8: Disposition of Funds Recaptured Through Payment Recapture Audit Programs

($ in millions)

Program or 

Activity

Amount 

Recaptured1

Agency 

Expenses 

to 

Administer 

the 

Program

Payment 

Recapture 

Auditor 

Fees

Financial 

Management 

Improvement 

Activities

Original 

Purpose 

Office of 

Inspector 

General 

Returned 

to 

Treasury

Other

DoD Travel 

Policy 

Compliance 

Program2, 3, 4

$2.08 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $2.08

TOTAL $ 2.08 $ - $ - $ - $ - $ - $ - $2.08 

Table 9 reports an aging schedule of the amount of overpayments identified through 

payment recapture audit programs that are outstanding (i.e., overpayments that have been 

identified, but not recaptured).

Table 9: Aging of Outstanding Overpayments Identified in the Payment Recapture Audit Programs

($ in millions)

Program or Activity

Amount 

Outstanding

(0 – 6 months) 

Amount 

Outstanding

(6 months to 1 year) 

Amount 

Outstanding

(over 1 year) 

Amount 

determined to 

not be 

collectable 

DoD Travel Policy Compliance Program5, 6 $ 0.89 $ 0.14 $ 0.63 $ 0.01 

Total $ 0.89 $ 0.14 $ 0.63 $ 0.01 

1 This amount will be identical to the “Overpayments Recaptured through Payment Recapture Audits - Amount Recovered in FY 2017” in Table 7. 2 IPERA mandates that only funding that is expired at the time of collection can be reallocated for the purposes identified in Table 9. As such, only 

$0.65M of the $2.08M recaptured was eligible for reallocation.

3 A re-allocation process has been developed and an initial test was conducted with the Air Force to prove the process. During the test $3,184.00 

was reallocated as follows: $1,447.00 to the Defense Travel Management Office for Agency Expenses to Administer the Program; $1,447.00 for 

Original Purpose; $290.00 to the Office of Inspector General (US Air Force). Evaluation is ongoing to determine if the cost of automation will be 

beneficial to DoD.

4 $0.65M was eligible for reallocation under IPERA. Other than the amount reallocated during the test, the funds remained as collected in the 

original appropriations. The DoD Financial Management Regulation directs funds that are not reallocated to remain in the original account until 

cancelled.

5 Amounts outstanding are identified errors, in which, no corrective actions have been taken to resolve them. Errors that have been corrected or 

errors that are currently in the collection process are not included.

6 Amount determined not to be collected are errors identified during FY 2017 that are uncollectible due to one of the following reasons: debt of $10 

or less, waiver approved, or out-of-service debt.
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DoD Travel Policy Compliance Program

In December 2012, the Department established the DoD Travel Policy Compliance 

Program, mandated by the National Defense Authorization Act for FY 2012. Managed by the 

Defense Travel Management Office, the program was established to ensure travel claims do not 

exceed reasonable or actual expenses as well as to minimize inaccurate, unauthorized, overstated, 

inflated, or duplicate travel claims. The DoD Travel Policy Compliance Tool, an automated 

application (separate and distinct from the DFAS Postpay Audit Compliance Tool), reviews paid 

DTS travel vouchers in near real time and identifies potential improper payments. If a potential 

improper payment is identified, travelers and their AOs are notified via e-mail to either submit a 

corrected claim or explain why the claim is correct. Service administrators can run reports to 

review all identified errors and track corrections.

The DoD Travel Policy Compliance Tool assists in recouping funds by tracking which 

identified improper payments have been corrected and repaid, and reporting on which identified 

errors have not been corrected. It also improves post-payment audits, educates travelers and 

administrators on travel policy, and identifies opportunities for greater controls in the future. As 

of September 30, 2014, all DoD Components using DTS are actively using the Compliance Tool, 

and all DTS vouchers are being examined using 13 areas of inquiry. During FY 2017:

• $4.14 million in errors were identified, and

• $2.08 million was recovered resulting in a recapture rate of 50 percent.

In addition to examining DTS vouchers, the Compliance Tool has expanded to include 

additional data sources, such as Government Travel Charge Card (GTCC) data, and is now 

comparing amounts claimed on vouchers with amounts charged on the GTCC to identify potential 

overpayments. Also, it now incorporates debt data from DTS to record recoveries against 

identified improper payments. Use of the Compliance Tool provides a mechanism to greatly 

facilitate the Department’s collections and improve the recovery rate for Travel Pay overpayments. 

In addition, funds recovered from prior years may be re-allocated for use in current year 

appropriations, in accordance with IPERA.

Defense Health Agency

DHA utilizes a number of different mechanisms to prevent, identify, and collect improper 

payments. These include claims auditing by an EIC, contractor utilization of DHA’s Duplicate 

Claims System, and periodic independent reviews of private-sector payments. This process 

utilizes post-payment review techniques, performed internally and by external contractors. 

Overpayment recoveries are returned to the Military Health Benefits program.

Contract payments comprise a large volume of transactions with high-dollar values; 

therefore, DHA is vigilant to ensure payment accuracy. In addition to the post-payment reviews, 

DHA also utilizes various internal manual and automated prepayment initiatives to prevent 

overpayments and underpayments. During FY 2016, DHA recovered $285.59 million in 

overpayments as a result overpayment errors identified by the EIC, refunds occurring in the course 

of routine claims adjustments, and ongoing private sector contractor internal audits.
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Defense Finance and Accounting Service

The Department continues to use its internal staff and procedures to identify and recover 

overpayments. The DFAS recovery percentages remain above the 85th percentile, as required by 

OMB.

In compliance with IPERIA, as well as the Debt Collection Improvement Act of 1996, the 

Department uses a number of other methods to prevent, identify, and collect improper payments. 

For example, DFAS implemented a Centralized Offset Program to look across the Components 

for opportunities to offset debts within the first 90 days of delinquency. Once this deadline passes, 

DFAS transfers the debts to the Department of the Treasury, no longer waiting until day 120 as 

allowed by statute, to utilize all debt collection tools available earlier in the debt lifecycle to 

increase the likelihood of collecting the debt. During FY 2017, the Centralized Offset Program 

requested and confirmed 756 offsets totaling approximately $11.6 million.

U.S. Army Corps of Engineers

USACE uses a data mining tool as part of its post payment/payment recapture program. 

This tool searches for potential errors, such as duplicate, missing, or irregular invoices, as well as 

specific types of recurring payments. If the data mining tool identifies errors, USACE takes 

appropriate action to correct them and recover any overpayments. There are ten scenarios built 

into the data mining tool, which searches 100 percent of all USACE commercial payments. The 

use of a data-mining tool complements the prepayment system edits built into the Corps of 

Engineers Financial Management System. Payment safeguards include a requirement to match a 

receiving report with an invoice and thereby prevent use of duplicate invoice numbers for the same 

obligation.

U.S. Air Force F-35 Lightning II's from Hill Air Force Base, Utah, fly in formation during a training 

flight May 2, 2017. The F-35s are participating in their first-ever flying training deployment to Europe.

Photo by Senior Airman Christine Groening
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IV. Barriers

The Department did not identify any statutory or regulatory barriers limiting its corrective 

actions in reducing improper payments in those programs determined in FY 2017 to be susceptible 

to significant improper payments.

V. Accountability

The Under Secretary of Defense (Comptroller)/Chief Financial Officer is the Accountable 

Official for the Department and is responsible for ensuring that, to the greatest extent possible, all 

DoD disbursements are accurate.

The Department adheres to title 10, United States Code, section 2773(a), which holds 

Departmental Accountable Officials (DAOs), including AOs, accountable for government funds. 

DAOs/AOs are subject to pecuniary liability for an illegal, improper, or incorrect payment. This 

law forms the basis of the DoD Financial Management Regulation (DoD FMR), 

Volume 5, Chapter 5, “Certifying Officers, Departmental Accountable Officials, and Review 

Officials.” Moreover, the Department’s efforts to recover overpayments are administered in 

accordance with the debt collection policy promulgated in DoD FMR, Volume 16, “Department of 

Defense Debt Management”.

The DoD FMR contains other policies that specifically address improper payments (DoD 

FMR Volume 4, Chapter 14) and recovery auditing (DoD FMR Volume 10, Chapter 22). The 

Office of the Deputy Chief Financial Officer, A&FP Directorate is the Executive Agent of the 

DoD improper payments program and its associated reporting requirements. This Directorate

provides oversight to the program by providing guidance and ensuring all Components adhere to 

applicable IPERA laws and regulations.

Over the past five FYs, the DoD Travel Pay program has consistently reported the highest 

improper payment error rate among all DoD-reported programs. As a result, reducing travel 

improper payments and enhancing recovery efforts were major priorities of OUSD(C). OUSD(C) 

implemented a revised Travel Pay Remediation Plan in FY 2017, and as part of the plan, the DCFO 

was designated as the Senior Accountable Official (SAO) for travel improper payments for DoD. 

Moreover, a key part of the implementation plan was the identification of SAOs for travel improper 

payments in each of the Military Services and seven defense agencies. Based on the positive 

results recognized in the DoD Travel Pay program, SAO responsibilities will be expanded, in 

FY 2018, to include the other improper payments program areas.

In addition, a new tool was introduced to the DoD improper payment program in FY 2017 

to track corrective action progress. The Notification of Findings and Recommendations (NFR) 

Tracker will be used to monitor audit recommendations and corrective actions. This tool provides 

a method to record corrective actions for each improper payment program, to set milestones and 

interim goals, and to monitor progress toward more long-term objectives. The tool will also be 

configured to notify officials when milestone dates are approaching, and also will require a 

justification when a milestone or deadline is missed.
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VI. Agency Information Systems and Other Infrastructure17

The Department has the information and infrastructure needed to reduce improper 

payments. For instance, DoD uses the Business Activity Management (BAM) tool and the Do Not 

Pay (DNP) portal as front-end controls to prevent improper payments prior to disbursement.

The majority of commercial payments are input into the BAM tool, which is a pre-payment 

control that evaluates payment data against a series of business rules called “integrity checks,” 

and, if payment exceptions are generated, requires users to review exception data against source 

systems and supporting documentation. Since the implementation of the BAM tool in 

August 2008, it has prevented a significant amount of improper payments in the Department’s 

commercial payment systems. Continued analysis of payment errors has enhanced BAM logic 

and improved disbursement accuracy. In FY 2017, DFAS enhanced the BAM tool through the 

successful implementation of an interface with the Defense Enterprise Accounting and 

Management System (DEAMS). This interface provides insight into potential improper payments 

within the DEAMS entitlement system in a pre-payment environment.

The DNP portal is a multi-functional analytics tool that allows the Department to check 

various data sources for pre-award, pre-payment eligibility verification, at the time of payment and 

any time in the payment lifecycle. It also allows disbursing Components to verify eligibility of a 

vendor, grantee, loan recipient, or beneficiary prior to payment and helps to prevent, reduce, and 

stop improper payments, as well as prevent fraud, waste, and abuse.

Moreover, the Department’s ongoing migration from legacy systems to new Enterprise 

Resource Planning systems presents a number opportunities to prevent and detect improper 

payments. This migration may also enhance the Department’s ability to improve its debt collection 

and recovery auditing abilities.

Military Health Benefits

DHA has much of the information and infrastructure needed to reduce improper payments. 

DHA Purchased Care Program (managed by the Contract Resource Management (CRM)) includes 

an immense volume of claims processed by private sector contractors. To track these programs, 

CRM utilizes the following systems:

• TRICARE Encounter Data (TED). TED is a financial feeder system, through which all 

claims are processed to Oracle Federal Financials. TED is the entry point of claims 

information from DHA private sector contractors. TED records provide detailed 

information for each treatment encounter and are submitted as either an institutional or 

non-institutional record. TED is primarily required by DHA to account for the expenditure 

of government funds, develop statistical information, and is as a data source of record for 

EIC audits. Records submitted through the TED System (TEDS) must pass numerous 

validation edits prior to being accepted into TEDS.

 17 In accordance with OMB Circular No. A-136, this section is applicable to only those programs with improper payments exceeding the statutory 

thresholds listed in OMB Circular No. A-123, Appendix C, Part I.A.9. Step 1, and therefore determined in FY 2017 to be susceptible to 

significant improper payments.
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• E-Commerce System (ECS). ECS is an integrated, centralized major system that improves 

DHA’s core financial, contracting and business process by providing seamless integrated 

financial and contracting systems.

• Oracle Federal Financials (OFF). OFF is the financial subsystem of the DHA ECS. It 

supports budget and accounting/financial functions and healthcare (TEDS) claims 

processing and contains TRICARE Claims Management, Accounts Receivable, Accounts 

Payable, Purchase Orders and the General Ledger modules. CRM uses OFF to track 

commitments and obligations. These transactions are submitted to DFAS and become the 

primary source into financial statements.

In addition to internal DHA financial systems, DHA private sector contractor’s claims 

processing systems are developed and designed in accordance TRICARE System Manual 

requirements and contain numerous systems edits. These edits include patient eligibility (verified 

via the Defense Enrollment Eligibility Reporting System (DEERS)), provider eligibility, and more. 

If a claim passes initial eligibility edits, benefit calculations occur based on programmed payment 

rules and reimbursement methods determined by TRICARE Reimbursement Policy. The claims 

processing systems are able to determine the appropriate reimbursement methodology based on 

information included in the healthcare claim such as type of service, claim form type, provider 

specialty, etc.

Further, DHA has developed the TRICARE Duplicate Claims System (DCS). This tool 

facilitates the identification of duplicate claim payments, the initiation and tracking of recoupments 

required by purchased care contractors, and the ultimate cancellation of duplicate records from the 

TEDS database. DHA purchased care contractors are contractually required to use the DCS and 

resolve duplicate payments.

Military Pay

A new system, the Integrated Personnel and Payment System (IPPS), has been slated to 

replace the Defense Joint Military Pay System (DJMS). It is an integrated pay and personnel 

system being designed to mitigate risks by reducing duplicate key-stroking thereby increasing the 

accuracy and timeliness of payment inputs from Command groups, human resource activities, pay 

activities, and Service Members. This system is currently scheduled to be phased in by 2020.

DoD Travel Pay

In FY 2017, DFAS launched a new post-pay database that consolidated the results of their 

DoD Travel Pay reviews. The database enabled DFAS to provide DoD leadership with timely, 

detailed information on the root causes of travel improper payments, recovery of funds, and other 

data at the service and activity level. This additional detail provided the services with data by key 

factors such as: agency, installation, traveler and reviewer/approving official, and detailed error 

descriptions. Specifically, the database provided information to the Department, which was used 

on the front-end of travel operations to reduce improper payments.

Moreover, the Defense Travel Management Office (DTMO) enhanced DTS with a receipts 

notification function that alerts travelers and AOs if required receipts for certain expenses are 
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missing prior to submitting travel vouchers for payment. This enhancement directly impacts one 

of the top five errors (i.e., insufficient or lack of documentation) identified in the DoD Travel Pay 

program. In addition, DTMO is also planning to add a Flat Rate per Diem control into DTS in 

FY 2018 to mitigate the leading error identified in the DoD Travel Pay program. This 

enhancement or front-end control will eliminate manual computations for travelers by automating 

the calculation of flat rate per diem for long-term travel. Also, the Department continues to use 

and enhance the DTMO DoD Travel Policy Compliance Tool as discussed in the Payment 

Recapture Audit Reporting section of this report.

Paratroopers assigned to 1st Battalion, 501st Parachute Infantry Regiment, 4th Infantry Brigade Combat Team (Airborne), 25th 

Infantry Division, U.S. Army Alaska, jump out of a Nevada Air National Guard C-130H Hercules while conducting airborne 

training at Joint Base Elmendorf-Richardson, Alaska, April 13, 2017. The Soldiers of 4/25 belong to the only American airborne 

brigade in the Pacific and are trained to execute airborne maneuvers in extreme cold weather/high altitude environments in support 

of combat, partnership and disaster relief operations.

Photo by Alejandro Pena
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VII. Sampling and Estimation18

The primary disbursing Components use statistically valid sampling methods designed to 

meet or exceed OMB’s requirements of a 90 percent confidence level and a margin of error of 

±2.5 percent. By using these methods, disbursing Components are able to identify valid sample 

sizes and project improper payment percentages for the Department’s improper payment 

programs. The smaller disbursing Components normally perform 100 percent post payment 

reviews or a full review of payments above a specific dollar threshold, with random sampling for 

lower dollar payments.

Military Health Benefits

DHA defines samples (sets strata boundaries, calculates sample sizes, and randomly selects 

claims for review) and the EIC reviews the selected claims to identify improper payments. 

Payment accuracy compliance reviews include two sample types: a payment sample (to ensure 

payment accuracy by identifying underpayment and overpayments) and a denied payment sample 

(to ensure appropriate claim denial). Paid samples are conducted as a stratified random sample 

based on paid amounts and denied samples are conducted as a stratified random sample based on 

billed amounts. Samples are drawn on either a quarterly or semi-annual basis, respective of DHA 

purchased care contract requirements.

• Payment Sample: Paid samples are conducted to identify improper payments and measure 

payment accuracy. Depending on the private sector contract type, the universe for a paid 

sample may contain between several hundred thousand to 30 million claims. All claims 

with government payment amount above a high-dollar threshold (i.e., $200,000) are 

reviewed by the EIC. Claims between the high-dollar threshold and a low-dollar threshold 

(i.e., $100) are randomly sampled based on stratification of the government payment 

amount and reviewed by the EIC. Claims below the low-dollar threshold are not included 

in EIC audits (but are represented by DHA Low-Dollar Internal Reviews).

o Samples for paid claims include between four and 12 strata, depending on the 

composition of the claims in the universe. Mathematical formulas are utilized to 

identify optimal strata boundary points, and sample sizes are calculated to meet (or 

exceed) an estimate with a minimum of 90 percent confidence plus or minus 

2.5 percentage points (as stipulated in the OMB Circular No. A-123, Appendix C,

guidelines).

• DHA Low-Dollar Internal Review: In addition to the EIC reviews, DHA conducts a 

statistically valid internal review of low-dollar claims that fall below the low-dollar 

threshold for payment samples and are thus excluded from EIC audits. Audits for these 

internal reviews are stratified if appropriate, given the composition of the universe data.

 18 In accordance with OMB Circular No. A-136, this section is applicable to only those programs with improper payments exceeding the statutory 

thresholds listed in OMB Circular No. A-123, Appendix C, Part I.A.9. Step 1, and therefore determined in FY 2017 to be susceptible to 

significant improper payments.
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• Denied Payment Sample: The primary purpose of the denied payment samples is to ensure 

that health care/supplies are not being denied inappropriately (which may represent 

obstacles in TRICARE beneficiaries’ access to care) by private sector contractors. Records 

that encompass the denied payment sample universe are limited to records with 

government payment amount equal to zero. All denied claims with a billed amount above 

a high-dollar threshold are reviewed, and claims below this threshold are randomly 

sampled based on stratification of the billed amount. Depending on the contract type, a 

denied audit universe may contain between several thousand to over one million claims.

o The denied payment sample is similar in design to the payment sample; the primary 

difference is that the denied sample is stratified based on billed amount since the 

paid amount for a denied claim is equal to $0.

• Combining the Samples: Results from the payment sample, denied sample, and DHA’s 

internal low-dollar review are combined to calculate the overall improper payment rate for 

the Military Health Benefits program.

Military Pay

DFAS designed the program samples using a dollar-stratified sampling plan and the 

Neyman Allocation method. The Neyman Allocation method stratifies financial data from the 

Defense Joint Military Pay System (DJMS) and the Marine Corps Total Force System (MCTFS) 

and allocates the data to defined strata. The overall variable sample size was calculated for the 

combined systems to produce a point estimate with a 95 percent confidence interval and a margin 

of error of ±2.5 percent. Samples were then randomly selected using the Statistical Package for 

the Social Sciences (SPSS) statistical software from each system’s population as a whole. Each 

payment within each stratum had an equal probability of selection.

On a monthly basis, DFAS statistically sampled Military Pay accounts stratified by Active 

Duty (i.e., Army, Navy, Air Force, and Marine Corps) and Reserve Components (i.e., Army 

Reserve, Army National Guard, Navy Reserve, Air Force Reserve, Air National Guard, and 

Marine Corps Reserve), and further stratified by the dollar amount of disbursements. The Defense 

Management Data Center provided the total universe of military pay accounts for each branch and 

component. DFAS reviewed the sampled pay accounts and calculated estimates of improper 

payments.

Military Retirement

On a monthly basis, DFAS statistically sampled military retirement payments stratified by 

retired and annuitant pay accounts. The reviews contained samples of: drilling reserve units, 

retiree offsets, survivor benefit plans, transfers to/from the Temporary Disability Retired List to 

the Permanent List, and Veterans Affairs offsets. The overall variable sample size was calculated 

to produce a point estimate with a 95 percent confidence interval and a margin of error of 

±2.5 percent.
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In FY 2018, DFAS will update its Military Retirement sampling plan to a methodology 

that stratifies the population by the status of the account (e.g. new accounts, accounts with changes, 

and unchanged accounts).

DoD Travel Pay

DFAS designed the program samples using a dollar-stratified sampling plan and the 

Neyman Allocation method. The Neyman Allocation method stratifies financial data from the 

Defense Travel System (DTS) and the Windows Integrated Automated Travel System (WinIATS) 

and allocates the data to defined strata. The overall variable sample size was calculated for the 

combined systems to produce a point estimate with a 95 percent confidence interval and a margin 

of error of ±2.5 percent. Samples were then randomly selected using SPSS statistical software 

from each system’s population as a whole. Each payment within each stratum had an equal 

probability of selection.

On a monthly basis, DFAS sampled vouchers from the Defense Travel System (DTS)

stratified by component (i.e., Army, Navy, USMC, Air Force, and defense agencies) and vouchers 

from the WinIATS stratified by travel type (i.e., Active, Reserve, Casualty, Contingency, Civilian 

Permanent Change of Station (PCS), Defense Agencies, International Military Education and 

Training, Military PCS, Navy Reserve Officers' Training Corps, and Navy Travel). In addition, 

each population was further stratified by dollar amount.

DFAS statisticians selected a random sample and the Postpay Review and Analysis team 

reviewed the samples and calculated estimates of improper payments. Furthermore, to form the 

overall DoD Travel Pay improper payments estimate, the DFAS DTS and WinIATS improper 

payment estimates were combined with the Army’s WinIATS estimates of overseas travel, the 

Navy’s WinIATS estimate, the Air Force’s Reserve Travel System estimate, and the U.S. Marine 

Corps’ WinIATS estimate.

In FY 2018, DFAS will segregate USSOCOM from the DTS Defense Agencies population 

and sample it separately in order to provide USSOCOM with more detailed information regarding 

the root causes of their travel errors. DFAS selected USSOCOM because it accounts for the largest 

number of travel vouchers amongst the Defense Agencies.

USACE Commercial Pay

The USACE post payment compliance reviews were conducted using a statistically valid, 

95 percent confidence level and a margin of error of ±2.5 percent, sample taken from the entire 

USACE Commercial Pay universe. USACE implemented a revised sampling plan in July 2017. 

This plan is a variable design, stratified by dollar amount performed for the period of July - June. 

Samples are drawn on a quarterly basis for review. The purpose of the sampling plan is to estimate 

the percentage of commercial payments in error as well as provide sample statistics on the dollar 

value of over and under payments (improper payments) for use in annual IPERIA reporting. In 

addition, the USACE Finance Center used prepayment controls, post payment contract audits, and 

data mining to identify and prevent improper payments in Commercial Pay.
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VIII. Significant Accomplishments

The Department is committed to full compliance with the requirements of IPERIA and the 

Federal Improper Payments Coordination Act of 2015. As part of the Department’s audit efforts, 

each disbursing Component is diligently reviewing and reporting all payments subject to IPERIA 

and the Federal Improper Payments Coordination Act of 2015, as well as examining processes for 

identifying the complete universe of payments.

Moreover, the Department continues to explore measures to improve its front-end internal 

controls to prevent improper payments, and strengthen post payment review teams to recover 

identified improper payments. Also, the Department is actively implementing recommendations 

from the following audit reports:

• DoD Inspector General 2016 report, “The DoD Did Not Comply With the Improper 

Payment Elimination and Recovery Act in FY 2016” (Report No. DODIG-2017-078); and

• Government Accountability Office 2013 report, “Significant Improvements Needed in 

Efforts to Address Improper Payment Requirements” (Report No. GAO-13-227).

Accordingly, OUSD(C) implemented a revised Travel Pay Remediation Plan by 

identifying SAOs for travel improper payments in each of the Military Services and seven Defense 

Agencies, holding quarterly progress meetings, using the new DFAS Postpay Audit Compliance 

Tool to distribute detailed travel error reports for action, and developing Component corrective 

action plans. OUSD(C)’s travel remediation efforts resulted in a 2.24 percent reduction in travel 

improper payments and improved metrics. As a result, SAO responsibilities will be expanded in 

FY 2018 to include the other improper payments program areas.

Also, the Department continued to adopt best practices related to statistical sampling and 

improved system controls, procedures, and guidance. In FY 2017, DFAS revised the sampling 

plans for the Civilian Pay, Military Pay, and Travel Pay programs from simple random sample 

designs to stratified random sample designs; DFAS also assisted the Department of the Navy with 

generating commercial and travel pay sampling results by using its Commercial Pay and Travel 

Pay revised stratified sampling plans; and USACE revised its sampling plans for its Commercial 

Pay and Travel Pay programs from simple random sample designs to stratified random sample 

designs. In FY 2018, DFAS will segregate the Mechanization of Contract Administration Services 

(MOCAS) system from the commercial systems population and sample it separately in order to 

improve the representation of the non-MOCAS commercial systems. MOCAS routinely accounts 

for approximately 60 percent of the Commercial Pay sample population every quarter. In addition, 

OUSD(C) obtained the services of a statistician to provide objective oversight and further assess 

Component sampling methodologies for each program, to ensure each yield statistically valid 

improper payment estimates.

Moreover, OUSD(C) began an initiative to identify the universe of entitlement and 

disbursing systems for each improper payment program. This initiative directly supports the 

assertion of completeness by validating that all payments are subject to review for improper 

payments. While the validation of the universe of payments will require extensive coordination 

and considerable time, OUSD(C) expects to make significant progress in FY 2018 as the 
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Department begins full financial statements audit. Preventing and recovering improper payments 

are among the top financial management priorities of DoD.

For additional information on improper payments not included in the FY 2017 AFR, refer

to PaymentAccuracy.gov.

A U.S. Marine Corps AH-1Z Cobra assigned to Marine Aviation Weapons and Tactics Squadron One (MAWTS-1) lands during 

the final exercise (FINEX) two as part of Weapons and Tactics Instructor course (WTI) 2-17 at Yuma Ariz., April 27, 2017. The 

FINEX exercise is designed to execute a simulated special operating forces raid while simultaneously supporting regimental 

combat team objectives and focusing on conducting all six functions of Marine Aviation. WTI is a seven-week training event 

hosted by MAWTS-1 cadre, which emphasizes operational integration of the six functions of Marine Corps aviation in support 

of a Marine Air Ground Task Force and provides standardized advanced tactical training and certification of unit instructor 

qualifications to support Marine Aviation Training and Readiness and assists in developing and employing aviation weapons and

tactics.

Photo by Cpl. AaronJames B. Vinculado
U.S. Department of Defense Agency Financial Report for FY 2017

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FRAUD REDUCTION REPORT

The Fraud Reduction and Data Analytics Act of 2015 (FRDAA) was enacted on 

June 30, 2016 to help improve the ability of Federal agencies to prevent, detect, and respond to 

fraud. Under the FRDAA, the Office of Management and Budget (OMB) was required to establish 

guidelines for Federal agencies to (1) establish financial and administrative control activities in 

order to identify and assess fraud risks and (2) design and implement control activities in order to 

prevent, detect, and respond to fraud, including improper payments. The FRDAA specifies that 

these OMB guidelines must incorporate the leading practices identified in the July 2015 

Government Accountability Office (GAO) Report No. GAO-15-593SP, “A Framework for

Managing Fraud Risks in Federal Programs.” In addition to the establishment of guidelines, the 

FRDAA required the OMB to establish a working group to improve the sharing and development 

of fraud-related data analytics and controls leading practices.

To establish accountability, the FRDAA requires each Federal agency to report on their 

progress in:

• Implementing (1) financial and administrative controls in compliance with the OMB 

guidelines, (2) the fraud risk principle in the GAO Standards for Internal Control in the 

Federal Government (“Green Book”), and (3) OMB Circular No. A-123 leading practices 

for managing fraud risk;

• Identifying risks and vulnerabilities to fraud; and

• Establishing strategies, procedures, and other steps to curb fraud.

In FY 2017, the Department began its efforts to comply with the requirements of the 

FRDAA. As a first step in this effort, the Department is conducting a coordinated fraud risk 

assessment throughout the DoD Components (including the Military Departments) to ascertain the 

extent of control activities currently in place related to the prevention, detection, and response to 

fraud. The results of this assessment will inform the Department of any gaps and shortfalls from 

the FRDAA requirements and enable the development of a comprehensive DoD-wide Fraud Risk 

Management Framework and strategy for the prevention, detection, and response to fraud. Once 

developed, the Fraud Risk Management Framework will guide the Department’s efforts in 

implementing integrated fraud risk assessment and related fraud control processes across the 

Department.

Also in response to the requirements of the FRDAA, the Department participated in

multiple meetings with the OMB working group tasked with overseeing the scope and 

development of an interagency library of data analytics tools and data sets and informing the 

government-wide strategy to manage fraud risk. During FY 2017, the OMB working group 

developed a plan to leverage existing data analytic programs and resources developed by thirdparty organizations (such as the Committee of Sponsoring Organizations of the Treadway 

Commission, the Association of Certified Fraud Examiners, and the Association of Government 

Accountants) and accomplished the compilation of an initial inventory of tools and materials, 

which is currently available for use by Federal agencies.
U.S. Department of Defense Agency Financial Report for FY 2017

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REDUCE THE FOOTPRINT

The Department of Defense (DoD) supports the principles set out by the Office of the 

Management and Budget (OMB) in Section 3 of OMB Memorandum-12-12, OMB Management 

Procedures Memorandum No. 2013-02, and the National Strategy for the Efficient Use of Real 

Property (2015-2020), by continually striving to identify opportunities for reduction in the total 

square footage of the domestic DoD office and warehouse inventory. As a result of the 

Department’s infrastructure consisting mainly of assets that are not typically candidates for 

consolidation or reuse by other Federal agencies, a significant portion of the reduction in DoD 

footprint continues to be in the form of demolition. However, because demolition incurs an initial 

cost to produce future savings in operating cost, budget cuts and continuing resolutions have had 

a negative impact on the Department’s ability to secure the necessary funding for the demolition 

of assets identified for disposal.

As such, Tables 10 and 11 reflect an increase in both the Department’s square footage and 

operating expenses related to office and warehouse space reported for FY 2016 over the FY 2015 

baseline. This increase resulted from shifts in the Department’s strategic deployment (such as the 

expansion of DoD operations into new or expanded locations) which necessitated the construction 

or acquisition of additional square footage, while assets identified for demolition continued to 

persist due to budgetary constraints. To remediate this situation, the Department continues to 

advocate for authority to pursue opportunities for Base Realignment and Closure action as a more 

realistic means of reduction.

Table 10. Reduce the Footprint Policy Baseline Comparison

FY 2015

Baseline FY 2016

Change

(FY 2016 – FY 2015 

Baseline)

Square Footage 

(in millions) 339.3 355.0 15.7

Table 11. Reporting of O&M Costs – Owned and Direct Lease Buildings

FY 2015

Reported Cost FY 2016

Change

(FY 2016 – FY 2015 

Baseline)

Operation and 

Maintenance (O&M) 

Costs ($ in millions)

$ 829.5 $ 903.6 $ 74.1
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CIVIL MONETARY PENALTY ADJUSTMENT FOR 

INFLATION

On November 2, 2015, the President signed into law the Federal Civil Penalties Inflation 

Adjustment Act Improvements Act of 2015 (the 2015 Act), which further amended the Federal 

Civil Penalties Inflation Adjustment Act of 1990 (the Inflation Adjustment Act). The 2015 Act, 

requires Federal agencies to annually adjust applicable civil monetary penalties for inflation to 

improve the effectiveness and retain the deterrent effect of such penalties. The implementation 

of this rule will deter violations of law, encourage corrective action(s) of existing violations, and 

prevent waste, fraud, and abuse within the Department of Defense.

* Penalty updates can be found at 81 Federal Register 62629 – 62631.

Table 12. FY 2017 Civil Monetary Penalty Adjustments for Inflation

Name of Penalty* Authority 

(Statute)

Year 

Enacted

Year of 

Previous 

Adjustment

Year of 

Current 

Adjustment

Current Penalty 

Level ($ 

Amount)

SubAgency/Bureau/

Unit

Unauthorized 

Activities Directed 

at or Possession of 

Sunken Military 

Craft

National Defense 

Authorization 

Act for FY 2005, 

10 U.S.C 113, 

note

2004 2016 2017 $126,626.00 Department of the 

Navy

Unlawful 

Provision of 

Health Care

10 U.S.C. 

1094(c)(1) 1985 2016 2017 $11,119.00 Defense Health 

Agency

Wrongful 

Disclosure —

Medical Records:

First Offense

Subsequent 

Offense

10 U.S.C. 

1102(k) 1986 2016 2017 $6,5759.00

$43,832.00

Defense Health 

Agency

Violation of the 

Pentagon 

Reservation

Operation and 

Parking of Motor 

Vehicles Rules 

and Regulations

10 U.S.C. 

2674(c)(2) 1990 2016 2017 $1,811.00 Deputy Chief 

Information Officer

Violation 

Involving False 

Claim

31 U.S.C. 

3802(a)(1) 1986 2016 2017 $10,957.00 Office of Inspector 

General

Violation 

Involving False 

Statement

31 U.S.C. 

3802(a)(2) 1986 2016 2017 $10,957.00 Office of Inspector 

General
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GRANTS OVERSIGHT & NEW EFFICIENCY ACT 

REQUIREMENTS

The Grants Oversight & New Efficiency (GONE) Act was enacted on January 28, 2016 

with the goal of helping Federal agencies to more efficiently identify and close out expired grants. 

To accomplish this, the Act requires the head of each agency to submit a report to Congress which 

identifies and quantifies federal grant awards (including cooperative agreements) which have been 

expired for more than 2 years but have not been closed out. Table 13 below provides a subset of 

the information to be reported to Congress by December 31, 2017 in response to the requirements 

of the GONE Act.

Table 13. Expired DoD Federal Grant and Cooperative Agreement Awards as of November 5, 2017

CATEGORY 2-3 Years >3-5 Years >5 Years

Number of 

Grants/Cooperative 

Agreements with Zero 

Dollar Balances

1,717 1,198 846

Number of 

Grants/Cooperative 

Agreements with 

Undisbursed Balances

858 224 174

Total Amount of 

Undisbursed Balances $138,804,185.69 $110,226,692.23 $14,812,146.67

The Department has been affected by multiple factors which have led to delays in its efforts 

to properly closeout federal grant awards in a timely manner:

• Lack of adequate staffing,

• Missing reports from grantees (including patent reports),

• Discrepancies between final cost reports and payment reports,

• Late calculation/receipt of final rates, and

• Delays caused by litigation settlements.

The Department is actively researching and seeking to implement strategies to mitigate 

these challenges in the grant closeout process. For instance, in response to the negative impact of 

inadequate staffing the Department increased the number of personnel whose job duties are 

dedicated to closing federal grant awards in FY 2017, including the hiring of additional 

experienced senior staff to review documentation and oversee the closeout process. Combined 

with other process improvements which have been implemented during FY 2017, the Department 

is already realizing benefits in its federal grant award closeout process, with expired awards being 

closed more rapidly than in the past.
U.S. Department of Defense Agency Financial Report for FY 2017

Other Information

214

SUMMARY OF THE DOD OFFICE OF THE INSPECTOR 

GENERAL’S TOP MANAGEMENT CHALLENGES 

Each year, the Department of Defense (DoD) Inspector General (IG) prepares a statement 

summarizing the most serious management and performance challenges facing the Department 

and provides a brief assessment of the Department’s progress in addressing these challenges. The 

IG management challenges were identified based on a variety of factors, including DoD OIG 

oversight work, research, and judgment; oversight work done by other DoD components; oversight 

projects conducted by the Government Accountability Office; and input from DoD officials.

For FY 201819, the DoD IG identified challenges in the following ten categories:

• Countering Strategic Challenges: North Korea, Russia, China, Iran, and Transnational 

Terrorism

• Addressing Challenges in Overseas Contingency Operations in Iraq, Syria, and 

Afghanistan

• Enabling Effective Acquisition and Contract Management

• Increasing Cyber Security and Cyber Capabilities

• Improving Financial Management

• Maintaining the Nuclear Enterprise

• Optimally Balancing Readiness, Modernization, and Force Structure

• Ensuring Ethical Conduct

• Providing Effective, Comprehensive, and Cost Effective Health Care

• Identifying and Implementing Efficiencies in the DoD

The DoD IG’s memorandum and report on “Top Management and Performance Challenges 

Facing the Department of Defense – FY 2018” may be found in Appendix E, reprinted in its 

entirety as published.

 19 This year’s IG summary of challenges is for FY 2018 rather than for FY 2017. In previous years, the document’s title contained the year of the 

DoD financial statement that included the report. While last year’s report was labelled as FY 2016, this year the IG labelled the document as the 

top management challenges for FY 2018 to reflect its forward-looking orientation. Therefore, no document is labelled FY 2017 summary of 

management challenges, but there has been no gap in IG top management challenges documents.
U.S. Department of Defense Agency Financial Report for FY 2017

Other Information

215

U. S. Air Force and U.S. Marine Corps explosive ordnance disposal technicians prepare a hole for a range detonation in Southwest 

Asia, Feb. 11, 2017. These essential technicians respond to in flight emergencies and properly dispose of hazardous or 

unserviceable explosives and ammunition.

Photo by Staff Sgt. Eboni Reams
216

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AGENCY FINANCIAL REPORT

APPENDICES

UNITED STATES DEPARTMENT OF DEFENSE

FISCAL YEAR 2017
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U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-1

APPENDIX A: DEFENSE SECURITY COOPERATION AGENCY -

SECURITY ASSISTANCE ACCOUNTS

The Defense Security Cooperation Agency (DSCA) is the Department of Defense (DoD) 

lead agency for the execution of security assistance functions, under Executive Order 11958, 

“Administration of Arms Export Controls.” The financial statements and explanatory notes in this 

appendix pertain to the following accounts, generally referred to as “security assistance” provided 

by the Department of State: Foreign Military Sales (FMS) Trust Fund; the International Military 

Education and Training Account; Foreign Military Financing Program Account; Foreign Military 

Loan Liquidating Account; Foreign Military Financing Direct Loan Financing Account; Military 

Debt Reduction Financing Account; and the Special Defense Acquisition Fund, granted to the 

Executive Office of the President (EOP) pursuant to the Arms Export Control Act, as amended. 

The DSCA receives separate funding for the administration of the DoD Regional Centers for 

Security Studies reported in the DoD consolidated financial statements and separate from the 

security assistance functions, not reported in these financial statements.

Staff Sergeant David E. Moore, a drill instructor with Recruit Training Regiment, speaks to Future Marines during the Recruiting 

Station (RS) Fort Lauderdale Annual Pool Function at Marine Corps Reserve Station Hialeah, Hialeah, Florida, Apr. 29, 2017. 

The annual pool function brought together every recruiting substation within RS Fort Lauderdale for a day of field meet events, 

friendly competition, and time with Marine Corps drill instructors. The annual function promotes camaraderie while providing 

Future Marines a sense of what it feels like to be a Marine recruit in the presence of drill instructors.

