Department of Defense: Additional Actions Needed to Improve Financial Management of Military Equipment
Published: 2010-07-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Major defense acquisition programs (MDAP) are used to acquire, modernize, or extend the service life of the Department of Defense's (DOD) most expensive assets, primarily military equipment. The Weapon Systems Acquisition Reform Act of 2009 (P.L. 111-23), section 304(b), directed us to perform a review of weaknesses in DOD's operations that affect the reliability of financial information for assets acquired through MDAP. To do so, GAO identified and reviewed previously reported weaknesses that impair DOD's ability to provide reliable cost information for military equipment acquired through MDAPs, and determined what actions DOD has taken to address them. GAO searched databases of audit reports issued during calendar years 2005 through 2009 to identify previously reported weaknesses. Using applicable criteria, GAO assessed whether the actions taken by DOD adequately addressed these weaknesses.
section_title: What GAO Found
paragraphs: GAO found that weaknesses that impaired the department's ability to identify, aggregate, and account for the full cost of military equipment it acquires comprised seven major categories. Specifically, DOD had not (1) maintained support for the existence, completeness, and cost of recorded assets; (2) structured its contracts at the level of detail needed to allocate costs to contract deliverables; (3) provided guidance to help ensure consistency for asset accounting; (4) implemented monitoring controls to help ensure compliance with department policies; (5) defined departmentwide cost accounting requirements; (6) developed departmentwide cost accounting capabilities; and (7) integrated its systems. Although the department has acknowledged that it is primarily focused on verifying the reliability of information, other than cost, recorded in its property accountability systems, DOD has begun actions to address these weaknesses and improve its capability to identify, aggregate, and account for the full cost of its military equipment. For example, DOD is requiring that acquisition contracts be structured in a manner that facilitates application of the appropriate accounting treatment for contract costs, including the identification of costs that should be captured as part of the full cost of a deliverable. In addition, it has also begun to require that all contract deliverables that meet defined criteria be assigned a unique item identifier to facilitate asset tracking and aggregation of costs, and that electronic contract-related documentation, such as the invoice and receipt/acceptance documents, be maintained in a central data repository to ensure the availability of supporting documentation. Moreover, the department has begun to identify cost accounting data elements within its Standard Financial Information Structure (SFIS) and requires that its business-related Enterprise Resource Planning (ERP) systems support this structure. These efforts are intended to improve data sharing and integration between business areas. DOD acknowledged that the actions taken to date do not yet provide the department with the capabilities it needs to identify, aggregate, and account for the full cost of its military equipment. For example, DOD has begun to develop ERPs but has not yet defined the cost accounting requirements to be used to evaluate if these ERPs will provide the functionality needed to support cost accounting and management. DOD stated that additional actions, sustained management focus, and the involvement of many functional groups across DOD are needed before weaknesses that impair its ability to account for the full cost of the military equipment it acquires are addressed. Until DOD defines its cost accounting requirements and completes the other actions it has taken (e.g., defining data elements in SFIS) to support cost accounting and management, DOD is at risk of not meeting its financial management objective to report the full cost of its military equipment. DOD has stated that until these actions are completed it will continue to rely on its military equipment valuation (MEV) methodology to estimate the cost of its military equipment for financial reporting purposes.
section_title: What GAO Recommends
paragraphs: GAO is making 11 recommendations intended to strengthen actions DOD has taken to begin improving its ability to identify, aggregate, and account for the cost of military equipment acquired through MDAPs. Specifically, our recommendations focused on the need to define departmentwide cost accounting requirements and develop the process and system capabilities needed to support cost accounting and management. DOD concurred with our recommendations.

section_title: Letter
paragraphs: For years, GAO and other entities have reported on weaknesses that affect  the Department of Defense’s (DOD) ability to effectively manage its major  defense acquisition programs (MDAP). Since 2003, DOD’s portfolio of  MDAPs has increased steadily from 77 to 98 and the cumulative estimated  investment in these programs has grown from approximately $1.2 trillion  to $1.7 trillion. MDAPs are used to acquire, modernize, or extend the  service life of some of the department’s most expensive assets, primarily  military equipment such as aircraft, ships, tanks, and self-propelled  weapons. Although MDAPs can include any major acquisition program  that meets the dollar or other criteria necessary for MDAP designation,  DOD officials stated that approximately 75 percent of the total number of  MDAPs reported in July 2009 are likely to involve the acquisition of  military equipment assets. While the department has reported over a  trillion dollars in its military equipment investments on its financial  statements, DOD acknowledged that the department lacks the process and  system capabilities to reliably identify, aggregate, and report the full cost  of these assets.
Given the magnitude of DOD’s military equipment assets and the inherent  risk associated with managing large acquisition programs, having reliable  and timely cost information is essential for proper planning and effective  management and oversight. In August 2009, the DOD Comptroller directed  that the department focus its limited financial management improvement  resources and efforts on identifying and addressing weaknesses in areas  deemed most useful to DOD managers. Specifically, the Comptroller  prioritized efforts focused on ensuring the reliability of the department’s  budgetary information and property accountability records for mission  critical assets, which includes military equipment. The DOD Comptroller  stated that many difficult problems remain unresolved—including  implementing compliant systems and valuing the department’s significant  investment in property, plant, and equipment—and will require the  involvement of many functional groups across DOD.
The Weapon Systems Acquisition Reform Act of 2009 (Pub. L. No. 111-23),  section 304(b), directed us to perform a review of weaknesses in DOD’s  operations that affect the reliability of financial information on assets  acquired through MDAPs. Our objective was to identify previously  reported weaknesses that impair DOD’s ability to provide reliable cost  information for military equipment acquired through MDAPs and  determine what actions DOD has taken to address them. This report  provides the results of our review. The act also requires our office to  review the growth in operating and support costs of major weapon  systems. We are issuing a separate report in response to that provision of  the act.
