DOD Financial Management: Greater Visibility Needed to Better Assess Audit Readiness for Property, Plant, and Equipment
Published: 2016-05-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1997, DOD has been required to prepare audited financial statements. However, long-standing and pervasive financial management weaknesses have precluded DOD from being auditable. The National Defense Authorization Act (NDAA) for Fiscal Year 2010 mandated that DOD develop and maintain a plan that among other things, describes the actions needed to ensure that its consolidated financial statements are audit ready by September 30, 2017.
The Senate report accompanying the NDAA for Fiscal Year 2015 included a provision for GAO to review DOD's plans to achieve audit readiness with respect to its PP&E. This report addresses the reported status of DOD's and the military services' (1) audit readiness assertions for PP&E asset accountability and (2) plans for valuing PP&E assets. GAO reviewed the FIAR Plan Status Reports and Guidance, documentation of assertions of audit readiness, and federal accounting standards and proposed changes, and interviewed DOD officials.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD), reporting about $630 billion total Property, Plant, and Equipment (PP&E) net of accumulated depreciation as of September 30, 2015, is responsible for over 70 percent of the U.S. government's reported PP&E. However, as GAO and others have previously reported—and made recommendations to address—DOD's accountability over and ability to value its PP&E assets has for years been challenged by poorly designed internal controls, processes, and systems. These challenges are highlighted by DOD's inability to prepare auditable financial statements.
The military services have asserted audit readiness regarding PP&E accountability for some categories of PP&E. However, they have not yet asserted audit readiness for certain key categories of PP&E, including land, government-furnished equipment, and internal-use software. In addition, the Marine Corps (a component of the Navy) has not yet asserted audit readiness for any of its PP&E. While the services have set target dates for asserting audit readiness for these remaining assets, almost all of the target dates have been delayed in some cases by multiple years, increasing the risk that DOD may not complete audit readiness efforts by the target date of September 30, 2017.
DOD reports its audit readiness status and progress in its semiannual Financial Improvement and Audit Readiness (FIAR) Plan Status Report. However, the Status Report does not provide clear visibility for Congress and other decision makers regarding the extent to which DOD has addressed deficiencies in the related internal controls. For example, the military services have asserted audit readiness regarding PP&E accountability for some individually large-value and high-visibility equipment, such as ships and aircraft. However, the Status Report does not reflect that the services have often asserted audit readiness without evaluating or correcting the underlying internal control deficiencies. Similarly, DOD identified a number of deficiencies, referred to as dealbreakers, that it reports to be so severe that they could prevent the services from demonstrating audit readiness or succeeding in audits—such as the inability to produce a complete list of items the services own. However, DOD's Status Report does not provide adequate visibility over actions taken and progress made toward correcting those dealbreakers. Without greater visibility of DOD's audit readiness status and progress in its FIAR Plan Status Report, Congress and other decision makers may not have sufficient information to assess DOD's current audit readiness status and the improvements that still need to be made.
Regarding valuation, DOD is in the early stages of developing specific methodologies and procedures to value its existing PP&E assets. DOD estimates that it needs to value over 440,000 real property assets and several hundred thousand individual pieces of equipment. Proposed changes to federal accounting standards would provide DOD more options for estimating the value of its existing assets. However, DOD reported that previously identified systems and control deficiencies impair its ability to properly account for the actual costs of newly acquired assets, and identified fixing such deficiencies as a priority in the FIAR Plan.
section_title: What GAO Recommends
paragraphs: To help provide better visibility of DOD's financial management status and efforts, GAO recommends that DOD expand its semiannual FIAR Plan Status Report to include (1) audit assertions that have been made without correcting internal control deficiencies along with actions and plans to remediate the deficiencies and (2) details of military services' actions taken and progress made toward correcting the underlying deficiencies for reported dealbreakers. DOD agreed with these recommendations.

