GAO-01-45R Army OM&S Financial Reporting

United States General Accounting Office

Washington, DC 20548

October 24, 2000

The Honorable Helen T. McCoy

Assistant Secretary of the Army for

Financial Management and Comptroller

General John G. Coburn, USA

Commanding General, U.S. Army Materiel Command

Mr. Thomas R. Bloom

Director, Defense Finance and Accounting Service

Subject: Financial Management: Reporting of Army Conventional Ammunition as

Operating Materials and Supplies

As part of our audit of the fiscal year 1999 governmentwide financial statements, we

evaluated the Army’s accounting practices and processes for reporting assets as operating

materials and supplies (OM&S) on the Army’s General Fund Balance Sheet.1 Our evaluation

identified problems in the financial reporting process for OM&S assets that caused a material

understatement of the value of these assets reported on the Army’s balance sheet for fiscal

year 1999. These problems also resulted in errors in consistently reporting missile quantities

as national defense equipment (NDE) in the Army’s Supplementary Stewardship Report. In

general, these problems can be attributed to the use of undocumented manual procedures for

accumulating these balances at fiscal year-end. Such manual procedures are in place because

DOD and the Army have not yet developed and implemented automated processes for

accumulating these data. The purpose of this letter is to inform you of these issues and

provide recommendations for improving the financial reporting of OM&S in the short term

and ensuring that these issues are addressed in plans for automating this process in the future.

Background

Virtually all of the $18.9 billion the Army reported as OM&S assets for fiscal year 1999

consisted of ammunition stored in ammunition depots, on prepositioned ships, at government

and contractor-owned production facilities, and at various Army installations worldwide.

Assets stored in depots, on prepositioned ships, and at production facilities and managed by

Army commodity managers assigned to the Army Materiel Command are referred to in

Army terminology as “wholesale-level assets.” The Army manages wholesale-level

ammunition assets using its wholesale logistics system, the Commodity Command Standard

System (CCSS). On a monthly and year-end basis, the Defense Finance and Accounting

1

Operating materials and supplies are reported on the Army General Fund Balance Sheet as a component of the

Inventory and Related Property, Net line item.
Page 2 GAO-01-45R Army OM&S Financial Reporting

Service (DFAS), which maintains the Army’s financial accounting system, obtains from

CCSS the value of the Army’s wholesale-level ammunition and missile assets and posts the

value to the Army’s General Ledger OM&S accounts.2

In contrast, assets held at Army installations, such as Fort Knox and Fort Hood, are referred

to as “retail-level assets.” Army units at installations are authorized to hold retail-level

ammunition and missile assets for training and related uses and to maintain combat readiness

capabilities.3 Army installations store retail-level ammunition assets at secure storage sites

called ammunition supply points, which typically are located in remote areas of installations

and use igloos or bunkers for storing munitions and other explosives. These ammunition

supply points use the Standard Army Ammunition System–Modified to account for

receiving, storing, and issuing these sensitive items. Ammunition supply point personnel

issue items to requesting units only upon their planned imminent use. Ammunition supply

points periodically report their ammunition and missile asset balances through their major

commands to the Worldwide Ammunition Reporting System (WARS), the Army’s

centralized visibility system for monitoring the location of all ammunition and missile assets

located worldwide, including both wholesale- and retail-level assets.

To report the value of retail-level assets, the DFAS Indianapolis Center derives asset

balances from WARS. At fiscal year-end, WARS analysts extract certain retail balances

from WARS and electronically mail the amount to DFAS Indianapolis, which posts an

adjustment to add the value of retail-level ammunition and missile assets to the Army’s

general ledger OM&S accounts. Statement of Federal Financial Accounting Standards

(SFFAS) No. 11, Amendments to Accounting for PP&E: Definitional Changes, requires

missiles to be reported as a separate class of assets, specifically national defense equipment.

Under SFFAS No. 3, Accounting for Inventory and Related Property, conventional

ammunition assets are to be reported in the OM&S accounts. As a result, DFAS Indianapolis

posts an additional fiscal year-end adjustment to deduct from OM&S the value of missiles

classified as national defense equipment to be reported on the Army’s Supplementary

Stewardship Report. The purpose of this adjustment is to avoid double reporting of the same

missile assets as both OM&S and national defense equipment in Supplementary Stewardship

Reports. For fiscal year 1999, the year-end adjustments to add the value of retail-level assets

and deduct the value of national defense equipment affected the reported balance of the

OM&S accounts by about $12 billion.