To address the objective, we searched databases of audit reports issued  during calendar years 2005 through 2009 using key terms (e.g., military  equipment) to identify weaknesses in business operations that impair  DOD’s ability to account for the cost of military equipment based on  relevant federal financial accounting standards. We grouped the  weaknesses into categories. We discussed with DOD officials the  categories of weaknesses identified and obtained supporting  documentation—such as memorandums, directives, and an independent  validation and verification report for the military equipment valuation  initiative—on their actions to address them. Using applicable criteria, we  assessed whether the actions taken adequately addressed the identified  weaknesses. To obtain clarification and explanations, as needed, we  interviewed key department officials. Our detailed audit scope and  methodology are presented in appendix I. We conducted this performance  audit from October 2009 through July 2010 in accordance with generally  accepted government auditing standards. Those standards require that we  plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives. We  requested comments on a draft of this report from the Secretary of  Defense or his designee. Written comments from the Office of the Under  Secretary of Defense (Comptroller) are reprinted in appendix II.
subsections: section_title: Background
paragraphs: DOD has acknowledged that process and system weaknesses impair its  ability to account for the full cost of military equipment and that these  weaknesses impede its ability to achieve financial statement auditability.  DOD is required by various statutes to improve its financial management  processes, controls, and systems to ensure that complete, reliable,  consistent, and timely information is prepared and responsive to the  information needs of agency management and oversight bodies, and to  produce annual audited financial statements prepared in accordance with  generally accepted accounting principles (GAAP) on the results of its  operations and its financial position.  Federal accounting standards,  which are GAAP for federal government entities, require that the full cost  of outputs (e.g., military equipment assets acquired) be reflected on  agencies’ financial statements.  As stated earlier, full cost is the sum of  direct and indirect costs to produce the output. The standards require that  the cost of property, plant, and equipment, which includes military  equipment, shall include all costs incurred to bring the asset to a form and  location suitable for its intended use. Examples of these costs include  amounts paid to vendors; labor and other direct or indirect productions  costs; and direct costs of inspection, supervision, and administration of  construction contracts and construction work. Federal accounting  standards allow reporting entities to use reasonable estimates of historical  cost to value their property, plant, and equipment while encouraging them  to establish adequate controls and systems to reliably capture asset costs  in the future.
DOD is also required by law to provide, at least annually, Selected  Acquisition Reports (SARs) to congressional defense committees on the  status of its MDAPs. SARs are the primary means by which DOD reports  the status of these programs to Congress. These reports are intended to  provide Congress the information needed to perform its oversight  functions. In general, SARs contain information on the cost estimates,  schedule, and performance of a major acquisition program in comparison  with baseline values established at program start. Specific information  contained in the SARs includes:    program description, including the reasons for any significant changes  in the total program cost for development and procurement reported  in the previous SAR;  schedule milestones;    quantity of items to be purchased;    procurement unit cost;    contractor costs (initial contract price, the current price, and the price  at completion); and  technical and schedule variances.
Congressional reporting through the SAR ceases after 90 percent of the  items related to a particular MDAP have been delivered to the government,  or after 90 percent of the planned expenditures under the program or  subprogram have been made. After the program reaches the 90 percent  threshold, the items are no longer categorized as MDAPs and enter what is  referred to as the sustainment period in which the cost of the units are  categorized as Operations and Support. A program can be redesignated as  an MDAP if planned modifications or upgrades to an asset meet the  criteria for MDAP designation.
section_title: DOD Has Actions Underway to Address Financial Management Weaknesses Related to Military Equipment, but Additional Actions Are Needed
paragraphs: Our review of prior reports, studies, and analyses to identify weaknesses  in DOD’s operations identified the following seven categories of  weaknesses that impaired the department’s ability to account for the cost  of military equipment: (1) support for the existence, completeness, and  cost of recorded assets is needed; (2) more detail is needed in DOD  contracts to allocate costs to contract deliverables; (3) additional guidance  is needed to help ensure consistency for asset accounting; (4) monitoring  is needed to help ensure compliance with department policies; (5)  departmentwide cost accounting requirements need to be defined; (6)  departmentwide cost accounting capabilities need to be developed; and  (7) systems integration is needed.
DOD has begun actions to address these previously reported weaknesses;  however, it acknowledges that additional actions are needed before these  weaknesses are fully addressed. DOD officials—including the Deputy  Director, Financial Improvement and Audit Readiness (FIAR) Directorate,  Office of the Under Secretary of Defense (Comptroller), and the Deputy  Director of Property and Equipment Policy within the Office of the Under  Secretary of Defense for Acquisition, Technology, and Logistics (AT&L)— stated that the size and complexity of the department’s operations make it  difficult to reach consensus on how best to address the weaknesses. They  acknowledged that the department is currently focused on verifying the  reliability of information, other than cost, recorded in its property  accountability systems. These officials told us that until the department  fully addresses the weaknesses that prevent it from accurately and  completely accounting for the cost of its military equipment, it will  continue to rely on a methodology to estimate the cost of its military  equipment assets for financial reporting purposes. The availability of  timely, reliable, and useful financial information on the full costs  associated with acquiring assets is an essential tool that assists both  management and Congress in effective decision making such as  determining how to allocate resources to programs. It also provides an  important monitoring mechanism for evaluating program performance  that can help strengthen oversight and accountability.
The seven categories of weaknesses and DOD’s actions to address them  are as follows.
Support for the existence, completeness, and cost of recorded assets is  needed. DOD has not maintained the documentation needed to support  the existence, completeness, and full cost of its military equipment assets.  There were instances in which the department could not (1) trace assets  recorded in its property accountability systems to actual physical assets,  or (2) locate the records supporting the actual physical assets. Further, for  assets included in the accounting system, DOD could not substantiate that  all costs (e.g., acquisition, freight, inspection, and modification) had been  captured and reported because of the lack of documentation (e.g.,  invoices). Standards for internal control call for transactions and other  significant events to be accurately and timely recorded, as well as clearly  documented, with the documentation being readily available for  examination. In addition, DOD policy requires that the components  maintain all financial records documenting the acquisition of property,  plant, and equipment in support of the department’s Records Management  Program. The components are also required to establish and maintain the  Records Management Program, as well as periodically evaluate  compliance. DOD stated that it has three ongoing initiatives to address this  weakness—the military equipment valuation (MEV), the Proper Financial  Accounting Treatment for Military Equipment (PFAT4ME), and the Wide  Area Work Flow (WAWF).