Photo by Lance Cpl. Jack A. E. Rigsby
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-2

Balance Sheet

Defense Security Cooperation Agency – Security Assistance Accounts Dollars in Thousands

As of September 30, 2017 and 2016

2017

Consolidated

2016

Consolidated 

ASSETS (Note 2)

Intragovernmental

Fund Balance with Treasury (Note 3) $ 40,218,161 $ 38,071,762

Total Intragovernmental Assets 40,218,161 38,071,762

Cash and Other Monetary Assets (Note 6) 21,342,836 20,675,249

Accounts Receivable, Net (Note 4) 15,930 33,692

Loans Receivable (Note 7) 3,059,896 602,885

Other Assets (Note 5) 37,853,241 36,865,602

TOTAL ASSETS $ 102,490,064 $ 96,249,190

LIABILITIES (Note 8)

Intragovernmental

Accounts Payable (Note 9) $ 498,251 $ 425,854

Debt (Note 10) 2,504,661 2,498,711

Other Liabilities (Note 11 and 12) 981,399 964,018

Total Intragovernmental Liabilities 3,984,311 3,888,583

Accounts Payable (Note 9) 366,489 436,809

Federal Employment Benefits (Note 13) 0 626

Other Liabilities (Note 11 and 12) 86,338,285 81,536,600

TOTAL LIABILITIES $ 90,689,085 $ 85,862,618

Commitments & Contingencies (Note 12)

NET POSITION

Unexpended Appropriations – Other Funds $ 6,262,500 $ 5,579,779

Cumulative Results of Operations – Other Funds 5,538,479 4,806,793

TOTAL NET POSITION $ 11,800,979 $ 10,386,572

TOTAL LIABILITIES AND NET POSITION $ 102,490,064 $ 96,249,190

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-3

Statement of Net Cost

Defense Security Cooperation Agency – Security Assistance Accounts Dollars in Thousands

For the Years Ended September 30, 2017 and 2016

2017

Consolidated

2016

Consolidated 

Program Costs

Gross Costs $ 36,922,633 $ 36,259,031

(Less: Earned Revenue) (45,712) (162,286)

Net Cost of Operations $ 36,876,921 $ 36,096,745

Statement of Changes in Net Position

Defense Security Cooperation Agency – Security Assistance Accounts Dollars in Thousands

For the Years Ended September 30, 2017 and 2016

2017

Consolidated

2016

Consolidated

Cumulative Results Of Operations

Beginning balances $ 4,806,793 $ 4,314,609

Budgetary Financing Sources

Appropriations used $ 5,726,712 $ 4,531,603

Nonexchange revenue 31,881,895 32,051,703

Other Financing sources

Other (+/-) 5,623

Total Financing Sources $ 37,608,607 $ 36,588,929

Net Cost of Operations (+/-) 36,876,921 36,096,745

Net Change $ 731,686 $ 492,184

Cumulative Results of Operations $ 5,538,479 $ 4,806,793

Unexpended Appropriations

Beginning Balances $ 5,579,779 $ 4,374,115

Budgetary Financing Sources

Appropriations received $ 6,421,913 $ 6,133,813

Appropriations transferred (in/out) (1,317) (386,909)

Other adjustments (rescissions, etc.) (11,163) (9,637)

Appropriations used (5,726,712) (4,531,603)

Total Budgetary Financing Sources $ 682,721 $ 1,205,664

Unexpended Appropriations $ 6,262,500 $ 5,579,779

Net Position $ 11,800,979 $ 10,386,572

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-4

Statement of Budgetary Resources

Defense Security Cooperation Agency – Security 

Assistance Accounts

For the Years Ended September 30, 2017 and 2016

Budgetary 

Financing Accounts

Non-Budgetary 

Financing Accounts

Dollars in Thousands

2017

Combined

2016

Combined

2017

Combined

2016

Combined

Budgetary Resources

Unobligated balance, brought forward, October 1 $ 3,589,404 $ 781,197 $ 2,541,747 $ 15,659

Recoveries of prior year unpaid obligations 39,652 31,740 0 1,966,472

Other changes in unobligated balance 2,940,690 (183,228) 0 0

Unobligated balance from prior year budget authority, net 6,569,746 629,709 2,541,747 1,982,131

Appropriation (discretionary and mandatory) 6,850,965 8,220,054 0 0

Borrowing Authority (discretionary and mandatory) 0 0 5,949 492,885

Contract authority (discretionary and mandatory) 39,562,596 28,924,655 0 0

Spending authority from offsetting collections

(discretionary and mandatory) 263,368 243,549 123,763 409,006

Total Budgetary Resources $ 53,246,675 $ 38,017,967 $ 2,671,459 $ 2,884,022

Status of Budgetary Resources

New obligations and upward adjustments (total) $ 51,077,060 $ 34,428,563 $ 2,579,556 $ 342,275

Unobligated balance, end of year:

Apportioned unexpired accounts 2,361,635 1,662,923 0 13

Unapportioned, unexpired accounts 189,917 1,893,368 91,903 2,541,734

Unexpired unobligated balance, end of year 2,551,552 3,556,291 91,903 2,541,747

Expired unobligated balance, end of year (381,937) 33,113 0 0

Unobligated balance, end of year (total) $ 2,169,615 $ 3,589,404 $ 91,903 $ 2,541,747

Total Budgetary Resources $ 53,246,675 $ 38,017,967 $ 2,671,459 $ 2,884,022

Change in Obligated Balance

Unpaid obligations, brought forward, October 1 $ 149,260,202 $ 147,685,828 $ 0 $ 2,033,076

New obligations and upward adjustments (total) 51,077,060 34,428,563 2,579,556 342,275

Outlays (Gross) (36,434,828) (32,822,449) (2,565,197) (408,879)

Recoveries of prior year unpaid obligations (39,652) (31,740) 0 (1,966,472)

Unpaid Obligations, end of year 163,862,782 149,260,202 14,359 0

Uncollected payments

Uncollected pymts, Fed sources, brought forward Oct 1 (-) $ 5 $ 12 $ 0 $ 0

Change in uncollected payments, Federal sources (5) (7) 0 0

Uncollected payments, Federal sources, end of year 0 5 0 0

Memorandum (non-add) entries

Obligated balance, start of year $ 149,260,207 $ 147,685,840 $ 0 $ 2,033,076

Obligated balance, end of year $ 163,862,782 $ 149,260,207 $ 14,359 $ 0

Budgetary Authority and Outlays, Net

Budget Authority, gross (discretionary and mandatory) $ 46,676,929 $ 37,388,258 $ 129,712 $ 901,891

Actual offsetting collections (discretionary and mandatory) (2,725,384) (244,314) (136,624) (493,805)

Change in uncollected customer payments from Federal sources 

(discretionary and mandatory) (5) (7) 0 0

Recoveries of prior year paid obligations (discretionary and 

mandatory) 2,462,021 772 0 0

Budget Authority, net (discretionary and mandatory) $ 46,413,561 $ 37,144,709 $ (6,912) $ 408,086

Outlays, gross (discretionary and mandatory) $ 36,434,828 $ 32,822,449 $ 2,565,197 $ 408,879

Actual offsetting collections (discretionary and mandatory) (2,725,384) (244,314) (136,624) (493,805)

Outlays, net (discretionary and mandatory) 33,709,444 32,578,135 2,428,573 (84,926)

Distributed offsetting receipts (31,881,894) (32,051,703) 0 0

Agency Outlays, net (discretionary and mandatory) $ 1,827,550 $ 526,432 $ 2,428,573 $ (84,926)

The accompanying notes are an integral part of these financial statements.
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-5

TABLE OF CONTENTS FOR NOTES TO THE FINANCIAL STATEMENTS

DSCA-Security Assistance Accounts (SAA) Financial Statements

Page

Note 1 Significant Accounting Policies............................................................................... A-6

Note Disclosures Related to the DSCA-SAA Balance Sheet

Note 2 Nonentity Assets..................................................................................................... A-14

Note 3 Fund Balance with Treasury................................................................................... A-15

Note 4 Accounts Receivable .............................................................................................. A-16

Note 5 Other Assets ........................................................................................................... A-16

Note 6 Cash and Other Monetary Assets........................................................................... A-17

Note 7 Direct Loan and Loan Guarantee Programs........................................................... A-17

Note 8 Liabilities Not Covered by Budgetary Resources.................................................. A-21

Note 9 Accounts Payable ................................................................................................... A-22

Note 10 Debt ........................................................................................................................ A-23

Note 11 Other Liabilities...................................................................................................... A-24

Note 12 Commitments and Contingencies........................................................................... A-26

Note 13 Federal Employment Benefits................................................................................ A-26

Note 14 General Disclosures Related to the Statement of Net Cost............................... A-27

Note 15 Disclosures Related to the Statement of Changes in Net Position ................... A-28

Note 16 Disclosures Related to the Statement of Budgetary Resources........................ A-29

Note Disclosures Not Pertaining to a Specific Statement

Note 17 Reconciliation of Net Cost of Operations to Budget.............................................. A-30
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-6

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

1.A. Basis of Presentation 

These financial statements have been prepared to report the financial position and results 

of operations of the Defense Security Cooperation Agency (DSCA), consisting of the Foreign 

Military Sales (FMS) Trust Fund and several other accounts, identified in the President’s Budget 

Request, as the Foreign Operations (International Affairs) appropriated accounts. The FMS Trust 

Fund includes accounts for U.S. government funds appropriated for security assistance and funds 

deposited by foreign countries and international organizations, or by others for their use. Refer to 

paragraph 1.C, Appropriations and Funds, for a list of these accounts.

The FMS Trust Fund and other accounts for funds appropriated for security assistance are 

managed by DSCA on behalf of the Department of Defense (DoD), in accordance with the 

authority of the Executive Office of the President (EOP), the requirements of the Chief Financial 

Officers Act of 1990 (CFO Act), as expanded by the Government Management Reform Act 

of 1994 (GMRA), and other applicable laws and regulations. The FMS Trust Fund and the 

accounts for funds appropriated for security assistance hereafter will be referred to as the DSCA 

Security Assistance Accounts.

The financial statements were prepared from accounting records that are maintained by the 

Military Departments (MILDEPs), Other Defense Organizations (ODO), and the Defense Finance 

and Accounting Service (DFAS) in accordance with, and to the extent possible, U.S. Generally 

Accepted Accounting Principles (U.S. GAAP) promulgated by the Federal Accounting Standards 

Advisory Board; the Office of Management and Budget (OMB) Circular-No. A-136, Financial 

Reporting Requirements; and the DoD Financial Management Regulation (FMR).

The accompanying financial statement information accounts for all DSCA Security 

Assistance Accounts unless otherwise noted. Information relative to classified assets, programs, 

and operations is excluded from the statements or otherwise aggregated and reported in such a 

manner to not be discernible.

The accounting systems used by DSCA Security Assistance Accounts are not fully 

compliant with all elements of U.S. GAAP and OMB Circular No. A-136, due to limitations of 

financial management processes, financial systems, and nonfinancial systems and processes 

supporting the financial statements. Many of the accounts derive their reported values and other 

information for major asset and liability categories largely from nonfinancial systems, such as the 

MILDEPs’ inventory and logistic systems. Such legacy systems were designed to support 

reporting requirements for maintaining asset accountability and reporting the status of federal 

appropriations rather than preparing financial statements consistent with U.S. GAAP. There are 

ongoing efforts to implement process and system improvements addressing these limitations.

The DSCA Security Assistance Accounts contribute to several of the Department’s 

13 auditor-identified material weaknesses: (1) Financial Management Systems, 

(2) Intergovernmental Eliminations, (3) Fund Balance with Treasury, (4) Statement of Net Cost, 
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-7

(5) Accounting Entries, (6) Reconciliation of Net Cost of Operations to Budget, (7) Accounts 

Payable, and (8) Accounts Receivable. The 13 material weaknesses were identified by the auditor 

prior to FY 2016. As prescribed by section 1008 of the National Defense Authorization Act 

(NDAA) for FY 2002, the auditor will not test remediation of these material weaknesses until DoD 

management has represented that they have been remediated.

1.B. Mission of the Reporting Entity

The DSCA mission is to lead, direct, and manage security cooperation programs and 

resources to support the U.S. national security objectives. Such programs build relationships with 

foreign countries and international organizations promoting the U.S. interests, develop allied and 

partner capacities for self-defense and coalition participation in overseas contingency operations, 

and promote peacetime and contingency access for U.S. forces. The DSCA accomplishes its 

responsibilities for security cooperation in concert with the Department of State, MILDEPs, other 

U.S. Government organizations, U.S. industry, and non-governmental organizations. Together we 

provide financial and technical assistance, Foreign Military Financing for defense articles and 

services, including training, provided through the FMS program, as well as training provided and 

funded under International Military Education and Training authorities.

1.C. Appropriations and Funds

The FMS Trust Fund is a U.S. Treasury account (Treasury Account Symbol (TAS) 8242) 

containing deposits from FMS foreign country and international organization customers, as well 

as funds transferred into the account from U.S. Government appropriations, for use in carrying out 

specific purposes or programs in accordance with the Arms Export Control Act, as amended; the

Foreign Assistance Act of 1961, as amended; and other legal authorities. The monies in the FMS 

Trust Fund are subject to U.S. Treasury account system controls from the date of receipt to the 

date of expenditure or refund. At the country or customer level there are separate subsidiary 

accounts used by the Department of Defense through DSCA and DFAS to separately and 

individually account for each FMS customer’s deposits, other collections or deposits, payments of 

bills, refunds, and adjustments. At the U.S. Treasury level, the corpus of the FMS Trust Fund 

represents the total aggregations of balances (receipts minus disbursements) for all activities and 

programs.

The Department uses separate U.S. Treasury Accounts for the General Fund Foreign 

Operations (International Affairs) appropriations. These accounts are:

• International Military Education and Training (TAS 1081)

• Foreign Military Financing Program Account (TAS 1082)

• Foreign Military Loan Liquidating Account (TAS 4121)

• Foreign Military Financing Direct Loan Financing Account (TAS 4122)

• Military Debt Reduction Financing Account (TAS 4174)

• Special Defense Acquisition Fund (TAS 4116)
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Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-8

The DSCA Security Assistance Accounts receive funds as general, special, and trust funds. 

The DSCA uses these appropriations and funds to execute its missions and subsequently reports 

on resource usage.

General and special appropriations transferred into the FMS Trust Fund are used for 

financial transactions, including personnel, operations and maintenance of security assistance 

functions, and financing of FMS, which may include sales of defense articles and services from 

stock or through procurement, and the sale of foreign military construction.

The FMS Trust Fund accounts for receipts and expenditures of funds held in trust by the 

U.S. Government for use in carrying out specific purposes or programs in accordance with 

applicable laws, regulations, and agreements.

The DSCA is a party to allocation transfers with other federal agencies as a receiving 

(child) entity. An allocation transfer is an entity’s legal delegation of authority to obligate budget 

authority and outlay funds on its behalf. Generally, all financial activity related to allocation 

transfers are reported in the financial statements of the parent entity. Exceptions to this general 

rule will apply to specific funds for which OMB has directed that all activity will be reported in 

the financial statements of the child entity. Exceptions include all U.S. Treasury-Managed Trust 

Funds, EOP, and all other funds specifically designated by OMB. The DSCA’s appropriations 

related to security assistance are allocation transfers from the EOP meeting the OMB exception 

and all related activity is reported separately from the consolidated DoD financial statements.

1.D. Basis of Accounting 

The legacy financial management systems used by DSCA Security Assistance Accounts 

are not fully compliant with full accrual accounting requirements. Many of the DSCA, MILDEP, 

and ODO financial and nonfinancial feeder systems and processes were designed and implemented 

prior to the issuance of U.S. GAAP guidance. These legacy systems were not designed to collect 

and record financial information on a full accrual accounting basis as required by U.S. GAAP. 

Most of DSCA, MILDEP, and ODO financial and nonfinancial legacy systems were designed to 

record information on a budgetary basis.

The DSCA Security Assistance Accounts financial statements and supporting trial balances 

are compiled from the underlying financial data and trial balances of the MILDEPs, ODOs, and 

their sub-entities. The underlying data is largely derived from budgetary transactions (obligations, 

disbursements, and collections), from nonfinancial feeder systems, and accruals made for major 

items such as payroll expenses, and accounts payable. Some of the sub-entity level trial balances 

may reflect known abnormal balances resulting largely from business and system processes. At 

the consolidated DSCA level these abnormal balances may not be evident. Disclosures of 

abnormal balances are made in the applicable footnotes, but only to the extent the abnormal 

balances are evident at the consolidated level. An abnormal balance occurs when the general 

ledger account balance reported is opposite of its normal balance, as it is defined by the Standard 

General Ledger guidance in the U.S. Treasury Financial Manual. 
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A-9

The DSCA, with MILDEPs and ODOs, is continuing the actions required to bring its 

financial and nonfinancial feeder systems and processes into compliance with U.S. GAAP. One 

such action is the current revision of accounting systems to record transactions based on the 

U.S. Standard General Ledger (USSGL). Until all DSCA, MILDEP, and ODO systems and related 

processes are able to collect and report financial information as required by U.S. GAAP, reported 

financial data is based on budgetary transactions and data from nonfinancial feeder systems.

1.E. Revenues and Other Financing Sources 

As authorized by legislation, payments for the sales of defense articles and services are 

deposited into the FMS Trust Fund. Appropriations provided on an annual or multiyear basis for 

security assistance are a financing source and are transferred into the FMS Trust Fund, or deposited 

into the accounts for funds appropriated for security assistance. Pricing for defense articles and 

services, including training, is established to recover costs as required by the Arms Export Control 

Act of 1976, the Foreign Assistance Act of 1961, and OMB Circular A-25, “User Charges.” The 

DSCA Security Assistance Accounts recognize revenue when earned within the constraints of 

current system capabilities.

The DSCA does not include nonmonetary support provided by friendly foreign countries 

and international organizations in amounts reported in the Statement of Net Cost and Note 17, 

Reconciliation of Net Cost of Operations to Budget.

The DSCA participates in assistance-in-kind agreements in its overseas presence. The 

assistance-in-kind provided in support of security cooperation programs includes the use of 

facilities and personnel (guards and drivers) at a small number of Security Cooperation Offices 

worldwide.

The DSCA collects payments from foreign customers in advance of delivery of goods or 

services and records unearned revenue accordingly. All FMS Trust Fund revenue is reclassified 

as nonexchange once customers confirm the receipt of goods and services, since the FMS Trust 

Fund does not provide any of the goods or services directly, but serves as an intermediary for the 

U.S. military services and contractors.

1.F. Recognition of Expenses

Department policy requires the recognition of operating expenses in the period incurred. 

Current financial and nonfinancial feeder systems used by DSCA Security Assistance Accounts 

were not designed to collect and record transactions on an accrual accounting basis. Estimates are 

made for major items such as payroll expenses, accounts payable, and unbilled revenue. The 

DSCA continues to implement process and system improvements to address these limitations.

1.G. Accounting for Intragovernmental Activities 

Accounting standards require an entity to eliminate intra-entity activity and balances from 

consolidated financial statements in order to prevent overstatement for business with itself. 

However, DSCA cannot accurately identify most of its intragovernmental transactions because the 
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-10

Department’s systems do not track buyer and seller data needed to match related transactions. In 

most cases, the buyer-side records are adjusted to agree with DoD seller-side balances and are then 

eliminated. The Department is implementing replacement systems and a standard financial 

information structure incorporating the necessary elements to enable the Department to correctly 

report, reconcile, and eliminate intragovernmental balances.

The Treasury Financial Manual, Part 2, Chapter 4700, “Agency Reporting Requirements 

for the Financial Report of the United States Government”, provides guidance for reporting and 

reconciling intragovernmental balances. The FMS Trust Fund and the accounts for funds 

appropriated for security assistance are unable to fully reconcile intragovernmental transactions 

with all federal agencies; however, the FMS Trust Fund is able to reconcile balances pertaining to 

borrowing from the U.S. Treasury and the Federal Financing Bank, and benefit program 

transactions with the Office of Personnel Management.

Imputed financing represents the costs paid on behalf of the FMS Trust Fund by the Office 

of Personnel Management for employee pension, post-retirement health, and life insurance 

benefits; and the Department of Labor post-employment benefits for terminated and inactive 

employees to include unemployment and workers compensation under the Federal Employees’ 

Compensation Act.

The Department’s proportionate share of public debt and related expenses to the Federal 

Government is not included. The Federal Government does not apportion debt and its related costs 

to federal agencies. The Department’s financial statements do not report any public debt, interest, 

or source of public financing whether from issuance of debt or tax revenues.

1.H. Transactions with Foreign Governments and International Organizations 

Each year, the DSCA Security Assistance Account administers the sale of defense articles 

and services to foreign governments and international organizations under the provisions of the 

Arms Export Control Act of 1976. Under the provisions of the Act, the Department has authority 

to sell defense articles and services to foreign countries and international organizations generally 

at no profit or loss to the Federal Government. Payment in U.S. dollars is required in advance.

1.I. Funds with the U.S. Treasury 

The FMS Trust Fund monies are held in U.S. Treasury accounts and the Federal Reserve 

Bank in individual accounts established by the U.S. for foreign countries. Funds held in the 

Federal Reserve Bank are transferred to the FMS Trust Fund account to be disbursed for FMS 

purposes.

For monetary financial resources maintained in U.S. Treasury accounts, the disbursing 

offices of DFAS, the Military Departments, the U.S. Army Corps of Engineers (USACE), and the 

Department of State’s financial service centers process the majority of DSCA Security Assistance 

Accounts cash collections, disbursements, and adjustments worldwide. Each disbursing station 

prepares monthly reports providing information to the U.S. Treasury on checks issued, electronic 

fund transfers, interagency transfers, and deposits.
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In addition, DFAS sites and USACE Finance Center submit reports to the U.S. Treasury, 

by appropriation, on interagency transfers, collections received, and disbursements issued. The 

U.S. Treasury records this information to the applicable Fund Balance with Treasury (FBWT) 

account. On a monthly basis, the FBWT for the DSCA Security Assistance Accounts is adjusted 

to agree with the U.S. Treasury accounts.

1.J. Cash and Other Monetary Assets 

Cash is the total of cash resources under the control of the Department including coin, 

paper currency, negotiable instruments held for deposit in banks or other financial institutions and 

is classified as “nonentity” and is restricted. 

The FMS Trust Fund only accepts U.S. dollars for payment of defense articles and services 

per DSCA Manual 5105.38-M, Security Assistance Management Manual, Chapter 5; “Foreign 

Military Sales Case Development.” All payments and collections are in U.S. dollars. 

1.K. Accounts Receivable 

The DSCA Security Assistance Accounts’ accounts receivable from other federal entities 

or the public include: accounts receivable, claims receivable, and refunds receivable. Allowances 

for uncollectible accounts due from the public are based upon analysis of collection experience by 

fund type. The Department does not recognize an allowance for estimated uncollectible amounts 

from other federal agencies. Claims against other federal agencies are to be resolved between the 

agencies in accordance with dispute resolution procedures defined in Appendix 10, 

“Intragovernmental Transaction Guide,” of Treasury Financial Manual, Part 2, Chapter 4700.

1.L. Direct Loans and Loan Guarantees 

The DSCA administers the Foreign Military Financing program on behalf of the EOP. 

Direct loans and loan guarantees are authorized by sections 23 and 24 of the Arms Export Control 

Act of 1976, as amended; Foreign Assistance Act of 1961, as amended; Public Law 90-269; and 

other specific legislation. These loans and guarantees assist friendly foreign countries and 

international organizations in purchasing U.S. defense articles and services.

1.M. Inventories and Related Property 

The DSCA Security Assistance Accounts do not maintain inventory. The defense articles 

are provided to FMS customers from the U.S. Government or the contractor pursuant to a contract 

with the U.S. Government. Defense articles sold from the Department or the U.S. Coast Guard 

are assets of the providing component until title is transferred to the foreign customer.

1.N. Advances and Prepayments 

When advances are permitted by law, legislative action, or presidential authorization, the 

Department’s policy is to record advances and prepayments in accordance with U.S. GAAP. As 

such, payments made in advance of the receipt of goods and services are reported as an asset on 

the Balance Sheet. The Department’s policy is to expense and/or properly classify the advances 
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and prepayments as assets when the related goods and services are received. Not all military 

services executing on behalf of DSCA have implemented this policy primarily due to system 

limitations.

1.O. Leases 

The FMS Trust Fund and the accounts for funds appropriated for security assistance do not 

have capital leases and currently are not able to reliably estimate the value of operating leases.

1.P. Other Assets 

Other assets include civil service employee pay advances, travel advances, and certain 

contract financing payments not reported elsewhere on the DSCA Security Assistance Accounts 

Balance Sheet.

The DSCA Security Assistance Account conducts business with commercial contractors 

using two primary types of contracts: fixed price and cost reimbursable. Contract financing 

payments are defined in the Federal Acquisition Regulations, Part 32, as authorized disbursements 

to a contractor prior to acceptance of supplies or services by the Government. These payments are 

designed to alleviate the potential financial burden on contractors performing on certain long-term 

contracts and facilitate competition for defense contracts. Contract financing payment clauses are 

incorporated in the contract terms and conditions and may include advance payments, 

performance-based payments, commercial advance and interim payments, progress payments 

based on cost, and interim payments under certain cost-reimbursement contracts. It is DoD policy 

to record certain contract financing payments as other assets.

Contract financing payments do not include invoice payments, payments for partial 

deliveries, lease and rental payments, or progress payments based on a percentage or stage of 

completion. The Defense Federal Acquisition Regulation Supplement authorizes progress 

payments based on a percentage or stage of completion only for construction of real property, 

shipbuilding, and ship conversion, alteration, or repair. Progress payments based on percentage 

or stage of completion are reported as Construction in Progress.

1.Q. Contingencies and Other Liabilities 

Statement of Federal Financial Accounting Standard (SFFAS) 5, “Accounting for 

Liabilities of the Federal Government,” as amended by SFFAS 12, “Recognition of Contingent 

Liabilities Arising from Litigation,” defines a contingency as an existing condition, situation, or 

set of circumstances involving an uncertainty as to possible gain or loss. The uncertainty will be 

resolved when one or more future events occur or fail to occur. The DSCA Security Assistance 

Accounts recognize contingent liabilities when past events or exchange transactions occur, a future 

loss is probable, and the loss amount can be reasonably estimated.

Financial statement reporting is limited to disclosure when conditions for liability 

recognition do not exist but there is at least a reasonable possibility of incurring a loss or additional 

losses. The DSCA Security Assistance Accounts’ risk of loss due to contingencies arise as a result 
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of pending or threatened litigation or claims and assessments due to events such as aircraft, ship, 

and vehicle accidents; medical malpractice; property or environmental damages; and contract 

disputes.

1.R. Accrued Leave 

The FMS Trust Fund reports liabilities for accrued compensatory and annual leave for 

civilians. Sick leave for civilians is expensed as taken. The liabilities are based on current pay 

rates.

1.S. Net Position 

Net position consists of unexpended appropriations and cumulative results of operations. 

Unexpended appropriations represent the amounts of budget authority that are unobligated and 

have not been rescinded or withdrawn. Unexpended appropriations also represent amounts 

obligated for which legal liabilities for payments have not been incurred. Cumulative results of 

operations represent the net difference between expenses and losses and financing sources 

(including appropriations, revenue, and gains) since inception. The cumulative results of 

operations also include donations and transfer in and out of assets that were not reimbursed.

1.T. Undistributed Disbursements and Collections

Undistributed disbursements and collections represent the difference between 

disbursements and collections matched at the transaction level to specific obligations, payables, or 

receivables in the source systems and those reported by the U.S. Treasury. Supported 

disbursements and collections may be evidenced by the availability of corroborating 

documentation which generally support the summary level adjustments made to accounts payable 

and receivable. Unsupported disbursements and collections do not have supporting documentation 

for the transactions and most likely would not meet audit scrutiny. However, both supported and 

unsupported adjustments may have been made to the DSCA accounts payable and receivable trial 

balances prior to validating underlying transactions. As a result, misstatements of reported 

Accounts Payable and Receivables are likely included in the DSCA financial statements.

Due to noted material weaknesses in current accounting and financial feeder systems, the 

Department is generally unable to determine whether undistributed disbursements and collections 

should be applied to federal or nonfederal accounts payable/receivable at the time accounting 

reports are prepared. Accordingly, the FMS Trust Fund and accounts for funds appropriated for 

security assistance follow the DoD policy to allocate supported undistributed disbursements and 

collections between federal and nonfederal categories based on the percentage of distributed 

federal and nonfederal accounts payable and accounts receivable. Unsupported undistributed 

disbursements and collections are also applied to reduce accounts payable and receivable 

accordingly.
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NOTE 2. NONENTITY ASSETS

Nonentity Assets Dollars in Thousands

As of September 30 2017 2016

Intragovernmental Assets

Fund Balance with Treasury $ 26,383,861 $ 14,338,784

Total Intragovernmental Assets $ 26,383,861 $ 14,338,784

Nonfederal Assets

Cash and Other Monetary Assets $ 21,342,836 $ 20,675,249

Loans Receivable 677,413 679,617

Other Assets 37,851,299 36,863,633

Total Nonfederal Assets $ 59,871,548 $ 58,218,499

Total Nonentity Assets $ 86,255,409 $ 72,557,283

Total Entity Assets $ 16,234,655 $ 23,691,907

Total Assets $ 102,490,064 $ 96,249,190

Nonentity Assets are assets for which the DSCA Security Assistance Accounts maintain 

stewardship accountability and reporting responsibility, but are not available for the agency’s 

operations. As such, the Nonentity Asset amounts disclosed in this note are a subset of the related 

balances presented in the Balance Sheet.

Nonentity Fund Balance with Treasury and Nonentity Cash and Other Monetary Assets 

consist of advance deposits from friendly countries and international organizations to facilitate the 

purchase of U.S. defense articles and services based on future requirement forecasts. 

Nonentity Loans Receivable consist of amounts for interest, fines, and penalties due on 

debt from loans and nonfederal funds owed to the FMS Trust Fund country accounts in litigation 

at Department of Justice or collection status at Defense Finance and Accounting Service. Some 

portion of these uncollected funds may be payable to the FMS Administrative Surcharge account, 

but are not discernible prior to collection.

Nonentity Other Assets consist primarily of advances paid for undelivered defense articles 

and services intended for future delivery to the FMS customer.
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NOTE 3. FUND BALANCE WITH TREASURY 

Fund Balance with Treasury Dollars in Thousands

As of September 30 2017 2016

Fund Balance

Appropriated Funds $ 7,116,135 $ 8,521,871

Trust Funds 33,102,026 29,549,891

Total Fund Balance $ 40,218,161 $ 38,071,762

Fund Balance Per Treasury Versus Agency

Fund Balance per Treasury $ 40,218,161 $ 38,071,762

Fund Balance per Agency 40,218,161 38,071,762

Reconciling Amount $ 0 $ 0

Status of Fund Balance with Treasury Dollars in Thousands

As of September 30 2017 2016

Unobligated Balances

Available $ 2,326,787 $ 1,662,936

Unavailable 4,023,006 8,267,271

Total Unobligated Balance 6,349,793 9,930,207

Obligated Balance not yet Disbursed 163,911,989 149,260,201

Non-FBWT Budgetary Accounts (130,043,621) (121,118,646)

Total Fund Balance $ 40,218,161 $ 38,071,762

The Status of FBWT reflects the budgetary resources to support FBWT and is a 

reconciliation between budgetary and proprietary accounts. It primarily consists of unobligated 

and obligated balances. The balances reflect the budgetary authority remaining for disbursement 

against current or future obligations.

Unobligated Balance is classified as available or unavailable and represents the cumulative 

amount of budgetary authority not set aside to cover outstanding obligations. The unavailable 

balance consists primarily of funds invested in U.S. Treasury securities temporarily precluded 

from obligations by law. Certain unobligated balances are restricted for future use and are not 

apportioned for current use. Unobligated balances for trust fund accounts are restricted for use by 

the public law establishing the funds.

Obligated Balance not yet Disbursed represents funds that have been obligated for goods 

and services not received and those received but not paid.

Non-FBWT Budgetary Accounts reduces the Status of FBWT. The Non-FBWT Budgetary 

Accounts primarily consists of nonentity cash deposited in the Federal Reserve Bank and contract 

authority.
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NOTE 4. ACCOUNTS RECEIVABLE

Accounts Receivable Dollars in Thousands

2017

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts Receivable, 

Net

Nonfederal Receivables 

(From the Public) $ 15,934 $ (4) $ 15,930

Total Accounts Receivable $ 15,934 $ (4) $ 15,930

Accounts Receivable Dollars in Thousands

2016

As of September 30

Gross Amount Due

Allowance for 

Estimated 

Uncollectibles

Accounts Receivable, 

Net

Nonfederal Receivables 

(From the Public) $ 33,700 (8) $ 33,692

Total Accounts Receivable $ 33,700 $ (8) $ 33,692

The accounts receivable represent the FMS Trust Fund claim for payment from contractors 

and individuals for refunds and overpayments. The FMS Trust Fund only recognizes an allowance 

for uncollectible amounts from the public. 

NOTE 5. OTHER ASSETS

Other Assets Dollars in Thousands

As of September 30 2017 2016

Nonfederal Other Assets

Outstanding Contract Financing Payments $ 5,327,384 $ 4,977,786

Advances and Prepayments 32,525,857 31,887,816

Total Nonfederal Other Assets $ 37,853,241 $ 36,865,602

Total Other Assets $ 37,853,241 $ 36,865,602

Other assets also includes nonentity amounts not available for use by the agency. 

Contract terms and conditions for certain types of contract financing payments convey 

certain rights to the FMS Trust Fund protecting the contract work from state or local taxation, liens 

or attachment by the contractor's creditors, transfer of property, or disposition in bankruptcy. 

However, these rights should not be misconstrued to mean ownership of the contractor’s work has 

transferred to the Government. The Government does not have the right to take the work, except 

as provided in contract clauses related to termination or acceptance, and the FMS Trust Fund is 

not obligated to make payment to the contractor until delivery and acceptance of a satisfactory 

product. 
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The balance of Outstanding Contract Financing Payments includes $2.8 billion in FY 2017 

and $2.7 billion in FY 2016 for contract financing payments and an additional $2.5 billion in 

FY 2017 and $2.3 billion in FY 2016 for estimated future payments to contractors upon delivery 

and government acceptance of a satisfactory product. See additional discussion in Note 11, Other 

Liabilities.

NOTE 6. CASH AND OTHER MONETARY ASSETS

Cash and Other Monetary Assets

Dollars in 

Thousands

As of September 30 2017 2016

Cash $ 21,342,836 $ 20,675,249

Total Cash, Foreign Currency, and Other Monetary Assets $ 21,342,836 $ 20,675,249

Restricted cash of $21.3 billion in FY 2017 and $20.7 billion in FY 2016, includes advance 

deposits from foreign nations in the Federal Reserve Bank which have not been transferred to the 

FMS Trust Fund and are not available for agency use (nonentity cash).

NOTE 7. DIRECT LOAN AND LOAN GUARANTEE PROGRAMS

Direct Loan and Loan Guarantee Programs

DSCA operates the following direct loans and/or loan guarantee programs:

The Arms Export Control Act of 1976, as amended, authorizes funds to be appropriated to 

the President for financing the sales of defense articles and defense services to eligible foreign 

countries. Each loan is reviewed in the light of the purchasing country’s financial condition, its 

need for credit, U.S. economic or military assistance programs in the country and region, and other 

proposed arms purchases by the country. The President delegates to the Secretary of Defense the 

authority to issue and guaranty loans through the designated administering agency, DSCA. The

loans are issued to friendly, less economically developed countries. Pursuant to the authority 

contained in the Act, DSCA operates the four funds, known as: 

• Foreign Military Loan Liquidating Account (FMLLA)), for pre-1992 loans

• Foreign Military Financing Direct Loan Program Account (FMFDLPA), for post-1991 

loans 

• Foreign Military Financing Direct Loan Financing Accounts (FMFDLFA), for 

post-1991 loans

• Military Debt Reduction Financing Account (MDRFA) for reducing loan receivables 

for eligible countries. 
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The FMLLA is a liquidating account including all assets, liabilities, and equities for loan 

balances recorded prior to FY 1992. No new loan disbursements are made from this account. 

Certain collections made into this account are made available for default claim payments. The 

Federal Credit Reform Act of 1990 (FCRA) provides permanent indefinite authority to cover 

obligations for default payments in the event the funds in the liquidating account are otherwise 

insufficient.

The FMFDLPA is a program account established pursuant to the FCRA to provide the 

funds necessary for the subsidy element of loans. Expenditures from this account finance the 

subsidy element of direct loan disbursements and are transferred into the FMFDLFA to make 

required loan disbursements for approved Foreign Military Sales or commercial sales. 

The FMFDLPA had one outstanding loan in FY 2016. The loan performed as a line of 

credit where the country could borrow from it at any time. The country initiated a loan during the 

fourth quarter for the first time since FY 2010. The country normally borrowed one day and 

immediately repaid it the next day. 

The FMFDLFA is a financing account used to make disbursements of Foreign Military 

Loan funds for approved procurements and for subsequent collections for the loans after

September 30, 1991. The account uses permanent borrowing authority from the U.S. Treasury 

combined with transfers of appropriated funds from FMFDLPA to make the required 

disbursements to loan recipient country borrowers for approved procurements. Receipts of debt 

service collections from borrowers are used to repay borrowings from U.S. Treasury.

The MDRFA is a financing account established for the debt relief of certain countries as 

established by Public Law 103-87. The MDRFA buys the portfolio of loans from the FMLLA, 

thus transferring the loans from the FMLLA account to the MDRFA account. The Paris Club 

negotiates the debt forgiveness with Highly Indebted Poor Countries (HIPC). 

The Paris Club has nineteen member countries that negotiate rescheduling or refinancing 

of debt for HIPC. The Paris Club provides debt reduction initially on payments coming due over 

a specific period corresponding to the length of an International Monetary Fund (IMF) supported 

economic reform program. Reduction then is staged, with each successive stage contingent upon 

debtor country compliance with its IMF-support program. Under the Naples Terms, establishing 

conditions for loans to the countries in the Paris Club agreed upon in 1994, the amount of 

outstanding debt is reduced after three years of good performance with respect to IMF reform 

programs and payments to Paris Club creditors. The U.S. incurs the budget cost of the eventual 

debt reduction when it agrees to the initial “maturities” reduction of payments coming due, since 

bilateral agreements commit the U.S. to loan reduction once the Paris Club agrees to provide them. 

The FCRA governs all amended direct loan obligations and loan guarantee commitments 

made after FY 1991 resulting in direct loans or loan guarantees.

Direct loans are reported at the net present value of the following projected cash flows: 

(1) loan disbursements, (2) repayments of principal, and (3) payments of interest and other 
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payments over the life of the loan after adjusting for estimated defaults, prepayments, fees, 

penalties, and other recoveries.

Summary of Direct Loans and Loan Guarantees Dollars in Thousands

As of September 30 2017 2016

Loans Receivable

Direct Loans

Foreign Military Loan Liquidating Account $ 661,497 $ 645,920

Foreign Military Financing Account 2,366,753 (252,601)

Military Debt Reduction Financing Account 31,646 209,566

Total Loans Receivable $ 3,059,896 $ 602,885

Abnormal Balances

The abnormal balance of $252.6 million for the FY 2016 Foreign Military Financing 

Account was due to a mapping error that was corrected during 4th quarter FY 2017.

Direct Loans Obligated Dollars in Thousands

As of September 30 2017 2016

Direct Loans Obligated After FY 1992 

(Allowance for Loss Method)

Foreign Military Loan Liquidating Account

Loans Receivable Gross $ 334,906 $ 342,629

Interest Receivable 2,100,081 2,007,609

Allowance for Loan Losses (1,773,490) (1,704,318)

Value of Assets Related to Direct Loans, Net $ 661,497 $ 645,920

Direct Loans Obligated After FY 1991 

(Present Value Method)

Foreign Military Financing Account

Loans Receivable Gross $ 2,652,834 $ 0

Allowance for Subsidy Cost (Present Value) (286,081) (252,601)

Value of Assets Related to Direct Loans $ 2,366,753 $ (252,601)

Military Debt Reduction Financing Account

Loans Receivable Gross $ 0 $ 180,000

Allowance for Subsidy Cost (Present Value) 31,646 29,566

Value of Assets Related to Direct Loans, Net $ 31,646 $ 209,566

Total Direct Loans Receivable $ 3,059,896 $ 602,885

The DSCA bills the countries every six months for loan repayments. Applying terms of 

the loans with the countries, accrued interest receivable is calculated using the simple interest 

method. Interest accrued on unpaid balances use the same interest rate plus 4 percent for loans 

owed to the Federal Financing Bank.

The allowance for credit subsidy account for the FMFDLFA account is calculated taking 

into consideration three transactions: (1) transfers of subsidy from the program account to the 

financing account; (the subsidy is the difference between the expected cash outlays from the 
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U.S. Government and the present value of the expected collections); (2) interest payments from 

the U.S. Treasury to the financing fund; and (3) upward adjustments due to reestimates as 

U.S. Treasury borrowing rates change over time from the loan repayment rate and an increase in 

estimated defaults on the loan. 

Abnormal Balances

The abnormal balances of $31.6 million in FY 2017 and $29.6 million in FY 2016, for 

MDRFA, Allowance for Subsidy Cost (Present Value) exist, as the DSCA requires an upward 

subsidy from U.S. Treasury to close outstanding loans.

Total Amount of Direct Loans Disbursed Dollars in Thousands

As of September 30 2017 2016

Direct Loan Program

Foreign Military Financing Account $ 0 $ 246,604

Total $ 0 $ 246,604

Schedule for Reconciling Subsidy Cost Allowance Balances

For Post-FY 1991 Direct Loans Dollars in Thousands

As of September 30 2017 2016

Beginning Balance, Changes, and Ending Balance

Beginning Balance of the Subsidy Cost Allowance $ 223,035 $ (5,493)

Adjustments

Subsidy Allowance Amortization 31,400 228,528

Total of the above Adjustment Components $ 31,400 $ 228,528

Ending Balance of the Subsidy Cost Allowance before Reestimates $ 254,435 $ 223,035

Ending Balance of the Subsidy Cost Allowance $ 254,435 $ 223,035

Administrative Expenses

Administrative expenses for loans are not funded in the loan program account. The Office 

of Management and Budget directed the administration of loans be funded by the Foreign Military 

Financing Program.
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NOTE 8. LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities Not Covered by Budgetary Resources Dollars in Thousands

As of September 30 2017 2016

Intragovernmental Liabilities

Other $ 0 $ 139

Total Intragovernmental Liabilities $ 0 $ 139

Nonfederal Liabilities

Accounts Payable (3,479) 1,506

Federal Employment Benefits 0 626

Total Nonfederal Liabilities (3,479) 2,132

Total Liabilities Not Covered by Budgetary Resources (3,479) 2,271

Total Liabilities Covered by Budgetary Resources $ 90,692,564 $ 85,860,347

Total Liabilities $ 90,689,085 $ 85,862,618

Military Retirement and Other Federal Employment Benefits consists of Federal Employee 

Compensation Act (FECA) actuarial liabilities of $626.1 thousand for FY 2016 that was not due 

and payable during the prior fiscal year. Refer to Note 13, Federal Employment Benefits, for 

additional details and disclosures. The U.S. Treasury conducted a review of the FECA bills and 

reconciled the source data from the Department of Labor (DOL) and the Office of Personnel 

Management (OPM) against DSCA’s Security Assistance Accounts trading partner data. The 

review identified a difference due to FECA bills from DOL and OPM being charged to DSCA’s 

general fund accounts under Other Defense Organizations (ODO). The DSCA FECA charges are 

now recorded under their general fund accounts as of Quarter 4, FY 2017 and are included in the 

Department’s financial statements.

Intragovernmental Liabilities Other represents the amount payable to Department of Labor 

for FECA liabilities.