2

CCSS programming automatically computes a monthly and fiscal year-end balance for financial reporting to

DFAS Indianapolis. This CCSS reporting program, called Application 431, extracts from logistics records the

quantity of items on hand and due in from other depots and multiplies the quantity of each item by its standard

price. The application also automatically reports items needing repair at their value net of estimated repair cost

and reports those deemed excess at their estimated salvage value.

3

Army units are required to have on hand or on requisition certain ammunition assets for readiness purposes.

The requirements are referred to as “basic load” requirements. As a general rule, a unit’s basic load assets are

stored at installation ammunition supply points in the same manner as is ammunition stored for all other

purposes. Units requisition and are issued ammunition from retail-level storage when needed for their

authorized purpose.
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Objective, Scope, and Methodology

Our objective was to assess the Army’s accounting practices and processes for reporting

operating materials and supplies for fiscal year 1999. We analyzed computerized logistic and

financial system data maintained by the DFAS Indianapolis Center and Saint Louis

Operating Location; the Army’s Aviation and Missile Command, Huntsville, Alabama; the

Army’s Operations Support Command, Rock Island, Illinois; and the Army Materiel

Command’s Logistics Support Activity, Huntsville, Alabama. We held discussions with

officials at these locations and with ammunition management officials assigned to tactical

and storage units at Fort Hood, Texas, and at the Army’s Forces Command, Atlanta, Georgia.

We discussed results of our findings with officials of the Army’s Office of the Deputy Chief

of Staff for Logistics and Office of the Assistant Secretary of the Army for Financial

Management and Comptroller, Washington, D.C. We performed our work at the above

locations from August 1999 through May 2000 in accordance with generally accepted

government auditing standards. We requested comments on a draft of this report from the

Secretary of Defense or his designee. On October 18, 2000, the Assistant Secretary of the

Army (Financial Management and Comptroller) provided us with comments, which are

discussed in the “Agency Comments and Our Evaluation” section and are reprinted in the

enclosure.

Improvements Needed in Year-end Adjustments

In our review of the process that Army and DFAS organizations used to compile and report

values for OM&S, we found problems in how the year-end adjustments to the financial

records were computed that affected the reported balance for OM&S. Misstatements

occurred in the reported asset balances for wholesale-level OM&S because adjustments to

the OM&S balances were computed using inconsistent methods and criteria. The major

factor contributing to the use of inconsistent methods and criteria for calculating the year-end

adjustments was that Army analysts had no written procedures on how to make appropriate

computations. Other misstatements occurred in the reported asset balances for retail-level

OM&S due to a disagreement regarding the application of certain provisions in SFFAS No.3,

Accounting for Inventory and Related Property.

Table 1 shows the dollar values that constituted the reported OM&S balances for fiscal year

1999.
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Table 1: Compilation of Army OM&S Balances for Fiscal Year 1999

(Dollars in billions)

Fiscal year 1999

Wholesale-level values

Conventional ammunition $ 15,1

Missiles 10.2

$ 25.3

Add: retail-level values

Conventional ammunition $ 1.0

Missiles 1.8

$ 2.8

Total wholesale and retail values

Conventional ammunition $ 16.1

Missiles 12.0

$ 28.1

Less: missiles reported as NDE

Wholesale-level $ (7.4)

Retail-level (1.8)

Total $ 9.2a

Reported OM&S balance $ 18.9

a

The remaining missile amount (about $2.8 billion) represents items that the Army determined did not meet the criteria for

national defense equipment and therefore were reported as OM&S.

Wholesale-Level NDE Missile Adjustments Calculated Incorrectly

The fiscal year 1999 OM&S reported balance was understated by at least $1.5 billion

because the $7.4 billion adjustment to remove the value for national defense equipment

missile assets from the OM&S account was not calculated correctly. This can be attributed

to the lack of specific written procedures for calculating the accounting adjustments to the

OM&S balances.