As allowed by federal accounting standards, DOD is using its MEV  methodology to estimate the historical cost of its military equipment  assets. The MEV methodology uses a combination of available data  (budgetary and expenditure) to estimate the historical cost of military  equipment assets. These estimated values were reported on the  department’s fiscal year 2006 through 2009 financial statements. However,  the results of several DOD Inspector General (IG) audits and an evaluation  by the Under Secretary for AT&L identified implementation issues that  impaired the reliability of the derived cost estimates in part, because DOD  was unable to provide documentation to substantiate the universe of  assets subject to its valuation methodology. For example, both reported  that, in some cases, assets were included in the valuation that no longer  existed, and assets that existed were improperly excluded from the  valuation.
To address these concerns, in 2009 DOD initiated efforts—primarily  physical inventories—to verify the reliability of information recorded in its  property accountability systems. In May 2010, the DOD Comptroller issued  guidance for the performance of the physical inventories and internal  control testing. This guidance states that the components should verify  critical information, such as individual item identifier, category/asset type,  location, condition, utilization rate, and user organization. It also identifies  the need to perform internal control testing. However, it does not  specifically require verification that a unique identifier has been assigned  to the asset and recorded in the Item Unique Identification (IUID)  registry as required by DOD policy. The guidance also does not provide  specific guidance to perform tests of internal controls (e.g., does not  identify which controls to test or how to do so). DOD officials, including  the Deputy Director, Financial Improvement and Audit Readiness (FIAR)  Directorate, Office of the Under Secretary of Defense (Comptroller)  agreed with our assessment. The FIAR Deputy Director further stated that  it is difficult to provide specifics on the internal control testing to be  performed in the above guidance so the department intends to establish a  2-day training course by the summer of 2010 that will provide instruction  on how to identify and test controls. DOD plans to complete the  verification of the existence and completeness of its military equipment  property accountability records in fiscal year 2015. Previously estimated  military equipment values reported on its financial statements will be  reassessed upon completion of verification efforts at each military  department.
In addition, the department issued its PFAT4ME policy in June 2006 that  requires all contracts be structured at the level of detail needed to provide  supporting documentation regarding the cost of individual items  delivered. The contract-related documentation (e.g., invoices, and receipt  and acceptance documents) received electronically that results from  performance of a contract is then to be input into a central repository  within the WAWF, which became operational in fiscal year 1999, where it  is maintained and available to help support full cost determinations.  However, these efforts do not adequately address this weakness because  they do not address the lack of supporting documentation for noncontract- related costs such as program management costs incurred. As stated  earlier, DOD policy requires components to maintain supporting  documentation for the full cost of acquired military equipment assets;  however, DOD has not enforced components’ compliance with its record  management policy. Because it does not have the needed supporting  documentation, the department has to rely on an estimation methodology  to derive these assets’ values.
More detail is needed in DOD contracts to allocate costs to contract  deliverables. DOD had not structured contracts at the level of detail  needed to identify and assign costs to individual military equipment assets.  Specifically, the contracts were not structured in a manner that facilitated  application of the appropriate accounting treatment for costs, including  the identification of those costs that should be captured as part of the full  cost of a deliverable. Standards for internal control require that the agency  identifies, captures, and distributes information at the sufficient level of  detail that permits management to carry out its roles and responsibilities.  DOD stated that the PFAT4ME and the Item Unique Identification (IUID)  initiatives will address this weakness. PFAT4ME requires program  managers to structure all contracts entered into after October 2006 in a  manner to facilitate the appropriate accounting treatment of contract  costs. To implement this initiative, DOD developed a training course on  how to comply with the requirements outlined in its PFAT4ME policy.  However, it is not a core or required course and DOD has not established a  process to ensure that acquisition personnel affected by this policy,  including program managers and business/financial management analysts,  complete the course.
In 2009, AT&L began to perform oversight activities to verify that the  components were properly structuring the contracts; however, AT&L  officials stated that they were not verifying whether program management  offices were appropriately accounting for the cost of each deliverable. In  addition, we found that DOD has not developed guidance for these  oversight activities, including how often these reviews are to be  performed, roles and responsibilities for this oversight, the steps to be  performed, and the basis for selecting contracts for review.
In addition, DOD policy requires contract deliverables, including military  equipment, that meet predefined criteria, be assigned a unique item  identifier. According to DOD officials responsible for the IUID initiative,  the purpose of the unique item identifier is to facilitate asset  accountability and tracking, including the identification and aggregation of  related costs to derive the full cost of a contract deliverable. The  department expected to fully implement IUID by fiscal year 2015; however,  according to DOD officials, the department is not on target for achieving  its timeline. These officials told us that the department has encountered  difficulty in obtaining consensus from the components in implementing  this initiative primarily due to the applicability of the IUID requirement to  controlled inventory items. The Deputy for Program Development and  Implementation, Defense Procurement and Acquisition Policy within  AT&L explained that controlled inventory items—which encompass items  such as ammunition and threaded fasteners and number in the hundreds  of millions—were never intended to be assigned individual unique item  identifiers. The department is currently in the process of clarifying this  requirement. DOD has determined that if it does not modify the IUID  policy to eliminate this requirement, it will not be able to fully implement  IUID until fiscal year 2023. If the IUID requirements are revised to exclude  these items, DOD expects to fully implement IUID by 2017. DOD officials  acknowledged that they have not yet developed policies and procedures  that define how IUID will be used to identify and aggregate asset costs.