Abnormal Balances

The abnormal balance of $3.5 million for the FY 2017 Accounts Payable is the result of 

Air Force posting an abnormal balance from closing appropriations within the International 

Military Education and Training account. The Department is working with the Component on 

corrective actions.
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NOTE 9. ACCOUNTS PAYABLE

Accounts Payable Dollars in Thousands

2017

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 498,251 N/A $ 498,251

Nonfederal Payables 

(To the Public) 366,489 0 366,489

Total Accounts Payable $ 864,740 $ 0 $ 864,740

Accounts Payable Dollars in Thousands

2016

As of September 30

Accounts Payable

Interest, Penalties, 

and Administrative 

Fees

Total

Intragovernmental Payables $ 425,854 N/A $ 425,854

Nonfederal Payables 

(To the Public) 436,809 0 436,809

Total Accounts Payable $ 862,663 $ 0 $ 862,663

Accounts Payable includes amounts owed to federal and nonfederal entities for goods and 

services received by DSCA Security Assistance Accounts.

The systems used by the DSCA Security Assistance Accounts do not track 

intragovernmental accounts payable transactions by customer. The DSCA therefore cannot 

reconcile accounts payable with other federal entities. Buyer-side accounts payable are adjusted 

to agree with interagency seller-side accounts receivable.

Abnormal Balances

Nonfederal Payables includes an abnormal balance of $3.5 million in USSGL 296000 is 

the result of Air Force posting abnormal accounts payable balance from closing appropriations 

(FY 2012) within the International Military Education and Training account.
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NOTE 10. DEBT

Debt Dollars in Thousands

2017

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 2,498,711 $ 5,950 $ 2,504,661

Total Debt $ 2,498,711 $ 5,950 $ 2,504,661

Debt Dollars in Thousands

2016

As of September 30 Beginning Balance Net Borrowing Ending Balance

Agency Debt 

(Intragovernmental)

Debt to the Treasury $ 39,354 $ 2,459,357 $ 2,498,711

Total Debt $ 39,354 $ 2,459,357 $ 2,498,711

The Federal Credit Reform Act of 1990 (FCRA) provides financing accounts with 

indefinite authority to borrow from the U.S. Treasury to fund disbursements of loans made to 

sovereign nations for security assistance. This debt to the U.S. Treasury is reflected in the Foreign 

Military Financing Direct Loan Financing Account and the Military Debt Reduction Account.

The majority of the debt represents direct and guaranteed loans to foreign countries for 

pre-1992 and post-1991 loans. The FCRA governs all direct loan obligations and loan guarantee 

commitments made after FY 1991. Before 1992, funds were borrowed from the Federal Financing 

Bank to either directly loan the funds to foreign countries or to reimburse guaranteed loans 

defaulted. Beginning in 1992, based on the FCRA, the security assistance program began 

borrowing the funds from the U.S. Treasury.

The DSCA must pay the debt if the foreign country borrower defaults. For loan defaults 

DSCA must pay the outstanding principal amounts guaranteed.
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NOTE 11. OTHER LIABILITIES

Other Liabilities Dollars in Thousands

2017

As of September 30 Current Liability Noncurrent Liability Total

Intragovernmental

Advances from Others $ 319,902 $ 0 $ 319,902

FECA Reimbursement to the 

Department of Labor 0 0 0

Custodial Liabilities 0 661,497 661,497

Total Intragovernmental Other 

Liabilities $ 319,902 $ 661,497 $ 981,399

Nonfederal

Accrued Funded Payroll and 

Benefits $ 187 $ 0 $ 187

Advances from Others 80,266,951 5,326,961 85,593,912

Deferred Credits 38,080 0 38,080

Accrued Unfunded Annual Leave 2,724 0 2,724

Contract Holdbacks 703,323 0 703,323

Employer Contribution and 

Payroll Taxes Payable 59 0 59

Total Nonfederal Other 

Liabilities $ 81,011,324 $ 5,326,961 $ 86,338,285

Total Other Liabilities $ 81,331,226 $ 5,988,458 $ 87,319,684

Other Liabilities Dollars in Thousands

2016

As of September 30 Current Liability Noncurrent Liability Total

Intragovernmental

Advances from Others $ 317,960 $ 0 $ 317,960

FECA Reimbursement to the 

Department of Labor 63 76 139

Custodial Liabilities 0 645,919 645,919

Total Intragovernmental Other 

Liabilities $ 318,023 $ 645.995 $ 964,018

Nonfederal

Accrued Funded Payroll and 

Benefits $ 101 $ 0 $ 101

Advances from Others 75,916,642 4,977,367 80,894,009

Contract Holdbacks 642,484 0 642,484

Employer Contribution and 

Payroll Taxes Payable 6 0 6

Total Nonfederal Other 

Liabilities $ 76,559,233 $ 4,977,367 $ 81,536,600

Total Other Liabilities $ 76,877,256 $ 5,623,362 $ 82,500,618
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Advances from Others represent liabilities for collections received to cover future expenses 

or acquisition of assets.

Custodial Liabilities represents liabilities for collections reported as non-exchange 

revenues where the Department is acting on behalf of another Federal entity.

Contract Holdbacks are amounts earned by contractors or suppliers during the production 

period but not yet paid to the contractor/supplier to ensure future performance.

The U.S. Treasury conducted a review of the FECA bills and reconciled the source data 

from the Department of Labor (DOL) and the Office of Personnel Management (OPM) against 

DSCA’s Security Assistance Accounts trading partner data. The review identified a difference 

due to FECA bills from DOL and OPM being charged to DSCA’s general fund accounts under 

Other Defense Organizations (ODO). The DSCA FECA charges are now recorded under their 

general fund accounts as of the Quarter 4, FY 2017 and are included in the Department’s financial 

statements.

Other Liabilities

Nonfederal Advances from Others, Noncurrent includes $5.3 billion for FY 2017 and 

$4.9 billion in FY 2016 related to contracts authorizing progress payments based on cost as defined 

in the Federal Acquisition Regulation (FAR). In accordance with contract terms, specific rights to 

the contractors’ work vest with the Federal Government when a specific type of contract financing 

payment is made. This action protects taxpayer funds in the event of contract nonperformance. 

These rights should not be misconstrued as rights of ownership. The Department is under no 

obligation to pay contractors for amounts greater than the amounts authorized in contracts until 

delivery and government acceptance. Due to the probability the contractors will complete their 

efforts and deliver satisfactory products, and because the amount of potential future payments are 

estimable, the Department has recognized a contingent liability for estimated future payments 

which are conditional pending delivery and government acceptance.

Total Contingent Liabilities for progress payments based on cost represent the difference 

between the estimated costs incurred to date by contractors and amounts authorized to be paid 

under progress payments based on cost provisions within the FAR. Estimated contractor-incurred 

costs are calculated by dividing the cumulative unliquidated progress payments based on cost by 

the contract-authorized progress payment rate. The balance of unliquidated progress payments 

based on cost is deducted from the estimated total contractor-incurred costs to determine the 

contingency amount.
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NOTE 12. COMMITMENTS AND CONTINGENCIES

The U.S. Government may be a party in various administrative proceedings or court 

litigations, but it is highly unlikely any will implicate the FMS Trust Fund. DSCA has not recorded 

any contingent liabilities for litigations for FY 2017 or FY 2016 within the Security Assistant 

Accounts. The U.S. funds appropriated for security assistance generally are not legally available 

for paying claims.

NOTE 13. FEDERAL EMPLOYMENT BENEFITS

Federal Employees’ Compensation Act (FECA)

The U.S. Treasury conducted a review of the Federal Employees’ Compensation Act 

(FECA) bills and reconciled the source data from the Department of Labor (DOL) and the Office 

of Personnel Management (OPM) against DSCA’s Security Assistance Accounts trading partner 

data. The review identified a difference due to FECA bills from DOL and OPM being charged to 

DSCA’s general fund accounts under Other Defense Organizations (ODO). The DSCA FECA 

charges are now recorded under their general fund accounts as of Quarter 4 FY 2017 and are 

included in the Department’s financial statements.

Federal Employment Benefits Dollars in Thousands

2017

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 0 $ 0 $ 0

Total Federal Employment Benefits $ 0 $ 0 $ 0

Federal Employment Benefits Dollars in Thousands

2016

As of September 30

Liabilities

(Less: Assets 

Available to Pay 

Benefits)

Unfunded 

Liabilities

Pension and Health Actuarial Benefits

FECA $ 626 $ 0 $ 626

Total Federal Employment Benefits $ 626 $ 0 $ 626
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-27

NOTE 14. GENERAL DISCLOSURES RELATED TO THE STATEMENT OF NET COST

The Statement of Net Cost (SNC) represents the net cost of programs and organizations of 

the Department as supported by appropriations or other means. The intent of the SNC is to provide 

gross and net cost information related to the amount of output or outcome for a given program or 

organization administered by a responsible reporting entity. Intragovernmental costs and revenue 

represent transactions between two reporting entities within the Federal Government. Public costs 

and exchange revenues are transactions made between the reporting entity and a nonfederal entity.

The systems utilized by Defense Security Cooperation Agency for the FMS Trust Fund 

and the accounts for funds appropriated for security assistance do not fully meet accounting 

standards. Information presented is based on budgetary obligations, disbursements, and collection 

transactions, as well as nonfinancial feeder systems adjusted to record known accruals for major 

items, such as payroll expenses and accounts payable. The Department’s current processes and 

systems do not capture and report accumulated costs for major programs based upon the 

performance measures as required by the Government Performance and Results Act of 1993 

(GPRA). The Department is in the process of reviewing available data and developing a cost 

reporting methodology as required by the Statement of Federal Financial Accounting Standards 

(SFFAS) 4, “Managerial Cost Accounting Concepts and Standards for the Federal Government,”

as amended by SFFAS 30, “Inter-entity Cost Implementation.”

Additionally, these systems do not track intragovernmental transactions by a customer at 

the transaction level. The FMS Trust Fund adjusts expenses by reclassifying amounts between 

federal and nonfederal expenses and accruing additional payables and expenses. Intradepartmental 

revenues and expenses are then eliminated. 

Abnormal Balances

Foreign Military Financing, Direct Loan Financing Account includes an abnormal balance 

of $33.4 million in USSGL 531000, Interest Revenue. This abnormal balance is due to DSCA not 

performing a subsidy reestimate on the Iraq loan before the end of FY 2017. 

Costs and Exchange Revenue Dollars in Thousands

As of September 30 2017 2016

Operations, Readiness & Support

Gross Cost

Intragovernmental Cost $ 2,990,115 $ 2,679,071

Nonfederal Cost $ 33,932,518 $ 33,579,960

Total Gross Cost $ 36,922,633 $ 36,259,031

Earned Revenue

Intragovernmental Revenue $ (23,763) $ (154,631)

Nonfederal Revenue $ (21,949) $ (7,655)

Total Earned Revenue $ (45,712) $ (162,286)

Total Net Cost $ 36,876,921 $ 36,096,745
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-28

NOTE 15. DISCLOSURES RELATED TO THE STATEMENT OF CHANGES IN NET POSITION

The Appropriations on the Statement of Budgetary Resources (SBR) does not agree with 

the Appropriations Received on the Statement of Changes in Net Position. The differences of 

$429.1 million in FY 2017 and $2.1 billion in FY 2016 are primarily attributable to mandatory 

adjustments required by the Office of Management and Budget.

Year Ended September 30, 2017

Reconciliation of Appropriations on the Statement of Budgetary Resources to 

Appropriations Received on the Statement of Changes in Net Position

Dollars in 

Thousands

Total

Appropriations, Statement of Budgetary Resources $ 6,850,965

Less: Appropriations Received, Statement of Changes in Net Position 6,421,913

Total Reconciling Amount $ 429,052

Items Reported as Decreases to Appropriations, Statement of Budgetary Resources

Temporary Reductions $ (324,069)

Transfers (491,147)

Contract Authority 1,244,268

Total Reconciling Items $ 429,052

Year Ended September 30, 2016

Reconciliation of Appropriations on the Statement of Budgetary Resources to 

Appropriations Received on the Statement of Changes in Net Position

Dollars in 

Thousands

Total

Appropriations, Statement of Budgetary Resources $ 8,220,054

Less: Appropriations Received, Statement of Changes in Net Position 6,133,813

Total Reconciling Amount $ 2,086,241

Items Reported as Decreases to Appropriations, Statement of Budgetary Resources

Temporary Reductions $ (200,780)

Transfers (212,543)

Contract Authority 2,499,564

Total Reconciling Items $ 2,086,241
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-29

NOTE 16. DISCLOSURES RELATED TO THE STATEMENT OF BUDGETARY RESOURCES

Disclosures Related to the Statement of Budgetary Resources

Dollars in 

Thousands

As of September 30 2017 2016

Net Amount of Budgetary Resources Obligated for Undelivered Orders at 

the End of the Period $ 173,303,596 $ 161,855,941

Abnormal Balances

The abnormal balances of $5.0 thousand for FY 2017 and $11.7 thousand for FY 2016 on 

the Uncollected Payments, Federal Sources, brought forward, Oct 1 line are due to a timing 

difference.

The Expired Unobligated Balance, End of Year is an abnormal balance, due to the Foreign 

Military Financing Grant Account abnormal balance of $381.9 million for FY 2017 in 

USSGL 465000, Allotments. The abnormal balance is due to posting an adjustment based upon 

OMB's review of the account. OMB requested this correction to more accurately reflect the 

amounts reported in FY 2016. This circumstance will be cleared going forward.

Other Disclosures

Obligations incurred of $51.1 billion in FY 2017 and $34.4 billion in FY 2016 are direct 

and exempt from apportionment.

The SBR includes intra-entity transactions because the statements are presented on a 

combined basis.

Borrowings from the U.S. Treasury are required to be repaid once a year at the end of the 

fiscal year. The financing sources for the repayments on borrowings are loan repayments from the 

countries or permanent indefinite appropriations through subsidy reestimates.

The portions of the FMS Trust Fund receipts collected in the current fiscal year that exceed 

current outlays are temporarily precluded from obligation by law. These receipts, however, are 

available for obligation as needed in the future.

The Federal Credit Reform Act of 1990 (FCRA) provides permanent indefinite 

appropriations to fund upward subsidy reestimates that fund repayments of principal and interest 

of U.S. Treasury borrowings with the Foreign Military Financing Direct Loan Program and the 

Military Debt Reduction Financing Account. The FCRA also provides permanent indefinite 

appropriations to fund loan defaults with the Federal Financing Bank in the Foreign Military Loan 

Liquidating Account.

The Appropriations line item on the SBR does not agree with Appropriations Received on 

the Statement of Changes in Net Position. Refer to Note 15, Disclosures Related to the Statement 

of Changes in Net Position, for additional details.
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-30

Legal limitations and time restriction on the use of unobligated appropriation balances are 

provided under Public Law.

NOTE 17. RECONCILIATION OF NET COST OF OPERATIONS TO BUDGET

Reconciliation of Net Cost of Operations to Budget Dollars in Thousands

As of September 30 2017 2016

Resources Used to Finance Activities

Budgetary Resources Obligated

Obligations incurred $ 53,656,616 $ 34,770,838

Less: Spending authority from offsetting collections and recoveries (2,901,665) (2,736,339)

Obligations net of offsetting collections and recoveries $ 50,754,951 $ 32,034,499

Less: Offsetting receipts (31,881,894) (32,051,703)

Net Budgetary Resources Obligated $ 18,873,057 $ (17,204)

Other Resources:

Other (+/-) 0 5,623

Net other resources used to finance activates 0 5,623

Total resources used to finance activities $ 18,873,057 $ (11,581)

Resources Used to Finance Items not Part of the Net Cost of 

Operations

Change in budgetary resources obligated for goods, services and 

benefits ordered but not yet provided

Undelivered Orders $ (11,447,654) $ 3,994,132

Resources that fund expenses recognized in prior periods (5,751) (115)

Budgetary offsetting collections and receipts that do not affect Net 

Cost of Operations 32,018,519 32,545,507

Resources that finance the acquisition of assets (2,565,197) (408,879)

Other resources or adjustment to net obligated resources that do not 

affect Net Cost of Operations:

Other (+/-) 0 (5,622)

Total resources used to finance items not part of the Net Cost of 

Operations $ 17,999,917 $ 36,125,023

Total resources used to finance the Net Cost of Operations $ 36,872,974 $ 36,113,442

Components of the Net Cost of Operations that will not Require or 

Generate Resources in the Current Period

Components Requiring or Generating Resources in Future Period

Other $ 2,724 $ 0

Total components of Net Cost of Operations that will Require or 

Generate Resources in future periods $ 2,724 $ 0

Components not Requiring or Generating Resources

Other $ 1,223 $ (16,697)

Total Components of Net Cost of Operations that will not Require 

or Generate Resources $ 1,223 $ (16,697)

Total components of Net Cost of Operations that 

will not Require or Generate Resources in the current period $ 3,947 $ (16,697)

Net Cost of Operations $ 36,876,921 $ 36,096,745
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-31

The Reconciliation of Net Cost of Operations to Budget reconciles the cost reflected on the 

Statement of Net Cost to the budgetary information reflected on the Statement of Budgetary 

Resources. This is accomplished by means of a reconciliation of budgetary obligations and nonbudgetary resources available to the reporting entity with its net cost of operations.

The following Reconciliation of Net Cost of Operations to Budget lines are presented as 

combined instead of consolidated as intra-agency budgetary transactions are not eliminated:

• Obligations Incurred

• Less: Spending Authority from Offsetting Collections and Recoveries

• Obligations Net of Offsetting Collections and Recoveries

• Less: Offsetting Receipts

• Net Obligations

• Undelivered Orders

• Unfilled Customer Orders

Due to system limitations, budgetary data is not in agreement with proprietary expenses 

and assets capitalized. The difference between budgetary and proprietary data is a previously 

identified deficiency.

The amount presented for Components Requiring or Generating Resources in Future 

Period, Other in FY 2017, is attributable to an increase in accrued unfunded annual leave. In 

FY 2016, there was no corresponding increase to accrued unfunded annual leave.
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix A Unaudited Financial Statements – DSCA Security Assistance Accounts

A-32

Sailors assigned to the visit, board, search and seizure (VBSS) team aboard the amphibious dock landing ship USS Carter Hall 

(LSD 50) participate in drills aboard the ship during exercise Alligator Dagger 17. The exercise provides an opportunity to enhance 

multilateral capabilities in critical mission sets inherent to the U.S. Navy-Marine Corps, as well as partners and allies in the region. 

Carter Hall, part of the Bataan Amphibious Ready Group, is deployed to the U.S. 5th Fleet area of operations in support of 

maritime security operations designed to reassure allies and partners, and preserve the freedom of navigation and the free flow of 

commerce in the region.

Photo by Mass Communication Specialist 1st Class Darren M. Moore
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix B List of Acronyms and Abbreviations

B-1

APPENDIX B: LIST OF ACRONYMS AND ABBREVIATIONS

Acronym Meaning

A&FP Accounting and Finance Policy Directorate

AcqDemo Defense Acquisition Workforce Development Fund, Acquisition 

Demonstration Project 

AECA Arms Export Control Act of 1976 

AF-IPPS Air Force Integrated Personnel and Pay System 

AFR Agency Financial Report

AO Approving Official

APP Annual Performance Plan 

APR Annual Performance Report

APSR Accountable Property System of Records 

ASP Agency Strategic Plan 

AU Assessable Unit 

AVF All-Volunteer Force 

BAM Business Activity Management 

BBP Better Buying Power

BRAC Base Realignment and Closure 

BRS Blended Retirement System 

CBY Charge Back Year 

CEFMS Corps of Engineers Financial Management System 

CERCLA Comprehensive Environmental Response, Compensation, and Liability Act 

of 1980 

CET Continuing Education and Training 

CIP Construction in Progress 

CJCS Chairman of the Joint Chiefs of Staff

CMC Commandant of the Marine Corps 

CNGB Chief of the National Guard Bureau 

CNO Chief of Naval Operations 

CO Contracting Officer

COLA Cost of Living Adjustment

COR Contracting Officer Representative

COTS Commercial Off-the-Shelf 

CPBO Commercial Bill Pay Office 

CPI Continuous Process Improvement 

CPIM Consumer Price Index Medical 

CR Continuing Resolution 

CRM Contract Resource Management 

CSA Chief of Staff of the Army 
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix B List of Acronyms and Abbreviations

B-2

Acronym Meaning

CSAF Chief of Staff of the Air Force 

CSOC Complementary Subservice Organization Controls

CUEC Complementary User Entity Controls

DAI Defense Agencies Initiative 

DCFO Deputy Chief Financial Officer 

DCS Duplicate Claims System 

DEAMS Defense Enterprise Accounting and Management System 

DeCA Defense Commissary Agency 

DEERS Defense Enrollment Eligibility Reporting System 

DERP Defense Environmental Restoration Program 

DFAS Defense Finance and Accounting Service 

DHA Defense Heath Agency 

DIUx Defense Innovation Unit-Experimental 

DJMS Defense Joint Military Pay System 

DLA Defense Logistics Agency

DNP Do Not Pay 

DoD Department of Defense

DoDI Department of Defense Instruction

DOL Department of Labor 

DRG Diagnosis Related Group 

DSCA Defense Security Cooperation Agency 

DTMO Defense Travel Management Office 

DTS Defense Travel System 

E&DL Environmental and Disposal Liabilities 

EBF Education Benefits Fund 

EBS Enterprise Business System 

ECS E-Commerce System

EIC External Independent Contractor

ELC Entity-Level Controls 

EOP Executive Office of the President 

ERM Enterprise Risk Management 

ERP Enterprise Resource Planning

FAR Federal Acquisition Regulation 

FASAB Federal Accounting Standards Advisory Board

FBWT Fund Balance with Treasury 

FCRA Federal Credit Reform Act of 1990

FECA Federal Employees’ Compensation Act 

FERC Federal Energy Regulatory Commission 

FFMIA Federal Financial Management Improvement Action of 1996
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix B List of Acronyms and Abbreviations

B-3

Acronym Meaning

FIAR Financial Improvement and Audit Readiness

FISCAM Federal Information System Controls Audit Manual

FM Financial Management 

FMFDLFA Foreign Military Financing Direct Loan Financing Accounts 

FMFDLPA Foreign Military Financing Direct Loan Program Account 

FMFIA Federal Managers’ Financial Integrity Act of 1982 

FMLLA Foreign Military Loan Liquidating Account 

FMR Financial Management Regulation 

FMS Foreign Military Sales 

FPSR FIAR Plan Status Report 

FRDAA Fraud Reduction and Data Analytics Act of 2015

FUSRAP Formerly Utilized Sites Remedial Action Program 

FY Fiscal Year

GAAP Generally Accepted Accounting Principles 

GAO Government Accountability Office

GCSS-A Global Combat Support System – Army 

GCSS-MC Global Combat Support System – Marine Corps 

GE General Equipment 

GFEBS General Fund Enterprise Business System 

GFM Government Furnished Material 

GFP Government Furnished Property 

GMRA Government Management Reform Act of 1994

GPP&E General Property, Plant, and Equipment

GPRA Government Performance and Results Act of 1993

GT&C General Terms and Conditions 

GTCC Government Travel Charge Card 

HIPC Highly Indebted Poor Countries 

HR Human Resources 

ICP Internal Control Program 

IDES Integrated Disability Evaluation System 

IG Inspector General

IGT Intragovernmental Transactions

IMF International Monetary Fund 

IPERA Improper Payments Elimination and Recovery Act of 2010 

IPERIA Improper Payment Elimination and Recovery Improvement Act of 2012

IPIA Improper Payments Information Act of 2002 

IPPS Integrated Personnel and Payment System 

IPPS-A Integrated Personnel Pay System – Army
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix B List of Acronyms and Abbreviations

B-4

Acronym Meaning

iRAPT Invoicing, Receipt, Acceptance, and Property Transfer 

ISIS Islamic State of Iraq and Syria 

IT Information Technology 

IUS Internal Use Software 

JCS Joint Chiefs of Staff 

JV Journal Voucher

LMP Logistics Modernization Program 

MCTFS Marine Corps Total Force System 

MD&A Management's Discussion and Analysis

MDRFA Military Debt Reduction Financing Account

MERHCF Medicare-Eligible Retiree Health Care Fund 

MHA Major DoD Headquarters Activities 

MHPI Military Housing Privatization Initiative 

MHS Military Health System 

MILDEP Military Department

MOCAS Mechanization of Contract Administration Services 

MRHB Military Retirement Health Benefits 

NCR National Capital Region 

NDAA National Defense Authorization Act 

NDS National Defense Stockpile

NDS National Defense Strategy

NFR Notification of Findings and Recommendations 

NOAA National Oceanic and Atmospheric Administration 

NPV Net Present Value 

OCO Overseas Contingency Operations

ODO Other Defense Organization

OFF Oracle Federal Financials 

OGC Office of General Counsel 

OHI Other Health Insurance 

OIG Office of the Inspector General 

OM&S Operating Materials & Supplies 

OMB Office of Management and Budget

OPM Office of Personnel Management 

OSD Office of the Secretary of Defense

OUSD(C) Office of the Under Secretary of Defense (Comptroller)

PCS Permanent Change of Station 

PP&E Property, Plant, and Equipment 

QDR Quadrennial Defense Review

R&D Research and Development 
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix B List of Acronyms and Abbreviations

B-5

Acronym Meaning

RCRA Resource Conservation and Recovery Act of 1976 

SAA Security Assistance Accounts 

SAO Senior Accountable Official 

SARA Superfund Amendments and Reauthorization Act of 1986 

SBR Statement of Budgetary Resources 

SCNP Statement of Changes in Net Position 

SFFAS Statement of Federal Financial Accounting Standards 

SFIS Standard Financial Information Structure 

SLOA Standard Line of Accounting 

SMS Sustainment Management System

SNC Statement of Net Cost

SOC Service Organization Controls

SOF Special Operations Forces 

SPSS Statistical Package for the Social Sciences

SRRB Service Requirements Review Board 

SSAE Statement on Standards for Attestation Engagements

TAP Transition Assistance Program 

TAS Treasury Account Symbol

TED TRICARE Encounter Data 

TEDS TRICARE Encounter Data (TED) System

TFL TRICARE for Life 

TI Treasury Index

TNC Treasury Nominal Coupon 

ToT Transportation of Things 

TSP Thrift Savings Plan 

TTH Time to Hire 

UoT Universe of Transactions 

USACE U.S. Army Corps of Engineers

USSGL United States Standard General Ledger 

USSOCOM U.S. Special Operations Command 

USSTRATCOM U.S. Strategic Command 

USTRANSCOM U.S. Transportation Command

VA Department of Veterans Affairs 

VCJCS Vice Chairman of the Joint Chiefs of Staff

VISTA Visual Inter-fund System Transaction Accountability 

VSI Voluntary Separation Incentive 
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix B List of Acronyms and Abbreviations

B-6

A 17th Special Operations Squadron MC-130J Commando II pilot conducts low altitude flight maneuvers during a training sortie 

March 21, 2017, off the coast of Okinawa, Japan. The 17th SOS, a unit of the 353rd Special Operations Group, conducts a variety 

of day and night missions in support of special operations forces and humanitarian and disaster relief throughout the Indo-Asia 

Pacific Theater.

Photo by Staff Sgt. Peter Reft
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-1

APPENDIX C: USEFUL WEBSITES

Link URL

2016 Annual Report on the 

Performance of the Defense 

Acquisition System

http://www.acq.osd.mil/fo/docs/Performance-ofDefense-Acquisition-System-2016.pdf

81 Federal Register 62629 – 62631 https://www.gpo.gov/fdsys/pkg/FR-2016-09-

12/pdf/2016-21878.pdf

“A Framework for Managing Fraud 

Risks in Federal Programs” (Report 

No. GAO-15-593SP)

http://www.gao.gov/assets/680/671664.pdf

Agency Strategic Plan (ASP) http://dcmo.defense.gov/Publications/DoD-ASP/

Annual Performance Plan (APP) http://dcmo.defense.gov/Publications/AnnualPerformance-Plan-and-Performance-Report/

Annual Performance Report (APR) http://dcmo.defense.gov/Publications/AnnualPerformance-Plan-and-Performance-Report/

Arms Export Control Act of 1976 

(AECA)

http://uscode.house.gov/view.xhtml?path=/prelim@titl

e22/chapter39&edition=prelim

Atomic Energy Act of 1954 https://www.nrc.gov/docs/ML1327/ML13274A489.pdf

#page=23

Budget Control Act of 2011 https://www.congress.gov/112/plaws/publ25/PLAW112publ25.pdf

Chairman of the Joint Chiefs of Staff http://www.jcs.mil/About/The-Joint-Staff/Chairman/

Chief Financial Officers Act of 1990 https://www.dol.gov/ocfo/media/regs/CFOA.pdf

Chief of Naval Operations http://www.navy.mil/cno/index.asp

Chief of Staff of the Air Force http://www.af.mil/AboutUs/AirForceSeniorLeaders/C

SAF.aspx

Chief of Staff of the Army http://www.army.mil/leaders/csa/

Chief of the National Guard Bureau http://www.nationalguard.mil/Leadership/CNGB.aspx

Commandant of the Marine Corps http://www.hqmc.marines.mil/cmc/Biography.aspx

Comprehensive Environmental 

Response, Compensation, and 

Liability Act of 1980 (CERCLA)

https://www.gpo.gov/fdsys/pkg/STATUTE94/pdf/STATUTE-94-Pg2767.pdf

Debt Collection Improvement Act of 

1996 https://www.dol.gov/ocfo/media/regs/DCIA.pdf

Defense Federal Acquisition 

Regulation Supplement http://www.acq.osd.mil/dpap/dars/dfarspgi/current/

Defense Security Cooperation 

Agency (DSCA) Manual 5105.38-M http://www.samm.dsca.mil/chapter/chapter-5

Defense Strategic Guidance http://archive.defense.gov/news/Defense_Strategic_G

uidance.pdf
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-2

Link URL

Department of Defense (DoD) 

Financial Management Regulation 

(FMR)

http://comptroller.defense.gov/fmr.aspx

Department of Defense (DoD) 

Financial Management Regulation 

(FMR) Volume 4, Chapter 14

http://comptroller.defense.gov/Portals/45/documents/f

mr/current/04/04_14.pdf

Department of Defense (DoD) 

Financial Management Regulation 

(FMR) Volume 5, Chapter 5

http://comptroller.defense.gov/Portals/45/documents/f

mr/current/05/05_05.pdf

Department of Defense (DoD) 

Financial Management Regulation 

(FMR) Volume 10, Chapter 22

http://comptroller.defense.gov/Portals/45/documents/f

mr/current/10/10_22.pdf

Department of Defense (DoD) 

Financial Management Regulation 

(FMR) Volume 16

http://comptroller.defense.gov/Portals/45/documents/f

mr/Volume_16.pdf

Department of Defense (DoD) 

Instruction 5000.61

http://www.esd.whs.mil/Portals/54/Documents/DD/iss

uances/dodi/500061p.pdf

Department of Homeland Security http://www.dhs.gov/

Department of the Air Force http://www.af.mil/

Department of the Army http://www.army.mil/

Department of the Navy http://www.navy.mil/

Deputy Chief Management Officer 

(DCMO) http://dcmo.defense.gov/

Deputy Secretary of Defense https://www.defense.gov/Leaders/Deputy-Secretaryof-Defense/

DoD Instruction (DoDI) 5010.40 http://www.esd.whs.mil/Portals/54/Documents/DD/iss

uances/dodi/501040p.pdf

Executive Order 11958 http://www.archives.gov/federalregister/codification/executive-order/11958.html

Federal Acquisition Regulation http://www.acquisition.gov/far/

Federal Acquisition Regulation, Part 

32

https://acquisition.gov/far/current/html/FARTOCP32.

html

Federal Civil Penalties Inflation 

Adjustment Act of 1990 

https://www.gpo.gov/fdsys/pkg/STATUTE104/pdf/STATUTE-104-Pg890.pdf

Federal Civil Penalties Inflation 

Adjustment Act Improvements Act of 

2015 

https://www.congress.gov/114/plaws/publ74/PLAW114publ74.pdf

Federal Credit Reform Act of 1990 

(FCRA)

https://www.fiscal.treasury.gov/fsreports/ref/ussgl/cre

ditreform/fcratoc.htm
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-3

Link URL

Federal Employees’ Compensation 

Act (FECA) https://www.dol.gov/owcp/dfec/regs/statutes/feca.htm

Federal Financial Management 

Improvement Act of 1996 (FFMIA) https://www.dol.gov/ocfo/media/regs/FFMIA.pdf

Federal Improper Payments 

Coordination Act of 2015

https://www.congress.gov/114/plaws/publ109/PLAW114publ109.pdf

Federal Managers’ Financial Integrity 

Act of 1982 (FMFIA)

https://www.gpo.gov/fdsys/pkg/STATUTE96/pdf/STATUTE-96-Pg814.pdf

FIAR Plan Status Report http://comptroller.defense.gov/ODCFO/FIARPlanStat

usReport.aspx

Foreign Assistance Act of 1961 https://legcounsel.house.gov/Comps/Foreign%20Assis

tance%20Act%20Of%201961.pdf

Fraud Reduction and Data Analytics 

Act of 2015 (FRDAA)

https://www.congress.gov/114/plaws/publ186/PLAW114publ186.pdf

FY 2016 Agency Financial Report http://comptroller.defense.gov/ODCFO/afr2016/

FY 2018 Budget https://www.whitehouse.gov/omb/budget

Government Management Reform 

Act of 1994 (GMRA)

https://www.congress.gov/103/bills/s2170/BILLS103s2170enr.pdf

Government Performance and 

Results Act of 1993 (GPRA)

https://www.gpo.gov/fdsys/pkg/STATUTE107/pdf/STATUTE-107-Pg285.pdf

Government Performance and 

Results Modernization Act of 2010

https://www.congress.gov/111/plaws/publ352/PLAW111publ352.pdf

Grants Oversight & New Efficiency https://www.congress.gov/114/plaws/publ117/PLAW114publ117.pdf

Implementation Guidance for Budget 

Directives in the National Security 

Presidential Memorandum on 

Rebuilding the U.S. Armed Forces

https://media.defense.gov/2017/Feb/01/2001693094/-

1/-1/0/DDD-170201-373-002.

Improper Payment Elimination and 

Recovery Improvement Act of 2012 

(IPERIA)

https://www.congress.gov/112/plaws/publ248/PLAW112publ248.pdf

Improper Payments Elimination and 

Recovery Act of 2010 (IPERA)

https://www.congress.gov/111/plaws/publ204/PLAW111publ204.pdf

Improper Payments Information Act 

of 2002 (IPIA)

https://www.congress.gov/107/plaws/publ300/PLAW107publ300.pdf

Joint Chiefs of Staff http://www.jcs.mil/

Low Level Radioactive Waste Policy 

Amendments Act of 1985

https://www.nrc.gov/docs/ML1327/ML13274A489.pdf

#page=295
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-4

Link URL

National Defense Authorization Act 

(NDAA) for FY 1984 http://uscode.house.gov/statutes/pl/98/94.pdf

National Defense Authorization Act 

(NDAA) for FY 1985

https://www.gpo.gov/fdsys/pkg/STATUTE98/pdf/STATUTE-98-Pg2492.pdf

National Defense Authorization Act 

(NDAA) for FY 1986

https://www.gpo.gov/fdsys/pkg/STATUTE99/pdf/STATUTE-99-Pg583.pdf

National Defense Authorization Act 

(NDAA) for FYs 1992 and 1993

https://www.gpo.gov/fdsys/pkg/STATUTE105/pdf/STATUTE-105-Pg1290.pdf

National Defense Authorization Act 

(NDAA) for FY 1996

https://www.congress.gov/104/plaws/publ106/PLAW104publ106.pdf

National Defense Authorization Act 

(NDAA) for FY 2001

https://www.congress.gov/106/plaws/publ398/PLAW106publ398.pdf

National Defense Authorization Act 

(NDAA) for FY 2002

https://www.congress.gov/107/plaws/publ107/PLAW107publ107.pdf

National Defense Authorization Act 

(NDAA) for FY 2005

https://www.congress.gov/104/plaws/publ106/PLAW104publ106.pdf

National Defense Authorization Act 

(NDAA) for FY 2012

https://www.congress.gov/112/plaws/publ81/PLAW112publ81.pdf

National Defense Authorization Act 

(NDAA) for FY 2014

https://www.congress.gov/111/plaws/publ84/PLAW111publ84.pdf

National Defense Authorization Act 

(NDAA) for FY 2016

https://www.congress.gov/114/plaws/publ92/PLAW114publ92.pdf

National Defense Authorization Act 

(NDAA) for FY 2017

https://www.congress.gov/114/plaws/publ328/PLAW114publ328.pdf

National Guard http://www.nationalguard.mil/

National Historic Preservation Act http://www.achp.gov/nhpa.pdf

National Security Act of 1947 https://legcounsel.house.gov/Comps/National%20Secu

rity%20Act%20Of%201947.pdf

National Strategy for the Efficient 

Use of Real Property (2015-2020)

https://obamawhitehouse.archives.gov/sites/default/fil

es/omb/financial/national-strategy-efficient-use-realproperty.pdf

Nuclear Waste Policy Act of 1982 https://www.nrc.gov/docs/ML1327/ML13274A489.pdf

#page=419

Office of the General Counsel (OGC) http://ogc.osd.mil/

Office of the Inspector General (OIG) http://www.dodig.mil/

Office of the Secretary of Defense 

(OSD)

https://www.defense.gov/About/Office-of-theSecretary-of-Defense/

OMB Circular No. A-11 https://www.whitehouse.gov/sites/whitehouse.gov/files

/omb/assets/a11_current_year/a11_2017.pdf
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-5

Link URL

OMB Circular No. A-25 https://www.whitehouse.gov/omb/circulars_a025

OMB Circular No. A-123 https://www.whitehouse.gov/sites/whitehouse.gov/files

/omb/memoranda/2016/m-16-17.pdf

OMB Circular No. A-123, Appendix 

C

https://www.whitehouse.gov/sites/whitehouse.gov/files

/omb/memoranda/2015/m-15-02.pdf

OMB Circular No. A-129 https://obamawhitehouse.archives.gov/sites/default/fil

es/omb/assets/a129/rev_2013/pdf/a-129.pdf

OMB Circular No. A-136 https://www.whitehouse.gov/sites/whitehouse.gov/files

/omb/circulars/A136/a136_revised_2017.pdf

PaymentAccuracy.gov https://paymentaccuracy.gov/

Presidential Memorandum on 

Rebuilding the U.S. Armed Forces

https://www.whitehouse.gov/the-pressoffice/2017/01/27/presidential-memorandumrebuilding-us-armed-forces

Public Law 89-538 http://www.gpo.gov/fdsys/pkg/STATUTE80/pdf/STATUTE-80-Pg347.pdf

Public Law 90-269 https://www.gpo.gov/fdsys/pkg/STATUTE82/pdf/STATUTE-82-Pg50.pdf

Public Law 103-87 https://www.gpo.gov/fdsys/pkg/STATUTE107/pdf/STATUTE-107-Pg931.pdf

Quadrennial Defense Review 2014 http://archive.defense.gov/pubs/2014_Quadrennial_D

efense_Review.pdf

Resource Conservation and Recovery 

Act of 1976 (RCRA) 

https://www.gpo.gov/fdsys/pkg/STATUTE90/pdf/STATUTE-90-Pg2795.pdf

“Significant Improvements Needed in 

Efforts to Address Improper Payment 

Requirements” (Report No. GAO-13-

227)

http://www.gao.gov/assets/660/654534.pdf

Special Defense Acquisition Fund http://uscode.house.gov/view.xhtml?path=/prelim@titl

e22/chapter39/subchapter5&edition=prelim

Standard Financial Information 

Structure (SFIS) 

http://dcmo.defense.gov/ProductsandServices/Standar

dFinancialInformationStructure.aspx

“Standardizing Facility Condition 

Assessments” 

https://www.acq.osd.mil/eie/Downloads/FIM/DoD 

Facility Inspection Policy.pdf

Standards for Internal Control in the 

Federal Government (Green Book) http://www.gao.gov/assets/670/665712.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 4 http://files.fasab.gov/pdffiles/handbook_sffas_4.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 5 http://files.fasab.gov/pdffiles/handbook_sffas_5.pdf
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-6

Link URL

Statement of Federal Financial 

Accounting Standards (SFFAS) 6 http://files.fasab.gov/pdffiles/handbook_sffas_6.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 12 http://files.fasab.gov/pdffiles/handbook_sffas_12.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 30 http://files.fasab.gov/pdffiles/handbook_sffas_30.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 31 http://files.fasab.gov/pdffiles/handbook_sffas_31.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 33 http://files.fasab.gov/pdffiles/handbook_sffas_33.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 42 http://files.fasab.gov/pdffiles/handbook_sffas_42.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 43 http://files.fasab.gov/pdffiles/handbook_sffas_43.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 48 http://files.fasab.gov/pdffiles/handbook_sffas_48.pdf

Statement of Federal Financial 

Accounting Standards (SFFAS) 50 http://files.fasab.gov/pdffiles/handbook_sffas_50.pdf

Statement on Standards for 

Attestation Engagements (SSAE) 18

http://www.aicpa.org/Research/Standards/AuditAttest/

DownloadableDocuments/SSAE_No_18.pdf

Superfund Amendments and 

Reauthorization Act of 1986 (SARA)

https://www.gpo.gov/fdsys/pkg/STATUTE100/pdf/STATUTE-100-Pg1613.pdf

“The DoD Did Not Comply With the 

Improper Payment Elimination and 

Recovery Act in FY 2016” (Report 

No. DODIG-2017-078)

https://media.defense.gov/2017/Jun/06/2001757913/-

1/-1/1/DODIG-2017-078.PDF

Title 10 U.S. Code, section 101(a)(4) http://uscode.house.gov/view.xhtml?req=(title:10%20

section:101%20edition:prelim)%20

Title 10 U.S. Code, section 2222

http://uscode.house.gov/view.xhtml?req=granuleid:U

SC-prelim-title10-

section2222&num=0&edition=prelim

Title 10 U.S. Code, section 2685 http://uscode.house.gov/view.xhtml?req=(title:10 

section:2685 edition:prelim)

Title 10 U.S. Code, section 2773(a) http://uscode.house.gov/view.xhtml?req=(title:10%20

section:2773%20edition:prelim)%20

Title 16 U.S. Code, section 460I-6a 

note

http://uscode.house.gov/view.xhtml?path=/prelim@titl

e16/chapter1/subchapter69&edition=prelim

Title 16 U.S. Code, sections 803(f) 

and 810

http://uscode.house.gov/view.xhtml?path=/prelim@titl

e16/chapter12&edition=prelim
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-7

Link URL

Title 16 U.S. Code, sections 3951 -

3956

http://uscode.house.gov/view.xhtml?path=/prelim@titl

e16/chapter59A&edition=prelim

Title 26 U.S. Code, section 9505 http://uscode.house.gov/view.xhtml?req=(title:26%20

section:9505%20edition:prelim)%20

Title 26 U.S. Code, section 9506 http://uscode.house.gov/view.xhtml?req=(title:26 

section:9506 edition:prelim)

Title 31 U.S. Code, section 3515(b) http://uscode.house.gov/view.xhtml?req=(title:31%20

section:3515%20edition:prelim)%20

Title 33 U.S. Code, section 683 http://uscode.house.gov/view.xhtml?req=(title:33%20

section:683%20edition:prelim)%20

Title 33 U.S. Code, sections 701c-3 http://uscode.house.gov/view.xhtml?path=/prelim@titl

e33/chapter15&edition=prelim

Title 33 U.S. Code, sections 701h, 

702f, and 703

http://uscode.house.gov/view.xhtml?path=/prelim@titl

e33/chapter15&edition=prelim

Title 33 U.S. Code, sections 2326 http://uscode.house.gov/view.xhtml?req=(title:33 

section:2326 edition:prelim

Treasury Financial Manual, Part 2, 

Chapter 4700 https://tfm.fiscal.treasury.gov/v1/p2/c470.pdf

U.S. Coast Guard http://www.uscg.mil/

U.S. Marine Corps http://www.marines.mil/

U.S. Special Operations Command 

(USSOCOM) http://www.socom.mil/

U.S. Strategic Command 

(USSTRATCOM) http://www.stratcom.mil/

U.S. Transportation Command 

(USTRANSCOM) http://www.transcom.mil/

Vice Chairman of the Joint Chiefs of 

Staff

http://www.jcs.mil/About/The-Joint-Staff/ViceChairman/

Water Resources Development Act of 

1986

https://www.fws.gov/habitatconservation/Omnibus/W

RDA1986.pdf

Weapons System Acquisition Reform 

Act of 2009

https://www.congress.gov/111/plaws/publ23/PLAW111publ23.pdf
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix C Useful Websites

C-8

US Soldiers with Charlie Company, 1st Battalion, 68th Armor Regiment, 3rd Armored Brigade Combat Team, 4th Infantry 

Division, fire from a M1A2 Abrams tank at Adazi Military Base, Latvia, April 14.