First, the automated year-end financial balance for OM&S provided by CCSS to DFAS

Indianapolis included a $1.4 billion amount, essentially a reserve, for the estimated cost to

repair missile assets in unserviceable condition, which reduced the balance in OM&S. This

year-end balance also included a $91 million amount to reflect the value of missile items

deemed to be economically unrepairable at their estimated salvage value. However, when

the adjustment was made to deduct missiles from OM&S, the related amounts for repairs and

salvage values were not also removed. As a result, the balance of OM&S was understated by

the amounts of these missile-related reductions.

Second, timing errors affected the accuracy of the reported value for OM&S because the

adjustment calculation to remove national defense equipment missiles included transactions

that were recorded in CCSS after the end of the fiscal year. In attempting to provide the best

information available, the Office of the Deputy Chief of Staff for Logistics requested that

commodity managers at the Army Aviation and Missile Command provide information on

missile balances to remove these balances from OM&S. The commodity managers reported
Page 5 GAO-01-45R Army OM&S Financial Reporting

balances as of the date of the request instead of the fiscal year-end. As a result, the

adjustment was inaccurate. For example, the adjustment improperly included 275 Stinger

missiles valued at $38,300 per unit that were received after September 30. These missiles

were not in the reported September 30 balance. As a result, their inclusion in the adjustment

inappropriately reduced the balance of OM&S.

Finally, the national defense equipment adjustment included a value for missiles in transit

that was much greater than the comparable in-transit values reported to DFAS by CCSS at

the end of the fiscal year. Specifically, the adjustment data included values for all in-transit

assets, while CCSS’s automated financial reporting process only reported those due in from

wholesale-level storage activities. For example, in-transit items excluded from CCSS

included 28 TOW missiles valued at $19,145 each and 38 advanced-version Stinger missiles

valued at $48,393 each. Because such items were included in the national defense equipment

adjustment and not in the September 30 reported balance, the Army’s OM&S was

understated by the amounts of these in-transit missile-related reductions.

Understatement of Retail-Level Inventory

The Army’s long-standing accounting policy for reporting OM&S has been to report a

portion of the retail ammunition using the consumption method, whereby the cost of goods is

removed from the OM&S account in the accounting period they are issued to an end user for

consumption in normal operations, and report another portion using the purchase method,

whereby the items are expensed when purchased. Because of recognized accounting system

inadequacies, the Army and DFAS-Indianapolis currently use manual work-around

procedures to post a year-end adjustment to the OM&S accounts to “recapitalize” the value

of ammunition and missile assets held for combat readiness purposes at the end of the fiscal

year, thus reporting these assets until they are consumed. The assets held at the end of the

year for future training and other purposes are not “recapitalized” and are therefore treated as

expensed when purchased. Use of these inconsistent methods to report the values of items

held in storage at fiscal year-end understates the value of ammunition held in storage. For

example, the 1999 fiscal year-end OM&S balance did not include approximately $1 billion in

ammunition stocks held in retail-level storage pending use in training exercises.

SFFAS No. 3, Accounting for Inventory and Related Property, specifies that the cost of

goods shall be removed from the OM&S account in the accounting period they are issued to

an end user for consumption in normal operations, under the consumption method of

accounting. However, SFFAS No. 3 provides that OM&S may be expensed when purchased

(using the purchase method of accounting) if (1) OM&S balances are not significant

amounts, (2) the items are in the hands of the end user for use in normal operations, or (3) it

is not cost-beneficial to apply the consumption method of accounting.

The Army stated in the notes to its financial statements that current financial and logistics

systems cannot fully support the consumption method of accounting—that is, expensing

OM&S when items are actually provided to end users. However, the notes stated that the

Army is moving to the consumption method of accounting for OM&S for future years. For

fiscal year 1999, the notes stated that significant portions of the Army’s OM&S were

reported under the purchase method because either the systems could not support the

consumption method of accounting or there is disagreement with the auditing community on

what constitutes an item being in the hands of an end user. With regard to items held for
Page 6 GAO-01-45R Army OM&S Financial Reporting

training, there appears to be little disagreement that these ammunition items were held in

warehouses at the end of the fiscal year. Items held in warehouses for further distribution

are, by definition, not in the possession of the end users.4 Furthermore, the lack of adequate

systems does not appear to be an impediment to reporting training ammunition because the

manual work-around procedures the Army uses to capitalize assets held for combat readiness

purposes could also be applied to training ammunition.