section_title: Letter
paragraphs: The successful execution of the Department of Defense’s (DOD) military  mission depends on a properly equipped and supplied force. DOD and  the military services collectively hold hundreds of thousands of unique  assets at thousands of worldwide locations. Accountable property  systems capable of providing reliable information concerning mission- critical assets are important both operationally as well as to provide the  financial information DOD managers need in making decisions about  allocating scarce resources, authorizing and modifying programs, and  evaluating program performance.
In its 2015 financial statements, DOD reported $427 billion of equipment  and $157 billion of real property, both net of applicable accumulated  depreciation. However, DOD reported that its financial statements did  not substantially conform to accounting requirements and that the  department’s financial management and feeder systems were unable to  adequately support material amounts on the basic financial statements. In  addition, DOD reported several auditor-identified material weaknesses  related to Property, Plant, and Equipment (PP&E). DOD’s serious  financial management problems, which have resulted in unauditable  financial statements, are one of the three impediments that continue to  preclude GAO from rendering an opinion on the U.S. government’s  accrual-based consolidated financial statements.
DOD’s ability to properly account for all of its PP&E assets in its  accountable property systems, and record a value for each asset, has for  years been hampered by poorly designed internal controls, processes,  and systems. DOD’s challenges in performing basic financial and  accountability functions are highlighted by its inability to prepare auditable  financial statements—one measure of good financial management.  DOD’s Financial Improvement and Audit Readiness (FIAR) Plan provides  the strategy for DOD’s financial management reform efforts. The Senate  report accompanying S.2410, a bill for the National Defense Authorization  Act for Fiscal Year 2015, included a provision for GAO to review DOD’s  plans for achieving audit readiness with respect to its PP&E.
This report addresses the reported status of DOD’s and the military  services’—the departments of the Army, Navy (including the Marine  Corps), and Air Force—(1) assertions of audit readiness for PP&E asset  accountability in accordance with the FIAR Guidance and (2) plans for  valuing PP&E assets. According to DOD’s FIAR Guidance, to assert audit  readiness means the department or service formally declares that it has  strengthened internal controls and improved financial practices,  processes, and systems so there is reasonable confidence that the  information can undergo an audit by an independent auditor.
To address the first objective, we reviewed the status of the military  services’ efforts to become audit ready regarding their accountability for  General Fund PP&E (which represents approximately 85 percent of  DOD’s total reported PP&E asset value) as reported in the most recent  FIAR Guidance. We interviewed Army, Navy, and Air Force officials and  analyzed documentation to gain an understanding of their processes and  systems for documenting and reporting their PP&E accountability and  asserting audit readiness. We evaluated the documentation the military  services prepared to support their assertions using the applicable FIAR  Guidance. We also reviewed the semiannual FIAR Plan Status Reports  issued from November 2010 to November 2015, in order to determine the  reported overall status of the services’ PP&E audit readiness assertions.
To address the second objective, we conducted interviews and reviewed  DOD’s overall plans and methodologies for valuing equipment and real  property. We also monitored Federal Accounting Standards Advisory  Board (FASAB) proceedings and discussions regarding proposed  changes to accounting standards for the valuation of PP&E.
We conducted this performance audit from November 2014 to May 2016  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 that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Further details on our scope  and methodology are provided in appendix I.
subsections: section_title: Background
paragraphs: Since 1997, DOD has been required to prepare annual audited  department-wide financial statements. However, our prior work has  shown that long-standing and pervasive financial management  weaknesses have precluded DOD from being auditable. Specifically,  GAO has reported that the efforts of DOD components to date to  implement the FIAR Guidance have not resulted in a fundamental  transformation of systems and operations necessary to resolve the  department’s long-standing financial management deficiencies.  Resolution of these deficiencies will be crucial to DOD’s efforts to meet  the target date for validating audit readiness of DOD’s full financial  statements.
We and other auditors have over the course of many years reported  multiple deficiencies in systems and controls over PP&E, and have made  many recommendations to DOD to remedy the deficiencies. For example,  the DOD Office of Inspector General (OIG) in its July 2015 summarization  of audits on DOD financial management challenges noted that it had  issued 43 reports discussing deficiencies in DOD’s PP&E, and that of the  131 open recommendations aimed at resolving deficiencies preventing  DOD from achieving auditability, there are numerous open  recommendations pertaining to remediating weaknesses in DOD’s  financial systems and controls over PP&E.