Photo by Sgt. Shiloh Capers
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix D Index of Figures and Tables

D-1

APPENDIX D: INDEX OF FIGURES AND TABLES

FIGURES

Figure 1. DoD FY 2017 Budget Authority .................................................................................................. 3

Figure 2. Department of Defense Organizational Structure....................................................................... 11

Figure 3. Office of the Secretary of Defense Principal Staff Assistants.................................................... 12

Figure 4. Reserve Components: Reserves and National Guard ................................................................. 14

Figure 5. Defense Agencies and DoD Field Activities.............................................................................. 15

Figure 6. Combatant Commands ............................................................................................................... 16

Figure 7. Trend in DoD Budget Authority................................................................................................. 25

Figure 8. Composition of DoD Total Budgetary Resources...................................................................... 26

Figure 9. Summary of Total Assets ........................................................................................................... 27

Figure 10. Summary of Total Liabilities.................................................................................................... 28

Figure 11. Liabilities Covered/Not Covered by Budgetary Resources...................................................... 28

Figure 12. Summary of Net Cost of Operations ........................................................................................ 29

Figure 13. Financial Performance Summary ............................................................................................. 30

Figure 14. The Department’s Integrated Business Framework ................................................................. 46

Figure 15. DoD Financial Management Improvement Initiatives............................................................. 47

TABLES

Table 1. Summary of Financial Statement Audit .................................................................................... 162

Table 2. Effectiveness of Internal Control over Financial Reporting (FMFIA § 2) ................................ 164

Table 2a. FY 2017 Effectiveness of Internal Control over Financial Reporting (FMFIA § 2)................ 165

Table 2b. Effectiveness of Internal Controls over Operations (FMFIA § 2)........................................... 173

Table 2b-1. FY 2017 Effectiveness of Internal Controls over Operations (FMFIA § 2)......................... 174

Table 2c. Compliance with Federal Financial Management System Requirements (FMFIA § 4).......... 178

Table 2c-1. FY 2017 Compliance with Federal Financial Management System Requirements 

 (FMFIA § 4)........................................................................................................................... 179

Table 3. Compliance with Section 803(a) of the Federal Financial Management Improvement Act 

 (FFMIA)..................................................................................................................................... 181

Table 4. Improper Payment Reduction Outlook ...................................................................................... 185

Table 5. Improper Payment Classification............................................................................................... 187

Table 6. Improper Payment Root Cause Category Matrix....................................................................... 188

Table 7. Overpayment Payment Recaptures with and without Recapture Audit Programs .................... 197

Table 8. Disposition of Funds Recaptured Through Payment Recapture Audit Programs...................... 198

Table 9. Aging of Outstanding Overpayments Identified in the Payment Recapture Audit 

 Programs.................................................................................................................................... 198

Table 10. Reduce the Footprint Policy Baseline Comparison ................................................................. 211

Table 11. Reporting of O&M Costs – Owned and Direct Lease Buildings............................................. 211

Table 12. FY 2017 Civil Monetary Penalty Adjustments for Inflation ................................................... 212

Table 13. Expired DoD Federal Grant and Cooperative Agreement Awards as of 

 November 5, 2017.................................................................................................................... 213
U.S. Department of Defense Agency Financial Report for FY 2017 

Appendix D Index of Figures and Tables

D-2

This Page Intentionally Left Blank
Top DoD

Management 

Challenges

Fiscal Year 2018
Mission

Our mission is to provide independent, relevant, and timely oversight 

of the Department of Defense that supports the warfighter; promotes 

accountability, integrity, and efficiency; advises the Secretary of 

Defense and Congress; and informs the public.

Vision

Our vision is to be a model oversight organization in the Federal 

Government by leading change, speaking truth, and promoting 

excellence—a diverse organization, working together as one 

professional team, recognized as leaders in our field.

For more information about whistleblower protection, please see the inside back cover.

INTEGRITY  EFFICIENCY  ACCOUNTABILITY  EXCELLENCE

dodig.mil/hotline|8 00.424.9098

HOTLINE

Department of Defense

F r a u d, W a s t e, & Abus e
INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

TOP MANAGEMENT AND PERFORMANCE CHALLENGES FACING

THE DEPARTMENT OF DEFENSE

Public Law 106-531, the “Reports Consolidation Act of 2000,” requires each Inspector General (IG) 

to prepare an annual statement that summarizes what the IG considers to be the “most serious 

management and performance challenges facing the agency” and also requires the IG to assess the 

Agency’s progress in addressing those challenges. The law states that “agency head may comment on 

the IG’s statement, but may not modify the statement.” By statute, the IG’s statement must be included 

in the agency’s Financial Report.

The following is the DoD Office of Inspector General’s (OIG) statement on the top management and 

performance challenges facing the DoD. The challenges outlined in this statement were identified 

based on a variety of factors, including DoD OIG oversight work, research, and judgment; oversight 

work done by other DoD components; oversight projects conducted by the GAO; and input from DoD 

officials. While we also reviewed DoD statements, documents, and assessments of these and other 

critical issues, we identified these top challenges independently. 

The DoD OIG also uses this document as a research and planning tool to identify areas of risk in the 

DoD operations. It is forward looking and outlines the most significant management and performance 

challenges facing the DoD now and in the future. 

This year’s summary of challenges is for FY 2018 rather than for FY 2017. In previous years, the 

document’s title contained the year of the DoD financial statement that included this report. While 

last year’s report was labelled as FY 2016, this year we labelled the document as the top management 

challenges for FY 2018 to reflect its forward-looking orientation. Therefore, no document is labelled 

FY 2017 summary of management challenges, but there has been no gap in our top management 

challenges documents. 

As reflected this this document, the FY 2018 top 10 management and performance challenges are: 

1. Countering Strategic Challenges: North Korea, Russia, China, Iran, and Transnational Terrorism

2. Addressing Challenges in Overseas Contingency Operations in Iraq, Syria, and Afghanistan

3. Enabling Effective Acquisition and Contract Management

4. Increasing Cyber Security and Cyber Capabilities

5. Improving Financial Management

6. Maintaining the Nuclear Enterprise 

7. Optimally Balancing Readiness, Modernization, and Force Structure

8. Ensuring Ethical Conduct

9. Providing Effective, Comprehensive, and Cost Effective Health Care 

10. Identifying and Implementing Efficiencies in the DoD
INSPECTOR GENERAL

DEPARTMENT OF DEFENSE

4800 MARK CENTER DRIVE

ALEXANDRIA, VIRGINIA 22350-1500

These challenges are not listed in order of importance or by magnitude of the challenge. All are 

critically important management challenges. 

We look forward to working with the DoD to help address these important challenges.

Glenn A. Fine

Acting Inspector General

iv | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

CONTENTS

U.S. marines with the 26th Marine Expeditionary Unit, and sailors from the USS Kearsarge, conduct a foreign object and 

debris walk-down during departure aboard the Kearsarge at Naval Station Norfolk, Virginia. (U.S. Marine Corps photo)
DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | v

CONTENTS

Summary of Management 

and Performance Challenges 

Facing the DoD

FISCAL YEAR 2018

Challenge 1: Countering Strategic Challenges: 

North Korea, Russia, China, Iran 

and Transnational Terrorism ...................................... 2

Challenge 2: Addressing Challenges 

in Overseas Contingency Operations 

in Iraq, Syria, and Afghanistan .................................10

Challenge 3: Enabling Effective Acquisition 

and Contract Management........................................ 18

Challenge 4: Increasing Cybersecurity 

and Cyber Capabilities............................................... 28

Challenge 5: Improving 

Financial Management.............................................. 40

Challenge 6: Maintaining the 

Nuclear Enterprise..................................................... 48

Challenge 7: Optimally Balancing Readiness, 

Modernization, and Force Structure ........................ 56

Challenge 8: Ensuring Ethical Conduct .................. 64

Challenge 9: Providing Effective, 

Comprehensive, and Cost Effective 

Health Care ................................................................ 72

Challenge 10: Identifying and Implementing 

Efficiencies in the DoD.............................................. 80
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

1 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Camp Humphreys, Republic of Korea: Soldiers from 1st Battalion, 5th Cavalry Regiment, 2nd Armored Brigade Combat 

Team, 1st Cavalry Division, secure cargo lines to a CH-47 Chinook during sling load training. (U.S. Army photo)
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 2

Addressing evolving global threats presents a significant challenge for the 

Department of Defense (DoD). State and non-state actors present security 

challenges that have destabilized the post-Cold War international order, and 

the DoD must confront these challenges in close coordination with U.S. allies 

and DoD interagency partners.

In a recent interview, General Joseph Dunford, Chairman of the Joint Chiefs 

of Staff, identified five significant global strategic challenges to U.S. interests: 

North Korea, Russia, China, Iran, and violent extremism or transnational 

terrorism. General Dunford noted that the DoD does not have “the luxury 

today of singling out one challenge.” He stated that, from a capability 

perspective, Russia presents the greatest mid-to-long-term threat to 

U.S. national security, but from an urgency perspective, North Korea poses 

the top challenge.

NORTH KOREA

“The most urgent and dangerous threat to peace and security [in the world] 

is North Korea,” Secretary of Defense James Mattis said in a June 12, 2017, 

statement before the House Armed Services Committee, and that assessment 

is even more concerning today. North Korea’s aggressive pursuit of nuclear 

weapons and ballistic missile technologies, and its role in their proliferation, 

presents a growing strategic threat to U.S. forces in the region and to the 

U.S. mainland, as well as to North Korea’s neighbors, South Korea and Japan. 

The United States is pressuring North Korea to stop the development of its 

nuclear weapons and ballistic missiles programs. 

However, North Korea has continued to develop its nuclear weapons and 

ballistic missile programs. Throughout 2017, North Korea conducted ballistic 

missile tests, including launching intercontinental ballistic missiles. Publicly 

reported analysis indicated that North Korea’s intercontinental ballistic 

missiles have the technical capability to reach the entire State of Alaska 

and parts of the U.S. mainland. On September 3, 2017, North Korea claimed 

to have tested a thermonuclear bomb—the blast was recorded by the U.S. 

Geological Survey as a human-made, 6.3-magnitude seismic event, which was 

far larger than previous North Korean nuclear weapon tests. Moreover, the 

Defense Intelligence Agency stated that North Korea is capable of creating a 

miniaturized nuclear device to use as a missile warhead. In addition to its 

nuclear capability, North Korea has deployed a significant ground force along 

its border with South Korea, maintains a chemical and biological warfare 

capability, and can strike South Korea’s capital, Seoul, with a formidable array 

of artillery and rockets. 

Challenge 1: Countering Strategic 

Challenges: North Korea, Russia, China, Iran 

and Transnational Terrorism
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

3 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

According to the 2017 Defense Posture Statement, 

the DoD has developed a comprehensive set of 

alliance capabilities to deter and counter the 

North Korean threat. The DoD maintains 80,000 

military personnel and a significant ground, air, 

and sea force capability in and around South 

Korea and Japan. It conducts regular joint military 

exercises with South Korea and Japan, with whom 

the United States has security treaty commitments. 

The United States and South Korea have also 

agreed to deploy a Terminal High-Altitude Area 

Defense missile capability to South Korea to defend 

South Korea and alliance forces from North Korea’s 

ballistic missile threats.

Speaking in Seoul on August 14, 2017, General 

Dunford stated that the military directly supports 

U.S. diplomatic and economic efforts to resolve the 

crisis with North Korea. He also stated that the 

DoD provides viable military options in the event 

that deterrence fails. However, General Dunford 

noted that armed conflict with North Korea would 

lead to a level of casualties not experienced since 

World War II. Similarly, Secretary of Defense 

Mattis has said that a military confrontation with 

North Korea would be “catastrophic.” 

The United States continues to reach out to 

China, North Korea’s closest ally and trading 

partner, to convince China to pressure North 

Korea to halt its nuclear program. In 2017, 

the United States imposed additional economic 

sanctions on North Korea, and China agreed to 

United Nations’ limitations on future imports from 

North Korea. However, North Korea has rejected 

formal negotiations and expressed no intention to 

de-nuclearize or stop developing ballistic missiles. 

North Korean leader Kim Jong-un reportedly 

believes that maintaining North Korea’s nuclear 

and ballistic missile capability is necessary to deter 

the threat that North Korea’s perceived enemies, 

principally the United States, pose to his regime.

Given the level of concern over North Korea’s 

statements and actions, the DoD faces several 

challenges: maintaining a high level of military 

readiness and deterrence; supporting the U.S. and 

allied strategy to seek diplomatic negotiations 

while imposing economic sanctions; and, if 

required, executing a military option.

RUSSIA

In June 2017, Secretary of Defense Mattis testified 

about a resurgent and more aggressive Russia, 

which objects to key aspects of the post-Cold War 

international order by taking multiple actions 

against other countries, including challenging the 

sovereignty of nations on its borders. In recent 

years, Russia has clashed with the United States 

over the 2014 revolution in Ukraine that ousted its 

pro-Russian president, the subsequent revolt of the 

president’s supporters and Russia’s intervention 

in Eastern Ukraine and seizure of Crimea. Russia 

has also opposed the expansion of the North 

Atlantic Treaty Organization (NATO) into the Baltic 

countries of Estonia, Latvia, and Lithuania, which 

brought U.S. and other NATO allies’ military forces 

to Russia’s border. 

In the Syrian civil war, Russia intervened on behalf 

of the Government of Syria. As a result, U.S. forces 

conducting operations to defeat the Islamic State 

of Iraq and Syria (ISIS) in Syria operate in close 

proximity to Russian military forces. The Defense 

Intelligence Agency has reported that Russia’s 

military intervention in Syria changed the dynamic 

of the conflict, bolstered the government of Syria, 

and ensured that resolution to the conflict is 

impossible without Russia’s agreement.

Republic of Korea Marine Amphibious Assault Vehicles 

eject smoke clouds during a Korean Marine Exchange 

Program exercise. (U.S. Marine Corps photo)
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 4

In addition to having a formidable nuclear force, 

Russia has significantly advanced its conventional 

and unconventional military capabilities. The 

Russian military has enhanced its ground, sea, and 

air strategic and operational forces; deployed an 

asymmetric, unconventional warfare capability; 

and expanded its covert use of cyber and 

information operations.

In Europe, the United States and its NATO allies 

have reinforced their military capabilities. Through 

the European Deterrence (formerly Reassurance) 

Initiative, announced in June 2014, the DoD has 

sought to build its European allies and partners’ 

capability to enable a quicker and more robust 

response to support NATO’s common defense. The 

European Deterrence Initiative augmented the 

presence of U.S. forces in Eastern Europe through 

increased unit rotations and pre-positioned 

materiel in strategic locations. In addition, other 

NATO countries have deployed military units to 

the Baltic countries and to Romania, Poland, and 

Bulgaria. NATO is also enhancing its Response 

Force into a flexible and mobile, 40,000-troop 

joint force composed of land, sea, air, and special 

operations units, and is conducting increased 

training and joint exercises with partner countries’ 

security forces. The total U.S. investment in the 

European Deterrence Initiative has quadrupled 

over the past year, from $789 million in FY 2016 to 

$3.4 billion for FY 2017. 

However, challenges remain to the rapid 

deployment of U.S. and other NATO forces in 

response to potential Russian aggression. For 

example, a recently released DoD OIG evaluation 

noted that, according to senior U.S. European 

Command officials, obstacles to a timely military 

ground response by U.S. and other NATO forces to a 

Russian military attack include a lack of compatible 

infrastructure and movement agreements between 

NATO countries and experience controlling 

military convoys.

In Syria, the United States and Russia have 

established communication mechanisms to 

de-conflict operations and avoid conflict. On 

June 19, 2017, after U.S. forces shot down a Syrian 

fighter aircraft, the Russian defense ministry issued 

a statement that “all kinds of airborne vehicles, 

including aircraft and UAVs of the international 

coalition detected to the west of the Euphrates 

River will be tracked by the Russian SAM [surfaceto-air missiles] systems as air targets.” Despite the 

heightened tension resulting from these actions the 

United States and Russia have sought to deconflict 

air zones in Syria. To further reduce the potential 

for military confrontation, in agreement with the 

United States and other concerned countries, Russia 

has established and is monitoring de-escalation 

zones in southern Syria. 

U.S. Marine Corps KC-130 J Hercules aircraft with Marine Aerial Refueler Transport Squadrons. (U.S. Marine Corps photo) 
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

5 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Strategically, Russia’s actions indicate that it has 

established an enduring presence in Syria to 

maintain its warm-water naval port and to project 

power regionally. As a United Nations Security 

Council member, Russia also influences a wide 

range of other international issues, including the 

fight against terrorism. The potential exists for 

military confrontation in these areas; the DoD 

needs to maintain an effective military deterrence 

capability and dialogue with the Russian military.

CHINA

Already a nuclear weapons power, China continues 

to further build its conventional military capacity. 

In recent years, China’s military has improved 

its offensive and defensive capabilities in the 

areas of ballistic and cruise missiles, counterspace and offensive cyber capabilities, electronic 

warfare systems, surface and submarine warfare 

capabilities, and its air force. In 2017, Chinese 

military expenditures increased another 7 percent. 

In recent years, China has undertaken aggressive 

expansionist activities in the Asia-Pacific region. 

In the South China Sea, China has increased 

tensions with its regional neighbors and with 

the United States by creating artificial islands 

in maritime territory claimed by multiple 

neighboring countries. China is militarizing these 

artificial islands, using them to gain control over 

the South China Sea’s air and sea lanes, as well 

as its extensive underwater natural resources. 

The Chinese government refuses to accept an 

international arbitration tribunal ruling that China 

does not have the maritime territorial sovereignty 

it claims over the South China Sea.

In the East China Sea, China declared an air-defense 

identification zone in 2013 in which it requires 

the identification, location, and control of foreign 

aircraft over what it considers its sovereign 

airspace or water. China’s self-declared air-defense 

identification zone extends over the Japaneseowned Senkaku Islands. Neither Japan nor the 

Unites States recognize China’s claims. In addition, 

the Japanese government has expressed concern 

over China’s almost daily intrusions into Japanese 

air space in 2017.

In response to China’s actions, the DoD continues 

to fly, sail, and operate throughout the South 

China and East China Seas, in accordance with 

international law, to demonstrate its commitment 

to freedom of navigation and overflight. 

Furthermore, the DoD is working to enhance 

A U.S. Navy Boatswain’s Mate directs an MH-60S Seahawk helicopter to the flight deck aboard the Littoral Combat Ship 

USS Coronado. (U.S. Navy photo)
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 6

the alliance relationships the United States 

has with countries in the Asia-Pacific region in 

support of regional stability and U.S. strategic 

interests. In 2014, the United States signed the 

Enhanced Defense Cooperation Agreement with 

the Philippines, which increased U.S. access 

to Philippine military bases, and provided for 

donations of U.S. maritime vessels to the Philippine 

military and joint training exercises. In 2015, 

the United States announced the Southeast Asia 

Maritime Security Initiative, a 5-year, $425 million 

project to enhance partner capabilities and 

collaboration among Southeast Asia countries, 

including the Philippines, Vietnam, Indonesia 

and Malaysia. 

To expand its global maritime influence, China 

established its first overseas military base 

in Djibouti in the Horn of Africa. Djibouti is 

strategically located on the Strait of Bab el-Mandeb 

between the Red Sea and the Gulf of Aden where 

approximately 20,000 ships and 20 percent of 

global exports traverse yearly. China is building 

a facility that will house up to 10,000 Chinese 

military personnel and provide a logistics 

base for its navy. 

U.S. intelligence analysts assert that this is a critical 

period in which China plans to test U.S. military 

and political resolve. The United States and its 

allies will need to have a clear response to protect 

U.S. interests.

IRAN

Iran continues to pose a significant global security 

threat to the United States given its regional power 

ambitions and potential development of a nuclear 

weapons capability. For example, according to the 

2017 Defense Posture Statement, Iran supports 

the Assad regime in Syria, backs the militant Shi’a 

terrorist organization Hezbollah in Syria and 

Lebanon, and contributes to disorder in Yemen. 

In July 2017, Michael Pompeo, the Director of the 

Central Intelligence Agency, described Iran’s use 

of proxy forces—Hezbollah in Lebanon and Syria 

and Shiite militias in Syria and Iraq—to establish 

Iranian dominance along the newly forming Shiite 

Crescent stretching from Beirut to Tehran. Iran’s 

ally Hezbollah claims it is “close to achieving this 

goal.” These actions directly threaten Israel and 

other U.S. allies in the Middle East.

In 2015, Iran, the P5+1 (China, France, Russia, the 

United Kingdom, the United States, and Germany), 

and the European Union agreed to the Joint 

Comprehensive Plan of Action, which seeks to 

ensure that Iran’s nuclear program is exclusively 

peaceful in exchange for the United States, the 

European Union, and the United Nations lifting 

economic sanctions. Under U.S. law, the State 

Department must notify Congress every 90 days 

of Iran’s compliance with the Joint Comprehensive 

Plan of Action. 

Because of Iran’s continued testing of ballistic 

missiles and direction of hostile actions in the 

region, Congress passed legislation in 2017 

imposing new economic sanctions against Iran. 

The State Department also stated Iran has 

expanded activities that undermine stability, 

security, and prosperity in the Middle East, such as 

supporting the terrorist groups Hezbollah, Hamas, 

and Palestinian Islamic Jihad. Iran also supports 

the government of Syrian President Bashar 

U.S. Marine Corps joint terminal attack controllers 

communicate with an MV-22 Osprey during takeoff.

(U.S. Marine Corps photo)
COUNTERING STRATEGIC CHALLENGES: NORTH KOREA, RUSSIA, CHINA, IRAN, AND TRANSNATIONAL TERRORISM

7 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

al-Assad, despite his atrocities against his own 

people. In Yemen, Iran has provided the Houthi 

rebels with advanced weaponry, which the rebels 

have used to attack Saudi Arabia, that threatens 

freedom of navigation in the Red Sea. Iran is also 

testing and developing ballistic missiles, in defiance 

of U.N. Security Council Resolutions.

In response to the new economic sanctions, 

President Hassan Rouhani of Iran warned that it 

could start its nuclear program “within hours.” 

Iran’s parliament also responded by voting 

overwhelmingly in favor of legislation to increase 

the budget for the country’s ballistic missile 

program and the Revolutionary Guard’s external 

operations arm, the Quds Force.

The United States is working with its allies in the 

Middle East to contain Iranian aggression and 

influence. In May 2017, the State Department 

announced a large arms package—$110 billion of 

defense equipment and services—for Saudi Arabia 

and other U.S. allies in the Gulf region to support 

their long-term security “in the face of the malign 

Iranian influence and Iranian-related threats.” The 

State Department re-designated Iran 2 months later 

as a State Sponsor of Terrorism, a designation it has 

held since 1984. 

Meanwhile, Iran has taken significant steps 

to increase its influence in Iraq. Speaking at 

the Aspen Security Forum in July 2017, Iraq’s 

Ambassador to the United States praised Iran’s 

provision of critical supplies in the fight against 

ISIS. He stated that Iran has enhanced its influence 

today in Iraq because other Arab nations were 

missing when Iraq needed their support against 

ISIS. Recently, however, Saudi Arabia has initiated 

talks with Iraq pursuant to an economic agreement 

to help reconstruct the country post-ISIS.

Notwithstanding its current support of Iraq to 

defeat ISIS, Iranian influence in Iraq could make 

it more difficult for Iraq to assert its sovereignty 

and maintain its independence as it attempts 

to reconcile competing sectarian interests and 

establish stable governance. Currently, Iranianbacked Shia Popular Mobilization Forces of 

considerable size and reach operate in Iraq to 

support the anti-ISIS campaign. The Government of 

Iraq has officially incorporated some of these Shia 

Popular Mobilization Forces into the Iraqi Security 

Forces. Iran has warned the Iraqi government 

not to weaken these Iranian-backed Shia forces, 

which, so far, have avoided conflict with U.S 

military personnel.

TRANSNATIONAL TERRORISM

Countering transnational terrorism remains a key 

U.S. national security challenge. Despite heightened 

U.S., European, and other allies’ focus on 

combatting terrorism following al-Qaeda’s attack on 

the United States on September 11, 2001, terrorist 

organizations have proliferated throughout the 

world and present a global threat. 

These terrorist organizations include Boko Haram 

in Nigeria and Chad; al-Shabab in Somalia; alQaeda in Syria, Yemen, and Afghanistan; the Islamic 

Maghreb in North Africa; and ISIS in Iraq, Syria, 

Libya, Afghanistan, Egypt, and the Philippines. 

Tens of thousands of young Muslims have migrated 

across nation-state borders to join the terrorist 

organizations, especially into Syria and Iraq, with 

an estimated 3,000 – 5,000 from Western Europe 

and the United States alone.

These terrorist organizations continue to pose a 

significant destabilizing force. ISIS, in particular 

and those it has inspired, has carried out multiple 

terrorist attacks in Europe and in the United States. 

A U.S. Marine Corps humvee enters the beach to board a 

Landing Craft Utility 1651 in order to transfer personnel 

and equipment. (U.S. Navy photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 8

ISIS recently directed its adherents to attack 

tourists anywhere in the world using a SUV or 

truck as its principal weapon. 

While each terrorist organization has a unique 

history, procedures, and motivation based on local 

grievances, the common thread linking them is 

adherence to interpretations of extremist versions 

of Islam that justify violence. 

However, the so-called Islamic Caliphate established 

by ISIS in Iraq and Syria is on the verge of defeat. 

In June 2017, after a 9-month battle, Iraqi Security 

Forces, backed by U.S. and Coalition air and special 

operations forces, liberated Mosul, Iraq’s second 

largest city. In August 2017, Kurdish and Arab 

military forces, supported by U.S. and Coalition air 

and special operations forces, entered Raqqa, Syria, 

the “capital” of the so-called Islamic Caliphate. 

However, the military success against ISIS in 

Syria and Iraq is driving some of the surviving 

ISIS fighters into other ungoverned spaces around 

the world, fueling the spread of transnational 

terrorism. The prospect of radicalized foreign 

fighters returning to their home countries to 

further spread ISIS influence and stage attacks 

poses a significant challenge to the United States 

and its allies. 

Special Presidential Envoy for the Global Coalition 

to Counter ISIS, Ambassador Brett McGurk, stated 

that the long-term key to preempting ISIS and 

other terrorist attacks after the military phase of 

defeating the so-called Islamic Caliphate in Iraq 

and Syria is to share information among the U.S. 

coalition of 69 countries. He noted that this will 

require increased emphasis on law enforcement and 

intelligence gathering to build a global database of 

known terrorists.

In addition to Iraq and Syria, the DoD is conducting 

military operations with allies against terrorist 

groups throughout the world, especially in several 

fragile or failed states. For example, General 

Raymond A. Thomas III, Commander, U.S. Special 

Operations Command, recently stated that forces 

under his command, along with local proxies, 

eliminated approximately 1,500 ISIS terrorists 

in Libya after ISIS established a presence there 

in 2015. He said that his teams operate globally 

against terrorists, anywhere a significant threat 

exists. In addition, U.S. forces are providing 

critical support and assistance to the Philippine 

Security Forces as they combat ISIS in the southern 

region of Mindanao. 

The DoD is also undertaking increased security 

cooperation initiatives in the Middle East and 

in other regions to enhance our alliances and 

build our partners’ military capability to defend 

themselves against Islamist extremist terrorist 

attacks. For example, on May 15, 2017, the DoD 

announced a new bilateral defense cooperation 

agreement with the United Arab Emirates on 

a range of shared regional security threats, 

including the ongoing Iranian, Al-Qaeda, or ISISbacked instability in Yemen and Libya, and the 

campaign to defeat ISIS in Iraq and Syria. The State 

Department also announced that the United States 

and Saudi Arabia are embarking on a number 

of new initiatives “to counter violent extremist 

messaging,” which will include opening a new 

Global Center for Combatting Extremist Ideology. 

A recent DoD OIG evaluation reported that DoD 

and State Department global efforts to build 

partner-country counterterrorism capacity through 

training and equipping programs have reached 

over 70 nations through the congressionally funded 

Section 2282 program.

In summary, transnational terrorism presents a 

long-term global threat. International institutions 

and governments must work to resolve the 

underlying conditions that led to the rise and 

continued propagation of violent extremism. 

These conditions result from the collapse of state 

economies and effective governance, sectarian 

and religious civil wars, and political and social 

alienation among the young in the countries in 

which the ideology has taken root.
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

9 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Iraqi federal police load artillery in support of the fight against ISIS near Hawijah, Iraq. (U.S. Army photo)
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 10

Challenge 2: Addressing Challenges 

in Overseas Contingency Operations 

in Iraq, Syria, and Afghanistan

The U.S. Government is engaged in two overseas contingency operations: 

(1) Operation Inherent Resolve (the effort to degrade and defeat the Islamic 

State of Iraq and the Levant [ISIS] in Iraq and Syria); and (2) Operation 

Freedom’s Sentinel (the effort to build partner capacity within the Afghan 

National Defense and Security Forces [ANDSF], and to counter terrorism in 

Afghanistan). Conducted in the U.S. Central Command Area of Responsibility, 

both operations are focused on building capacity for each host nation to 

provide for its own security, while addressing challenges to U.S. security 

interests from both state and non-state actors.

The U.S. Central Command Area of Responsibility is a region of 20 nations, 

with more than 550 million people from over 20 ethnic groups. It lies at 

the intersection of sea-lanes, flight corridors, pipelines, and overland routes 

supporting regional and global economic networks. Many threats in the region 

go beyond state borders, and occur on land, sea, and in cyberspace. The region 

remains an epicenter for terrorism and violent extremism, and according to 

General Votel, the Commander of U.S. Central Command, accounts for almost 

80 percent of terrorism incidents worldwide.

General Votel testified before the House Armed Services Committee in March 

2017 that the root causes of regional instability include ethnic and sectarian 

hostility, reduced government services and lack of economic opportunity, 

unemployed youth populations susceptible to radical ideologies, and 

expanding ungoverned areas. General Votel explained that violent extremist 

organizations, such as ISIS and al Qaeda, exploit this instability to foment 

unrest, challenge governments, and threaten U.S. national interests. 

The internet can facilitate the recruitment of violent extremists. Admiral Mike 

Rogers, Commander of U.S. Cyber Command, testified before the Senate Armed 

Services Committee in May 2017 that ISIS employs cyber capabilities to recruit 

followers and solicit contributions in the West. Closer to the Middle East, ISIS 

employs the internet to boost morale among its fighters, frighten opponents, 

and promote its false narrative of Sunni fundamentalism. 

According to General Votel, the DoD and its Coalition partners are pursuing 

a strategy of working “by, with, and through” partners in Iraq, Syria, and 

Afghanistan to prevail over adversaries in the region. The DoD’s challenge in 

this region is to contribute to a whole-of-government approach that addresses 

the regional and growing global threats, protects human and financial 

investments, and promotes the national security and foreign policy of the 

United States and its partner nations. General Votel stated that military 

operations alone cannot address the root causes of instability, but can help 

create necessary conditions for progress. 
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

11 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

OPERATION FREEDOM’S SENTINEL

The DoD has been fighting in Afghanistan for 

nearly 16 years. The direct combat mission of 

Operation Enduring Freedom began in October 

2001 and transitioned to the North Atlantic Treaty 

Organization Resolute Support mission in January 

2015. According to CENTCOM, Resolute Support 

provides training, advice, assistance, and equipment 

to Afghan security forces and institutions as part 

of a broader engagement by the international 

community to ensure that Afghanistan is not a safe 

haven for terrorism. Under Operation Freedom’s 

Sentinel, the DoD has two complementary missions: 

(1) participate in Resolute Support with North 

Atlantic Treaty Organization partners and allied 

nations to train, advise, assist, and equip the 

ANDSF; and (2) conduct U.S. counterterrorism 

operations against al Qaeda, the Islamic State 

of Iraq and Syria-Khorasan (ISIS-K), and their 

affiliates in Afghanistan. 

The DoD reports that the ANDSF has shown 

increased capability, but the ANDSF still suffers 

from leadership and logistical problems, and its 

casualty rates remain high. Despite significant 

U.S. and international support to Afghanistan, 

DoD officials recently described the fight as a 

“stalemate,” and have declared that “we are not 

winning” in Afghanistan. In August 2017, the U.S. 

announced a revised strategy for Afghanistan and 

South Asia, emphasizing preventing safe havens for 

terrorists and preventing terrorists from obtaining 

nuclear weapons and materials. The strategy relies 

on five principles: 

• adopt a conditions-based approach; 

• integrate diplomatic, economic, and 

military power; 

• persuade Pakistan to deny safe haven 

to terrorists; 

• partner with India to assist in 

stabilizing Afghanistan; 

• and provide U.S. warfighters the 

resources and rules of engagement 

necessary for success. 

However, the DoD recognizes the need for a 

regional strategy that includes Pakistan and India, 

as well as addresses persistent challenges with 

ANDSF capability gaps and long-term DoD support. 

The U.S. strategy also seeks to integrate various 

elements of U.S. power to make possible a political 

settlement that includes elements of the Taliban 

in Afghanistan.

An F-16CM Fighting Falcon pilot assigned to the 79th Fighter Squadron returns home to Shaw Air Force Base, South 

Carolina, after a six-month deployment in support of Operation Freedom’s Sentinel. (U.S. Air Force photo)
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 12

REGIONAL INFLUENCES ON THE 

INSURGENCY AND AFGHAN 

GOVERNANCE

In its June 2017 report “Enhancing Security and 

Stability in Afghanistan,” the DoD identified 

Pakistan as the most influential external actor 

affecting Afghan stability. According to this 

report, although Pakistani military operations 

have disrupted some militant sanctuaries, 

Pakistan plays a destabilizing role in Afghanistan, 

driven in part by its India-centric regional policy 

objectives and because of the support and refuge 

it provides to multiple militant groups within 

Pakistan. In addition, General John W. Nicholson, 

the Commander of U.S. Forces-Afghanistan, has 

identified the use of ungoverned sanctuaries 

outside of Afghanistan by terrorists and Afghan 

insurgents as the single greatest external factor 

that could cause failure of the 39-nation North 

Atlantic Treaty Organization-led coalition in 

Afghanistan. To address this concern, the DoD 

withheld $400 million in FY 2016 military funding 

intended for Pakistan, and an additional $50 million 

in FY 2017 funding, pending certification that 

Pakistan is taking sufficient action in denying safe 

haven to insurgent groups.

In addition, the DoD has reported that Russia, 

China, and Iran are seeking to develop greater 

relationships with the Afghan government and 

the Taliban. General Nicholson has criticized 

both Russian and Iranian support to the Taliban 

and rejected the “false narrative” that such 

engagements were in the pursuit of peace.

LEADERSHIP CHALLENGES AND 

CORRUPTION WITHIN THE ANDSF

Poor leadership and endemic corruption have 

weakened the fighting effectiveness of Afghan 

forces and adversely affected retention of 

personnel. This year, Afghan President Ashraf 

Ghani directed the development of a 4-year 

“Road Map” to reform and strengthen the 

ANDSF in the key areas of fighting capability, 

leadership development, unity of command, and 

countering corruption.

However, DoD OIG and Special Inspector General for 

Afghanistan Reconstruction reports have continued 

to identify corruption and mismanagement in 

Afghanistan contracting operations, failures in 

budgeting and execution, a lack of transparency 

and internal oversight, and failures in governance 

and rule of law. While the DoD has implemented 

measures, such as Conditionality Agreements and 

Bilateral Financial Commitment Letters, to promote 

improved ANDSF management practices, continued 

corruption plagues the ANDSF. 

For example, a DoD OIG report noted that the 

Afghan government was not penalized for repeated 

commitment letter violations regarding U.S. direct 

assistance funding. The DoD has attempted to 

place the management of fuel procurement under 

the responsibility of the Ministry of Defense, but 

corruption and mismanagement of operations 

and facilities caused President Ghani to cancel 

these efforts and return full administration to the 

U.S. Government.

The Afghan government has taken some positive 

steps to attempt to address corruption issues. In 

June 2016, the Afghan government opened its 

Anti-Corruption Justice Center as an independent 

authority to enforce the law and prosecute 

corruption crimes. Since its inception, the AntiCorruption Justice Center has completed 14 major 

corruption cases involving 38 defendants, including 

four from the Ministry of Interior, one from the 

Ministry of Defense, and the rest from other 

ministries or private sector entities.

A UH-60 Black Hawk helicopter flies over the rugged 

terrain of eastern Afghanistan. (U.S. Army photo)
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13 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

ANDSF CAPABILITY GAPS

In June 2017, the DoD reported that the ANDSF 

has progressed in planning combat operations and 

integrating combat enablers, such as integrating 

air and ground forces and intelligence collectors 

into those operations. However, persistent gaps in 

ANDSF capabilities remain, many of which require 

continued U.S. support. For example, according 

to the report Afghan intelligence collection 

for targeting and battle assessments is being 

enhanced through remotely piloted aircraft and 

other technical tools, but the Afghans are unable 

to maintain the equipment. In addition, a lack of 

trust between the Afghan Ministries of Defense 

(military) and Interior (police) inhibits intelligence 

sharing. Maintenance and training strategies 

intended for adoption by the ANDSF have not met 

established milestones and have faced challenges 

caused by Afghan illiteracy, a lack of leadership, 

and management shortcomings. 

In addition, according to the DoD report, the 

Afghan Air Force is using the Super Tucano light 

attack (fixed-wing) aircraft to attack targets 

of strategic significance, although technical 

limitations currently limit the use of precision 

guided munitions. Meanwhile, the decreasing 

availability of non-North Atlantic Treaty 

Organization Mi-17 helicopters is severely limiting 

Afghan troop support and casualty evacuation. 

The planned introduction of U.S.-type helicopters 

presents a long-term solution but does not resolve 

the immediate shortfalls in aerial transport. To 

assess these challenges, the DoD OIG is currently 

conducting an assessment of U.S. and Coalition 

efforts to train, advise, assist, and equip the 

Afghan Air Force. 

The DoD continues efforts to build critical 

capabilities and to implement technical support 

systems within an underdeveloped ANDSF. 

However, the DoD has reported that these efforts 

are hindered by the limited capability of the 

Ministry of Defense to execute resource and 

personnel management, as well as procurement 

planning. In addition, the Afghan National Police 

has significant shortcomings in training, equipping, 

and employing its personnel and is several years 

behind the Army in its development.

Soldiers of the U.S. Army’s 3rd Infantry Division load bags for soldiers deploying to Afghanistan in support of Operations 

Resolute Support and Freedom’s Sentinel. (U.S. Army photo)
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 14

LACK OF RELIABLE DATA TO MEASURE 

PROGRESS IN ANDSF DEVELOPMENT

In its June 2017 report, the DoD stated that the 

coalition relies largely on ANDSF reporting for all 

metrics. As such, the DoD’s assessments of progress 

in the Afghan Ministries of Defense and Interior 

rely on data provided by the Afghan ministries. 

However, much of this information cannot be 

verified because Afghan operations occur beyond 

the reach of Coalition advisors who face security 

restrictions on their travel.

To help address these weaknesses, the DoD is 

attempting to modernize Afghan ministerial 

functions, which includes the introduction of three 

automated systems: 

• Afghan Human Resource Information 

Management System to validate ANDSF 

personnel numbers and salaries; 

• Afghan Personnel Pay System to facilitate 

unit strength accountability and personnel 

verification; and 

• Core Information Management 

System to improve accountability of 

equipment inventories. 

These automated systems seek to provide 

ANDSF leadership and their advisors the tools to 

evaluate personnel and resource management in a 

more accurate way.