In addition, the fiscal year 1999 adjustments to add certain retail-level assets to the OM&S

account and deduct retail-level national defense equipment missile assets were computed

using different criteria. The computation of the adjustment to add a value for retail-level

assets included only those on-hand assets required to maintain readiness requirements while

the computations to deduct from the OM&S account the value of retail-level national defense

equipment included assets held for all requirements, including those held for training and

other operational purposes. Not consistently including assets held at year-end for all

authorized purposes when computing the two adjustments resulted in an understatement of

the reported OM&S balance by about $128 million for fiscal year 1999. This amount is a

part of the approximately $1 billion of unreported training assets held in retail-level storage

at the end of fiscal year 1999.

Conclusions

The Army’s current accounting practices and manual procedures for computing OM&S

balances caused compilation errors resulting in at least a $1.5 billion understatement of the

Army’s fiscal year 1999 OM&S balance. Further, OM&S was understated by approximately

$1 billion of ammunition held at retail-level installations for training purposes that was

excluded from the financial reports. In the short term, written policies and procedures for

identifying the population of assets that is to be reported and for compiling year-end balances

for OM&S would help ensure that these assets are properly reported. These issues will also

be important to consider in the development of long-term systems solutions for accounting

for OM&S to help ensure that the problems encountered in the manual process are not

perpetuated in future automated procedures.

Recommendations for Executive Action

To improve the current manual processes for the financial reporting of OM&S, we

recommend that the Army’s Assistant Secretary for Financial Management and Comptroller,

in coordination with the Commanding General of the U.S. Army Material Command and the

Director of the Defense Finance and Accounting Service, develop and implement formal

written policies and procedures to properly calculate and record year-end adjustments to the

OM&S account. Such policies and procedures should address properly and consistently

calculating the adjustment to remove national defense equipment missiles, including

reducing the value for reparable and salvage items, eliminating timing errors, and including

in-transit assets.

4

According to SFFAS No. 3, “[a]n end user is any component of a reporting entity that obtains goods for direct

use in the component’s normal operations. Any component of a reporting entity, including contractors, that

maintains or stocks operating materials and supplies for future issuance shall not be considered an end user.”
Page 7 GAO-01-45R Army OM&S Financial Reporting

In addition, we recommend that your offices collaboratively address two additional matters.

First, we recommend that as the Army moves toward implementing the consumption method

of accounting for OM&S, you apply the manual work-around procedures used to capitalize

assets held for combat readiness purposes to items held for training as well. Second, we

recommend that you consider the issues discussed in this letter in the development and

implementation of the long-term system solutions for proper accounting of the Army’s

OM&S.

Agency Comments and Our Evaluation

In written comments on a draft of this letter (see enclosure), DOD concurred with our

recommendations. Specifically, the response stated that the Army’s Assistant Secretary for

Financial Management and Comptroller will work with the staffs of the Director of the

Defense Finance and Accounting Service, Deputy Chief of Staff for Logistics, and Army

Materiel Command to develop procedures to properly calculate and record year-end

adjustments to the OM&S account beginning with the fiscal year 2000 financial statements.

DOD also agreed to address (1) the application of procedures to capitalize assets held for

training until these items are placed in the possession of end users and (2) ensuring that the

procedures for reporting these assets are considered in the development and implementation

of long-term system solutions.

-----

Within 30 days of the date of this letter, we would appreciate receiving a written statement

on actions taken to address the recommendations included in this letter.

We are sending copies of this letter to Nelson Toye, Deputy Chief Financial Officer, Office

of the Under Secretary of Defense (Comptroller); Major General Charles C. Cannon, USA,

Acting Deputy Chief of Staff for Logistics; and interested congressional committees. Copies

will be made available to others upon request.

Please contact me at (202) 512-9095 or Gayle Fischer, Assistant Director, at (202) 512-9577,

if you or your staffs have any questions concerning this letter. James D. Berry and

Ronald M. Haun were major contributors to this assignment.

Lisa G. Jacobson

Director, Defense Audits

Enclosure
Enclosure

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Comments From the Department of the Army
Enclosure

Page 9 GAO-01-45R Army OM&S Financial Reporting
Enclosure

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(919530)