Additional guidance is needed to help ensure consistency for asset  accounting. DOD had not developed a policy and procedures requiring the  components to account for the full costs of military equipment assets.  Standards for internal control call for agencies to develop and implement  appropriate policies, procedures, techniques, and mechanisms to ensure  that management’s directives are consistently carried out. DOD stated  that the PFAT4ME, IUID, and the MEV methodology will address this  weakness. AT&L officials, including the Deputy Director of Property and  Equipment Policy, told us that they are working with the Federal  Accounting Standards Advisory Board’s Accounting and Auditing Policy  Committee (AAPC) to develop full cost guidance. They also noted that  AT&L has drafted guidance intended to supplement its PFAT4ME policy  memorandum to assist managers in identifying the types of contract costs  that should be included in determining the full cost of an asset, such as  military equipment. According to these officials, this policy has not been  finalized because the department has had difficulty reaching consensus  regarding its cost accounting requirements. These officials stated that this  draft guidance does not yet address noncontract-related costs, such as  program management costs incurred directly by the military services and  indirect costs. They did not provide a time frame for completing these  efforts.
As stated earlier, the department is currently relying on an estimation  methodology referred to as MEV to report the cost of its military  equipment. In order for management and auditors to rely upon the results  of the methodology it is important that the methodology be implemented  consistently. To help ensure consistency in the application of its  estimating methodology, DOD developed business rules in 2005. In  addition to the MEV implementation issues identified by the DOD IG, we  identified inconsistencies in the business rules for estimating the cost of  military equipment, which further impact the reliability of reported  estimates. For example, the MEV full cost business rule states that all  costs incurred to acquire and bring military equipment to a form and  location for its intended use should be capitalized, including the direct  costs of maintaining the program management office. However, the MEV  program management office business rule states that program  management office costs are immaterial and should be expensed. DOD  officials agreed that there are inconsistencies in the business rules and  acknowledged the need to revisit them.
Monitoring is needed to help ensure compliance with department policies.  DOD has not established adequate monitoring controls to assess  compliance with applicable policies or the extent to which actions taken  are achieving their intended objectives. For example, although DOD  property accountability policies and regulations require DOD components  to (1) perform periodic physical inventories and to reconcile the results to  the associated property accountability records, and (2) track and maintain  records for all government-furnished property in the possession of  contractors, DOD management has not established needed monitoring  controls to help ensure compliance. Standards for internal control require  agencies to develop and implement ongoing monitoring activities over the  internal control system to ensure adherence with policies and  procedures. DOD financial management and AT&L officials, including the  Deputy Director of Property and Equipment Policy within AT&L, stated  that weaknesses in the department’s ability to ensure compliance with  property accountability requirements have impacted its ability to  substantiate reported military equipment costs. As a result of the  breakdowns in compliance with policies and regulations for recording and  tracking property, property records used by the components for valuing its  military equipment included assets that no longer existed, and did not  include other assets that did exist. To address this concern, DOD is in the  process of verifying its property accountability records by conducting  physical inventories and internal control testing. As stated earlier, DOD  has issued guidance, but it does not provide specifics as to the internal  control testing to be performed. The DOD Comptroller told us that the  department plans to complete this effort in fiscal year 2015. After  completing this effort, effective ongoing monitoring activities are needed  to ensure departmentwide compliance with policies designed to help  maintain reliable property accountability records.
Departmentwide cost accounting requirements need to be defined. DOD  has not defined its requirements for the identification and aggregation of  cost information, which will be the foundation for its development of  departmentwide cost accounting and management capabilities. Federal  accounting standards require that the full cost of resources, which directly  or indirectly contribute to the production of outputs (e.g., military  equipment acquired), be reflected on an agency’s financial statement. To  ensure that costs are identified and accumulated in a consistent and  comparable manner, entities should define their requirements and  procedures for identifying, measuring, analyzing, and reporting costs.  Since DOD has stated that it intends to support the identification,  aggregation, accounting, and reporting of cost information through the  implementation of the Enterprise Resource Planning (ERPs), it is  important that DOD define its cost accounting requirements to ensure that  these systems provide these capabilities. Institute of Electrical and  Electronics Engineers (IEEE) and the Software Engineering Institute at  Carnegie Mellon recommend that organizations define their requirements,  which are the specifications that system developers and program  managers use to develop or acquire, implement, and test a system. This  process should identify user requirements, as well as those needed for the  definition of the system. It is critical that requirements be carefully defined  and that they reflect how the organization’s day-to-day operations are or  will be carried out to meet mission needs. Improperly defined or  incomplete requirements have been commonly identified as a root cause  of system failure and systems that do not meet their cost, schedule, or  performance goals. DOD Comptroller and Business Transformation  Agency officials stated that the implementation of the ERPs and its  Standard Financial Information Structure (SFIS) are intended to address  this weakness. Comptroller and Business Transformation Agency and  military department financial management and comptroller officials stated  that most of the ERPs under development within the military departments  have cost accounting management capabilities inherent in their design as  required by DOD policy.
Although agencies should first define their requirements, which are then  used to evaluate the system’s capabilities to determine if it will meet users’  needs before it is developed or acquired, the department has not yet  defined its cost accounting requirements at the major component level,  including how SFIS will be used to support cost accounting in the existing  and ERP system environments. They stated that the department has been  unable to reach consensus on how to implement SFIS in support of cost  accounting and management. SFIS is intended to be a comprehensive  “common business language” that will standardize the financial reporting  of information and data for budgeting, financial accounting, and  cost/performance management. DOD has not yet determined how the SFIS  data elements will be used to identify and aggregate cost information, nor  has it established time frames for developing the cost accounting  requirements and completing SFIS.
Departmentwide cost accounting capabilities need to be developed. DOD  had not developed departmentwide cost accounting capabilities to capture  military equipment asset costs. Federal accounting standards require  agencies to develop and implement cost accounting systems that provide  the capability to collect cost information by responsibility segments,  measure the full cost of outputs, provide information for performance  measurement, integrate cost accounting and general financial accounting,  provide appropriate and precise information, and accommodate special  cost-management needs. DOD’s legacy financial management and related  business systems were not designed to meet current financial reporting  requirements and do not provide adequate evidence for supporting  material amounts on the financial statements or acquisition management  decision making. These systems were designed to record and report  information on the status of appropriations and support funds  management, and not designed to collect and record financial information  in compliance with federal accounting standards. DOD acknowledged that  it does not yet have the capability to identify, aggregate, and capture the  full costs of its military equipment and has stated that the ERPs are  intended to provide this capability.