Nevertheless, the DoD OIG has found that the 

Combined Security Transition Command – 

Afghanistan needs to strengthen controls over 

U.S. direct assistance funding. For example, a DoD 

OIG audit found that the Afghans could not ensure 

the accuracy of reports detailing fuel delivery and 

consumption by the Ministry of Defense. Similarly, 

a 2017 Special Inspector General for Afghanistan 

Reconstruction audit found that the DoD spent over 

$400 million to build ANDSF intelligence capacity 

but lacked performance metrics to assess progress. 

The DoD is emphasizing the need for Afghanistan 

to implement reforms to address illicit activity and 

patronage networks within security organizations 

in order to reduce corruption and increase ANDSF 

effectiveness. The DoD OIG is currently conducting 

a summary audit of its previous reports on direct 

assistance that will make recommendations to 

address any systemic issues identified. Future DoD 

OIG oversight will assess U.S. and North Atlantic 

Treaty Organization efforts to enable the Ministry 

of Interior to develop its own oversight and internal 

control capabilities.

ANDSF CAPACITY AND LONG-TERM 

DOD AUGMENTATION

The United States and the North Atlantic Treaty 

Organization have relied heavily on contract 

support for the ANDSF, with the long-term goal that 

the ANDSF would establish its own capabilities for 

many of these functions. As of April 2017, around 

25,000 personnel served under DoD contracts in 

Afghanistan, which included support to the ANDSF.

A previous DoD OIG evaluation of Afghan National 

Police maintenance sustainment capability 

found that the Afghan National Police lacked a 

sustainable logistics planning capability, failed to 

adequately capture consumption and demand data, 

lacked funding and experience to sustain existing 

infrastructure, and delayed the transition to an 

organic maintenance capability. In the long-term, 

the DoD strategy is for U.S. and North Atlantic 

Treaty Organization advisors, along with ANDSF 

leadership, to commit to implementing the National 

Maintenance Strategy and its goal of ANDSF selfsustainability by 2021. 

In summary, the DoD’s progress in Afghanistan 

faces continuing challenges in security, governance, 

and capacity-building. The ANDSF faces an 

intensified Taliban insurgency, Islamic State 

affiliates maintain the ability to conduct suicide 

attacks and regenerate forces, and Afghan-Pakistan 

relations remain contentious. After 16 years of 

U.S. engagement, the challenges in Afghanistan 

are persistent.
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

15 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

OPERATION INHERENT RESOLVE

Operation Inherent Resolve began on August 

8, 2014, when U.S. airstrikes attacked ISIS as it 

threatened the Iraqi city of Erbil. On September 

10, 2014, the United States announced the 

creation of the Global Coalition to Defeat ISIS, 

which seeks to use diplomatic, economic, 

informational, and military power to degrade and 

ultimately defeat ISIS. 

The DoD efforts to train, advise, assist, and 

equip local forces in Iraq and Syria remain a 

cornerstone of the U.S. strategy to defeat ISIS. 

The United States and its 72 Coalition partners 

support and advise Iraqi Security Forces, Kurdish 

Peshmerga, Syrian Democratic Forces, and vetted 

Syrian opposition forces in military operations 

against ISIS. Iraqi forces’ liberation of the city 

of Mosul demonstrates their increasing security 

capabilities and the eroding ISIS physical 

caliphate in Iraq.

INFLUENCE OF RUSSIA AND IRAN 

IN SYRIA

In March 2017, General Votel testified that Iran 

poses the greatest danger to long-term peace in the 

Middle East. He also stated that Iran seeks to take 

advantage of the war against ISIS and the civil war 

in Syria to pursue regional dominance. Iran sends 

fighting forces into Syria in support of the Syrian 

regime forces of President Bashar al-Assad, and 

Iran has influence over several of the militias in 

the Popular Mobilization Forces in Iraq.

The DoD’s Defense Intelligence Agency has 

reported that Russia’s military intervention in 

Syria in 2015 changed the dynamic of the conflict, 

bolstered the Assad regime, and ensured that 

no resolution to the conflict is possible without 

Moscow’s agreement. Fighting has also divided the 

country into zones of influence. As of July 2017, 

the Syrian regime and pro-regime forces backed 

by Russia and Iran controlled most of the west 

of the country, which includes an array of major 

population centers. In addition, Iran has taken 

significant steps to increase its influence, mainly 

through its support for Shia militias operating 

in both countries, and has warned the Iraqi 

government not to weaken Iranian-backed Shia 

Popular Mobilization Forces operating in Iraq.

THE FUTURE OF ISIS

In June 2017, the DoD reported that ISIS was 

transitioning from a state-like entity in control of 

territory to an insurgency. The 9-month battle to 

liberate Mosul illustrated the growing competence 

of Iraqi Security Forces, but also demonstrated 

the tenacity and durability of ISIS as a dangerous 

enemy. ISIS will remain a physical threat within 

the region in some form, and its viral nature makes 

it a global threat.

In response to a congressional request, in 

June 2017, Secretary of Defense James Mattis 

submitted to Congress a report on the U.S. strategy 

to defeat ISIS. The report described a new 

framework for coordinating whole-of-government 

activities to defeat the global reach of ISIS, while 

accelerating and intensifying the Operation 

Inherent Resolve mission in Iraq and Syria. The 

new strategic framework directs simultaneous 

pressure across ISIS’s global organization, increases 

focus on non-lethal efforts, seeks to improve 

interagency collaboration and implementation, and 

Iraqi soldiers assigned to the 1st Battalion, 73rd Brigade, 

16th Division, run through a breach in a berm. 

(U.S. Army photo)
ADDRESSING CHALLENGES IN OVERSEAS CONTINGENCY OPERATIONS IN IRAQ/SYRIA AND AFGHANISTAN

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 16

streamlines decision-making processes. As part 

of the framework, the DoD collaborates with the 

Departments of State, Treasury, and Homeland 

Security; the Office of the Director of National 

Intelligence; the Joint Chiefs of Staff; and senior 

Administration officials to develop the U.S. strategy.

The framework to defeat ISIS described, in part, 

that intelligence collaboration among partner 

nations has helped hinder ISIS’s attempts to 

export terror. A recent classified DoD OIG report 

determined whether the DoD allocation process 

for intelligence, surveillance, and reconnaissance 

capability effectively supported the intelligence 

requirements of the Combined Joint Task Force–

Operation Inherent Resolve Commander, while 

managing the global availability of forces. Future 

DoD OIG oversight will evaluate DoD policies 

and procedures for sharing intelligence with 

allied Coalition forces supporting Operation 

Inherent Resolve.

HUMANITARIAN CRISIS IN IRAQ 

AND SYRIA

The United Nations Office for the Coordination 

of Humanitarian Affairs reported that Iraq’s 

humanitarian crisis is severe and rapidly 

expanding. The conflict has displaced over 

3 million Iraqis who are living in 3,700 locations 

across the country. Additionally, more than 

1 million displaced people and refugees have 

fled to areas controlled by the Kurdistan Region 

Government. According to the United Nations 

Office for the Coordination of Humanitarian Affairs, 

because of the intensity of fighting in Mosul, Hawija 

and Tal Afar, as many as 1.1 million additional 

civilians may be forced from their homes. As Iraq’s 

campaign transitions to rebuilding the governing, 

economic, and social structures in areas liberated 

from ISIS, the humanitarian crisis places immense 

burdens on the Iraqi central government, regional 

governments, and host communities.

Similarly, Syria remains one of the most complex 

and dynamic humanitarian crises in the world 

today. According to the United Nations Office 

for the Coordination of Humanitarian Affairs 

2017 humanitarian response plan for Iraq, an 

estimated 13.5 million people, including 6 million 

children, continue to be in need of humanitarian 

assistance. Of these, 5.47 million people are in 

hard-to-reach areas, including nearly 600,000 

people in 18 besieged areas. Humanitarian access 

to individuals in need remains constrained by 

ongoing conflict; shifting frontlines; administrative 

and bureaucratic hurdles; violence along access 

routes; and general safety and security concerns 

in contravention of international law, particularly 

international humanitarian and human rights law. 

The DoD coordinates with the Department of State 

and the U.S. Agency for International Development 

to address humanitarian assistance needs. The 

DoD uses Overseas Humanitarian, Disaster, 

and Civic Aid funding to address humanitarian 

assistance projects and help meet the basic needs 

of civilian populations. This funding allows for 

valuable civilian-military cooperation, capacitybuilding of partner nations, and strengthening of 

regional stability and security, while promoting 

U.S. national security interests. 

In summary, while the U.S-led Global Coalition to 

Defeat ISIS has trained and supported Iraqi and 

Moderate Syrian Opposition forces in significantly 

reducing ISIS’s control of territory and in liberating 

major population centers, significant challenges 

remain. DoD officials have stated that ISIS is 

transitioning to an insurgency with the ability 

to conduct asymmetric attacks in governmentcontrolled territory with minimal to no warning. 

Iraqi Government is also challenged in its efforts to 

incorporate the Popular Mobilization Forces under 

its control, as some government factions and Iran 

seek to retain influence. While key major cities 

have been liberated from ISIS, the transformation 

of ISIS from a pseudo-state to a trans-regional 

insurgency will present continued challenges to the 

DoD and the Global Coalition.
17 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

An airfield manager guides in a C-130 as it taxis on the flightline at Dobbins Air Reserve Base, Georgia.

(U.S. Air Force photo)
DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 18

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

Challenge 3: Enabling Effective Acquisition 

and Contract Management

Acquisition and contract management have remained high-risk areas for the 

DoD for many years, and delivering weapons and technology systems on 

time and within budget continues to pose major management challenges for 

the DoD. Although Congress and the DoD have initiated reforms designed 

to improve the acquisition of major weapon systems, many DoD programs 

fall short of cost, schedule, and performance expectations. As a result, the 

DoD regularly pays more than anticipated, buys less than expected, and in 

some cases, delivers less capability than its contracts require. In addition, 

the Defense Acquisition System often focuses on near-term costs, schedule, 

and performance trade-offs to the detriment of long-term costs. Yet, more 

than 70 percent of the life-cycle costs of a weapon system are incurred in the 

operation and sustainment of the weapon system. 

In total, the DoD obligates more than $273 billion annually on contracts for 

goods and services, including support for military installations, information 

technology, consulting services, and commercial items. In these areas, the 

DoD faces challenges in overseeing the contracting officer’s representatives, 

making contract payments, and assessing and reporting on contractor 

performance. In addition, DoD decision makers sometimes lack information 

on past and anticipated future contracted services and sometimes focus 

more on processing the contract action than evaluating the underlying need 

for the service. 

Compounding the acquisition and contracting challenges is the external threat 

targeting U.S. technologies—specifically, foreign attempts to obtain sensitive 

or classified information and technologies. The DoD must prevent the illegal 

transfer of operational and defense technologies.

ACQUISITION AND SUSTAINMENT

As of April 2017, the DoD portfolio of Defense Acquisition programs included 

1,667 programs. In the FY 2018 Presidential Budget, the DoD requested 

$208.6 billion to fund these acquisition programs. Over the past year, the 

number of programs in the DoD portfolio of Major Defense Acquisition 

programs grew from 79 to 85, increasing the total planned investment in these 

programs from $1.64 trillion to $1.75 trillion. 
19 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

In 2010, the DoD launched the Better Buying Power 

initiatives in an effort to strengthen the DoD’s 

buying power; improve industry productivity; 

and provide an affordable, value-added military 

capability to the warfighter. The Better 

Buying Power initiatives were based on a set of 

fundamental acquisition principles, such as:

• eliminating redundancy, 

• mandating affordability, 

• building stronger partnerships with the 

requirements community to control costs, 

• using the technology development phase for 

true risk reduction, 

• emphasizing competition strategies, 

• creating and maintaining 

competitive environments, 

• eliminating requirements imposed on 

industry where costs outweigh benefits, 

• increasing the use of Performancebased Logistics, 

• enforcing open system architectures, and 

• effectively managing technical data rights. 

Congress has also enacted acquisition reforms 

designed to simplify the procurement process, 

reduce unnecessary paperwork and regulatory 

burdens, and enable the development of clearer 

and more agile acquisition strategies. Through 

the National Defense Authorization Act, For Fiscal 

Year 2017, Congress reorganized the acquisition 

authority within the Office of the Secretary of 

Defense. The National Defense Authorization 

Act for FY 2017 also created the position of the 

Chief Management Officer of the DoD, effective 

February 1, 2018. The Chief Management Officer 

will be responsible for improving the quality and 

productivity of the DoD’s business operations, 

and reducing the costs of those operations, which 

could enable the DoD to reallocate resources 

from business operations to readiness and 

recapitalization of the combat force. The reforms 

also seek to streamline and modernize DoD’s 

acquisition system, empower better decision 

making, and encourage investment earlier in 

acquisition programs. The ultimate goal of the 

reforms is to provide better technology faster and 

more efficiently to the warfighter.

While DoD OIG audits determined that the 

DoD has made progress in acquisition reform, 

program personnel have not always adequately 

defined, validated, funded, and executed 

requirements or delivered weapon systems that 

meet performance requirements. For example, 

in 2017, a DoD OIG audit found that the Navy did 

not effectively establish capability requirements 

and execute testing to procure the Surface Mine 

Countermeasure Unmanned Undersea Vehicle 

(Knifefish). Specifically, the Knifefish requirements 

developer did not fully define requirements to 

support the communication interface and launch 

and recovery operations between the Knifefish 

system and the Littoral Combat Ship, which 

is a fast, agile ship designed for operations in 

environments near the shoreline. Additionally, the 

Knifefish program office did not effectively plan 

and execute testing because of funding shortfalls, 

which resulted in a 14-month delay in meeting 

program milestones. 

A U.S. Air Force contracting specialist from the 20th 

Contracting Squadron reviews a contract.

(U.S. Air Force photo)
DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 20

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

The DoD OIG has found that sometimes capability 

requirements have not been adequately 

defined and tested and that test community 

recommendations or deficiencies have not been 

adequately addressed and, in some cases, have 

been ignored. For example, the DoD OIG evaluated 

the Navy’s management of waivers and deferrals 

from operational test requirements for nine major 

weapon systems. The DoD OIG review of waiver 

requests at the Naval Air Systems Command found 

that Navy program managers and system sponsors 

did not fully implement Navy policies for requesting 

waivers and deferrals before certifying that the 

programs were ready for Initial Operational Test 

and Evaluation to support the final production 

decision. As a result, six of nine programs 

reviewed had completed Initial Operational Test 

and Evaluation with unresolved deficiencies that 

negatively impacted the warfighter’s primary 

missions. The Navy took corrective actions by 

issuing interim guidance to address the gaps in the 

testing and identification of deficiencies caused by 

program offices’ unchecked use of the waiver and 

deferral process. Additionally, the Vice Chairman of 

the Joint Chiefs of Staff updated the Manual for the 

Operation of the Joint Capabilities Integration and 

Development System to include a requirement that 

program managers notify the Joint Requirement 

Oversight Council when a program is not meeting 

its primary mission requirement.

In addition, DoD OIG audits have determined that 

the DoD continues to exceed cost and schedule 

baselines and still does not consistently define 

performance metrics. Between October 2016 and 

March 2017, the DoD OIG identified $909.7 million 

in questioned costs and funds recommended to be 

put to better use during acquisition audits. For 

example, the DoD OIG reported in August 2016 that 

Army officials could have managed the schedule, 

affordability, and quantity requirements of the 

XM25 program more effectively. The XM25 is 

a semiautomatic, shoulder-fired weapon system 

that fires 25-mm high-explosive, air-bursting 

ammunition to allow soldiers to fire at hidden 

enemy targets. The initial production decision for 

the XM25 has been delayed since the first quarter 

of FY 2012. In April 2017, the Army terminated 

the XM25 contract with the prime contractor after 

it failed to deliver the weapons as specified by the 

terms of the contract. 

An assistant product manager for Soldier Protective Equipment shows the Acting Principal Deputy for the Assistant Secretary 

of the Army (Acquisition, Logistics and Technology) how hard armor saves soldiers’ lives. (U.S. Army photo)
21 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

The DoD OIG also continues to identify challenges 

with the sustainment of weapon systems. For 

example, in 2017 the DoD OIG determined that the 

DoD did not consolidate its purchase of 2.9 million 

H-60 spare parts to maximize its market leverage. 

The H-60 is a twin-engine helicopter that has 

been in service since 1979. The Army, Navy, Air 

Force, and U.S. Special Operations Command all 

fly different versions of the H-60. The DoD used 

at least 2,136 different contracts and purchase 

orders from February 2015 through January 2016 

to purchase H-60 spare parts valued at $394.9 

million. These contracts and purchase orders 

were awarded to at least 590 different contractors. 

The DoD procured the same H-60 spare parts on 

different contracts, often at different prices. As 

a result, the DoD missed the opportunity to use 

quantity discounts to lower spare parts prices and 

administrative costs. 

Overall, as of March 2017, the DoD OIG was 

tracking 245 open recommendations on the 

formulation and oversight of contracting strategies 

that support the procurement of DoD acquisition 

programs, automated information systems, and 

special interest projects for the DoD. These 

recommendations are related to issues such as 

support for the procurement of weapon systems 

and automated information systems and obtaining 

fair and reasonable contract pricing. We believe 

the DoD needs to examine best practices to 

integrate critical requirements, resources, and 

acquisition decision-making processes.

CONTRACT MANAGEMENT 

AND OVERSIGHT

As noted above, the DoD spends more than 

$273 billion each year on contracts for supplies, 

such as furniture and services, support for military 

bases, support for contingency operations in 

Southwest Asia, and general support services. 

The Government Accountability Office has stated 

that ensuring the DoD has the people, skills, 

capacities, tools, and data needed to make informed 

acquisition decisions is essential if the DoD is to 

effectively and efficiently carry out its mission in 

an era of more constrained resources. 

Oversight of Government contract surveillance is 

also critical to ensuring that contractors provide 

quality services and supplies in a timely manner, 

within cost; mitigating contractor performance 

problems; and ensuring that the Government 

receives the best value for the warfighter. However, 

DoD OIG audits have found deficiencies in contract 

An HH-60 conducting rescue operations in the Beaumont, Texas, area after Hurricane Harvey. 

(U.S. Air National Guard photo)
DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 22

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

oversight. For example, DoD OIG audits have 

determined that DoD contracting officers do not 

always appoint contracting officer’s representatives 

(CORs), appointed CORs are not always adequately 

trained, contracting officials do not always develop 

adequate quality assurance surveillance plans or 

never developed them at all, quality assurance 

surveillance plans do not reflect current contract 

requirements, and CORs did not always maintain 

supporting documentation. Moreover, the CORs 

did not use the oversight procedures established in 

the quality assurance surveillance plans to monitor 

contractor performance. 

In addition, the DoD OIG determined that Defense 

Logistics Agency (DLA) Land and Maritime did 

not adequately process product quality deficiency 

reports or pursue appropriate restitution for a 

projected 267 contracts for which contractors 

supplied defective parts. In addition, DLA Land 

and Maritime did not account for the defective 

parts in the DoD supply chain, including all 

parts on a contract for a critical safety item for 

which DoD customers submitted product quality 

deficiency reports.

DoD OIG audits also identified problems with 

the management of contract requirements. 

For example, the DoD OIG determined that 

for the contracts used to provide commercial 

transportation in the Middle East, the Army did 

not analyze asset usage or continuously evaluate 

transportation requirements so that it could 

increase or decrease orders based on operational 

needs. As a result, the Army ordered an average 

of 39 percent more transportation assets than 

it needed throughout the life of the contracts. 

Further, excessive guaranteed minimum payments 

were paid to each of the four contractors, which 

prompted the Army to order services to meet 

the guaranteed minimums rather than what 

was actually required within that period of 

performance. The audit concluded that the Army 

wasted $53.6 million throughout the life of the 

contracts on services that it did not require. 

The DoD also must seek to reduce improper 

payments. Improper payments are overpayments 

or underpayments that should not have been made, 

payments made in an incorrect amount, payments 

made to ineligible recipients or for ineligible 

goods or services, and payments made with 

missing or insufficient documentation. Improper 

payments are often caused by unreliable data or 

inadequate internal controls that increase the 

likelihood of fraud. The DoD reported that it made 

$973.77 million in improper payments for FY 2016; 

however, a DoD OIG audit found problems with the 

completeness and accuracy of the DoD improper 

payment review and the information DoD reported. 

Recent DoD OIG reports highlighted improper 

payments related to service fees for on-time 

delivery for deliveries that were late, as well as 

ineligible travel-related expenses. These reports 

focused on specific areas of concern related 

to improper payments, such as unidentified 

improper billings by vendors and lack of adequate 

controls to pay for eligible services or supplies 

received by the DoD. 

The DoD OIG has also identified significant 

problems with the reporting of contractor past 

performance in the Contractor Performance 

Assessment Reporting System across the DoD. The 

Federal Acquisition Regulation requires contractor 

U.S. sailors and marines with Special Purpose Marine 

Air-Ground Task Force – Crisis Response – Central Command 

carry a marine to a UH-60L Black Hawk in the Middle East. 

(U.S. Marine Corps photo)
23 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

performance information be collected in the 

Contractor Performance Assessment Reporting 

System and used in source selection evaluations. 

Contractor past performance information is critical 

to ensuring that the U.S. Government only does 

business with companies that provide quality 

products and services in support of DoD missions. 

However, DoD officials have not always evaluated 

contractor performance in accordance with Federal 

guidance. In addition, DoD OIG audits identified 

an internal control weakness in the Contractor 

Performance Assessment Reporting System that 

allowed incomplete evaluations of contractor 

performance to be submitted. As a result, Federal 

source selection officials did not have access to 

timely, accurate, and complete past performance 

assessment information needed to make informed 

decisions related to contract awards. 

As of March 2017, the DoD OIG made and tracked 

131 open recommendations related to issues such 

as assessment of contractor performance through 

performance assessment reports, management 

of energy savings performance contracts, costreimbursement contract issuance, and management 

and identification of defective spare parts. In 

FY 2018, the DoD OIG plans to perform additional 

audits on oversight of various contracts in Africa 

and Southwest Asia, DoD integration of operational 

contract support into force development and 

training, privatization of DoD utilities, improper 

payments, and use of past performance information 

in the source selection process.

ILLEGAL TECHNOLOGY TRANSFER 

AND COUNTERFEIT

The DoD spends billions of dollars each year to 

develop and acquire sophisticated technologies 

that provide an advantage for the warfighter 

during combat or other missions. Many of these 

technologies are also sold or transferred to other 

countries to promote U.S. economic, foreign policy, 

and national security interests. However, sensitive 

DoD technology is also a target for unauthorized 

transfer, such as theft, espionage, reverse 

engineering, and illegal export.

Each year, the Defense Security Service publishes 

a report, “Targeting U.S. Technologies: A Trend 

Analysis of Cleared Industry Reporting,” providing 

a compilation and analysis of the suspicious contact 

reports received from cleared industry, which 

are industry partners that must meet specific 

requirements to safeguarding critical technologies 

in their possession. The report stated that the 

threat posed by illegal transfer of DoD technology 

“shows no sign of waning, and securing our cuttingedge technology remains key to maintaining our 

military and economic advantage.”

To address the threat of illegal technology 

transfers, the DoD has also published agencywide policies and worked to strengthen programs 

to identify and protect technologies critical to 

U.S. interests. The Defense Security Service 

administers the National Industrial Security 

Program for DoD and 30 other Federal agencies, 

which seeks to ensure that DoD contractors 

properly safeguard classified information and 

information associated with critical technologies. 

The guidance requires cleared contractors to 

remain vigilant and report suspicious contacts to 

the Defense Security Service. 

A U.S. Army soldier with the 5th Special Forces Group 

(Airborne) demonstrates an Australian rappel.

(U.S. Army photo)
DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 24

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

While these measures help to protect critical 

technologies, illegal transfer of sensitive 

technologies still occurs. As the criminal 

investigative arm of the DoD OIG, the Defense 

Criminal Investigative Service (DCIS) conducts 

counter-proliferation investigations that seek 

to deter the illegal transfer of sensitive DoD 

technologies and hold accountable those who do 

so. DCIS Counter-proliferation investigations 

resulted in 19 criminal charges, 19 convictions, 

1 suspension and 11 debarments from Government 

contracts in FY 17.

For example, a DCIS investigation resulted in the 

guilty plea and sentencing of Fuyi Sun, a citizen 

of the People’s Republic of China, for violating 

the International Emergency Economic Powers 

Act. Sun was sentenced to 3 years in prison for 

a scheme to covertly bypass U.S. export laws to 

obtain M60JB-3000-50B carbon fiber, which has 

applications in aerospace technologies, unmanned 

aerial vehicles and other military applications. This 

highly protected material is export-controlled and 

requires a license to export to China. 

In another example, a Chinese businessman, Guan 

Ying Li, also known as “Henry Li,” pleaded guilty 

and was sentenced to 10 years in Federal prison 

for attempting to provide military equipment to 

a Peruvian terrorist organization. Li brokered 

several deals with a purported Chicago-area 

businessman, knowing the items would be used 

to harm Peruvian and U.S. Government personnel. 

The equipment included thermal batteries designed 

for use in man-portable air-defense systems, very 

high frequency radios and night-vision systems.

In addition to illegal technology transfers, the 

DoD is also at risk of counterfeit parts being 

used on DoD weapons systems. For example, 

with many manufacturing steps being performed 

off-shore, sophisticated adversaries can exploit 

vulnerabilities to introduce kill switches, back 

doors, or viruses to render systems ineffective or 

to leak sensitive information. In particular, the 

use of counterfeit parts can affect the integrity 

of systems and ultimately endanger the lives of 

service members. Many systems face risks of being 

counterfeited, including microelectronics used in 

fighter jets, ground combat systems, and missile 

guidance systems. 

The GAO reviewed the DoD’s efforts to address 

vulnerabilities from counterfeit parts in the DoD 

supply chain. The GAO found several aspects of the 

DoD’s implementation of its mandatory reporting 

The final brigade-level exercise to enhance readiness to deter aggression in Europe while serving in support of 

Operation Atlantic Resolve. (U.S. Army photo)
25 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

for suspect counterfeit parts to have limited its 

effectiveness as an early warning system. The 

GAO also concluded that, without proper oversight 

ensuring that the reporting requirement was 

consistently applied, the DoD could not ensure 

it effectively managed the risks associated with 

counterfeit parts. 

The DoD OIG has also identified gaps in the DoD’s 

supply chain management process that have 

increased the risk that an adversary could infiltrate 

the supply chain and sabotage, maliciously 

introduce an unwanted function, or otherwise 

compromise the design or integrity of systems. For 

example, the DoD OIG determined that the Missile 

Defense Agency had established several initiatives 

to manage supply chain risk for the Ground-based 

Midcourse Defense system. The Missile Defense 

Agency is piloting a DoD software assurance 

program to improve the supply chain security for 

its critical software. However, the Missile Defense 

Agency did not fully implement the DoD supply 

chain risk management policy for the Ground-based 

Midcourse Defense system. As a result, there was 

an increased risk to the Missile Defense Agency’s 

supply chain security for the Ground-based 

Midcourse Defense system’s critical hardware, 

software, and firmware.

The DoD OIG is also planning to conduct reviews 

addressing key risk areas regarding counterfeit 

parts and the industrial base. For example, the 

DoD OIG is planning to review whether the controls 

governing the Commercial and Government Entity 

Code process are adequate and effective. The 

Commercial and Government Entity Code is a fiveposition code that identifies contractors conducting 

business with the U.S. Government, North Atlantic 

Treaty Organization member nations, and other 

foreign governments. The Commercial and 

Government Entity code allows contractors access 

to a variety of mechanized systems throughout 

the Government and provides for a standardized 

method of identifying a given legal entity at a 

specific location. 

DoD OIG investigations of product substitution, 

including counterfeit, defective, or substandard 

products, are also one of DCIS’s investigative 

priorities. Product substitution can disrupt 

A U.S. Army soldier checks targets through a spotting scope during the Squad Designated Marksman Course.

(U.S. Air National Guard photo)
DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 26

ENABLING EFFECTIVE ACQUISITION AND CONTRACT MANAGEMENT

readiness, waste economic resources, and threaten 

the safety of military and Government personnel 

and other end users. DCIS coordinates with the 

DLA to react to anomalies and threats affecting 

the DoD supply chain. As of September 6, 2017, 

product substitution investigations resulted in 

19 criminal charges, 3 convictions, 8 suspensions, 

and 16 debarments from Government 

contracts in FY 2017.

For example, a DCIS investigation determined 

that a DoD contractor, Boggs & Associates, Inc., 

was selling nonconforming parts to the DLA 

for military aircraft, vehicles, and vessels. The 

majority of these parts were considered critical 

application items and had to meet certain 

military specifications to ensure weapon 

system performance and the safety of operating 

personnel. Testing of parts provided by Boggs & 

Associates revealed that the company provided 

DLA nonconforming parts on 46 different purchase 

orders. Specifically, the parts were made from 

unauthorized substituted material or did not 

pass specified testing requirements. As a result, 

Stephan D. Boggs, president of Boggs & Associates, 

was sentenced to 24 months in prison and debarred 

from Federal contracting. 

In summary, with the prospect of slowly-growing 

or flat DoD budgets for years to come, the DoD 

must find ways to deliver weapon systems on 

time and within budget. The DoD needs to build 

on existing reforms by examining best practices 

to integrate critical requirements, resources, and 

acquisition decision-making processes. In addition, 

the DoD needs to better manage and oversee 

contracts for goods and services and to prevent the 

illegal transfer of sensitive technology.

U.S. marines with the 3rd Battalion, 23rd Marine Regiment, assault a beach using a Higgins landing boat from the 

Turkish ship TCG Karamurselbey. (U.S. Marine Corps photo)
INCREASING CYBER SECURITY AND CYBER CAPABILITIES

27 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

A U.S. Army soldier, assigned to the 4th Infantry Division, and soldiers from Romania and Bulgaria work at the 

International Help Desk during exercise Saber Guardian. (U.S. Army photo)
INCREASING CYBER SECURITY AND CYBER CAPABILITIES

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 28

Challenge 4: Increasing Cybersecurity 

and Cyber Capabilities

Cyber threats to the United States are unpredictable, rapidly changing, and 

widespread. Adversaries are becoming more sophisticated and strategicminded, and cyber threats and exploitable vulnerabilities will continue to 

grow. Since 2013, the Director of National Intelligence has identified cyber 

threats as the top strategic global threat facing the United States. During the 

same period, the GAO identified cybersecurity of Federal information systems 

and networks as a high-risk area because all sectors of the Government—

energy, transportation systems, communications, financial services, and 

defense of the homeland—are dependent on information systems and 

electronic data to perform operations. 

Since the beginning of 2016, well-publicized cyberattacks, such as those 

against the Democratic National Committee, state voter databases 

and software systems during the 2016 U.S. presidential election, and 

private industry have compromised national security and had significant 

economic impacts. 

Cyberattacks can also affect DoD missions. The DoD relies heavily on 

cyberspace to perform the full spectrum of its military, intelligence, and 

business operations. While cybersecurity is the responsibility of all DoD 

Components and personnel, several Components are assigned specific 

responsibility for DoD cybersecurity programs. The DoD Chief Information 

Officer must develop strategies and policies for operating and defending 

the DoD Information Network (DoDIN) and building the DoD cybersecurity 

workforce, manage the DoD information technology architecture, and maintain 

inventories of DoD mission-critical and mission-essential systems. This is 

a challenging responsibility because the DoDIN is composed of thousands 

of DoD networks and systems worldwide, including DoD-owned and leased 

communications, software, data, security devices, and other associated 

services. U.S. Cyber Command (USCYBERCOM) leads DoD cyberspace 

operations by planning, coordinating, synchronizing, and directing activities 

to conduct defensive and offensive cyberspace operations to support 

military operations in air, land, sea, space, and cyberspace. The Joint Force 

Headquarters–DoDIN Commander also serves as the Director of the Defense 

Information Systems Agency. 
INCREASING CYBER SECURITY AND CYBER CAPABILITIES

29 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Each Military Service and Defense agency is 

responsible for protecting its networks and 

systems. The Military Services also staff and equip 

the Cyber Mission Force. The Cyber Mission Force 

is composed of the:

• National Mission Force, which defends 

national interests against cyberattacks of 

significant consequence; 

• Combat Mission Force, which generates 

integrated cyberspace effects and develops 

cyberspace capabilities to support 

combatant commanders in meeting 

command plan objectives; and 

• Cyber Protection Teams, which support 

the DoD’s cyber workforce in performing 

traditional defensive measures and defends 

priority DoD networks and systems against 

specific threats. 

In May 2017, the President issued Executive Order 

13800, which stated that a “whole-of-government” 

approach is needed to protect information 

technology and data from unauthorized access 

and other cyber threats. Many Government 

organizations and the private sector contribute 

to securing U.S. and DoD networks because no 

one agency or organization has the capability to 

do it alone. For example, USCYBERCOM supports 

a portion of the whole-of-government effort to 

defend America’s critical infrastructure by working 

with other Government agencies, such as the 

Departments of Homeland Security and Justice, to 

help protect national critical infrastructure and to 

prepare for scenarios in which U.S. military action 

is required to defend against cyberattacks. In 

addition, USCYBERCOM and other Federal agencies 

are increasingly sharing information about cyber 

threats and working to clarify their roles to assist 

the private sector in responding to cyberattacks 

and recovering from cyber incidents.

In 2017, the Director of National Intelligence 

testified that adversaries from nation states 

(Russia, China, Iran, and North Korea) and 

non-nation states (terrorists, criminals, and 

“hacktivists”) were investing heavily in developing 

cyberspace capabilities and becoming more adept at 

using cyberspace to threaten U.S. national security 

interests. The Director also stated that nearly all 

information, communication networks, and systems 

are at risk because of supply chain operations 

that insert compromised hardware or software, 

malicious actions by trusted insiders, and mistakes 

by system users. Additionally, the Director stated 

that cyber threats pose an increasing risk to public 

health, safety, and the economy as technology is 

integrated with critical infrastructure in sectors 

that support American society. 

The cybersecurity risks identified by the Director, 

as well as the DoD’s ability to develop strong 

partnerships with U.S. allies, international 

partners, and other private organizations, are 

critical challenges for the DoD. To address 

these challenges, the FY 2017 National Defense 

Authorization Act required the DoD to establish a 

Unified Combatant Command for cyber operations 

forces. In addition, the Act prohibited the 

Secretary of Defense from separating the “dualhatted” relationship between the USCYBERCOM 

Commander and the National Security Agency 

Marines with I Marine Expeditionary Force and Sailors with 

553 Cyber Protection Team, monitor network activity during a 

I MEF Large Scale Exercise. (U.S. Marine Corps photo)
INCREASING CYBER SECURITY AND CYBER CAPABILITIES

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 30

Director until specific conditions are met.1 In 

August 2017, the President directed the Secretary 

of Defense to begin elevating USCYBERCOM to a 

Unified Combatant Command, consistent with the 

2017 Act requirements.

DEFENDING THE DOD 

INFORMATION NETWORK FROM 

INSIDER AND EXTERNAL THREATS

The DoD must defend the DoDIN against 

cyberattacks, recover quickly if security measures 

fail, and operate in a degraded environment if a 

system or network is compromised. While the DoD 

will have difficulty defending every network and 

system against every kind of intrusion, it must take 

steps to identify, prioritize, and defend its most 

critical networks from insider and external threats. 

The President’s May 2017 Executive Order notes 

that known but unmitigated vulnerabilities—such 

as using operating systems or hardware beyond the 

vendor’s support lifecycle, declining to implement 

1 The National Defense Authorization Act for FY 2017 identifies specific conditions that needed to be met before terminating the dual-hatted 

relationship—sufficiency of tools, capabilities, and infrastructure to meet the unique cyber mission needs of each agency; establishing command 

and control systems and processes to plan, de-conflict, and execute military cyberspace operations; and the CMF achieving full operational 

capability.

a vendor’s security patch, or failing to execute 

security-specific configuration guidance—are 

among the highest cybersecurity risks faced by 

the U.S. Government. The 2017 Executive Order 

also states the majority of malicious activity on 

Federal systems and networks are perpetrated 

by exploiting known vulnerabilities and could 

be prevented by mitigating those vulnerabilities. 

However, the DoD OIG and the GAO have both found 

in recent years that DoD leadership did not address 

vulnerabilities consistently or in a timely manner. 

One measure the DoD has initiated to reduce 

cybersecurity risks is the consolidation of DoD 

information technology systems. In 2010, the DoD 

began migrating to a Joint Information Environment 

to reduce the DoDIN attack surface by establishing 

a single security architecture, optimizing identity 

and access management, and migrating to cloud 

computing. A major component of that architecture 

is the Joint Regional Security Stacks, which is a 

suite of equipment with network applications that 

provide data processing platforms and network 

A U.S. Air Force E-3 Sentry Airborne Warning and Control System takes off from Nellis Air Force Base, Nevada.

(U.S. Air Force photo)
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31 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

capabilities, such as firewalls, intrusion detection 

and prevention, and enterprise risk management 

solutions. However, the DoD OIG and the GAO 

have identified challenges the DoD has faced in 

implementing the Joint Information Environment, 

such as implementing an effective cloud strategy 

and defining the scope and cost of key initiatives 

of the Joint Information Environment program. In 

the coming year, the DoD OIG intends to determine 

the progress of the DoD’s implementation of Joint 

Information Environment initiatives specific to the 

Joint Regional Security Stacks.

The DoD must be vigilant to risks posed by 

insiders. An insider is any person with authorized 

access to U.S. Government resources, including 

personnel, facilities, information, equipment, 

networks, and systems. This access can provide 

insiders a unique opportunity to damage the 

United States through espionage and unauthorized 

disclosures of national security information. 

The Government and the DoD have taken steps to 

attempt to mitigate insider threats. For example, 

in response to the Wikileaks disclosures in 2010, 

the President issued Executive Order 13587 

establishing an insider threat detection and 

prevention program in 2011. In 2012, the President 

issued a Presidential Memorandum to establish 

minimum standards for Executive Branch insider 

threat programs. In 2013, the DoD issued a 

strategy to defend its networks, systems, and data, 

which included goals to:

• enhance security through good 

cyber hygiene, which is general user, 

administrator, and leadership compliance 

with laws, regulations, Federal and DoD 

policies and standards critical to protecting 

systems and networks against cyber threats; 

• identify and detect insider threats through 

increased monitoring of high-risk roles; and 

• increase focus on industrial control 

systems, which are systems used to operate 

infrastructure such as base utilities, dams, 

and nuclear facilities within the DoD. 

In May 2016, the DoD began requiring contractors 

to establish and implement an insider threat 

program. In October 2016, the DoD also created 

the Defense Insider Threat Management and 

Analysis Center and the DoD Component Insider 

Threat Records System to analyze, monitor, and 

audit insider threat information derived from DoD 

insider threat programs. In an upcoming audit, 

the DoD OIG intends to assess whether the Defense 

U.S. Army soldiers assigned to the 44th Expeditionary Signal Battalion, 2nd Theater Signal Brigade, monitor the 

network at Lightning Ops. (U.S. Army photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 32

Insider Threat Management and Analysis Center has 

implemented effective controls over the collection, 

analysis, and dissemination of information related 

to insider threats.

Yet, although the DoD has made progress 

defending against insider threats, more progress 

is needed. Despite efforts to limit insider risks, 

two contractors working for the National Security 

Agency removed classified information in 2017, 

and in at least one instance disclosed classified 

information detrimental to national security. The 

DoD OIG also intends to determine whether DoD 

intelligence community agencies have secured 

access to and monitored user activity affecting 

classified enclaves within their agencies.

In a review completed in August 2016, the DoD OIG 

determined that the National Security Agency’s 

processes and technical controls to limit insider 

threats from privileged users to its networks, 

systems, and data were ineffective. In a followup 

audit, the DoD OIG is examining whether the 

National Security Agency implemented effective 

security configuration controls and processes to 

monitor user activity within its enterprise, identify 

and authenticate connected devices, and disable 

removable media. 

In July 2017, the DoD OIG also identified 

weaknesses in Army and Defense Health Agency 

efforts to protect their networks and systems 

that process, store, and transmit patient health 

information. The DoD OIG is examining whether 

the Navy and Air Force implemented sufficient 

security protocols to protect electronic health 

records and patient health information from 

unauthorized access and disclosure. The DoD OIG 

is also determining whether Missile Defense Agency 

contractors implemented controls and processes 

to protect ballistic missile defense system data. 

The DoD OIG also intends to assess whether the 

Military Departments have mitigated cybersecurity 

vulnerabilities in major acquisition programs 

identified during operational testing, and whether 

DoD Components implemented effective cyber 

hygiene programs.

In July 2017, the DoD OIG published a Compendium 

of Open Recommendations that identified all open 

recommendations from prior reports. These 

open recommendations included more than 

100 recommendations, which if implemented, 

would improve the DoD’s efforts to reduce its 

risks of insider threats and protect the DoDIN. 

For example, the USCYBERCOM Commander, the 

Chiefs of Staff for the Army and Air Force, the 

Chief of Naval Operations, and the Commandant 

of the Marine Corps have not yet developed a 

comprehensive framework that reduces the 

DoD’s risk to fully meeting current and future 

Cyber Mission Force resourcing requirements. In 

addition, the Army has not fully identified the 

owner of each Secret Internet Protocol Router 

Network that is responsible for managing and 

securing those circuits. Further, the Under 

Secretary of Defense for Acquisition, Technology, 

and Logistics has not developed and issued a policy 

requiring program offices to implement applicable 

software assurance countermeasures throughout 

the lifecycle of DoD programs. These actions 

would help the DoD to build and sustain its cyber 

workforce, improve its ability to conduct offensive 

and defensive cyberspace operations, and protect 

its systems and networks from cyber threats.

The U.S. Marine Corps fielded its first tactical information 

system to be issued standard with Windows 10.