DOD is responsible for over 70 percent of the federal government’s  reported PP&E. However, since 1995 DOD’s financial management has  been on GAO’s list of federal programs and operations at high risk of  being vulnerable to fraud, waste, and abuse. This is due to financial  management deficiencies and related business management system and  control weaknesses that have adversely affected DOD’s ability to   (1) control costs; (2) ensure basic accountability; (3) anticipate future  costs and claims on the budget; (4) measure performance; (5) maintain  funds control; (6) prevent and detect fraud, waste, and abuse; (7) address  pressing management issues; and (8) prepare auditable financial  statements. Without accurate, timely, and useful financial information, our  prior work has shown that DOD and others are severely hampered in  making sound decisions affecting its operations. Further, to the extent  that current budget constraints and fiscal pressures continue, the  reliability of DOD’s financial information and ability to maintain effective  accountability for its resources will be increasingly important to the federal  government’s ability to make sound resource allocation decisions.
The National Defense Authorization Act (NDAA) for Fiscal Year 2010  required that DOD develop and maintain the FIAR Plan. The FIAR Plan  must include specific actions DOD plans to take to help correct  deficiencies that impair DOD’s ability to prepare timely, reliable, and  complete financial management information and ensure that its financial  statements are validated as ready for audit by September 30, 2017. The  NDAA for Fiscal Year 2010 also required DOD to implement semiannual  status reporting on the FIAR Plan to the congressional defense  committees. These status reports can also be used by other decision  makers to help in their oversight responsibilities. The FIAR Plan Status  Report, nearly 300 pages long in its most recent update, communicates  the broad issues impeding the reliability of DOD’s financial statements  and discusses department-wide initiatives to address them.  Impediments to accurately reporting PP&E is one of many issues  separately discussed in the report, as well as department-wide initiatives  and service-specific impediments to other financial report line items, such  as inventory and accounts payable, and impediments to financial  statements, such as the Statement of Budgetary Resources.
Further, the NDAA for Fiscal Year 2014 mandated a full audit of DOD’s  fiscal year 2018 financial statements and submission of those results to  Congress by March 31, 2019. The military services are required to  prepare and issue annual audited financial statements, from which DOD  consolidates the component financial statements to prepare its  department-wide financial statements. As prescribed by Office of  Management and Budget (OMB) and DOD policy for the preparation and  audit of agency financial statements, DOD and its components must  prepare their financial statements consistent with U.S. generally accepted  accounting principles and establish and maintain effective internal control  over financial reporting and compliance with laws and regulations.
The FIAR Plan—first issued in 2005 and updated semiannually through  status reports—provides the strategy for DOD’s financial management  reform efforts. It is DOD’s strategic plan and management tool for guiding,  monitoring, and reporting on the department’s financial management  improvement efforts. As such, the plan communicates progress in  addressing the department’s financial management weaknesses and  achieving financial statement auditability. The plan focuses on several  goals, which include the following.  1.  Achieve and sustain effective internal controls through the  implementation of sustained improvements in business processes and  controls addressing the material weaknesses in internal control.  2.  Develop and implement financial management systems that support  effective financial management.  3.  Achieve and sustain financial statement audit readiness.
In May 2010, the DOD Comptroller first issued the FIAR Guidance, which  provided a standard methodology for components to follow in  implementing the FIAR Plan. DOD has stated that the components’  successful implementation of this methodology is essential to its ability to  achieve full financial statement auditability.
In its financial statements and notes to the financial statements, DOD  presents details of its balance sheet account General PP&E, which  comprises major asset classes, such as equipment, which includes military equipment, such as ships, aircraft,  and combat vehicles, government-furnished equipment held by  contractors, and other equipment, such as material handling  equipment, training equipment, special tooling, and special test  equipment;  real property, which includes land, buildings, structures, facilities, and  leasehold improvements;  internal-use software (IUS), which represents the cost of software  whether commercial off-the-shelf, internally developed, or contractor  developed; and other, which includes construction-in-progress whether for real  property structures or equipment that is being constructed and not yet  placed in service.