We have previously reported on problems that DOD has encountered in its  efforts to implement ERPs. In 2007, we reported that the Army lacked an  integrated approach for implementing its ERPs, which could result in  interoperability problems. In September 2008, the Army reported a  similar finding. Specifically, the Army reported that interoperability  problems were likely to occur due to the lack of common data definitions  and structures between the Army’s ERPs—General Fund Enterprise  Business System (GFEBS), Global Combat Support System-Army (GCSS- Army), and Logistics Modernization Program (LMP)—thus resulting in the  need for manual reconciliations and reduced efficiencies. The report  concluded that the planned configuration of these systems may prevent  the Army from receiving the intended benefits of an ERP, including  financial transparency and cost accounting. Army officials stated that they  are addressing these deficiencies, but did not provide a time line for  completion. In July 2009, Navy reported that its ERP did not yet provide  the capability to aggregate cost information to derive the full cost of its  military equipment and to segregate military equipment from other general  property, plant, and equipment. The Navy Financial Management Officer  stated that these deficiencies have not yet been addressed because of  other priorities. DOD stated that ERPs are critical to transforming  business operations within the military departments.
Systems integration is needed. DOD had not fully integrated its property  and logistics systems with acquisition and financial systems. DOD policy  requires that its financial management systems are planned for and  managed together, operated in an integrated fashion, and linked together  electronically in an efficient and effective manner to provide reliable,  timely, and accurate financial management information. The  department’s property and logistics systems were not designed to capture  acquisition costs and the cost of modifications and upgrades, or to  calculate depreciation. Many of the financial management systems in use  are not fully integrated with other systems within the military components  or departmentwide. The number of system interfaces and subsidiary and  feeder systems, and the lack of standard data elements employed by each  DOD component, make it difficult to cross-walk data between systems,  share data, and ensure consistency and comparability of data. In March  2009, DOD reported that its legacy system environment does not facilitate  the identification and aggregation of the full cost of its assets. DOD  officials, including the Deputy Director of Property and Equipment Policy,  AT&L, stated that the implementation of the ERPs and SFIS is intended to  address this weakness. To facilitate information sharing for financial  reporting purposes, in August 2005 DOD issued a policy requiring systems,  including ERPs, that contain financial information to provide the ability to  capture and transmit information following the SFIS data structure or, if  not, to demonstrate that this capability will be achieved through a cross- walk to the SFIS data structure. DOD components and agencies are  required to report to the Business Transformation Agency (BTA) the  extent to which SFIS requirements, as defined in the department’s  business enterprise architecture, are met. BTA officials, including the  official responsible for the SFIS initiative, stated that the department is  developing a process to validate the information included in the SFIS  compliance reports submitted by the components and agencies but did not  provide a time frame for completion. However, if certain SFIS  requirements, such as cost accounting, are not clearly defined, including a  determination of how cost information should be identified, aggregated,  and managed within and across acquisition programs, the department’s  intent to achieve standardization and comparability of cost information  will be at risk. Further, as stated above, the Army’s ERPs—GFEBS, GCSS- Army, and LMP—may experience interoperability problems because of the  lack of common data definitions and structures. In addition, DOD stated  that it has not yet determined whether or how WAWF and the IUID will be  integrated into the emerging ERP environment to facilitate the  identification and aggregation of cost to address the agency’s  requirements.
section_title: Conclusions
paragraphs: While DOD is relying on a methodology to estimate the cost of its military  equipment, the department has various actions underway to begin laying a  foundation for addressing weaknesses that currently impair its ability to  identify, aggregate, and account for the full cost of its military equipment  assets. For example, DOD has taken important steps such as requiring  greater detail in contract-related documentation, such as invoices, and the  assignment of unique identifiers to individual items to aid its ability to  identify, aggregate, and account for the cost of acquired assets. An  additional challenge that DOD faces is establishing the universe of assets  subject to valuation and cost accounting. Previous audits and evaluations  have showed that some assets that no longer existed were included while  other existing assets were improperly excluded from DOD’s property  accountability records. This situation exists due to a combination of  issues, including gaps in DOD’s guidance and policies related to asset  accountability, as well as a lack of compliance with existing policies and  guidance. These examples illustrate the interconnection or dependency  between the various asset accounting issues the department is facing and  its related actions to improve its cost accounting financial management for  military equipment. DOD has acknowledged that additional actions are  needed before the department achieves cost accounting and management  capabilities, but stated that its improvement efforts are not yet focused on  achieving these capabilities. Additional efforts are needed to issue  additional guidance regarding how to identify the full cost of an asset to  supplement its PFAT4ME guidance and to identify and define  departmentwide cost accounting requirements at the major component  level, including what information is needed to manage cost within and  across acquisition programs and support asset valuation and life-cycle  management and how implementation of SFIS and the ERPs will support  these requirements. Moreover, DOD needs to determine the extent to  which certain actions currently underway, such as WAWF and IUID, will  be utilized in the emerging ERP environment. Without additional actions  and guidance, the department’s current efforts are at risk of not meeting  the intended objectives of providing cost accounting capabilities needed to  reliably account for and report the full cost of its military equipment.
section_title: Recommendations
paragraphs: In order to enhance corrective actions underway within DOD to address  previously reported weaknesses and improve DOD’s ability to provide  reliable information on the full cost of military equipment acquired  through MDAPs, we recommend that the Secretary of Defense direct the  DOD Chief Management Officer to work jointly with the Under Secretary  of Defense (Comptroller); the Under Secretary of Defense for Acquisition,  Technology, and Logistics; and the military department Chief Management  Officers, as appropriate, to take the following nine actions:    Enforce compliance with the department’s records management policy  by periodically evaluating the extent to which the components are  maintaining documentation in support of the full cost of military  equipment.