(U.S. Marine Corps photo)
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33 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

In summary, the DoD continues to take steps to 

defend its vast architecture of cyber systems, 

networks, and devices from insider and external 

threats, but significant challenges to protecting 

the networks remain. In pursuing this challenge, 

the DoD must accurately identify the composition 

of its networks; prioritize the systems, networks, 

and data it needs to focus on protecting because 

of their impact on critical missions; consistently 

assess the risk of known vulnerabilities and take 

timely action to mitigate these risks; and improve 

the effectiveness of its cyber hygiene programs 

to ensure fundamental cybersecurity practices 

are followed. These are not easy or short-term 

tasks, but they are critical to many aspects of 

the DoD’s mission.

PROTECTING DOD CRITICAL 

INFRASTRUCTURE

Heightening the importance of the cybersecurity 

challenge, the nation’s critical infrastructure has 

become much more interdependent, transitioning to 

an operating environment interconnected through 

multiple platforms, such as cloud computing, mobile 

devices, the Internet, and wireless connectivity. 

Critical infrastructure includes assets, systems, 

and networks, whether physical or virtual, so 

vital to the United States that their incapacitation 

or destruction would have a debilitating impact 

on national security, the economy, public health, 

or safety. Examples of critical infrastructure 

include power plants, dams, nuclear reactors, and 

communication networks. 

The risks threatening critical infrastructure are 

complex, uncertain, and constantly evolving. 

Critical infrastructure that has been subject to 

risks associated with physical threats and natural 

disasters is increasingly exposed to cyberspace 

risks. The DoD relies on a global network of 

critical infrastructure and the systems used to 

operate the assets to protect, support, and sustain 

its forces, and to conduct operations worldwide. 

In January 2017, the Director of National 

Intelligence and USCYBERCOM Commander stated 

that adversaries were developing capabilities to 

compromise U.S. critical infrastructure, as well 

as consumer and industrial devices known as the 

“Internet of Things,” which are everyday physical 

objects that are able to connect to the Internet 

and identify themselves to other devices within 

a network. The Commander stated that several 

countries have disrupted or remotely accessed 

critical infrastructure systems of the United States 

A U.S. Air Force aircraft metals technology journeyman from the 20th Equipment Maintenance Squadron, welds a portable 

deployment trailer at Shaw Air Force Base, South Carolina. (U.S. Air Force photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 34

and its allies. For example, the “Black Energy” 

malware affected energy-sector systems worldwide 

and caused a malicious cyberattack against 

Ukrainian power systems in 2015, which resulted 

in widespread, unplanned, and lengthy power 

outages across western Ukraine. 

The DoD OIG has issued several reports about 

DoD cybersecurity weaknesses affecting critical 

infrastructure. In 2013 and 2014, the DoD OIG 

issued a series of reports that determined that the 

U.S. Army Corps of Engineers did not adequately 

protect critical infrastructure, such as locks and 

dams and the industrial control systems used to 

operate those structures, from unauthorized access 

and cyberattacks. More recently, the DoD OIG 

determined that the Air Force did not implement 

basic cybersecurity controls to protect, detect, 

counter, and mitigate potential cyberattacks on 

industrial control systems that provide essential 

services such as those generating or providing 

electricity, distributing and treating potable water, 

and heating and cooling computer rooms and data 

centers. The DoD OIG is currently determining 

whether the Air Force adequately plans for the 

recovery of information systems and data after 

emergencies, system failures, or disasters and 

whether DoD has effective programs to detect, 

report, and respond to security incidents on 

mission-critical control systems.

In summary, the DoD continues to face challenges 

in protecting critical infrastructure and supporting 

other Government agencies in protecting critical 

infrastructure. To mitigate these risks, the DoD 

needs to fully identify physical and cybersecurity 

risks affecting each asset, identify all industrial 

control systems used to operate the assets, 

adequately fund security improvements, and enable 

staff with expertise to operate and secure the 

industrial control systems.

INCREASING SUPPLY CHAIN RISK 

MANAGEMENT PRACTICES

Federal agencies also face constant risks associated 

with information technology products that may 

contain malicious functionality, are counterfeit, 

or are vulnerable to compromise because of poor 

manufacturing and development practices within 

the supply chain. In 2008, National Security 

Presidential Directive-54 and Homeland Security 

Presidential Directive-23 made supply chain risk 

management a national priority. Supply chain risks 

include acts by an adversary or trusted insider to 

sabotage, maliciously introduce unwanted functions 

or malware, or otherwise change the design, 

integrity, and operation of a system to degrade its 

use or functionality. 

Cybersecurity risks in the supply chain are a 

subset of the supply chain risks. Examples of 

cybersecurity supply chain risks include:

• third-party service providers and 

vendors with physical or logical access to 

information systems, software code, or 

intellectual property;

• poor information security practices;

• compromised software or 

hardware purchases;

• counterfeit software or hardware with 

embedded malware; and

• third-party data storage and software 

security vulnerabilities in the 

supply chain process.

Cybersecurity risks in the supply chain are 

especially challenging to the DoD when it develops 

and acquires weapon systems or any system that 

relies on technology. However, cybersecurity in 

the supply chain cannot be viewed as solely an 

information technology problem. Ensuring DoD 

warfighting mission capabilities are not impaired 

by vulnerabilities introduced through the supply 

chain process by foreign intelligence, terrorists, 

or hostile actors, whether an insider or external 

adversary, is essential to ensuring uncompromised 
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35 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

weapons and information systems. For example, 

in 2015, the supply chain was compromised when 

a third-party vendor installed adware known 

as “Superfish” in Lenovo notebook computers. 

Superfish tampered with the user’s computer 

security in such a way that cyber attackers 

could see all communications, including banking 

transactions, passwords, and e-mails. In 2016, 

the DoD’s Joint Staff warned the DoD against 

using equipment, such as computers and handheld 

devices, made by Lenovo, a Chinese manufacturer, 

amid concerns that the technology could be used to 

spy on DoD networks. 

To combat and manage these risks throughout the 

life cycle of a program requires robust systems 

engineering, supply chain risk management, 

hardware and software assurance, and information 

systems security.2

 In April 2016, the DoD OIG 

determined that the DoD had not issued procedures 

for applying software assurance countermeasures 

across all Major Defense Acquisition programs, and 

the Navy did not perform all software assurance 

countermeasures in the program protection plan 

2 Hardware and software assurance is the level of confidence that hardware and software will function as intended and be free of vulnerabilities, 

either intentionally or unintentionally designed or inserted, throughout the component’s life cycle.

for the Navy Littoral Combat Ship, a type of ship 

designed to operate close to shore to counter 

shallow-water mine, surface, and submarine 

threats. Additionally, the DoD OIG reported 

in April 2017 that the Missile Defense Agency 

did not fully implement the DoD supply chain 

risk management policy for the Ground-based 

Midcourse Defense System, a critical system 

used to detect, track, and destroy intermediate 

and long-range ballistic missiles during the 

midcourse phase of flight. The DoD OIG is 

currently examining whether the Air Force Space 

Command has implemented an effective supply 

chain risk management program for critical 

strategic systems, which are systems so vital 

that their loss or degradation would prevent 

the Air Force from providing resilient space and 

cyberspace capabilities to meet Joint Force and 

national objectives.

In summary, while the DoD is taking steps to 

reduce its supply chain risks, more must be done 

in this area to manage the risks associated with 

acquiring assets containing technology. The DoD 

needs to develop and consistently implement 

software assurance countermeasures across 

all major acquisition programs; coordinate 

with other agencies and the private sector 

to improve cybersecurity over products for 

which the DoD has limited to no direct control 

within the manufacturing process; and identify 

susceptibilities, vulnerabilities, and threats 

throughout the DoD supply chain and develop 

mitigation strategies to combat those threats.

PLANNING AND CONDUCTING 

DEFENSIVE AND OFFENSIVE 

OPERATIONS

Defensive and offensive cyberspace operations, 

whether conducted individually or simultaneously, 

are critical for defending the U.S. and supporting 

combatant commanders. Presidential Policy 

An M270 Multiple Launch Rocket System fires an MGM-140 

Army Tactical Missile. (U.S. Army photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 36

Directive-20 gives the DoD authority to conduct 

offensive and defensive cyberspace operations. 

Defensive cyberspace operations include activities 

to discover, detect, analyze, and mitigate prioritized 

threats against cyber key terrain to ensure mission 

success. In military doctrine, cyber key terrain 

includes the physical location where routers, 

switches, cables, and other devices are located, as 

well as the logical configuration of a network and 

the users and administrators (cyber persona) of 

an architecture. Offensive cyberspace operations 

include activities and the use of cyberspace 

capabilities to project power and achieve a specific 

objective in and through cyberspace. 

To conduct successful offensive and defensive 

cyberspace operations, the DoD requires detailed, 

predictive, and actionable intelligence about global 

networks and systems, adversary capabilities, and 

malware to develop its intelligence, warning, and 

cyber capabilities. However, the DoD continues 

to face challenges in developing or acquiring 

unique cyber capabilities to conduct defensive 

and offensive operations. Cyber capabilities 

include the infrastructure, such as computers, 

cables, antennas, switches and routers; the 

electromagnetic spectrum, such as datalink, 

cellular, and wireless frequencies; and the content, 

such as data, algorithms, and applications needed 

to conduct cyberspace operations. USCYBERCOM, 

the Military Services, and the Defense Information 

Systems Agency are now focused on identifying, 

prioritizing, and developing Service-specific and 

joint infrastructure and cyberspace capabilities. 

Specifically, the DoD continues to build a Unified 

Platform that provides an extended network of 

cyber capabilities to the Cyber Mission Force to 

conduct full-spectrum cyberspace operations, 

but the platform will not be operational for 

several years. 

In January 2016, the USCYBERCOM Commander 

stated that the DoD needed to work with its allies 

and international partners to develop cybersecurity 

capabilities and build on the global investments 

in cyber-related capabilities, technologies, and 

strategies because “no single group, nation, 

segment, or entity has all the answers.” The 2015 

DoD Cyber Strategy, which is consistent with the 

National Military Strategy, includes a goal to build 

and maintain robust international alliances and 

partnerships to deter shared threats and increase 

international security and stability. It states that 

the DoD must work with its interagency partners, 

the private sector, and allied and partner nations, 

such as those in the Middle East, Asia, and Europe, 

to deter and if necessary defeat a cyberattack of 

significant consequence to the United States and 

U.S. interests. 

USCYBERCOM and the Cyber Mission Force are 

also executing cyberspace missions to support 

operations against violent extremists, especially 

across the U.S. Central Command’s area of 

responsibility and in U.S. Special Operations 

Command missions. However, building alliances 

and maintaining partnerships to develop combined 

capabilities that support combatant command 

objectives are difficult and require continual focus, 

particularly given rapidly shifting and dynamic 

military and strategic alliances.

Since 2011, the Secretary of Defense has issued two 

strategies for operating in cyberspace to guide the 

DoD’s cyber activities and operations, which include 

accelerating the integration of cyber requirements 

into combatant command plans. However, the 

DoD continues to struggle to implement these 

strategies. For example, in December 2014, the 

DoD OIG determined that combatant commands 

An HH-60G Pave Hawk refuels from an HC-130P/N King 

enroute to rescue two German citizens in distress at sea.

(U.S. Air Force photo)
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37 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

had insufficient resources and guidance from 

the Joint Staff to adequately plan and conduct 

cyberspace operations in their areas of operations. 

The DoD OIG is currently determining whether the 

U.S. European Command has integrated offensive 

and defensive cyberspace operations into its 

command plans. 

In summary, despite the DoD’s efforts to effectively 

conduct defensive and offensive cyberspace 

operations, critical challenges remain in this area. 

The DoD needs to map its cyber key terrain and 

prioritize which systems and networks it must 

defend to meet critical mission objectives. The 

DoD also needs to ensure appropriate intelligence 

is available to inform strategic, operational, and 

tactical planning and to identify solutions to rapidly 

develop or acquire capabilities. Additionally, the 

DoD must build and maintain strong international 

alliances and partnerships to deter shared threats.

BUILDING, RETAINING, AND 

GROWING DOD’S CYBER 

WORKFORCE

Despite Federal policies and strategies designed 

to grow the DoD cybersecurity workforce, the 

DoD and the U.S. Government continue to struggle 

in attracting, growing, and retaining its cyber 

workforce. Addressing the growing cybersecurity 

challenges requires a capable workforce that has 

the necessary cybersecurity knowledge, skills, and 

competencies to counter increasingly sophisticated 

and ever-changing threats. 

In 2017, the GAO again identified the shortage 

of cybersecurity professionals in the U.S. 

Government as a high-risk area. Recognizing 

significant gaps in the Government’s cybersecurity 

workforce, the Office of Management and 

Budget issued Memorandum M-16-04 to support 

Government efforts to recruit, develop, and 

maintain cybersecurity talent and to address 

existing challenges in understanding key 

capabilities and capacity gaps affecting the 

cybersecurity workforce. 

The DoD cyber workforce includes personnel 

who build, secure, operate, and defend DoD and 

U.S. cyberspace resources, and conduct related 

intelligence activities and operations in or through 

cyberspace. According to the USCYBERCOM 

Commander, to attract, build, retain, and grow the 

DoD cyber workforce, the DoD is:

• expanding training capacity by tapping into 

previously unused resources and building 

new partnerships with academia, other 

Federal agencies, and the private sector;

• developing and refining specific career 

tracks within the Military Services; 

• identifying specific cybersecurity roles and 

responsibilities instead of categorizing the 

entire workforce as a single group; 

• instituting selective re-enlistment 

bonus programs; and

• offering enlistments at higher ranks 

for personnel entering the service with 

cybersecurity-related certifications. 

In November 2015, the DoD OIG determined that 

the USCYBERCOM and Military Services needed 

to develop a defined process to determine the 

acceptability, suitability, and feasibility of a 

proposed force design change that addresses 

A U.S. Army network operations noncommissioned officer 

configures a router. (U.S. Army photo)
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strategies to build, grow, and sustain the Cyber 

Mission Force. As of October 2016, the DoD 

reported that all 133 Cyber Mission Force teams 

had achieved initial operating capability and 

expected the teams to reach full operating 

capability by the end of FY 2018. As of June 2017, 

approximately 5,000 of the 6,200 personnel needed 

to fully execute critical cyberspace missions within 

the Cyber Mission Force were staffed.3

 

The shortage of cybersecurity staff directly affects 

the DoD’s efforts to protect its networks from 

malicious cyber attacks. Although the DoD has 

made gains in growing the Cyber Mission Force and 

the entire DoD cybersecurity workforce, attracting 

and retaining a skilled cyber workforce remains 

a significant challenge. These challenges include 

fully staffing the Cyber Mission Force, ensuring 

existing and planned training capacity meets the 

DoD’s needs now and in the future, leveraging 

unique strengths of the Reserve and the National 

Guard and, when applicable, integrating them into 

the DoD’s cybersecurity workforce, and expanding 

partnerships and relationships with Government 

agencies, as well as the private sector.

In summary, malicious actors will continue to 

seek unauthorized access to compromise DoD 

networks, systems, and data. The cybersecurity 

challenge is that adversaries and defenders 

constantly innovate and adapt capabilities, and the 

DoD will need to continually focus attention and 

resources to protect its networks and information 

technology assets from increasingly sophisticated 

cyberattacks. Technological changes will accelerate 

the intersection of cyber and physical devices, 

therefore, creating new and more serious risks. 

While the DoD continues to take steps to improve 

security over its systems and networks, significant 

challenges remain. The DoD needs to continue to 

evolve its tactics, techniques, and technologies to 

defend DoD systems, networks, and infrastructure 

3 USCYBERCOM defines meeting initial operating capability as all CMF teams reaching a minimum threshold of capability to perform their 

fundamental missions.

from insider and external threats. It is also 

essential that the DoD improve user activity 

monitoring and other programs to reduce insider 

threat risks, integrate cyberspace operations into 

command plans, build and sustain international 

alliances and partnerships, develop and use cyber 

capabilities to perform offensive and defensive 

operations, and build and maintain a skilled 

cyber workforce.

A U.S. Army soldier checks signal connection strengths.

(U.S. Army photo)
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39 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

U.S. Navy sailors stand by on the flight deck of Littoral Combat Ship USS Coronado before an all-hands call with Chief of 

Naval Operations Adm. John Richardson. (U.S. Navy photo)
IMPROVING FINANCIAL MANAGEMENT

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 40

Challenge 5: Improving 

Financial Management

The DoD is the only Federal agency that has never undergone a full financial 

statement audit. Moreover, the lack of a favorable audit opinion on the DoD 

financial statements is the major impediment to a successful audit of the U.S. 

Government. Long-standing financial management challenges continue to 

impair the DoD’s ability to provide reliable, timely, and useful financial and 

managerial information to support reported financial statement balances. 

Additionally, the lack of reliable financial information prevents its full use in 

operating, budgeting, and policy decisions. 

The DoD’s financial management challenges involve a complex array of issues, 

including maintaining documentation that supports recorded transactions, 

recording timely and proper accounting entries, maintaining a valid universe 

of transactions, operating with many decentralized and noncompliant 

information technology systems, accurately documenting business processes, 

implementing strong internal controls over accounting data and business 

operations, and eliminating the need for journal vouchers to force agreement 

of budgetary, financial, and accounting transactions and balances. 

The DoD is required by the Chief Financial Officers Act of 1990 to undergo 

a full financial statement audit covering its budget, assets, and liabilities. In 

addition, the National Defense Authorization Act for 2010 specifically requires 

the DoD to have audit-ready financial statements by September 30, 2017. 

In the past, DoD OIG and independent public accounting firm auditors have not 

conducted a full-scope, detailed audit of the DoD financial statements because 

the DoD’s supporting records have not been suitable for audit. Since the 

DoD began preparing financial statements in the early 1990s, the DoD Under 

Secretary of Defense (Comptroller)/Chief Financial Officer and the Military 

Departments have consistently acknowledged that weaknesses exist with 

respect to financial reporting. In addition to process design weaknesses and 

insufficient accounting policies, the DoD could not previously assert that it was 

able to provide auditors with sufficient evidence to complete a timely financial 

statement audit.

IMPORTANCE OF STRONG FINANCIAL MANAGEMENT

For decades, auditors have reported weaknesses in DoD financial management, 

including financial statement reporting and financial management systems. 

These weaknesses affect not only the DoD’s ability to attain an unmodified 

opinion on its financial statements, but also its ability to make sound decisions 

related to its mission and operations. Having sound financial management 

practices and reliable, useful, and timely financial information is also 
IMPROVING FINANCIAL MANAGEMENT

41 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

important to ensure accountability over the DoD’s 

budgets and assets, and to allow DoD leadership 

to make informed decisions. Sound financial 

management is particularly important for the DoD 

because its expenditures constitute nearly half of 

the Government’s discretionary spending and its 

physical assets represent more than 70 percent of 

the Government’s physical assets. 

A key component of sound financial management 

is an agency’s network of internal controls. 

Strong internal controls include the procedures, 

requirements, instructions, and checks designed to 

ensure that agency resources are used effectively 

and safeguarded properly. For example, within the 

DoD, key financial management internal controls 

include leadership commitment to auditability, 

automated system security, policies and procedures 

that ensure compliance with accounting standards, 

checks to ensure adherence to asset or fiscal 

accountability, documented data reconciliations, 

performance measurement, and tracking corrective 

actions to audit findings. 

Internal controls are also vital to effective 

financial management. For example, sound 

internal controls over asset quantities, asset 

cost information, item movement, customer 

requirements, and product ordering help ensure 

that property location, movement, and costs 

are known and accurate. Internal controls help 

prevent waste and even fraud, minimize costs, 

and allow timely decision making. For example, 

accurate quantity and cost information is essential 

to making informed procurement decisions. In 

addition, when managers can trust that financial 

data is accurate, improved buying and inventory 

decisions will result.

With respect to internal control over asset 

accountability, recent DoD OIG audits had 

determined that the DoD needs improvements 

in this area. Specifically, the DoD continues to 

struggle to provide auditors with detailed asset 

cost information and to maintain accurate asset 

quantity information when assets are tracked 

in multiple property systems. Better internal 

controls, such as detailed reconciliations and 

research of quantity discrepancies, would improve 

the accuracy of financial reports and could 

improve budgeting decisions because the financial 

system data would match actual quantities onhand. When internal controls are strong and 

on-hand quantities and costs of physical assets 

are known and accurate, the DoD is able to make 

the most cost-effective buying decisions. Internal 

The U.S. Marine Corps Silent Drill Platoon executes the ‘bursting bomb’ during a Friday Evening Parade

at Marine Barracks Washington, D.C. (U.S. Marine Corps photo)
IMPROVING FINANCIAL MANAGEMENT

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 42

controls over asset accountability, such as periodic 

inventories, also minimize the risk of buying more 

stock than needed.

Unreliable financial information also makes it 

difficult to accurately develop and execute budgets 

and to determine the effectiveness and efficiency 

of military operations. DoD financial management 

challenges hinder the ability to see potential waste, 

mismanagement, and cost overruns when certain 

data is either untimely, unavailable, or inaccurate. 

For example, auditors of the Military Department’s 

budgetary financial statement have recently 

concluded that adequate supporting records were 

not available to complete the audit. The findings 

demonstrate the difficulty that the DoD has in 

maintaining accounting control of the hundreds of 

thousands of transactions that occur all over the 

world every day.

Yet, internal control weaknesses and noncompliance 

continue to exist within the DoD’s financial feeder 

systems. Feeder systems contain information 

that the DoD provides to its accounting agency 

(the Defense Finance and Accounting Service) to 

support dollar values reported in DoD financial 

statements. The feeder systems are decentralized 

and consist of over 200 significant systems that 

process millions of transactions reported in 

DoD financial statements. Independent public 

accountants have issued hundreds of findings to 

the DoD related to the lack of internal controls and 

noncompliant information technology processes in 

these feeder systems. 

Improving financial feeder systems and controls 

by correcting weaknesses identified by auditors 

may be the most demanding challenge related to 

DoD financial management and audit readiness. 

For example, the DoD reported in its May 2017 

Financial Improvement and Audit Readiness Plan 

Status Report that each Military Department 

will have uncorrected information technology 

weaknesses when the FY 2018 financial statement 

audits begin. As part of improving financial 

management, the DoD must eliminate outdated 

systems and continue to develop and document 

adequate controls that comply with accounting 

standards and improve system security.

The DoD also needs to expedite its plan to retire 

legacy systems while ensuring that remaining 

systems interface with each other without the 

need for manual processes to validate that data 

is transferred accurately. The remaining systems 

should record, maintain, and disseminate timely 

and accurate transaction data that decision 

makers can rely on for financial reporting and for 

assurance that programs are working and funds are 

being used properly.

Characteristics of strong financial management 

include routine and documented reconciliations 

without the need for thousands of journal 

vouchers and other adjustments. Sound process 

improvements would also significantly reduce the 

current effort being made to reconcile transactions 

between DoD business partners and minimize the 

need for processing thousands of journal vouchers.

FINANCIAL AUDITABILITY

Throughout FY 2017, DoD senior leadership 

has been clear regarding their commitment 

to undergoing full financial statement audits 

beginning in FY 2018, as required by statute. For 

example, in a May 2017 memorandum, Secretary 

of Defense Mattis stressed the challenge of 

achieving a clean audit opinion, as well as the 

importance of improving financial management. 

The Secretary stated that DoD leadership would 

A U.S. Army soldier adjusts the aim of an M777 towed 

155 mm howitzer. (U.S. Army photo)
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43 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

be held accountable for achieving a positive audit 

opinion in the shortest timeframe possible. He also 

indicated that undergoing a full financial statement 

audit is the best tool to improve controls and 

strengthen business processes and systems. 

On September 27, 2017, Secretary Mattis and DoD 

Comptroller Norquist asserted to the DoD Acting 

Inspector General that the DoD is ready for a 

financial statement audit. They added that the DoD 

was not expecting an unmodified audit opinion on 

its agency-wide consolidated financial statements, 

and it was not a certification that the DoD financial 

statements or components’ financial statements are 

reliable. Rather, they were asserting that the DoD 

has the capabilities to allow an auditor to scope 

and perform a full financial statement audit that 

results in actionable feedback on various financial 

processes, systems, and documentation. 

At the same time, Secretary Mattis notified 

Congress that the DoD will begin full financial 

statement audits in FY 2018. He wrote that it will 

take time for the DoD to go from being audited to 

passing an audit. He noted that “Direct feedback 

from auditors keeps audit remediation in the 

forefront of our day-to-day work and helps us to 

be accountable to DoD decision-makers as well as 

responsive to you and other stakeholders.” 

In addition, Deputy Secretary of Defense Shanahan 

wrote a memorandum to all DoD employees 

stating the DoD’s support for the FY 2018 financial 

statement audits. He wrote that he expected 

everyone to make it a priority to correct problems 

identified in these audits. He noted “This 

Department is the last federal agency to not have 

a clean agency-wide financial opinion. This must 

change. We must lead and not lag behind.” He 

added that the audits will give DoD leaders and 

commanders the reliable information they need to 

exercise judgment and accomplish their mission. 

Other DoD leaders have also initiated actions 

to obtain buy-in from all personnel involved in 

the recording and reporting of financial data. 

For example, Army leaders have stressed the 

importance of audit readiness in an Army-specific 

publication for functional components to support 

audit readiness. 

In addition, the DoD pursued initiatives to 

support audit readiness or improve overall 

financial management. For example, the Financial 

Improvement and Audit Readiness Directorate 

continues to work toward improving the quality 

of DoD financial information with a positive 

audit opinion as the desired outcome. The 

Financial Improvement and Readiness Directorate 

provides DoD reporting entities the key tasks and 

requirements that should be followed to become 

audit ready. The DoD has also created working 

groups to ensure that solutions to its financial 

management challenges comply with accounting 

standards and can pass auditor testing. The groups 

are working to address long-standing accounting 

weaknesses, including Fund Balance With Treasury 

reconciliation, property valuation documentation, 

and a full account of billions of dollars in payments 

to DoD contractors. Further, the DoD continues to 

update the Financial Management Regulation and 

issue policy memorandums designed to improve 

accounting operations and establish standard and 

sustainable processes.

A U.S. Marine Corps noncommissioned officer flips through 

the Command Financial Specialist training booklet.

(U.S. Marine Corps photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 44

The DoD’s definition of “audit ready” and the DoD 

Comptroller’s position that a clean audit opinion is 

not expected immediately demonstrates that, while 

progress has been made, the magnitude of what 

remains to be done to achieve a favorable opinion is 

significant. Even if the DoD does not obtain clean 

audit opinions immediately, the DoD OIG agrees 

that performing full financial statement audits can 

provide benefit to the DoD. Financial statement 

audits can help DoD leadership ascertain where 

financial and other business processes are working 

as intended, and where specific deficiencies need 

to be corrected.

CURRENT STATUS OF DOD 

FINANCIAL STATEMENT AUDITS

The DoD continues to award financial statement 

audit contracts for entities that have asserted audit 

readiness. In FY 2016, the DoD contracted for 

seven financial statement audits and three Military 

Department budgetary statement audits. The U.S. 

Army Corps of Engineers, the Military Retirement 

Fund, and Defense Health Agency-Contract 

Resource Management all passed FY 2016 audits 

with unmodified audit opinions. In addition, the 

results of the Defense Information Systems Agency 

financial statement audit were generally favorable 

in that one of its two business segments attained 

a clean opinion. Other FY 2016 audits were not 

as successful. Independent public accountants 

determined that the Military Department budgetary 

financial statements were not audit-ready and thus 

the auditors disclaimed opinions. 

In FY 2017, the Defense Logistics Agency (DLA) 

and the Marine Corps underwent a full financial 

statement audit. However, the independent public 

accountants determined that DLA and Marine 

Corps personnel were not able to provide sufficient 

documentation to the auditors to perform a full 

audit. In addition, independent public accountants 

continue to perform audits of FY 2017 Army and 

Air Force budgetary records. Recently, these 

independent public accountants notified Army and 

Air Force leadership that the auditors were not 

provided sufficient documentation to perform a full 

audit and that the auditors plan to issue disclaimers 

of opinion on the budgetary financial statement. 

Other audit contracts continue to be awarded, 

including those for the FY 2018 financial statement 

audits of the U.S. Special Operations Command, 

the U.S. Transportation Command, and the 

Defense Health Program. In addition, actions 

have been taken to award contracts or exercise 

U.S. Air Force explosive ordnance disposal technicians assigned to the 99th Civil Engineer Squadron walk 

onto a range for training. (U.S. Air Force photo)
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45 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

options so that independent public accountants 

can perform FY 2018 financial statement audits of 

the Military Departments. The CFO Act requires 

that the DoD OIG either perform or contract for 

DoD financial statement audits. To fulfill this 

responsibility, the DoD OIG performs oversight of 

the contractors to ensure that the independent 

public accountants follow auditing standards, 

comply with DoD security policies, and meet 

contract requirements. 

DoD OIG audits have found a lack of supporting 

documentation for account balances and system 

data that are not reliable, accurate, or timely. 

In addition, asset information, such as certain 

inventory and equipment balances, continue to 

lack sufficient valuation documentation, and 

sometimes lack accurate location and quantity 

information. These deficiencies have consequences. 

For example, inaccurate inventory and equipment 

counts can result in DoD personnel placing orders 

for new parts or equipment even though there are 

sufficient supplies in stock. Likewise, inaccurate 

asset information limits the DoD’s ability to 

ensure material and equipment are available for 

operational readiness if actual on-hand balances 

are lower than balances in the property system.

Other DoD OIG financial management audits 

continue to identify the need for improved financial 

management controls and reporting. In FY 2017, 

the DoD OIG issued reports that highlighted 

problems with Fund Balance With Treasury 

reconciliations, ineffective financial management 

system strategies, and inaccuracies in reported 

costs of programs. As of July 2017, 172 open DoD 

OIG recommendations related to DoD finance and 

accounting topics, such as management of DoD 

suspense accounts, transactions that support 

financial statements and budget submissions, and 

DoD financial management and accounting systems. 

Implementing the necessary actions to close these 

recommendations has proven challenging for the 

DoD because business processes and accounting 

policies need to be reviewed, improved, and 

monitored. For example, the DoD’s implementation 

of new integrated logistics and accounting systems 

that include proper internal controls, such as 

compliant and timely accounting entries, has been 

slow and costly. When the property systems 

of record include accurate account balances, 

reliance on these balances, such as physical asset 

counts or cost information, can result in efficient 

buying decisions

WHAT’S LEFT TO DO — AN 

AUDITOR PERSPECTIVE

Although the DoD plan to conduct its full financial 

statement audits beginning October 1, 2017, 

as required by law, numerous key challenges 

continue to face the DoD when preparing for 

the FY 2018 and subsequent financial statement 

audits. According to the DoD, a key indicator 

of its FY 2018 audit readiness will be its ability 

to respond to auditors’ requests for supporting 

documentation. This indicator is very different 

from the normal objective of a financial statement 

audit, which is to determine whether the agency’s 

financial statements are fairly presented in all 

material respects in accordance with U.S. Generally 

Accepted Accounting Principles. For the FY 2018 

financial statement audits, the DoD needs to clearly 

demonstrate the extent to which it has remediated 

the material weaknesses previously identified. 

Remediating these weaknesses requires improved 

internal controls, systems, and data reliability. 

Evidence that these weaknesses have been 

corrected will contribute to auditable financial 

A U.S. Army soldier with Assassin Troop, 1st Squadron, 

11th Armored Cavalry Regiment, scans the battlefield.

(U.S. Army photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 46

statements that contain complete, reliable, timely, 

and consistent data for financial management 

decision making.

The major impediments to auditability require 

the DoD to improve, and in some cases change, its 

way of doing business. Long-standing business 

processes that have supported DoD missions are 

not always sufficient for an audit. For example, 

audits conducted by independent public accounting 

firms of the Military Department’s FY 2016 

budgetary financial records cited more than 700 

combined findings and recommendations that 

revealed individual and systemic issues that 

prevented the auditors from opining on the Military 

Department budgetary statements. These audit 

results demonstrate that current DoD business 

practices need to be redesigned to support 

Federal accounting policies and information 

technology requirements.

DoD OIG and independent auditors have 

consistently found that the DoD needs to develop 

sustainable and repeatable processes to better 

respond to audit requirements and provide 

timely and sufficient supporting documentation 

for transactions. 

To achieve and sustain reliable financial data, 

the DoD must also focus on other high-risk areas, 

such as the ability to eliminate the use of journal 

vouchers as a means of addressing unsupported 

or unreconciled accounting transactions. DoD 

accountants use journal vouchers for various 

reasons, such as to adjust errors identified during 

financial statement compilation; record accounting 

entries that, due to system limitations or timing 

differences, have not been otherwise recorded; 

or for month and year-end closing purposes. 

For decades, DoD accountants have prepared 

journal vouchers as a means to complete financial 

reporting requirements and force balances to agree 

without detailed reconciliation processes to fully 

support and explain the accounting adjustment. 

Unsupported journal vouchers and unresolved 

differences between the DoD and the Department of 

the Treasury have contributed to unfavorable audit 

results on prior DoD financial statements. 

Another area of significant concern that delays an 

auditor’s ability to opine on financial statement 

balances is the lack of a verifiable universe of 

transactions from the outset of the audit. The DoD 

recognizes the need for detailed transactions and 

continues to work internally with stakeholders 

to develop a complete universe of transactions 

that reconciles from feeder systems to its 

financial statements. 

Further, the DoD must be able to account for the 

assets reported on its balance sheet, including 

adequate support for how much assets cost, how 

much the DoD owns, and where the assets are 

located. These challenges must be addressed as 

the DoD pursues its plan to reduce the number of 

financial and feeder systems. 

With the heightened level of review and scrutiny 

of full financial statement audits, the DoD should 

anticipate additional independent public accountant 

audit findings and recommendations. The DoD 

needs to be prepared for this additional workload 

and have the capability to prioritize the current 

and new weaknesses and recommendations into an 

efficient plan for success. The need for corrective 

actions to address current and newly identified 

material weaknesses and deficiencies will compete 

for tight resources in the future. 

In summary, the DoD plans to have its largest 

agencies under financial statement audit in 

FY 2018, including the Military Departments 

and many Defense agencies. DoD leaders have 

acknowledged that there are still corrective actions 

to be implemented and remediation efforts to 

be completed before unmodified audit opinions 

can be achieved. Without these corrections, 

the DoD financial statements will continue to 

remain unreliable and affect the DoD’s ability 

to make important financial, management, and 

resource decisions.
MAINTAINING THE NUCLEAR ENTERPRISE

47 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

U.S. Army soldiers with the 20th CBRNE Command’s CBRNE Leaders Course bound forward during a squad movement 

training exercise. (U.S. Army photo)
MAINTAINING THE NUCLEAR ENTERPRISE

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 48

Challenge 6: Maintaining the 

Nuclear Enterprise

Maintaining a secure and effective nuclear deterrent is a key priority, and an 

important challenge, for the DoD. U.S. nuclear weapons serve as a deterrent 

to attacks by adversaries armed with nuclear weapons or other weapons of 

mass destruction. A credible and capable U.S. nuclear force also provides 

security for U.S. allies and reduces pressure for them to field their own 

nuclear weapons.

GLOBAL THREAT OF NUCLEAR WEAPONS

In April 2017, General John Hyten, the Commander of U.S. Strategic Command 

and the individual responsible for overseeing U.S. nuclear forces, stated that 

the global security environment has changed—the United States’ adversaries 

are developing advanced nuclear and conventional weapons that rival U.S. 

capability. As noted above, Secretary of Defense Mattis identified five entities 

that present the greatest challenges for the DoD: Russia, China, Iran, North 

Korea, and violent extremist organizations. Of the five, Russia, China, Iran 

and North Korea are actively modernizing or expanding their nuclear and 

strategic strike capabilities. The extremist threat, on the other hand, can be 

unpredictable, and requires vigilance in monitoring their efforts to obtain a 

nuclear weapon or other weapon of mass destruction. 

In a June 12, 2017, written statement, Secretary Mattis testified that the 

most urgent and dangerous threat to global peace and security is North 

Korea. Secretary Mattis stated that North Korea’s continued pursuit of 

nuclear weapons and the means to deliver them has increased in pace and 

scope. He also stated, “The regime’s nuclear weapons program is a clear and 

present danger to all, and the regime’s provocative actions, manifestly illegal 

under international law, have not abated despite United Nations’ censure 

and sanctions.”

Comparatively, Russia has well-developed nuclear capabilities. According 

to the Defense Science Board, Russia’s nuclear doctrine is publicly stated as 

“escalate to de-escalate,” based on Russia’s assumption that its first use of lowyield nuclear weapons against a conventionally superior North Atlantic Treaty 

Organization forces would result in a halt to further aggression. 

China, on the other hand, has maintained a “no first use” policy, stating 

that it would use nuclear forces only in response to a nuclear strike against 

China. The DoD’s May 2017 Annual Report to Congress on the military and 

security developments of the People’s Republic of China noted that some 

People’s Liberation Army officers have written publicly of the need to specify 

situations when China might need to use nuclear weapons first. The People’s 
MAINTAINING THE NUCLEAR ENTERPRISE

49 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Liberation Army officers stated an example of first 

use could be if an enemy’s conventional attack 

threatened the survival of China’s nuclear force or 

the regime itself. 

Iran’s development of nuclear capabilities is 

a significant risk, notwithstanding the Joint 

Comprehensive Plan of Action, signed on July 

14, 2015, by China, France, Germany, Russia, the 

United Kingdom, the United States, the European 

Union, and Iran, which established monitoring and 

verification of Iran’s nuclear program. In July 2017, 

the State Department criticized Iran’s successful 

launch of a rocket that can carry satellites into 

orbit. The State Department stated that the launch 

appeared to violate United Nations Security Council 

Resolution 2231, tied to the 2015 Iran nuclear deal, 

prohibiting Iran from conducting activities related 

to the development of ballistic missiles capable of 

carrying nuclear warheads. 

In addition, extremist organizations, such as ISIS, 

continue to threaten the United States, and express 

the desire to obtain nuclear weapons. To deter 

the nuclear threat, the United States must ensure 

that its nuclear weapons, weapon systems, and 

command and control needed to use those weapons 

are capable and effective.

SIMULTANEOUS SUSTAINMENT 

AND MODERNIZATION OF THE 

U.S. NUCLEAR TRIAD

Since the early 1960s, the United States has 

maintained a nuclear triad consisting of three 

systems capable of delivering strategic nuclear 

weapons. The first consists of long-range 

bombers, which can launch and be recalled if the 

identified threat subsides. The second consists 

of Intercontinental Ballistic Missiles, which are 

strategically placed in large enough numbers 

that an attack against them would have to be 

massive and unambiguous. The third consists of 

the submarines that carry Submarine Launched 

Ballistic Missiles. By staying submerged and 

undetected, these submarines are survivable even 

if the other two systems of the triad are destroyed 

through a massive nuclear attack. 

The triad of delivery systems has been modernized 

twice, once in the early 1960s and again in the 

1980s. The average warhead is now over 29 

years old. According to General Paul Selva, Vice 

Chairman of the Joint Chiefs of Staff, every system, 

including elements of the Nuclear 

A B-52 Stratofortress waits to approach a 908th Expeditionary Air Refueling Squadron KC-10 Extender 

for refueling over Syria. (U.S. Air Force photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 50

Command, Control, and Communications system, is 

nearing a crossroads and will require significant 

modernization or replacement.

In March 2017, General Selva testified that the DoD 

is at a point where it must concurrently recapitalize 

each component of the nuclear deterrent. He also 

stated that nuclear modernization can no longer be 

deferred and any disruption to future acquisition 

plans will introduce significant risk to the U.S. 

nuclear deterrent. General Hyten also testified 

during the same hearing that Russia and China 

have modernized and upgraded their nuclear forces.

In January 2017, Secretary of Defense Ashton 

Carter wrote an exit memorandum that discussed 

the progress the DoD had made in its efforts to 

recapitalize the nuclear triad. The memorandum 

stated that: 

• The DoD had initiated the program to 

build the Columbia-class nuclear ballistic 

missile submarine to replace the Ohioclass submarine.

• The DoD selected a designer for the 

B-21 Raider long-range strike bomber, 

which will ensure that the United States 

maintains a bomber capable of penetrating a 

sophisticated air defense system.

• The DoD is developing the Long-Range 

Standoff cruise missile, which will 

replace the air-launched cruise missile 

starting in 2030.

• The Air Force is continuing production of 

the F-35 Joint Strike Fighter, which will be 

updated to assume the role of dual-capable 

aircraft and provide the United States and 

its allies with continued non-strategic 

nuclear capabilities.

• The Air Force has begun the process 

for replacement of the Minuteman III 

Intercontinental Ballistic Missile system to 

continue providing a stable and responsive 

deterrent capability.

The DoD’s efforts to modernize and sustain the 

nuclear triad require adequate funding. The 

February 2017 Congressional Budget Office 

estimated that the DoD will need to spend $267 

billion for strategic nuclear delivery and command 

and control systems over the next 10 years. The 

Congressional Budget Office projects that the 

estimated cost, by function, will be:

• $80 billion for the new ballistic 

missile submarine

• $39 billion for the new intercontinental 

ballistic missile

• $34 billion for the new bomber

• $6 billion for tactical nuclear delivery 

systems and weapons

• $14 billion for nuclear command and control

• $20 billion for nuclear-related 

communications systems

• $24 billion for early-warning systems

• $13 billion for nuclear-related research and 

operations support activities by the DoD 

that the Congressional Budget Office could 

not associate with a specific type of delivery 

system or weapon

Even if adequate funding is provided, 

modernization and sustainment of the nuclear triad 

will be not be assured. The DoD OIG has regularly 

assessed the DoD’s efforts to sustain current 

components of the nuclear enterprise and found 

significant challenges. The DoD OIG issued six 

An unarmed U.S. Air Force Minuteman III intercontinental 

ballistic missile launches during an operational test.

(U.S. Air Force photo)
MAINTAINING THE NUCLEAR ENTERPRISE

51 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

evaluations between 2014 and 2017 that identified 

significant parts obsolescence and manufacturing 

shortages due to closure of many small companies 

that provided support for the parts. Additionally, 

the DoD OIG evaluations determined that Air 

Force and Navy senior leaders were not aware 

of the identified sustainment challenges or the 

operational practices at the unit level that drove 

some of the obsolescence and shortage challenges. 

According to DoD OIG reports issued in 2014 and 

2016, the Air Force has made progress by initiating 

more robust quality assurance processes to identify 

mission-essential parts and suitable substitutes 

for the Minuteman III Intercontinental Ballistic 

Missile (ICBM) and the Integrated Tactical Warning 

and Attack Assessment’s Ground Based Radars. 

Furthermore, Air Force Global Strike Command 

developed metrics tailored to the Minuteman III 

system, these metrics include measures related 

to infrastructure support, helicopter securityresponse capability, and communications. The 

development of these metrics provide an enduring 

and standardized measure of effectiveness of the 

supply chain support to the Minuteman III ICBM. 

Yet, additional progress is required. For example, 

a 2012 DoD OIG report recommended that the Air 

Force acquire a new helicopter to support ICBM 

field operations. As of 2017, the Air Force has still 

not implemented this recommendation. As a result, 

the Air Force continues to use the UH-1N, which 

lacks the range, capacity, and endurance to meet 

current requirements. Air Force UH-1N helicopters 

have been performing the nuclear support mission 

since 1969. The helicopter airframes suffer from 

age-related cracks in rotor hubs, the lift-beam area, 

and tail-boom assemblies. As far back as 2011, 

the Commander, Air Force Global Strike Command, 

stated that it is a “Herculean effort to keep the 

Vietnam-era helos in the sky.”

A 2014 DoD OIG report determined that the Navy 

has also made significant progress in addressing 

sustainment challenges with its nuclear command 

and control facilities. The Navy implemented 

actions to improve its preventive maintenance 

procedures, improve its deficiency reporting, and 

strengthen its inspection system related to backup 

power systems and other supporting infrastructure. 

The Navy reinvigorated maintenance and material 

management for the Fixed Submarine Broadcast 

System, a global network of very low frequency 

antennae. By developing standard operating 

procedures and power plant maintenance plans, the 

Navy improved material readiness and sustainment 

of the 1950s-era system. 

Despite efforts to sustain nuclear delivery 

platforms, nuclear support infrastructure, and 

Nuclear Command, Control, and Communications 

systems, the DoD OIG evaluations determined 

that those systems are deteriorating at a faster 

pace than their scheduled replacement. To assess 

these challenges, the DoD OIG plans to evaluate 

whether the Ohio-class nuclear ballistic missile 

submarine can be sustained until the Columbiaclass nuclear ballistic missile submarine is 

operational. Planned maintenance actions for the 

Ohio-class have become increasingly longer, which 

reduces the number of available submarines for 

patrol. This is due to increased deterioration of the 

submarines and incorporating upgrades to meet 

current threats. Based on the commission date of 

the Ohio-class submarine, its 30-year projected life 

U.S. Army soldiers with the 51st Chemical Biological 

Radiological Nuclear Company, prepare to treat victims 

at a decontamination field site. (U.S. Army Reserve photo)
MAINTAINING THE NUCLEAR ENTERPRISE

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 52

cycle would have ended between 2017 and 2030. 

However, some of the submarines will reach up to 

42 years of service by the time the first Columbiaclass submarine is fielded. 

Overall, DoD senior leaders agree that nuclear 

modernization can no longer be deferred and 

any disruption to future acquisition plans will 

increase risk to the U.S. nuclear deterrent. 

Simultaneously modernizing the triad and 

elements of nuclear command and control while 

sustaining legacy platforms and systems remains a 

top DoD challenge.

NUCLEAR COMMAND, CONTROL, 

AND COMMUNICATIONS

In addition, the U.S. nuclear deterrent is only as 

effective as the command and control network 

that enables it to function. Nuclear Command, 

Control, and Communications systems must be 

reliable and resilient because they are essential 

for providing time-critical early warning 

information to the President and Secretary of 

Defense for decision-making, as well as effective 

direction of the nuclear forces in response to 

a strategic crisis. The magnitude of Nuclear 

Command, Control, and Communications systems 

is reflected in the combined $34 billion annual 

proposed costs over the next 10 years for their 

modernization. However, any cancellation or delay 

of Nuclear Command, Control, and Communications 

modernization programs increases the risk to the 

critical communication capability and potentially 

degrades the U.S. Government’s ability to respond 

to a nuclear threat.

The DoD needs to transition Nuclear Command, 

Control, and Communications from outdated analog 

systems that transmit simple coded messages 

from point to point. The President, Secretary 

of Defense, and all levels of leadership, down to 

individual units, rely on video conferencing and 

large amounts of near real-time data to conduct 

conventional warfare. Yet, decisions on the use 

of nuclear weapons are communicated through 

a totally different nuclear communications 

network that is antiquated and often unfamiliar 

to leadership. However, using new technologies, 

such as IP-based networks, to upgrade nuclear 

communication systems for senior leaders 

increases the risk of exploitable vulnerabilities 

and disruptions. 

The DoD OIG issued five reports between 

2013 and 2017 assessing the DoD’s efforts in 

improving Nuclear Command, Control, and 

Communication infrastructure. By resolving 

findings and implementing recommendations 

from these five reports, the Air Force and Navy 

have made progress in improving the readiness or 

effectiveness of the National Airborne Operation 

Center, early warning radars and communication 

systems, and the security of data passing through 

multiple communication systems. 

To improve its ability to manage Nuclear 

Command, Control, and Communication, the 

Air Force established the U.S. Air Force Nuclear 

Command, Control and Communication Center 

in April 2017. The Air Force also designated its 

portion of the Nuclear Command, Control, and 

Communications system as a weapon system, which 

the Air Force believes will improve sustainment 

and modernization efforts by establishing a 

The Commandant of the Defense Threat Reduction Agency’s 

Defense Nuclear Weapons School discusses the intricacies 

of the control panel for the historic, first-of-its-kind, SM-1 

nuclear reactor at Fort Belvoir, Virginia. (U.S. Army photo)
MAINTAINING THE NUCLEAR ENTERPRISE

53 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

foundation to address the weaknesses identified 

in DoD OIG evaluations. The Navy also increased 

its focus on Nuclear Command, Control, and 

Communications. For example, in 2015 the Navy 

took actions to resolve Nuclear Command, Control, 

and Communication recommendations from an 

evaluation report on the Navy’s Fixed Submarine 

Broadcast System. The Navy revised the 

organizational structure to enhance accountability, 

appointed a single authority for Fixed Submarine 

Broadcast System issues, increased inspections, and 

funded recommended system upgrades. 

While the DoD has made progress in protecting 

the security of the Nuclear Command, 

Control, and Communications infrastructure, 

deferred maintenance and schedule delays 

affect sustainment and modernization of the 

infrastructure. For example, DoD OIG reports have 

determined that:

• programs did not meet system requirements 

or lacked configuration control;

• personnel inappropriately waived 

preventive maintenance on nuclear support 

equipment, such as generators and backup 

power supplies; and

• system sustainment planning was 

inadequate, forcing continued reliance 

on old technology, such as vacuum tubes, 

punch cards, floppy disks and other 

outdated systems

The DoD OIG is planning additional reviews in 

this area, such as an evaluation of U.S. European 

Command’s ability to effectively direct, control, and 

execute the non-strategic nuclear mission. 

Modernizing Nuclear Command, Control, and 

Communications to provide leadership with a 

reliable, secure communication system is vital to 

ensuring a continued credible nuclear deterrent.

MAINTAINING ROBUST 

INTELLECTUAL CAPACITY

Federal advisory committees, the Defense Science 

Board, the GAO, and the DoD OIG have all identified 

the reduction in the number of DoD personnel 

with nuclear expertise as a challenge. The DoD 

is faced with an aging civilian nuclear workforce 

coupled with difficulties in recruiting and retaining 

new personnel. 

For example, as DoD nuclear civilian experts 

retire, the DoD is challenged to find qualified 

replacements. A contributing factor to this 

Sailors stand topside aboard the Virginia-class, nuclear-powered, fast-attack submarine USS Missouri as the boat 

approaches the pier at Naval Submarine Base New London, Connecticut. (U.S. Navy photo)
MAINTAINING THE NUCLEAR ENTERPRISE

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 54

challenge is that the DoD lacks a formal career 

progression path for the civilian nuclear workforce. 

Furthermore, junior personnel entering the DoD 

workforce are not trained on 1950s- and 1960s-era 

vacuum tubes or other early technology used in 

the nation’s nuclear weapons and command and 

control systems.

Also, in part, DoD OIG evaluations determined that 

some nuclear command and control sites cannot 

fill critical technical positions because of the 

austere work locations. Site managers have stated 

to the OIG this challenge is “two-fold.” First, the 

technical positions require advanced education 

and certifications, but the organizational size and 

locality only allows for lower general schedule 

salaries not commensurate with the qualifications 

needed. Second, site managers have found that 

the lack of large local retail establishments 

hurts recruitment.

In recent years, the DoD has taken steps to 

improve capabilities of nuclear personnel through 

partnerships with universities. U.S. Strategic 

Command has established an academic alliance 

program focused on developing a community of 

interest on deterrence in the context of national 

security, with 20 universities and military highereducation institutes. 

Despite these steps, challenges remain for the DoD 

to ensure that critical nuclear positions are filled. 

The DoD should pursue targeted recruitment and 

provide an appropriate career path to build the 

depth of experience and knowledge needed to 

replace the retiring nuclear experts. This pool of 

talent needs sufficient incentives to take on critical 

functions in some of the austere locations.

GOVERNANCE

Over the last decade, the lack of an effective 

DoD governance structure to maintain a 

secure and effective nuclear deterrent has 

been documented in various federal advisory 

reports, DoD internal assessments, and DoD OIG 

reports. For example, the DoD does not assign 

a person or organization to ensure that nuclear 

capabilities are planned, resourced, modernized, 

or sustained in an integrated fashion by all DoD 

Services and organizations involved in nuclear 

operations. Multiple committees, with overlapping 

memberships, address governance issues in the 

nuclear enterprise, but many of these committees 

are merely advisory or coordination committees 

and cannot commit resources. In December 2015, 

the President directed the DoD to establish and 

chair a Security and Incident Response Council 

to manage a whole-of-government approach to 

securing and responding to incidents that may 

occur in the U.S. nuclear weapons stockpile. 

However, the DoD has not yet established this 

Council, making it one of our most critical 

unresolved DoD OIG recommendations.

In addition, at the program or system level, the DoD 

OIG has noted instances when the lack of funding 

or programmed sustainment was a governance 

issue. For example, the Nuclear Detonation 

Detection System has many stakeholders, but they 

do not have a venue to decide on programmatic 

adjustments based on changes in threats, 

presidential guidance, or funding challenges. 

Agreements for cost sharing have expired, and 

some stakeholders have unilaterally dropped their 

funding contributions, forcing other organizations 

to budget for the additional funding. 

In summary, the DoD has focused on the critical 

task of modernizing its nuclear force. However, the 

DoD must balance the risk between sustainment 

of the current nuclear force and the modernization 

and acquisition of future nuclear capabilities. The 

DoD needs to make additional progress on the 

governance of the nuclear force and identify a 

means for attracting and retaining a skilled civilian 

nuclear workforce. U.S. adversaries are committed 

to developing and adapting nuclear capabilities, 

which increases the importance of continual 

progress by the DoD in this area. 
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55 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

The guided-missile destroyer USS Porter conducts strike operations against a target in Syria while in the 

Mediterranean Sea. (U.S. Navy photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 56

Challenge 7: Optimally Balancing 

Readiness, Modernization, 

and Force Structure

Balancing readiness, modernization, and force structure is a significant and 

enduring challenge for the DoD. It must build and maintain readiness across 

the current force to meet today’s requirements, while also modernizing and 

transforming the force to meet future demands. 

In a June 2017 hearing before the Senate Appropriations Committee, Secretary 

of Defense James Mattis outlined five priorities for the DoD: 

• continue to improve upon war fighter readiness initiatives 

started in 2017,

• increase capacity and lethality while preparing for future investment,

• reform how DoD does business,

• keep faith with service members and their families, and

• support overseas contingency operations. 

The priorities help the DoD balance its resources and initiatives to meet 

global demands across the range of military operations while investing in 

modernizing the force for the future.

READINESS

Readiness is the ability of military forces to fight and meet the demands of 

assigned missions. Manning, training, and equipping are the three elements 

of readiness. Rebuilding and maintaining readiness after more than 16 

years of continuous conflict competes with the need to modernize and to 

adjust force structure. Increasing the size of the military, its force structure, 

without corresponding investments in readiness risks the creation of a 

“hollow force” that is insufficiently manned, trained, or equipped to defend the 

nation’s interests.

MANNING

The DoD is the largest employer in the United States with over 2.1 million 

active duty, National Guard, and Reserve members serving in uniform, and 

over 800,000 civilian personnel. DoD leadership recognizes that the strength 

of the DoD is its people. All Services must remain competitive in their efforts 

to recruit, develop, and retain the right mix of talented and skilled people 

willing and able to serve. 

Maintaining a force with the right mix of skills and experience for an everchanging, globally deployed force is a challenge across the DoD. For example, 

in June of 2017, Army Chief of Staff Mark Milley testified before the Senate 
OPTIMALLY BALANCING READINESS, MODERNIZATION, AND FORCE STRUCTURE

57 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Appropriations Committee that the Army did not 

have enough soldiers to accomplish its assigned 

missions. The Chief of Staff further stated that 

the active component size of the Army should be 

between 540,000 and 550,000, the National Guard 

between 350,000 and 355,000, and the Army 

Reserve between 205,000 and 209,000. The Active 

Army currently has 476,000, the National Guard 

has 343,000, and the Army Reserve has 199,000 

uniformed personnel. 

In May of 2017, the Government Accountability 

Office (GAO) found that reductions to crew sizes the 

Navy made in the early 2000s were not analytically 

supported and may now be creating safety risks. 

The GAO also found that the work-week standard 

used by the Navy did not reflect the actual time 

sailors spent working and did not account for inport workload—both of which have contributed 

to some sailors working over 100 hours a week. 

The GAO concluded that until the Navy changes its 

factors and policies used in determining manpower 

requirements, its ships may not have the right 

number of skilled sailors to maintain readiness. 

Additionally, the Navy may not have the ability to 

reduce the 100-hour, per-week demand, and the 

manning issue may become more prevalent as the 

Navy seeks to increase the size of its fleet.

The Air Force identified shortages of skilled 

maintenance personnel and pilots as that service’s 

principal readiness challenge. As a result, the 

Air Force continues to prioritize maintenance 

personnel in its training pipeline as the Air Force 

requests to grow its active duty end strength to 

325,100 in FY 2018. At the start of FY 2017, the 

Air Force reported a deficit of 1,555 pilots across 

all mission areas. This shortage resulted from 

high operational tempo and the civilian airline 

industry’s demand for former Air Force pilots. To 

address this shortage, the Air Force plans to use 

bonuses and other initiatives to retain pilots. In 

addition, the goal of an ongoing Air Force personnel 

review is to reduce the number of pilots serving in 

non-flying positions. 

These are only a few examples of the challenges 

faced by the DoD with regard to manning. 

However, manning is only part of the readiness 

equation -- to be ready, troops must be trained.

TRAINING

Across the Joint Force, the high operational tempo 

is impacting the training that is required to 

maintain military readiness. The lack of funding 

or time for training presents a serious concern 

for the U.S. military’s ability to remain a ready 

force. The DoD must find innovative ways to meet 

the operational demands on the force and while 

continuing to conduct adequate training. Training 

to meet requirements across the range of military 

operations, while sustaining an unrelenting 

operational tempo and balancing competing 

demands for resources, is a challenge common 

to each Service.

In January of 2017, the President ordered a 

30-Day Readiness Review of the Armed Forces. 

This review initiated the development of the 

“DoD Request for Additional Fiscal Year 2017 

Appropriations” that identified the issues requiring 

additional funding. Training to improve near-term 

readiness was one of these issues. 

For example, the DoD requested additional funding 

for the Army to increase training and readiness for 

operating and generating forces. The DoD reported 

that this increase would provide more realistic 

training at the National Training Center, mitigating 

safety and maintenance issues, and enabling the 

National Training Center to replicate the tactics and 

capabilities of potential nation-state adversaries. 

The goal of the funding request was to increase 

ground operational tempo and flying hours, 

enabling both Active and Reserve Component units 

to train to higher levels, thereby building readiness 

and making more units ready and available for 

global contingencies. This training is designed to 

improve readiness levels and to assess readiness. 

In FY 2018 the DoD OIG plans to review whether 

Army and Air National Guard units are accurately 

reporting personnel readiness levels.
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 58

The DoD also requested funding for the Navy to 

support maintenance and upgrades to 14 additional 

surface ships in FY 2017. The additional funding 

seeks to help the additional ships to begin training 

on time for their next deployments with improved 

material condition and modernization to combat 

systems, communications, and engineering systems. 

The increased funding would also enable the Navy 

to add 14,000 flying hours to support tactical 

training for 5 carrier air wings and 33 noncarrier squadrons. 

Recent collisions involving Navy ships are an 

example of a potential readiness shortfall due 

to training deficiencies. In response to these 

collisions, Admiral Philip Davidson, Commander 

of Fleet Forces, is leading a 60 day comprehensive 

review to examine training, individual 

development, and certifications. 

In March of 2017, the Maine Corps Times reported 

that the Marine Corps is facing a critical gap 

in scout snipers due to lower than anticipated 

graduation rates for scout sniper schools over the 

past several years. To address this gap, the Marine 

Corps is considering dividing sniper training 

into two sessions, then assigning students to an 

operational unit between sessions to provide more 

on-the-job experience.

As part of a request for additional appropriations, 

the Air Force sought funds for military 

construction to improve its training environment 

and infrastructure and to strengthen facility 

operations through sustainment and restoration. 

The Air Force stated that its number one readiness 

priority is funding 4,000 airmen in joint critical 

mission areas: maintenance; aircrew; intelligence, 

surveillance, and reconnaissance; cyber; and 

battlefield airmen. The funding would also expand 

training and recruiting capacity to support endstrength growth to fill these capability gaps.

Additionally, during his Senate Armed Services 

Committee testimony on June 6, 2017, the Air 

Force Chief of Staff David Goldfein stated that 

the shortage of key personnel and the focus on 

providing support for the fight against extremist 

groups is preventing training designed to confront 

other major adversaries. He attributed the driving 

factor for this readiness shortfall as the current 

size of the Air Force in relation to the expanded 

mission requirements and the increased capabilities 

of U.S. adversaries.

In September 2017, a GAO report found that select 

Marine Corps personnel had limited capacities 

to perform training missions for amphibious 

operations and other related priorities. The GAO 

The Ticonderoga-class guided-missile cruiser USS Lake Champlain is moored pier side in Singapore with the Carl Vinson 

Carrier Strike Group. (U.S. Navy photo)
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59 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

report stated that the decline in the number 

of active Navy amphibious ships also affected 

the Marine Corps training capacities for priority 

areas, such as recurring training for home-station 

units. While the Navy and the Marine Corps 

have begun to address the challenges related 

to amphibious training, the GAO recommended 

that the Navy and the Marine Corps increase 

coordination and implement collaborative 

practices to aid the naval integration of 

amphibious operations.

EQUIPPING

The ability to efficiently “reset” equipment after 

deployment is a persistent challenge for the DoD. 

Equipment reset consists of the actions taken to 

reconstitute units and equipment to a desired level 

of combat capability required for future missions. 

In his testimony before the Senate Armed Services 

Committee regarding the FY 2018 budget, Secretary 

Mattis stated that 16 years of continuous conflict 

has “exhausted our equipment faster than planned.” 

The cost associated with maintaining equipment 

further adds to the DoD challenge in balancing 

investments to sustain existing equipment with 

investments in the development and acquisition 

of new equipment.

The Chairman of the Joint Chiefs of Staff General 

Joseph Dunford, Jr. articulated this challenge in 

his statement at the same hearing with Secretary 

Mattis, stating:

Since 9/11, an extraordinarily 

high level of operational tempo 

has accelerated the wear and tear 

of our weapons and equipment. 

Meanwhile, budget instability 

and the Budget Control Act have 

forced the DoD to operate with 

far fewer resources than required 

for the strategy of record. As a 

consequence, we prioritize nearterm readiness at the expense of 

replacing aging equipment and 

capability development. We also 

maintain a force that consumes 

readiness as fast as we build it. We 

lack sufficient capacity to meet our 

current operational requirements 

while rebuilding and maintaining 

full spectrum readiness.

Secretary Mattis added that units back at home 

station are “unable to train as equipment is 

sent forward to cover shortfalls or returned for 

extensive rework.” One of the DoD’s strategies to 

address equipping issues it to reuse equipment 

that is no longer needed by one unit by repairing 

and reissuing it to another unit. In FY 2018, the 

DoD OIG plans to determine whether the Defense 

Logistics Agency-Disposition Services is properly 

reutilizing and disposing of equipment in Kuwait.

MODERNIZATION

Over 16 years of continuous conflict, current 

readiness has necessarily been a higher priority 

than modernization. However, DoD’s capacity for 

technological innovation remains integral to its 

ability to dominate any enemy. Realizing that the 

U.S. technological advantage was declining, the 

2014 Quadrennial Defense Review established 

innovation as a central effort of the new Third 

Offset Strategy. Now in its second year of 

implementation, the strategy seeks to combine 

U.S. marines with Bravo Battery, 1st Battalion, 10th 

Marine Regiment, 2nd Marine Division, provide security 

during a CH-53 day battle drill. (U.S. Marine Corps photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 60

new technological innovations with supporting 

doctrine describing how to effectively employ 

new equipment and formations in combat. Recent 

initiatives include the F-35 Joint Strike Fighter, the 

emerging B21 Bomber, the Aegis Ballistic Missile 

Defense and Theater High Altitude Area Defense 

missile systems, counter drone technologies, and 

directed energy weapons. In an effort to produce a 

balanced and lethal force, the DoD plans to combine 

these newly acquired technologies with shortterm modernization programs that are designed to 

enhance the lethality and survivability of existing 

U.S. weapons systems. 

Determining whether to divest or retain existing 

capabilities is another aspect of the modernization 

challenge. The DoD’s divestiture decision process 

relies on the analysis of current needs compared to 

anticipated future requirements. This analytical 

decision process also identifies any identified 

gaps in capabilities associated with a transition. 

For example, the Air Force plans to remove the 

A-10 ground attack aircraft from its inventory by 

2022 in order to support modernization through 

fielding the F-35 program. However, removal of 

the A-10 from service creates a potential capability 

gap because the Air Force would no longer 

have a dedicated aircraft for close air support. 

Determining if the monetary savings gained 

through divestiture of the A-10 is worth the loss 

in ground support capacity remains a subject of 

DoD analysis. 

In 2016, the GAO found the Air Force did not 

have quality information on the full implications 

of removing the A-10 from service. The GAO 

recommended that the Air Force fully identify 

modernization gaps, risks, and mitigation 

strategies, in addition to refining cost estimates of 

the savings before the Air Force removes the A-10 

from its inventory. The GAO also recommended 

that DoD establish requirements to guide the 

removal of future weapon systems as the challenge 

to balancing modernization with the retention 

of existing equipment will increase as current 

weapon systems age.

In the 2017 Defense Posture Statement, Former 

Secretary of Defense Ash Carter detailed the 

plan for Navy modernization. The statement 

attempted to balance investments in readiness 

and modernization to generate the force presently 

needed, as well as the anticipated force required 

for future naval superiority. It took into account 

the maritime threats posed by China, North 

Korea, and Russia. 

However, in 2017 the Navy reduced the number 

of Littoral Combat Ships originally forecasted in 

2016, in order to acquire additional capabilities 

in submarines, surface ships, and aircraft. 

During a Congressional hearing in May 2017, the 

Commandant of the Marine Corps noted that the 

Marine Corps fleet of Landing Craft Air Cushion, 

a hovercraft that ferries Marines, vehicles and 

supplies from ship to shore, has been in service for 

25 years while the Landing Craft Utility, a mediumsized vessel capable of transporting personnel, 

cargo, and vehicles entered service in 1959. 

Army modernization efforts include a 30-mm 

cannon upgrade for the Stryker combat vehicle to 

counter similar systems used by Russia and China 

over the past 5 years. The Army also upgraded 

the 155-mm ammunition for the M777 Howitzer 

A U.S. Air Force crew chief with the 159th Aircraft 

Maintenance Squadron cleans the canopy on an F-15C 

Eagle aircraft. (U.S. Air Force photo)
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61 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

that doubled its effective range and is replacing the 

aging M113 Armored Personnel Carrier and High 

Mobility Multipurpose Wheeled Vehicle. Improved 

aircraft turbine engines for the AH-64 Apache and 

UH-60 Black Hawk are in development to increase 

platform capability in high altitude locations such 

as Afghanistan. 

As current systems age and the pace of operations 

remains high, all Services will be challenged 

with finding the right balance between funding 

replacement of aging and worn existing equipment 

and investing in next-generation systems to counter 

evolving threats. Secretary of the Navy Richard 

Spencer stated, “We have been at war for the past 

16 years with the operational tempo of the various 

conflicts in which we are engaged denying us the 

needed time and resources for modernization 

and maintenance.”

FORCE STRUCTURE

Force structure consists of DoD organizations, both 

military and civilian, that comprise and support the 

Armed Forces. The DoD’s force structure challenge 

is to design a force that can optimally meet a broad 

range of global requirements across the range 

of military operations, over time, within the end 

strength authorized by and funding appropriated 

by Congress. The force structure challenge is multifaceted: achieving the right mix of capabilities 

across all Services; balancing the mix of Active, 

National Guard, and Reserve forces; and designing 

organizations within each Service that can be 

sufficiently manned, trained, and equipped to provide 

the capabilities that the Services need to fulfill their 

global requirements, when and where needed. 

Many factors influence force structure decisions, 

including strategy, technology, funding, politics, and 

current and future operational requirements. 

• Strategy. At the highest levels, the National 

Security Strategy, Defense Strategic Guidance, 

National Military Strategy, and Quadrennial 

Defense Review all shape decisions on what 

the military builds for the nation. The 

first three of these documents date from 

2015, and the most recent QDR report was 

published in 2012. 

• Technology. This factor is advancing at 

an accelerated rate. New technologies 

are combined with doctrine, people, and 

organizational design to produce new 

capabilities in the DoD’s force structure. 

The guided-missile submarine USS Ohio arrives at Naval Magazine Indian Island, Washington. (U.S. Navy photo)
OPTIMALLY BALANCING READINESS, MODERNIZATION, AND FORCE STRUCTURE

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 62

• Funding. This factor influences force 

structure as the Services modernize over 

time to evolve their force structure at an 

affordable rate. 

• Politics. From the international to the 

local level, this factor influences decisions 

on where to assign units and whether 

to increase or decrease force structure, 

affecting jobs in those communities and 

relations with allies. 

• Current Operational Requirements. High 

demand for certain capabilities over the 

last 16 years of conflict drove changes in 

organizational design and growth in the 

number of high demand formations. For 

example, the Army’s transformation from 

a Division-centric structure to a Brigadecentric structure, and its growth in Brigade 

Combat Teams at the height of Operation 

Iraqi Freedom. 

• Future Operational Requirements. This 

is the greatest challenge in developing 

the future force for an unknown and 

unknowable future. The DoD’s force 

structure changes continuously over time, 

through the disciplined application of a 

variety of processes, as DoD leaders seek to 

manage the known risks of today with the 

anticipated risks of tomorrow. 

In summary, readiness and modernization come 

together in force structure. Meeting the immediate 

demands of global operations while developing a 

lethal future force is a fundamental challenge for 

the DoD. A sustained high-operational tempo, a 

broad range of evolving threats, rapid technological 

change, and uncertain funding complicate this 

challenge. These conditions have become the 

norm in today’s environment. Optimally balancing 

readiness, modernization, and force structure to 

meet current and future military requirements will 

remain a difficult challenge for the DoD.

U.S. Army soldiers of 1st Battalion, 4th Infantry Regiment role-play as enemy combatants while conducting an offensive 

operation training exercise. (U.S. Army photo)
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63 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Members of the U.S. Army Band, “Pershing’s Own,” participate in a full honors wreath laying ceremony

at the Tomb of the Unknown Soldier in Arlington National Cemetery, Virginia. (U.S. Army photo)
ENSURING ETHICAL CONDUCT

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 64

Challenge 8: Ensuring Ethical Conduct

Ensuring ethical conduct throughout the DoD is a critical and continual 

responsibility for DoD leaders. Ethical failures by DoD officials, public 

corruption investigations, and misconduct by a few DoD employees can 

undermine public confidence in the DoD, as well as foster an unwarranted 

perception about the overall character, ethics, dedication, and sacrifice of 

all DoD employees. At its core, ethical misconduct violates DoD core values 

and tarnishes the high standards of integrity expected of DoD personnel. 

Therefore, DoD leaders must continually strive to deter and prevent ethical 

lapses and misconduct, and hold accountable those individuals who violate the 

law, the standards of conduct, or other ethical requirements.

EFFORTS TO ENSURE ETHICAL CONDUCT

The responsibility for ensuring ethical conduct starts at the top of any 

organization. In this regard, on August 4, 2017, the Secretary of Defense 

emphasized the importance of ethical conduct by issuing a brief and direct 

memorandum to all DoD employees. This memorandum, “Ethical Standards 

for All Hands,” states “those entrusted by our nation with carrying out 

violence, those entrusted with the lives of our troops, and those entrusted 

with enormous sums of taxpayer money must set an honorable example in 

all we do.” The Secretary emphasized that employees should focus on the 

essence of ethical conduct: “doing what is right at all times, regardless of the 

circumstances or whether anyone is watching.” 

In addition, in March 2017 the Secretary of Defense, responding to reports of 

military misuse of social media sites, issued a statement that such conduct 

represented “egregious violations of the fundamental values” of the DoD and 

that “lack of respect for the dignity and humanity of fellow members” of the 

DoD is unacceptable and will not be tolerated. 

In a memorandum dated February 12, 2016, “Leader-Led, Values-Based Ethics 

Engagement,” the former Secretary of Defense informed the DoD’s leaders of 

the importance of integrity and public confidence in DoD activities and its 

people. The Secretary directed leaders at every level to engage personally 

with their subordinates and to discuss values-based decision making to foster 

a culture of ethics and promote accountability, respect, and transparency 

throughout the DoD. 

There are other examples of DoD leadership setting the tone at the top. 

In April 2016 the Chief of Naval Operations released a message he had 

provided to Naval Flag officers and Senior Executive Service (SES) members 

emphasizing the Navy’s core values of honor, courage, and commitment and 
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65 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

its core attributes of integrity, accountability, 

initiative, and toughness. This message was issued 

in part because of the Glenn Defense Marine Asia 

(GDMA) corruption scandal (also known as the “Fat 

Leonard” case, which is discussed in more detail 

below). The Chief of Naval Operations emphasized 

to the Navy senior leaders that their personal 

conduct and the example it sets are essential to 

their credibility, as well as to the overall integrity 

and efficiency of the Navy.

INSPECTORS GENERAL 

PROACTIVE INITIATIVES

The DoD Office of Inspector General (DoD OIG), 

Military Service and DoD agency Inspectors 

General (IGs), and the Military Criminal 

Investigative Organizations also play an 

important role in addressing this challenge, by 

investigating allegations of ethical violations and 

other misconduct and also by providing proactive 

education and training. 

For example, the Military Services IGs have 

implemented various proactive initiatives intended 

to focus DoD personnel on ethical conduct, core 

values, and professionalism. The IGs engage in a 

broad range of proactive efforts to inform their 

leadership and the workforce about trends in 

both allegations of misconduct and substantiated 

investigations. Sharing these trends is intended to 

provide lessons learned and to help senior leaders 

and the workforce avoid misconduct. These efforts 

also include issuing publications for Service-wide 

distribution and speaking to general and flag 

officers, SES members, new commanders and 

officers at military schools, conference attendees, 

and personnel during site visits.

In particular, the Army IG uses publications, 

briefings, and visits to educate Army personnel 

on relevant trends in allegations and investigative 

findings the IG sees across the Army. The Army IG 

also publishes an annual report examining the 

prevalence of misconduct investigated across 

the Army. The report is distributed to Army IGs, 

attendees of officer and noncommissioned officer 

professional military education courses, and 

courses for officers selected for command. 

The Naval IG briefs attendees of the Navy 

Leadership and Ethics Course, Naval flag and 

noncommissioned officer professional military 

education courses, and courses for new flag officers 

and SES members. The briefings focus on ethical, 

legal and moral behavior using real-life scenarios 

of both successes and failures in ethical decisionmaking by Navy leaders.

The Air Force IG briefs Air Force leaders at 

institutional training programs, including those 

for commanders at all echelons of command, new 

flag officers and SES members at the Senior Leader 

Orientation Course, Air National Guard commander 

courses, and Air National Guard senior leader 

conferences. The briefings focus on potential 

pitfalls and misconduct trends that have been 

identified by the Air Force IG.

The Marine Corps IG has initiated a series of 

professional military education briefings to general 

officers, senior noncommissioned officers, and legal 

advisors to inform them of the factors, indicators, 

and conduct that could lead to an allegation of 

senior official misconduct. 

The DoD OIG has also implemented proactive 

initiatives designed to increase awareness of 

ethical pitfalls and prevent ethical misconduct by 

DoD employees. For example, the DoD IG regularly 

briefs newly appointed SES members at the DoD’s 

APEX training about the role of the DoD OIG, trends 

in senior official misconduct, conduct to avoid, and 

A warrant officer with the 383rd Military Police Detachment 

(Criminal Investigation Command), of Lakeland, Florida, poses with 

a blue forensic light on a staged crime scene wall. (U.S. Army photo)
ENSURING ETHICAL CONDUCT

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 66

how to respond to OIG investigations. Recently, the 

Acting DoD IG has begun briefing new general and 

flag officers at the CAPSTONE class on these topics.

ETHICAL CONDUCT TRENDS

IGs are responsible for the investigating allegations 

of misconduct, whistleblower reprisal, and public 

corruption. These investigations are critical 

holding individuals accountable when they commit 

misconduct, and also in clearing them when the 

allegations are not supported.

TRENDS IN SENIOR OFFICIAL 

MISCONDUCT INVESTIGATIONS

Despite the proactive initiatives by DoD leaders 

and Service IGs, the DoD continues be confronted 

with high-profile misconduct cases. For example, 

an investigation by the DoD OIG found that an 

Army major general misused his Government Travel 

Charge Card for personal expenses at off-limits 

and adult entertainment establishments in South 

Korea and Italy; made false official statements to 

subordinates and to Citibank regarding charges 

he made to his travel card for personal expenses; 

and engaged in inappropriate behavior that 

included patronizing an establishment off limits to 

U.S. military personnel, drinking to excess in public, 

and interacting improperly with women. Another 

investigation found that an Air Force lieutenant 

general engaged in an unprofessional relationship 

with a married colonel.

The number of allegations received by the DoD OIG 

against senior DoD officials has increased over 

the past several years. There was a 13 percent 

increase in complaints alleging misconduct 

by senior officials from FY 2015 to FY 2017 

(710 to 803). The most common allegations 

involved personal misconduct including improper 

relationships, improper personnel actions, misuse 

of government resources, and travel violations. The 

substantiation rate increased from 26 to 37 percent 

for investigations conducted by DoD OIG and the 

IGs for the Military Services, Defense agencies, and 

combatant commands. In the category of personal 

misconduct, there has been a steady trend in 

substantiated allegations of improper relationships 

and sexual misconduct.

TRENDS IN WHISTLEBLOWER 

REPRISAL INVESTIGATIONS

From FY 2013 through FY 2016, there has 

been a 51-percent increase in the number of 

whistleblower reprisal and military restriction 

complaints filed under the whistleblower protection 

statutes administered by the DoD OIG. The 

DoD OIG processes whistleblower reprisal and 

restriction complaints filed by military personnel, 

nonappropriated fund instrumentality employees, 

DoD contractor and subcontractor employees, and 

DoD intelligence community civilian employees. 

In FY 2016, there was a 30 percent increase in 

the number of these complaints. The number of 

reprisal investigations completed by Service IGs 

and other DoD Components, which require DoD 

OIG oversight, has increased by 50 percent since 

FY 2013. The overall substantiation rate for 

military reprisal investigations has remained at 

12 percent over the years, while the substantiation 

rate for military restriction investigations has been 

A U.S. Navy engineman works on a lube oil purifier in the higher, at 50 percent.

main machinery room aboard the amphibious transport 

dock USS Green Bay. (U.S. Navy photo)
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TRENDS IN SEXUAL 

ASSAULT PREVENTION AND 

RESPONSE INVESTIGATIONS

Preventing sexual assaults, ensuring victims who 

report sexual assault do not suffer retaliation, and 

fully investigating sexual assault allegations in 

a timely manner remains a continuing challenge 

for the DoD. According to the DoD Sexual Assault 

Prevention and Response Office, sexual assault 

prevention programs are designed to reinforce 

mutual respect, trust, professional values, and 

team commitment and to create an environment 

where discriminatory behaviors, sexual 

harassment, and sexual assault are not condoned, 

tolerated, or ignored. 

The DoD Sexual Assault Prevention and Reporting 

Office is responsible for oversight of the DoD’s 

sexual assault policy. This Office works with the 

Military Services and other DoD Components to 

develop and implement prevention and response 

programs. One such program is the DoD Safe 

Helpline—a crisis support service for members of 

the DoD community affected by sexual assault. The 

Safe Helpline provides live, one-on-one specialized 

support that is confidential, anonymous, and 

secure. The helpline is designed to provide crisis 

response, information, and to connect survivors to 

needed resources, while simultaneously building 

confidence in the reporting process. 

Reports of sexual assault continue to rise. For 

example, the Military Services received 6,172 

reports of sexual assault involving Service 

members as either victims or subjects of criminal 

investigations throughout FY 2016, which 

represents a 1.5-percent increase from the reports 

made in FY 2015. However, as reported to the 

Committees on Armed Services of the Senate and 

the House of Representatives in May 2017, the 

DoD FY 2016 Annual Report on Sexual Assault in 

the Military documented considerable progress to 

address sexual assault in the military. The 2016 

Workplace and Gender Relations Survey indicated 

that estimated instances of sexual assaults for 

active duty Service members decreased in FY 

2016, while the proportion of Service members 

choosing to report a sexual assault increased. 

Moreover, with sexual assault being a significantly 

underreported crime, the DoD considers the higher 

proportion of reporting as an indicator that victims 

are continuing to gain confidence in their leaders 

and response personnel to provide them with 

the care they need and hold alleged perpetrators 

appropriately accountable.

The Patriots Jet Team performs aerial acrobatics during the 2017 Twilight Show at Marine Corps Air Station 

Yuma, Arizona. (U.S. Marine Corps photo)
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The DoD OIG has also implemented overarching 

sexual assault investigative policy guidance to 

ensure uniform reporting and investigations of 

sexual assaults within the DoD. Most recently, 

DoD policies were updated to allow a victim of a 

sexual assault to anonymously report information 

from a restricted report to a Military Criminal 

Investigative Organization without affecting the 

restricted nature of the report. 

With respect to oversight of investigations of sexual 

assault allegations, the DoD OIG has conducted 

several evaluations of adult sexual assault 

investigations closed by the Military Criminal 

Investigative Organizations. These evaluations 

indicate that investigations of sexual assault cases 

have been thorough. In a 2017 evaluation, the 

DoD OIG determined that only 2 of the 378 cases 

reviewed (0.5 percent) had significant deficiencies 

that likely adversely impacted the outcome of the 

investigations. This is a dramatic improvement 

since 2013, when a similar DoD OIG evaluation 

determined that 56 of 501 cases (11.2 percent) had 

significant deficiencies.

TRENDS IN PUBLIC 

CORRUPTION INVESTIGATIONS

Public corruption threatens national security; 

compromises the safety and security of DoD 

operations, systems, and personnel; wastes tax 

dollars; and undermines the mission of the DoD. 

Public corruption also involves a breach of the 

public’s trust in the Government. 

In FY 2017, public corruption investigations 

by the Defense Criminal Investigative Service 

(DCIS) resulted in 31 criminal charges and 

30 convictions, including 15 DoD employees 

charged and 14 convicted. These investigations 

resulted in over $16 million in recoveries for the 

Government and the debarment of 29 entities from 

Government contracting.

A troubling example of public corruption in 

DoD programs involves a case relating to Glenn 

Defense Marine Asia PTE, LTD (GDMA), a defensecontracting firm based in Singapore that provides 

ship maintenance and supply services. Leonard 

Glenn Francis, a Malaysian national, was the former 

President and Chief Executive Officer of GDMA. A 

joint DCIS/Naval Criminal Investigative Service 

(NCIS) investigation determined that Francis 

conspired with former and current U.S. Navy 

officials to commit bribery and to defraud the U.S. 

Government. The scheme involved the fraudulent 

billing of goods and services that GDMA provided to 

Navy ships at various Asian seaports, including fuel, 

tugboat services, and sewage disposal. In exchange 

for things of value, such as dinners, hotel stays, 

travel, and prostitutes, Navy officers overlooked 

excessive bills and provided GDMA employees with 

classified U.S. Navy ship schedules, contract data, 

preference and assistance in Navy contracting 

decisions, and a corrupt U.S. Federal agent provided 

access and insights into criminal investigations 

involving GMDA. 

As of October 2017, 27 individuals have been 

criminally charged in connection with this scheme. 

Of those 27 individuals, 19 have pleaded guilty, 

including one Navy flag officer, a former member 

A KC-10 Extender from the 76th Air Refueling Squadron, 

514th Air Mobility Wing, Joint Base McGuire-DixLakehurst, New Jersey, refuels an F-22 Raptor.
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of the DoD Senior Executive Service, three Navy 

captains, several other Navy officers and enlisted 

personnel, a supervisory NCIS Special Agent, 

Francis, two former GDMA employees, and the 

GDMA corporate entity. Sentences have been 

imposed on 12 individuals range from 18 months 

to 12 years. 

In addition, as a result of the active duty military 

personnel potentially involved in either criminal or 

unethical behavior involving GDMA, the Secretary 

of the Navy established a Consolidated Disposition 

Authority, headed by a four-star admiral, to review 

GDMA investigations forwarded by the Department 

of Justice to the U.S. Navy for evaluation under the 

Uniform Code of Military Justice. Dispositions by 

the Consolidated Disposition Authority may range 

from no action to various forms of disciplinary 

measures, to include court martial.