Establish and implement ongoing monitoring activities to enforce  compliance with the department’s existing policies and procedures  requiring the components to (1) perform periodic physical inventories  and to reconcile the results to property accountability records after  completion of existing efforts to verify the reliability of the property  accountability records and (2) track and maintain records for  government-furnished property in the possession of contractors.
Update the department’s guidance regarding verification of  information in component property accountability records to include  verification that all assets recorded in the accountability records that  are required by DOD to have a Unique Item Identifier are included in  its IUID registry.
Develop and implement guidance on how the IUID will be used to  identify, aggregate, and report asset cost information.
Classify the PFAT4ME training as a core course for the department’s  affected acquisition personnel, including program managers, and track  attendance to ensure that such personnel take the training.
Develop and implement guidance to help ensure compliance with the  oversight activities for the PFAT4ME initiative, including how often  these reviews are to be performed, roles and responsibilities for  oversight, the steps to be performed, and the basis for selecting  contracts for review.
Complete efforts to develop and implement a policy requiring the  components to account for the full cost of military equipment,  including guidance for what types of contract and other costs should  be included and for determining the appropriate accounting treatment  of these costs.
Review the MEV methodology business rules to identify  inconsistencies and revise the rules as needed.
Assess the WAWF and IUID initiatives and determine the extent to  which they will be utilized in the emerging ERP business systems  environment.
Additionally, we recommend that the Secretary of Defense direct the  military department Chief Management Officers, in consultation with the  Under Secretary of Defense (Comptroller) and the Under Secretary of  Defense for Acquisition, Technology, and Logistics, as appropriate, take  the following two actions:    Define the cost accounting requirements at the major component level,  including how SFIS data elements will be used to identify, aggregate,  account for, and report cost information.
After defining the cost accounting requirements, utilize the  requirements as input to the ERPs to help ensure that the ERPs will  provide the capability to identify and aggregate cost information for  the department’s assets in accordance with DOD’s defined  requirements.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the Under  Secretary of Defense (Comptroller) which are reprinted in Appendix II. In  commenting on the report, the Under Secretary stated the department  agreed with the need to establish a framework that provides improved  cost and management information that will support better management of  Major Defense Acquisitions Programs (MDAP). The department concurred  with the 11 recommendations and cited actions taken, under way, or  planned to address them.
In its response, the department emphasizes that it is sensitive to the cost  of obtaining information solely for the purpose of proprietary financial  reporting or audit compliance where this information is not otherwise  used by management. It further states that DOD has concluded that it is  not cost-effective to gather auditable data on the historical cost of military  equipment systems for proprietary financial reporting and audit because  the information is not used to manage. DOD has indicated that it will  propose changes in department policies and instructions to accommodate  this decision. These pending policy changes will likely impact DOD’s  implementation of our recommendations and so at some point we may  need to assess DOD’s corrective actions under the changed policies to  determine whether the actions meet the intent of our recommendations.
DOD acknowledges that there may be requirements for cost information  related to acquisition-program lifecycle management, which the  department will accommodate as appropriate. DOD also stated that it is  working with federal standard setters to develop full-cost guidance that  would guide its cost accounting efforts. The department will integrate this  guidance into the ERPs and guide cost accounting efforts and will develop,  coordinate, and issue policy and guidance on accounting for the full cost  of military equipment consistent with our recommendations. We welcome  DOD’s decision to accommodate such requirements and contribute to  revised guidance for cost-effectively serving management’s information  needs and reliable reporting on the cost of acquisition programs and assets  acquired.
It is also important to note that while federal accounting standards do not  require agencies to collect historical, transaction-based cost data, they  encourage agencies that estimate asset value, such as DOD, to establish  the internal control practices and systems needed to capture and sustain  such data for future acquisitions. We believe that this guidance reflects the  importance of actual costs in providing reliable historical information for  accountability to the American taxpayer and for management decision  making as well. It is important to emphasize that our recommendations are  focused not on gathering costs retrospectively but are intended to assist  DOD in its efforts to develop the processes and systems needed to  produce reliable information going forward. We believe that providing  reliable information is likely to include capturing transaction-based costs  as historical information for future management decisions and  accountability reporting.
The availability of timely, reliable, and useful financial information on the  costs associated with acquiring assets is an essential tool that assists both  management and Congress in effective decision making such as  determining how to allocate resources to programs. It also provides an  important monitoring mechanism for evaluating program performance  that can help strengthen oversight and accountability.
We are sending copies of this report to interested congressional  committees; the Secretary of Defense; the Secretaries of the Army, the  Navy, and the Air Force; the Deputy Secretary of Defense/Chief  Management Officer; the Under Secretary of Defense (Comptroller)/Chief  Financial Officer; the Under Secretary of Defense for Acquisition,  Technology, and Logistics; the Under Secretary of the Army/Chief  Management Officer; the Under Secretary of the Navy/Chief Management  Officer; the Under Secretary of the Air Force/Chief Management Officer;  and the Office of Management and Budget’s Office of Federal Financial  Management. This report is available at no charge on GAO’s Web site at  http://www.gao.gov. Should you or your staff have any questions  concerning this report, please contact me at (202) 512-9095 or  khana@gao.gov. Contact points for our Offices of Congressional Relations  and Public Affairs may be found on the last page of this report. Key  contributors to this report are listed in appendix IV.
section_title: Appendix I: Objective, Scope, and Methodology
paragraphs: Our objective was to identify previously reported weaknesses that impair  the Department of Defense’s (DOD) ability to provide reliable cost  information for military equipment acquired through major defense  acquisition programs (MDAPs) and determine what actions DOD has  taken to address them.