INITIATIVES TO IMPROVE 

TIMELINESS OF INVESTIGATIONS

Holding individuals accountable for misconduct, or 

exonerating them when they have not committed 

misconduct, should be done in a timely manner. 

The DoD OIG, Service IGs, and others investigating 

alleged misconduct must have a sense of urgency 

in accomplishing their work because of the impact 

investigations have on the lives of individuals 

and on their organizations’ ability to perform 

effectively. However, many factors affect the 

timeliness of investigations, such as the complexity 

of the matters under investigation, the number 

and availability of witnesses, and the volume 

of complaints. 

IGs have implemented several initiatives to improve 

the timeliness of investigations. For instance, 

over the last several years, the DoD OIG has 

standardized business processes and improved 

the timeliness of DoD Hotline referrals and 

administrative investigations. The DoD OIG also 

obtained funding to deploy and sustain the Defense 

Case Activity Tracking System Enterprise (DCATSe) 

through 2021. This case management system will 

transform the business processes and operations of 

the Military Services IGs and the Defense agencies 

by improving the efficiency and timeliness of the 

transmittal of investigative documents to offices 

located at posts, camps, and stations around the 

world and capturing the DoD-wide universe of 

complaints and investigations. 

The deployment of DCATSe will also help meet the 

requirements of the National Defense Authorization 

Act for FY 2017, which requires the DoD OIG 

to establish uniform standards for conducting 

military restriction and whistleblower reprisal 

investigations. By standardizing the investigative 

processes, the DoD OIG hopes to also improve 

timeliness in various ways, including eliminating 

lengthy preliminary inquiries before opening 

investigations, developing consistent investigative 

and review timelines, and establishing uniform 

templates for investigative plans and reports 

of investigation.

At the request of the Deputy Secretary of Defense, 

the DoD OIG led a task force to review and improve 

the timeliness of senior official administrative 

investigations. The task force reviewed data, 

processes, policies, and resources and examined 

proposed changes to conduct more efficient 

and timely investigations. The task force’s 

report, issued on November 6, 2014, included 

Soldiers from the U.S. Army’s 3rd Brigade Combat Team, 

10th Mountain Division, march toward a CH-47 Chinook 

while conducting cold load training. (U.S. Army photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 70

recommendations to implement best practices for 

the intake and investigation processes, standardize 

processes, and deploy the DoD OIG’s case tracking 

system across the DoD to increase efficiencies 

and timeliness throughout the entire investigative 

cycle. Many of the task force recommendations 

have been implemented. The Deputy Secretary of 

Defense endorsed the recommendation to deploy 

DCATS-e across the DoD, which is scheduled to be 

operational in FY 2019. 

Nevertheless, timeliness of investigations, and 

disciplinary decisions once the investigation 

is completed, need further improvement. The 

DoD OIG will continue to focus on timeliness 

in investigations, as well as thoroughness and 

accuracy. However, a significant increase in 

whistleblower reprisal complaints and complaints 

resulting in an investigation has adversely 

impacted the timeliness of investigations. The 

volume of open cases has affected the ability of the 

DoD OIG and Service IGs, who conduct a majority 

of the whistleblower reprisal investigations, to 

reduce the time it take to complete investigation. 

This has presented a challenge for the DoD OIG 

and Service IGs and has prompted the IGs to seek 

innovative ways to promote further improvements 

in these areas. 

In October 2016, the DoD OIG improved its process 

for oversight reviews of Service IG whistleblower 

reprisal investigations, reducing the average time 

from 70 to 10 days. The new approach has two 

stages. First, the review analyzes the report 

of investigation and scrutinizes the underlying 

documents if the report itself appears to be 

inconsistent, contains gaps, the conclusions are 

not supported by the facts presented, or appears 

deficient in another respect. The second stage is 

a programmatic assessment by the DoD OIG of the 

processes and overall quality of the whistleblower 

protection programs operated by each Service. 

The assessment is performed through a formal 

evaluation by the DoD OIG every 3 years, similar 

to a peer review, of the Service IGs and the Service 

Military Criminal Investigation Organizations. The 

DoD OIG has completed reviews of the Navy and Air 

Force IGs and will review the Army IG in FY 2018. 

In addition, the DoD OIG has recently established 

an Alternative Dispute Resolution program 

to allow the parties the opportunity to settle 

certain types of whistleblower reprisal complaints 

through mediation or another Alternate Dispute 

Resolution process. Alternate Dispute Resolution 

programs can help reduce the time required to 

resolve complaints, typically more quickly than 

traditional investigative processes. The newly 

formed DoD OIG Alternative Dispute Resolution 

program will focus initially on complaints filed 

by employees of DoD contractors, subcontractors, 

grantees, and subgrantees, as well as personal 

services contractors; employees of nonappropriated 

fund instrumentalities; and employees of the DoD 

covered by Presidential Policy Directive 19. These 

types of allegations are the majority of the DoD 

OIG’s reprisal complaints. Once fully implemented, 

the DoD OIG Alternative Dispute Resolution 

program will give contractors and employees 

the option of voluntarily seeking to resolve their 

concerns in a timely manner rather than undergo a 

lengthy investigation process.

In summary, timely and quality investigations 

require adequate resources, particularly given 

increasing investigative caseloads throughout the 

DoD. Adequate funding is necessary for DoD OIG 

operations, as well as for other DoD oversight 

entities such as the DoD agency and Service IGs, 

Service Auditors General, and Military Criminal 

Investigative Organizations to handle these 

increasing caseloads and provide timely and 

thorough investigations of misconduct. However, 

funding for some these DoD oversight entities 

has not always kept pace with the growth of the 

DoD, the increase in their responsibilities, or the 

dramatic increase in caseloads. This will continue 

to present a significant challenge for the DoD in its 

efforts to ensure ethical conduct.
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A paratrooper from the U.S. Army’s 173rd Brigade Combat Team re-enlists before boarding a C-130 Hercules to conduct 

airborne training operations. (U.S. Air Force photo)
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Challenge 9: Providing Effective, 

Comprehensive, and Cost Effective 

Health Care

The Military Health System is a global, comprehensive, integrated health care 

system that includes a health care delivery system, combat medical services, 

public health activities, medical education and training, and medical research 

and development. The Military Health System provides medical care to service 

members, retirees, and their eligible family members. It includes direct and 

purchased care. Direct care is health care provided at military treatment 

facilities, primarily by military and contracted doctors. Purchased care is 

health care provided at commercial locations through the TRICARE program, 

which is the DoD’s health care program. The Defense Health Agency manages 

the TRICARE program under the authority of the Assistant Secretary of 

Defense (Health Affairs).

In total, the Military Health System must provide health care, within fiscal 

constraints, for over 9 million beneficiaries, while facing increased user 

demand and inflation. As with any large health care system, the Military 

Health System must also respond and adapt to changing demographics, 

shifting policies, evolving standards for access and quality, advances in science 

and medicine, complex payment and cost considerations, rapidly evolving 

communications and information technology capabilities, and fluid patient 

expectations. As a result, providing health care at a reasonable cost without 

sacrificing quality remains a challenge for the DoD. 

Over the last 10 years, the DoD OIG has performed audits and evaluations and 

made multiple recommendations related to DoD health care, many of which 

are still awaiting full implementation. As of March 31, 2017, the DoD had 114 

open recommendations related to health care and morale issues, including 

recommendations to improve tracking of suicides throughout the DoD and 

reducing health care costs. The DoD OIG believes that fully implementing 

those open recommendations will help the DoD more effectively address 

this challenge.

QUALITY, SAFETY, AND ACCESS

In August 2014, the Military Health System Review Group published a report 

to the Secretary of Defense, which concluded that the Military Health System 

generally provided quality care that was safe, timely, and comparable in access, 

quality, and safety to that found in the civilian sector. However, as former 

Secretary of Defense Charles “Chuck” Hagel stated, “We cannot accept average 

when it comes to caring for our men and women in uniform and their families. 

We can do better; we all agree that we can do better.” The Military Health 

System Review report indicated some areas where the Military Health System 

excelled and other areas where some facilities underperformed. The report 
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73 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

contained 78 recommendations to improve military 

health care. The report made recommendations 

in six major areas and recommended immediate 

action to improve underperformance and establish 

clear performance goals with standardized metrics. 

On October 1, 2014, the Secretary of Defense 

issued a memorandum, which directed the DoD 

to follow up on the August 2014 review results 

and to perform other specified tasks to improve 

transparency and transform the Military Health 

System into a High Reliability Organization. 

In addition, the National Defense Authorization 

Act for FY 2016 added several requirements for 

the DoD that highlighted the importance of health 

care quality, safety, and access. For example, the 

Act included a provision requiring the Secretary of 

Defense to establish access standards for routine 

and specialty care and to ensure that TRICARE 

Prime beneficiaries seeking an appointment obtain 

appointments within those standards. The Act 

added requirements for the Secretary of Defense 

to publish on a DoD public website all measures he 

deemed appropriate to assess patient safety, quality 

of care, patient satisfaction, and health outcomes 

for health care provided under the TRICARE 

program. The Act also added requirements to 

detail the number of practitioners at military 

treatment facilities that were reported to the 

National Practitioner Data Bank, and to assess the 

accreditation status of military treatment facilities 

and other data related to health care quality, 

safety, and access.

According to Defense Health Agency personnel, 

the Military Health System has implemented all 

of the National Defense Authorization Act for 

FY 2016 requirements. In 2017, the DoD OIG 

initiated two evaluations, and plans to initiate 

another evaluation, to determine whether the 

DoD’s response to the August 2014 Military Health 

System Review Final Report improved access to 

care, quality of care, and patient safety. The DoD 

OIG also initiated an audit to review access to care 

at selected military treatment facilities.

BEHAVIORAL HEALTH

Behavioral health treatment for the military 

continues to be a significant issue for the DoD. 

In recent years, the DoD has focused significant 

attention and resources on detecting, diagnosing, 

and treating mental disorders—especially those 

related to long and repeated deployments and 

combat stress. Between 2012 and 2016, mental 

disorders were among the leading cause for 

U.S. Air Force airmen transfer patients from an ambulance bus to a C-130 Hercules as part of a simulated aeromedical 

evacuation at Young Air Assault Strip, Fort McCoy, Wisconsin. (U.S. Air Force photo)
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hospitalization of active duty service members, 

accounting for between 12 to 15 percent of 

hospitalizations during those years. In addition, 

mental disorders accounted for the second most 

common reason for outpatient clinic visits by active 

duty service members in 2016. 

In particular, proactively diagnosing and treating 

those with behavioral health conditions and those 

at risk for suicide remains a challenge for the 

DoD. A RAND report published in August 2017 

highlighted the continuing challenges facing the 

DoD in providing both access and follow up to 

quality behavioral health care, which are key to 

the DoD’s suicide prevention efforts. The RAND 

report concluded that the Military Health System 

continues to be a leader in achieving high rates 

of follow up after psychiatric hospitalization, and 

that the Military Health System excels at screening 

for suicide risk and substance use, but that follow 

up for service members who have already been 

identified as having elevated suicide risk needs 

improvement. The report also concluded that 

quality of care for post-traumatic stress disorder 

and depression varied by Service branch, TRICARE 

region, and service member characteristics, 

and suggested that opportunities for quality 

improvement may be achievable by systemic 

enhancements of processes across the DoD. A DoD 

spokesperson stated that the DoD is reviewing the 

report findings and recommendations and that 

they will be used to shape and improve the future 

direction of patient care.

SEPARATION FROM SERVICE 

OF PERSONNEL WITH MENTAL 

HEALTH CONDITIONS

The GAO reported in May 2017 that from 2011 

through 2015, 62 percent of service members 

separated for misconduct were diagnosed with 

post-traumatic stress disorder, traumatic brain 

injury, or other mental health conditions within 

2 years of separation. Other mental health 

conditions for these separated service members 

included adjustment disorders, alcohol-related 

disorders, anxiety disorders, bipolar disorders, 

depressive disorders, personality disorders, and 

substance-related disorders. Of those with mental 

health conditions, 23 percent received other than 

honorable characterizations of service, making 

them potentially ineligible for health benefits from 

the Department of Veterans Affairs. The GAO 

concluded that, because of policy inconsistencies 

and limited monitoring, the DoD had minimal 

assurance that certain service members diagnosed 

with post-traumatic stress disorder or traumatic 

brain injuries received the required screening 

and counseling before they were separated from 

the Service for misconduct. Additionally, the 

risk increased that service members may be 

inappropriately separated for misconduct without 

adequate consideration of these conditions’ 

effects on behavior, separation characterization, 

or eligibility for Department of Veterans Affairs 

benefits and services. 

The GAO recommended that the Secretary 

of Defense direct the Air Force and Navy to 

address inconsistencies in their policies with 

DoD policy related to screening service members 

and reviewing results prior to separation for 

misconduct, and training service members 

to identify mild traumatic brain injuries in a 

deployed setting. The GAO also recommended 

that the Secretary of Defense ensure that the 

military Services routinely monitor adherence 

to those policies and policies related to 

counseling on Department of Veterans Affairs 

benefits and services. The DoD agreed with 

the recommendations.

SUICIDE PREVENTION

As noted above, suicide prevention continues to be 

a challenge for the DoD. As of the fourth quarter 

of 2016, the total number of suicide deaths for DoD 

was 276 for the Active Component and 203 for the 

Reserve Component. 

In response to the number of suicides, the DoD 

developed and promoted prevention policies, 

practices, and programs to attempt to reduce 

military suicide. For example, the Defense Suicide 
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Prevention Office was established in 2011 to 

provide advocacy, program oversight, and policy 

for DoD suicide prevention, intervention, and 

follow-up efforts to reduce suicidal behaviors in 

service members, civilians, and their families. It 

also leads working groups of representatives from 

the Services, the Office of the Assistant Secretary 

of Defense (Health Affairs), and other interested 

organizations, related to expanding access to 

behavioral health care for service members. In 

2015, the Defense Suicide Prevention Office 

also implemented the DoD Strategy for Suicide 

Prevention, which is designed to guide and 

coordinate suicide prevention efforts across the 

DoD. As one part of that effort, the Defense Suicide 

Prevention Office published and distributed guides 

to military family members on suicide warning 

signs, risk factors, and actions to take in a crisis. 

The office also sponsors research initiatives and 

training that address gaps in suicide prevention 

and resilience policies and practices. 

The DoD collaborated with the Department of 

Veterans Affairs to develop suicide prevention 

and intervention policy. For example, in June 

2013, the DoD and Department of Veterans Affairs 

jointly developed the Clinical Practice Guideline, 

“Assessment and Management of Patients at Risk 

for Suicide,” which recommended best practices for 

assessing and managing the risk of suicide among 

active duty military and veterans. 

The DoD OIG has performed several evaluations to 

assess DoD suicide prevention efforts. For example, 

in September 2015, a DoD OIG evaluation found 

that the DoD lacked a clearly defined governance 

structure and alignment of responsibilities for the 

Defense Suicide Prevention Program. In addition, 

the DoD OIG identified the lack of clear processes 

for planning, directing, guiding, and resourcing 

to effectively develop and integrate the Suicide 

Prevention Program within the DoD. In response 

to the DoD OIG’s recommendations, the Defense 

Suicide Prevention Office issued and implemented 

the 2015 Strategy for Suicide Prevention, noted 

above, to coordinate suicide prevention efforts 

across the DoD. In response to another DoD OIG 

evaluation report in November 2014, the Defense 

Suicide Prevention Office developed and is in the 

process of issuing guidance for data collection and 

reporting on suicide events. 

In November 2014, the DoD OIG recommended 

that the Under Secretary of Defense for Personnel 

and Readiness publish guidance requiring suicide 

event boards to establish a multidisciplinary 

approach for obtaining the data necessary to 

make comprehensive DoD Suicide Event Report 

submissions. The DoD OIG reported this as 

a key open recommendation in its July 2017 

Compendium of Open Recommendations. Without 

a comprehensive and complete DoD Suicide Event 

Report submission, it will be difficult for the DoD 

to conduct the trend or causal analysis necessary 

to develop effective suicide prevention policy and 

programs to reduce suicide rates across the force. 

In summary, the DoD needs to continue to pursue 

programs to diagnose behavioral health issues and 

risk factors for military personnel and its other 

health care beneficiaries.

A U.S. Marine Corps sergeant detaches a set of inert ordinance 

from the High-Mobility Artillery Rocket System during an 

unloading and loading exercise. (U.S. Marines photo)
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INCREASING HEALTH CARE COSTS

The DoD faces a continuing challenge to contain 

costs and prevent health care fraud. Over the 

last decade, health care costs in the United States 

have grown dramatically, and Military Health 

System costs have been no exception. For example, 

the DoD FY 2016 appropriations for health care 

were $32.3 billion, almost triple the FY 2001 

appropriation of $12.1 billion. In its FY 2018 

budget, the DoD requested $33.7 billion for the 

Defense Health Program. 

One of the leading contributors to health care 

cost is fraud. Health care fraud is one of the top 

investigative priorities for the Defense Criminal 

Investigative Service (DCIS). As of July 7, 2017, 

DCIS had 523 open health care investigations. In 

FY 2016 and FY 2017 combined, DCIS health care 

fraud investigations resulted in 100 criminal 

charges and 68 convictions, the seizure of $53 

million in assets, and $117 million in recoveries for 

TRICARE and the Defense Health Agency. 

However, health care fraud schemes are constantly 

evolving. As one vulnerability is closed, corrupt 

individuals look for another vulnerability within 

the health care payment system to exploit. 

Therefore, the DoD needs to be constantly vigilant 

to detect health care fraud, and to establish strong 

internal controls to determine areas at risk for 

health care fraud.

PHARMACEUTICALS

The DCIS continues to vigorously investigate fraud 

arising from the compound pharmaceutical fraud 

epidemic that exploited TRICARE in 2014 and 2015. 

Compound drugs are developed from combining, 

mixing, or altering two or more ingredients to 

create a customized medication for an individual 

patient. In 2015, the Defense Health Agency 

experienced a dramatic increase in compounding 

pharmacy fraud, with $1.6 billion spent on 

compound medications in that 1 year alone. Much 

of expenditures were fraudulent. 

For example, compound drug fraud schemes 

involved providers who prescribed compound 

drugs, including various pain and other creams, 

without examining or even meeting the patient; 

medication refills sent without the consent of the 

patient; kickbacks paid to providers, marketers, and 

patients; and grossly inflated bills for prescriptions. 

These schemes took advantage of a TRICARE 

reimbursement policy that allowed for full and 

immediate reimbursement of prescribed compound 

drugs. The Defense Health Agency changed its 

reimbursement policy for compound drugs in 

response to the significant losses it realized.

As a specific example of this type of fraud, 

one compounding pharmacy in Florida sought 

reimbursement for compounding pharmaceutical 

prescriptions that were not medically necessary 

and were prescribed by physicians that had never 

actually examined or even seen the patients. 

Further, a military member involved in the scheme 

committed identity theft by stealing fellow military 

members’ personally identifiable information in 

order to facilitate additional billings to TRICARE in 

exchange for kickbacks. In this case, 14 individuals 

have been convicted of various crimes, $31 million 

A U.S. Army staff sergeant assigned to the Asymmetric 

Warfare Group, runs to assist a competitor during the 

Army Best Warrior Competition. (U.S. Army photo)
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77 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

has been court-ordered back to the Defense Health 

Agency as restitution, and approximately $10 

million in assets have been seized. 

In May 2015, the Defense Health Agency 

implemented new controls, which reduced 

payments for compound drugs from $497 million 

in April 2015 to $10 million in June 2015. In an 

audit report issued in July 2016, the DoD OIG found 

that, while the controls were effective in reducing 

costs for compound drugs, additional controls 

were necessary to prevent reimbursement for 

certain non-covered compound drug ingredients. 

The Defense Health Agency agreed with the 

recommendation and took actions to improve 

controls related to compound drugs. 

Fraud and escalating costs also occur in noncompound pharmaceuticals. The DoD OIG has 

two ongoing audits related to pharmaceuticals, 

including an audit reviewing the Defense Health 

Agency’s process for implementing controls in 

response to escalating costs for non-compound 

pharmaceuticals, and an audit to determine 

whether the Defense Logistics Agency Troop 

Support managed its Pharmaceutical Prime Vendor 

Program to effectively control health care costs.

AUTISM TREATMENT

One emerging fraud trend involves Applied 

Behavioral Analysis, which employs techniques and 

principles to encourage a meaningful and positive 

change in behavior. Applied Behavioral Analysis 

is a benefit offered by TRICARE for children with 

a diagnosis on the Autism Spectrum. In a March 

2017 audit, the DoD OIG determined that the 

Defense Health Agency made improper payments 

for autism services to five companies in the 

TRICARE South Region. Specifically, the Defense 

Health Agency improperly paid for services where 

the beneficiary was not present; the beneficiary 

was napping; providers were not authorized by 

TRICARE; documentation to support services 

was lacking; and the provider billed for higher 

qualified health care professionals than those who 

actually performed the services. As a result, the 

audit determined that the Defense Health Agency 

improperly paid $1.9 million of the total $3.1 

million paid to the five companies in 2015. 

The DCIS also investigated an Applied Behavioral 

Analysis therapy clinic that allegedly provided 

therapy using personnel who were not properly 

trained per Defense Health Agency guidelines, 

billed group therapy as one-on-one therapy, 

and billed for services never rendered. The 

investigation resulted in the indictment and 

conviction of the clinic owner and the reassignment 

of TRICARE beneficiaries from this clinic to 

others in the area.

PAYMENT COLLECTIONS

Another aspect of controlling health care 

costs involves ensuring collections are made 

for services provided at military treatment 

facilities. The DoD OIG issued six reports from 

August 2014 through January 2017 related to 

collections from non-DoD beneficiaries, which 

concluded that military treatment facilities did 

not actively pursue collections from non-DoD 

beneficiaries for 129 accounts, valued at $13.1 

million, of the 145 accounts the DoD OIG reviewed. 

The military treatment facilities also did not 

appropriately transfer funds to the U.S. Treasury 

for 114 delinquent accounts, valued at $13.4 million, 

of the 145 accounts the DoD OIG reviewed for 

collection. In 2017, the DoD OIG plans to perform 

another audit to review billing and reimbursement 

for health care provided to Department of 

Veterans Affairs patients at selected Army military 

treatment facilities.

While the Defense Health Agency has made 

progress in controlling some costs, people 

committing fraud will continue to look for new 

vulnerabilities to exploit. As internal controls are 

tightened in one area, those intent on committing 

fraud seek other vulnerabilities to exploit. For 

example, emerging areas of concern for fraud 

within the DoD health care system involve genetic 

and DNA testing, durable medical equipment, 

and opioids. The Defense Health Agency needs 
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 78

to be vigilant in reviewing billing trends to 

look for the next fraud schemes and implement 

effective controls to help prevent payments for 

fraudulent claims.

ELECTRONIC HEALTH RECORDS

In addition, the DoD faces challenges with 

the security of electronic health records and 

integration of those records with the Department 

of Veteran Affairs. According to a media report, 

more than 115 million patient records in the 

United States were compromised in 2015, and 

more than 25 million records were “compromised” 

from January to October 2016. The DoD has 

a responsibility to protect the patient health 

information for its 9 million beneficiaries and 

transfer records as needed to the Department of 

Veterans Affairs. 

The DoD OIG also found security weaknesses 

within the DoD’s electronic health records. A July 

2017 DoD OIG audit reported that Defense Health 

Agency and Army officials did not consistently 

implement effective security protocols to protect 

systems that stored, processed, and transmitted 

electronic health records and electronic patient 

health information. Specifically, Defense Health 

Agency and Army officials did not enforce the use 

of Common Access Cards to access five electronic 

health record systems and did not comply with 

DoD password complexity requirements for three 

systems. In addition, the DoD OIG reported that 

system and network administrators at three Army 

facilities did not consistently mitigate known 

vulnerabilities affecting Army networks, protect 

stored data for five systems, and grant user access 

to the seven systems based on the user’s assigned 

duties. The DoD OIG began a similar audit in 

April 2017 of the Navy and Air Force electronic 

health records.

In addition to the security of health records, 

according to congressional testimony by a GAO 

official in 2016, the DoD and the Department of 

Veterans Affairs have failed in several attempts 

to integrate their respective electronic health 

records since 1998. The testimony noted that the 

Department of Veterans Affairs has undertaken 

a patchwork of initiatives with the DoD to allow 

their health information systems to exchange 

information and increase interoperability. These 

have included initiatives to share viewable data 

in their existing (legacy) systems, link and share 

computable data between their updated health data 

repositories, and jointly develop a single integrated 

system that would be used by both departments.

The National Defense Authorization Act for FY 2017 

directed the DoD and the Department of Veterans 

Affairs to integrate their electronic health records 

and gave the Departments 5 years to meet this 

requirement. The Secretary of the Department 

of Veterans Affairs announced in 2017 that the 

Department of Veterans Affairs will acquire the 

same system as DoD. The DoD should monitor this 

acquisition and work closely with the Department 

of Veterans Affairs to ensure that the system 

will be interoperable with the DoD system. The 

DoD should work closely with the Department of 

Veterans Affairs to ensure interoperability between 

the Departments’ electronic health records and 

ensure that sensitive patient health information 

contained in electronic health records are 

adequately protected. 

In summary, providing quality, cost-effective 

health care to the DoD’s 9 million beneficiaries 

will continue to be a significant challenge for the 

DoD. The DoD must continue to seek efficiencies 

to control costs without undermining timely 

access to quality health care. That is not an easy 

task. At the same time, the DoD needs to address 

behavioral disorders and aggressively seek to 

reduce the number of suicides within the military. 

In addition, the DoD must protect patient health 

information within its electronic health records 

and work closely with the Department of Veterans 

Affairs to integrate electronic health records 

between the Departments. The DoD OIG will 

continue to perform reviews of high-risk health 

care issues and monitor progress in these areas to 

identify additional ways to improve health care for 

DoD beneficiaries.
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79 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Low Altitude Air Defense gunners with 3rd LAAD Battalion, Marine Air Control Group 38, 3rd Marine Aircraft Wing, lock 

onto incoming enemy aircraft during assault support tactics one. (U.S. Marine Corps photo)
IDENTIFYING AND IMPLEMENTING EFFICIENCIES IN THE DoD

DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 80

Challenge 10: Identifying and 

Implementing Efficiencies in the DoD

In February 2017, Secretary of Defense Mattis stated that the DoD needed to 

field a larger, more capable, and more lethal joint force, and he also highlighted 

the need for the DoD to implement necessary efficiencies at the same time. 

In a memorandum dated February 21, 2017, the Secretary directed the 

establishment of cross-functional teams to seek improved mission effectiveness 

and efficiencies. He also encouraged cross-enterprise consolidation of business 

activities associated with human resource management, financial management, 

real property management, acquisition and contract management, logistics and 

supply chain management, health care management, base services, and cyber 

and information technology management. 

 In a related effort, in April 2017 the Office of Management and Budget issued 

a memorandum to the heads of executive departments and agencies entitled, 

“Comprehensive Plan for Reforming the Federal Government and Reducing the 

Federal Civilian Workforce,” which addressed streamlining the Government 

and eliminating duplicative functions. Specifically, the Office of Management 

and Budget directed departments and agencies to develop comprehensive 

plans for reforming the Government, reducing their civilian workforces, and 

maximizing employee performance. 

Although the DoD has some progress in identifying opportunities for 

efficiencies, the most challenging part of this initiative involves actually 

implementing identified efficiencies. The DoD, DoD OIG, GAO, and other 

oversight organizations regularly identify opportunities for efficiencies, but 

fully implementing these efficiencies has been difficult.

DOD’S REFORM PLAN TO IDENTIFY AND 

IMPLEMENT EFFICIENCIES

In response to the Office of Management and Budget memorandum, the 

DoD is developing a DoD Reform Plan in two phases. During Phase I, DoD 

Components must identify reform initiatives for potential inclusion in the 

DoD Reform Plan. In Phase II, DoD Components must provide additional 

information on their plans to implement the initiatives the DoD selects and 

the specific performance goals and measures included in the DoD Agency 

Strategic Plan. The DoD will also include a comprehensive DoD Workforce 

Rationalization Plan to fulfill the requirement for developing a long-term 

workforce reduction plan.

As part of Phase I, the Deputy Secretary of Defense submitted the draft 

Defense Reform Plan to the OMB on June 30, 2017. The DoD’s Office of 

the Deputy Chief Management Officer developed the draft Defense Reform 
IDENTIFYING AND IMPLEMENTING EFFICIENCIES IN THE DoD

81 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

Plan with DoD Component input. The draft 

plan details proposed initiatives to improve 

travel, lodging, computer systems, medical, 

mobile communications, security, commissaries, 

and exchanges. 

As examples of these initiatives, the DoD proposed 

consolidating the purchase of medical supplies 

and food across the DoD to take advantage of 

economies of scale; proposed converting the 

Armed Forces Retirement Home to a non-profit, 

private institution; and proposed consolidating 

all commissary and exchange systems, which 

would allow economies of scale in purchasing and 

standardization of operating policies. 

The DoD’s Office of the Deputy Chief Management 

Officer is in the process of quantifying the 

savings from the proposed initiatives highlighted 

in the draft Defense Reform Plan and plans to 

incorporate the expected results into the final 

Defense Reform plan.

DOD OIG INPUT TO REFORM PLAN

Although not specifically identified in the DoD’s 

draft plan, the DoD OIG provided input to the DoD 

reform plan, which outlined five other specific 

opportunities for efficiencies and enhanced mission 

effectiveness: 

• Logistics Systems and Spare Parts: 

The DoD could achieve efficiencies by 

transitioning to one joint system for the 

procurement and tracking of spare parts. 

A joint system could improve the DoD’s 

purchasing power and improve visibility 

of available inventory so the Services 

could more easily obtain spare parts, 

especially for shared weapon systems 

and platforms. In addition, with one joint 

system, the Services could avoid buying 

spare parts that another Service already 

has in stock or could avoid buying spare 

parts at unreasonable prices. The lack of a 

centralized logistics system also complicates 

identifying and removing defective parts 

from inventory, tracing the defective 

parts back to the suppliers, and recouping 

payment or receiving replacement parts. 

A U.S. marine assigned to Kilo Company, 3rd Battalion, 1st Marines, uses a radio to support an assault during a support 

training exercise. (U.S. Marine Corps photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 82

• Financial Systems: The DoD could achieve 

significant efficiencies by reducing the 

number of financial systems related to core 

finance and accounting functions. Over 

time, DoD Components have developed 

separate solutions to meet their individual 

financial management requirements. At 

least some of these systems do not interface 

well with other systems at the Defense 

Finance and Accounting Service. The DoD 

has made progress in integrating systems; 

however, many inefficient processes and 

excess overhead exist across the DoD’s 

financial community. For more details, 

see Management Challenge 5, Improving 

Financial Management. 

• Suspension and Debarment Offices: The 

DoD could achieve efficiencies by eliminating 

duplication, standardizing processes, and 

streamlining the coordination and tracking 

of suspension and debarment actions. For 

example, the DoD currently has five primary 

suspension and debarment officials assigned 

to the Army, Navy, Air Force, Defense 

Logistics Agency, and Defense Information 

Systems Agency. Although these suspension 

and debarment officers operate under the 

same standards as each other, the different 

suspension and department offices are at 

risk of disparate decisions with regard to 

similar suspensions and debarments.

• Professional Military Education and 

Training Schools: The DoD could achieve 

efficiencies through phased consolidation 

of schools among the Services. The DoD 

maintains Service-specific schools for 

common professional skills and leadership 

training. For example, the military Services 

each maintain schools related to military 

justice, aviation, junior and mid-level officer 

and non-commissioned officer leadership 

schools, among others. Each of these 

schools requires manpower (instructor 

and overhead positions) and funding 

for curriculum development, travel, and 

installation management. The DoD should 

consider consolidation of these schools. 

• Military Health Care: The DoD could 

achieve efficiencies by strengthening 

internal controls and policy related to 

medical billing and payments. For more 

details, see Management Challenge 9, 

Providing Effective, Comprehensive, and 

Cost Effective Health Care. The DoD 

OIG has issued several audit reports in 

FY 2016 related to improper payments 

and billing for military healthcare. For 

example, a report identified that military 

treatment facilities did not actively pursue 

collections from non-DoD beneficiaries, 

valued at over $11.3 million, and failed to 

appropriately transfer delinquent accounts 

to the U.S. Treasury, valued at $13.4 million. 

Additionally, in FY 2016, Defense Criminal 

Investigative Service investigations resulted 

in 32 criminal charges, 16 convictions, and 

over $380 million in recoveries related 

to military health care. These audits and 

investigations demonstrate the need for 

improved internal controls to help the DoD 

reduce the number of improper payments 

and allow for increased collections for 

health care services.

An EC-130J Commando Solo pilot flies a mission in support 

of Operation Inherent Resolve at an undisclosed location in 

Southwest Asia. (U.S. Air Force photo)
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83 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

OIG OPEN RECOMMENDATIONS 

FOR EFFICIENCIES IN THE DOD

On July 11, 2017, the DoD OIG published a 

Compendium of Open Recommendations that 

identified all open recommendations from prior 

reports. These open recommendations identify 

potential efficiencies across the DoD that, if 

addressed, could help the DoD meet Secretary 

of Defense and Office of Management and 

Budget goals. The DoD should carefully consider 

these open recommendations as it develops 

its reform plan. 

Specifically, DoD OIG reports provided 1,300 

recommendations for efficiencies in the areas of 

acquisition, contract management, and financial 

management among others. Although the DoD 

has taken corrective action on many of these 

recommendations, it should look more broadly at 

DoD OIG recommendations and consider how it can 

implement corrective actions across the DoD. 

By not implementing DoD OIG recommendations in 

a timely manner, the DoD is missing opportunities 

to improve the efficiency and effectiveness of 

DoD programs and operations. Each year, the 

DoD OIG issues an average of 150 audit and 

evaluation reports. These reports contain findings 

that identify deficiencies within DoD programs 

and operations, as well as recommendations 

for improvement. Recommendations address a 

wide range of topics throughout the DoD, such as 

procurement of weapon systems and automated 

information systems, maintenance and sustainment 

of military systems, DoD financial management 

and accounting systems, cybersecurity, contractor 

oversight, health care costs, military construction, 

maintenance and structural stability of dams, and 

identification and prioritization of critical assets. 

DoD management and the DoD OIG share 

responsibility to follow up on implementation 

of open recommendations. DoD managers are 

responsible for implementing recommendations 

promptly. At the same time, the DoD OIG must 

follow up to assess whether the DoD takes the 

agreed-upon corrective actions and whether those 

actions meet the intent of the recommendations. 

When DoD management does not agree to 

implement a recommendation and does not propose 

alternative corrective action to address the 

identified problems, the recommendation remains 

unresolved and open. 

In the Compendium, the DoD OIG identified 

1,251 recommendations that remained open despite 

DoD management’s agreement to take corrective 

actions. The Compendium included listings of 

recommendations that best help improve the 

efficiency of DoD programs and operations and 

highlighted recommendations that the DoD OIG 

considered to be high priority. The Compendium 

also listed 47 unresolved recommendations made in 

reports dating back to June 2012. In addition, the 

Compendium listed 58 recommendations from 40 

DoD OIG reports that identified billions in potential 

monetary benefits the DoD could achieve if the 

open recommendations were fully implemented. 

 In summary, while the DoD has taken various 

corrective actions on the specific recommendations 

contained in DoD OIG reports, the DoD should 

refocus attention on open recommendations and 

seek to implement agreed upon corrective actions 

across the DoD. 

A U.S. Navy seaman stands the forward lookout watch 

aboard the aircraft carrier USS Nimitz. (U.S. Navy photo)
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DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD | 84

OTHER REPORTS THAT 

HIGHLIGHTED EFFICIENCIES

Similarly, the GAO has identified areas of needed 

efficiencies throughout the DoD. For example, 

the Director of the GAO testified to the U.S. 

Senate Committee on Homeland Security and 

Governmental Affairs on opportunities to achieve 

financial benefits in the Government, including 

opportunities to reduce overlap and duplication. 

This testimony provided examples in the following 

four DoD missions and functions: 

• Army and Air Force Virtual Training: The 

Army and Air Force need to improve the 

management and oversight of their virtual 

training programs to avoid fragmentation 

and to more efficiently and effectively 

acquire and integrate virtual devices into 

operational training and potentially save 

tens of millions of dollars. 

• Construction for Military Contingency 

Operations: By improving oversight of 

contingency construction projects, the 

DoD could potentially reduce duplication 

and save millions.

• Defense Weather Satellites: Establishing 

formal mechanisms for coordination 

and collaboration with the National 

Oceanic and Atmospheric Administration 

could reduce the risk of gaps in weather 

satellite capabilities.

• Advertising: The DoD should improve 

coordination and information sharing 

across its fragmented advertising programs 

for more efficient and more effective 

use of resources.

In addition to the recommendations from 

external reviews conducted by the DoD OIG and 

the GAO, DoD Components have also completed 

internal studies that have identified potential 

efficiencies for the DoD. For example, the Under 

Secretary of Defense, Acquisition, Technology, 

and Logistics 2016 Annual Report highlighted 

multiple areas of needed improvements across 

the DoD. The Annual Report stated that the DoD 

has significantly lowered cost growth within 

acquisition programs. According to the report, the 

DoD’s efforts to improve cost performance have 

not adversely impacted contractor profits, but have 

provided a reasonable alignment of industry and 

government goals. 

However, the 2016 report identified multiple 

areas where the DoD could improve, one of which 

related to gaining efficiencies. Specifically, the 

report noted that the percentage of competitive 

acquisitions fell each year except for one from 

FYs 2010 through 2015. Major drivers of this trend 

were high-value sole-source Foreign Military Sales, 

fewer new program starts, and higher percentages 

of the Major Defense Acquisition programs 

in production and thus sole or dual-sourced. 

According to the report, increased bid protests 

also forced the DoD to award sole-source contracts 

to bridge until the new contract awards could be 

let. By increasing competition, the DoD could drive 

costs down and realize efficiencies.

A U.S. Air Force weather forecaster with the 7th Operations 

Support Squadron reviews weather radars. 

(U.S. Air Force photo)
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85 | DoD OIG FY 2018 Summary of Management and Performance Challenges Facing the DoD

DoD acquisition managers could also make 

better use of the program assessments DOT&E 

provides in making production decisions. The 

DOT&E recommendations could save billions 

in unnecessary expenditures for upgrading 

fielded systems, provided DoD acquisition 

managers fully use the program assessments and 

recommendations. However, in a March 2017 

report, the GAO estimated that the 78 DoD 

acquisition programs assessed by the GAO 

experienced $253.6 billion of cost growth after 

starting production. The GAO found that these 

significant post-production cost increases may 

indicate that programs start production without 

having demonstrated that a fully integrated, 

capable production-representative prototype will 

work as intended. 

In FY 2018, the DoD OIG plans to conduct an 

audit to determine whether DoD acquisition 

managers are effectively using the DOT&E FY 2016 

recommendations to better plan and execute 

operational testing for their programs.

In summary, although the DoD has made progress 

toward implementing efficiencies, many more 

opportunities for efficiencies exist throughout the 

DoD. The DoD OIG, GAO, and DoD Components 

regularly identify efficiency improvements. A 

large part of DoD’s challenge is to actually 

implement efficiencies that have been identified 

and will continue to be identified. While it is 

important to identify opportunities for efficiencies, 

it is even more important to implement these 

recommendations. It will take continual, concerted 

attention and focus at all levels in the DoD to make 

substantial progress on implementing efficiencies. 

A U.S. Air Force crew chief with the 4th Aircraft Maintenance Squadron conducts a preflight check. (U.S. Air Force photo)
Whistleblower Protection

U.S. Department of Defense

The Whistleblower Protection Enhancement Act of 2012 requires 

the Inspector General to designate a Whistleblower Protection 

Ombudsman to educate agency employees about prohibitions on 

retaliation, and rights and remedies against retaliation for protected 

disclosures. The designated ombudsman is the DoD Hotline Director. 

For more information on your rights and remedies against 

retaliation, visit www.dodig.mil/programs/whistleblower.

For more information about DoD IG 

reports or activities, please contact us:

Congressional Liaison 

congressional@dodig.mil; 703.604.8324

Media Contact

public.affairs@dodig.mil; 703.604.8324

For Report Notifications 

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INTEGRITY  EFFICIENCY  ACCOUNTABILITY  EXCELLENCE

Acknowledgements

The DoD Agency Financial Report is the reflection of the energies and talents of devoted 

people across the Office of the Secretary of Defense and the Department who support the DoD 

mission. We owe all of them our sincerest thanks and acknowledgement. In particular, we want 

to recognize the following individuals for their special contributions to this report. 

Mr. Brian Banal Mr. David Martin

Ms. Charlotte Beacham Ms. Lora H. Muchmore

Mr. Jerry W. Christensen Ms. Barbara Orlando

Dr. Pamela Clay Mr. Thomas Rohn

Mr. Gerald Davenport Ms. Glenda Scheiner

Mr. Mike Hayes Mr. Shawn Sparks

Ms. Rosana Heraud Ms. Vanessa A. Stanton

Ms. Alaleh Jenkins Mr. Ned Torson

Ms. Karla Johnson-Griffith Ms. Nancy Valeski

Ms. Mobola Kadiri Mr. Wade Wargo

Mr. John Kenney Mr. Robert Weeden

Ms. Meron Laiketsion Mr. Keith Welk

Ms. Kim Laurance
We are interested in your feedback 

regarding the content of this report.

Please feel free to send your comments to:

osd.pentagon.ousd-c.mbx.dod-agency-financial-report@mail.mil

or

United States Department of Defense

Office of the Under Secretary of Defense (Comptroller)

1100 Defense Pentagon

Washington, DC 20301‐1100

You may also view this document at:

http://comptroller.defense.gov/odcfo/AFR2017.aspx

DEPARTMENT OF DEFENSE