To address this objective, we ob including the military equipment (i.e., weapon systems) assets acquired  through such programs, by reviewing DOD guidance and interviewing  officials from the Office of the Under Secretary of Defense for Acquisition,  Technology, and Logistics. We identified and reviewed applicable federal  financial accounting standards, and interviewed officials of the Federal  Accounting Standards Advisory Board to obtain clarification on the  changes made to Statement of Federal Financial Accounting Standards  (SFFAS) 35. We searched databases of audit reports issued during  calendar years 2005 through 2009 using key terms (e.g., military  equipment; general property, plant, and equipment; financial management;  tained an understanding of MDAPs,  weapons systems acquisition; and major defense acquisition programs).  We reviewed the results of our search (e.g., reports, studies, and ana to identify weaknesses in business operations that, based on relevan federal financial accounting standards, impair DOD’s ability to account the cost of military equipment. We grouped these weaknesses into  categories. To identify additional reports or relevant DOD studies and  analyses and to obtain clarification, as needed, on reported weaknesses,  we interviewed key department officials, including the following:    Deputy Director, Financial Improvement and Audit Readiness  Directorate, Office of the Under Secretary of Defense (Comptroller);    Acting Deputy Director, Office of the Under Secretary of Defense for  Acquisition, Technology, and Logistics;  representatives from the DOD’s Inspector General Office;  representatives from the military services’ offices of the Assistan Secretary, Financial Management and Comptroller, Financial  Management Operations; and    Chief Management Office representatives within DOD and the military  services as required by section 304(b).
See appendix III for the reports, studies, and analyses reviewed to identify  the relevant weaknesses.
We discussed with DOD officials the categories of weaknesses we  identified as a result of our search of prior reports, studies, and analyses,  and obtained supporting documentation—such as memorandums,  directives, an independent validation and verification report for the  military equipment valuation initiative, and gap analyses related to the  Navy Enterprise Resource Planning effort—from DOD on its actions to  address them. Using applicable criteria, we assessed whether the actions  taken adequately addressed the identified weaknesses. We interviewed th DOD officials referred to above to obtain clarification and explanation of  e  actions taken to address the weaknesses, including mechanisms and  metrics used to monitor progress.
We conducted this performance audit from October 2009 through July  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We be evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: Documentation Reviewed to Identify Weaknesses That Impair DOD’s Ability to Identify and Account for the Cost of Military Equipment
paragraphs: Financial Management: Achieving Financial Statement Auditability in  the Department of Defense. GAO-09-373. Washington, D.C.: May 6, 2009.
DOD’s High-Risk Areas: Actions Needed to Reduce Vulnerabilities and  Improve Business Outcomes. GAO-09-460T. Washington, D.C.: March 12,  2009.
Defense Business Transformation: Status of Department of Defense  Efforts to Develop a Management Approach to Guide Business  Transformation. GAO-09-272R. Washington, D.C.: January 9, 2009.
DOD Business Transformation: Air Force’s Current Approach Increases  Risk That Asset Visibility Goals and Transformation Priorities Will Not  Be Achieved. GAO-08-866. Washington, D.C.: August 8, 2008.
Fiscal Year 2007 U.S. Government Financial Statements: Sustained  Improvement in Financial Management Is Crucial to Improving  Accountability and Addressing the Long-Term Fiscal Challenge.  GAO-08-926T. Washington, D.C.: June 26, 2008.
Defense Business Transformation: Sustaining Progress Requires  Continuity of Leadership and an Integrated Approach. GAO-08-462T.  Washington, D.C.: February 7, 2008.
Defense Business Transformation: A Full-time Chief Management  Officer with a Term Appointment Is Needed at DOD to Maintain  Continuity of Effort and Achieve Sustainable Success. GAO-08-132T.  October 16, 2007.
Defense Business Transformation: Achieving Success Requires a Chief  Management Officer to Provide Focus and Sustained Leadership.  GAO-07-1072. Washington, D.C.: September. 5, 2007.
Financial Management: Long-standing Financial Systems Weaknesses  Present a Formidable Challenge. GAO-07-914. Washington, D.C.: August 3,  2007.
DOD’s High-Risk Areas: Efforts to Improve Supply Chain Can Be  Enhanced by Linkage to Outcomes, Progress in Transforming Business  Operations, and Reexamination of Logistics Governance and Strategy.  GAO-07-1064T. Washington, D.C.: July 10, 2007.
Defense Business Transformation: A Comprehensive Plan, Integrated  Efforts, and Sustained Leadership Are Needed to Assure Success.   GAO-07-229T. Washington, D.C.: November 16, 2006.
Department of Defense: Sustained Leadership Is Critical to Effective  Financial and Business Management Transformation. GAO-06-1006T.  Washington, D.C.: August 3, 2006.
Department of Defense, Office of Inspector General  Independent Auditor’s Report on the DOD Agency-Wide FY 2009 2008 Basic Financial Statements. D-2010-016. Arlington, Va.: Nove 12, 2009.
Independent Auditor’s Report on the Department of the Navy General  Fund FY 2009 and FY 2008 Basic Financial Statements. D-2010-014.  Arlington, Va.: November 8, 2009.
Independent Auditor’s Report on the Department of the Navy Work Capital Fund FY 2009 and FY 2008 Basic Financial Statements. D- 012. Arlington, Va.: November 8, 2009.
Independent Auditor’s Report on the Army General Fund FY 2009 and  FY 2008 Basic Financial Statements. D-2010-010. Arlington, Va.:  November 8, 2009.
Independent Auditor’s Report on the Army Working Capital Fund F 2009 and FY 2008 Basic Financial Statements. D-2010-009. Arling Va.: November 8, 2009.
Independent Auditor’s Report on the Air Force Working Capital Fund FY  2009 and FY 2008 Basic Financial Statements. D-2010-008. Arlington,  Va.: November 8, 2009.
Independent Auditor’s Report on the Air Force General Fund FY 2009  and FY 2008 Basic Financial Statements. D-2010-006. Arlington, Va.:  November 8, 2009.
Internal Controls over Government Property in the Possession of  Contractors at Two Army Locations. D-2009-089. Arlington Va.: Jun 2009. e 18,  Independent Auditor’s Report on the Department of Defense FY 2008 an FY 2007 Basic Financial Statements. D-2009-021. Arlington, Va.:  November 12, 2008.
Independent Auditor’s Report on the Army Working Capital Fund FY  2008 and FY 2007 Basic Financial Statements. D-2009-020. Arlington,  Va.: November 8, 2008.
Independent Auditor’s Report on the Army General Fund FY 2008 FY 2007 Basic Financial Statements. D-2009-018. Arlington, Va.:  November 8, 2008.
Report of Marine Corps  Funds. D-2007-122. Arlington, Va.: September 11, 2007.
Internal Controls Over Military Equipment  Vendor Pay Disbursement Cycle, Air Force General Fund: Financial  Accounting. D-2007-059. Arlington, Va.: February 8, 2007.
Financial Management: Contracts Classified as Unreconcilable by the  Defense Finance and Accounting Service Columbus. D-2005-040.  Arlington, Va.: March 14, 2005.
Implementation of a Cost-Accounting System for Visibility of Wea Systems Life-Cycle Costs. D-2001-164. Arlington, Va.: August 1, 2001. pon  Management of Special Tooling and Special Test Equipment at Naval  Air Systems Command. N2009-0026. Washington, D.C.: April 24, 2009.
Logistics Modernization Program System Federal Financial  Management Improvement Act of 1996 Compliance – First Deployment  Functionality. A-2007-0205-FFM. Alexandria, Va.: September 7, 2007.
Management of Government-Furnished Property, Fort Hood, Texas. A- 2005-0126-FFE. Alexandria, Va: March 4, 2005.
Comprehensive Engine Management System Controls. F2005-0004-FB200 Washington, D.C.: April 27, 2005.
0.
Agency Financial Report for Fiscal Year 2009. Washington, D.C.:  November 16, 2009.
Department of Defense Fiscal Year 2009 Report on Reliability.  Washington, D.C.: September 30, 2009.
Financial Improvement and Audit Readiness Plan (FIAR Plan). March  30, 2009.
Department of Defense, Office of the Secretary of Defense. Linking  Financial Data to Contract Documents. Washington, D.C.: March 18,  2009.
Fiscal Year 2008 Agency Financial Report. Washington, D.C.: Novembe 17, 2008.
U.S. Department of Defense 2008 Enterprise Transition Plan (ETP).  Washington, D.C.: September 30, 2008.
Office of the Under Secretary of Defense for Acquisition, Technology, and  Logistics. Annual Statement Required under the Federal Managers’  Financial Integrity Act (FMFIA) of 1982. Washington, D.C.: June 27,  2008.
Office of the Under Secretary of Defense (Comptroller). Summary of  Business Rule for Group or Composite Depreciation. October 24, 2006.
Office of the Under Secretary of Defense (Comptroller). Summary of  Business Rule with Corresponding Analysis on the Department of  Defense Military Equipment Capitalization Threshold. October 24, 2006.
Office of the Under Secretary of Defense (Comptroller). Summary of  Business Rule for Recording Program Management Office (PMO) Costs October 24, 2006. .
Office of the Under Secreta Logistics, Property and Equipment Policy. Internal Validation and  Verification Project: Military Equipment Valuation Property and  Equipment Policy. June 13, 2006.  ry of Defense for Acquisition, Technology, and  Office of the Under Secretary o Business Rules for Accounting for and Reporting of Military Equipment:  Componentization. June 8, 2005.  f Defense (Comptroller). Summary of  Transforming Department of Defense Financial Management: A  Strategy for Change. Washington, D.C.: April 13, 2001.
U.S. Army Statement. Washington, D.C.: November 2009. . Fiscal Year 2009 United States Army Annual Financial  Secretary of the Army to the Secretary of Defense. Fiscal Year (FY) 20 Statement of Assurance on Internal Controls as Required Under the  Federal Managers’ Financial Integrity Act of 1982. Washington, D.C.:  August 17, 2009.
U.S. Army. Fiscal Year 2008 United States Army Annual Financial  Statement. Washington, D.C.: November 2008.
U.S. Army Program Executive Office Enterprise Information Systems. U.S.  Army ERP Phase III Analysis Brief. Fort Belvoir, Va.: September 26,  2008.
Secretary of the Army to the Secretary of Defense. Fiscal Year (FY) 20 Statement of Assurance on Internal Controls as Required Under the  Federal Managers’ Financial Integrity Act of 1982. Washington, D.C.:  August 13, 2008.
Fiscal Year 2009 Department of the Navy Annual Financial Report Washington D.C.: October 2009. .
Under Secretary of the Navy to the Secretary of Defense. Annual  Statement Required Under the Federal Managers’ Financial Integrity Act (FMFIA). Washington, D.C.: August 25, 2009.
Science Applications International Corporation (SAIC)/Eagan, McAllister,  Associates, Inc. (EMA) for the Department of the Navy Financial  Improvement Program, Naval Air Systems Command. Gap Analysis  peration Materials and Supplies,  Study: NAVAIR Management of O General Equipment, and Military Equipment in Navy ERP, Lexington  Park, MD: July 31, 2009.
Department of the Navy Annual F Washington D.C.: October 2008. inancial Report Fiscal Year 2008.
Secretary of the Navy to the Secretary of Defense. Annu Required Under the Federal Managers’ Financial Integrity Act (FMFIA).  Washington, D.C.: August 28, 2008.
Department of the Air Force  Acquire to Retire Process: OMB Circular A-123 Appendix A, Part II  Internal Controls over Financial Reporting. December 18, 2009.
United States Air Force Annual Financial Statement 2009. Washington D.C.: November 2009.
United States Air Force Annual Financial Statement 2008. Washing D.C.: November 2008.
Acting Secretary of the Air Force to the Secretary of Defense. Annual  Statement Required Under the Federal Managers’ Financial Integrity A (FMFIA) of 1982. Washington, D.C.: August 26, 2008.
Secretary of the Air Force to the Secretary of Defense. Annual Statement  Required under the Federal Managers’ Financial Integrity Act.  Washington, D.C.: August 24, 2009.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact person named above, key contributors to this  reports were Evelyn Logue, Assistant Director; Vanessa Estevez; Maxine  Hattery; John Lopez; Chris Martin; Heather Rasmussen; Darby Smith; and  Omar Torres.