Table 1 provides DOD’s PP&E asset categories and reported values as of  the end of fiscal year 2015. While information presented in table 1 has  been obtained from DOD’s published financial statements, DOD  management reported that the financial statements did not substantially  conform to accounting requirements and that DOD financial management  and feeder systems were unable to adequately support material amounts  on the basic financial statements. Consequently, the financial auditors  could not obtain sufficient, reliable information regarding the reliability of  reported amounts.
section_title: DOD and the Military Services’ Efforts to Assert Audit Readiness for PP&E Are Behind Schedule, and Status Reports Do Not Include Sufficient Information to Assess Progress
paragraphs: DOD faces challenges in its efforts to provide reasonable assurance of  accountability for its PP&E—knowing what it has, where it is located, what  condition it is in, and its depreciated cost. Although DOD has been  working to address previously reported deficiencies by improving its  systems and procedures, a substantial amount of work remains before  DOD can demonstrate that the full portfolio of PP&E assets is reliably  reported in the financial statements. Congress has mandated that DOD  take steps to be audit ready by September 30, 2017.
As defined in the FIAR Guidance, an audit-ready entity is one that has  strengthened internal controls and improved financial practices,  processes, and systems so that it has reasonable confidence the  resulting information can undergo an audit by an independent auditor.  The military services have asserted that some individually large-value and  high-visibility equipment (such as ships, submarines, and aircraft) are  ready for audit. However, they have also reported that they have not  completed validation of the accountability over certain key classes of  PP&E and therefore have not yet asserted audit readiness for such  assets, including land, government-furnished equipment, and IUS. For the  latter two asset classes, DOD has stated that it does not have an  accurate estimate of what it has or where it is located. The Army, for  example, indicated in a report related to property and equipment held by  contractors that it does not know the actual amount of these assets but  anticipates that actual quantities may be greatly different than the Army’s  documented property records reflect. Moreover, the Marine Corps (a  component of the Navy) has not yet asserted audit readiness for any of its  PP&E.
While the military services have set target dates for asserting audit  readiness for its PP&E, almost all of the target dates have been delayed,  in some cases by multiple years, increasing the risk that DOD may not  complete audit readiness efforts by the target date of September 30,  2017. Figure 1 shows that some planned assertion dates have been  significantly extended.
Although the services have asserted that several categories of  equipment, particularly military equipment, are audit ready, in some  assertions they reported that they did not evaluate or correct identified  internal control deficiencies in accordance with the FIAR Guidance prior  to asserting audit readiness. In some cases, the services acknowledged  that controls were inadequate to be relied on as a basis for the  assertions. For example, while the Army asserted audit readiness for  some of its real property, it reported that internal controls for certain real  property acquisitions and disposals were not operating effectively and  deficiencies identified had not been remediated. The Navy asserted some  categories of its equipment as audit ready and that key controls were  designed and operating effectively. However, the Navy reported that  test results for four of seven key controls had failure rates in excess of  limits established in the FIAR Guidance. Though the Navy has developed  corrective action plans, it had not remediated all of the identified  deficiencies prior to asserting audit readiness. The Air Force also  asserted in August 2015 that certain equipment, such as support  equipment and vehicles, was ready for audit. Yet, according to an Air  Force official, the service was unable to reconcile the assets from the  accountable property system to amounts in the financial statements.
Additionally, DOD has acknowledged a set of control deficiencies,  identified as “dealbreakers,” that it reports are so severe that they could  prevent the services from demonstrating audit readiness or succeeding in  audits. These dealbreakers, first reported in the May 2015 FIAR Plan  Status Report, include the inability to reconcile transaction detail to the  general ledger, the inability to produce a complete universe of  transactions, and ineffective information system controls, all of which can  preclude auditability. These dealbreakers were not remediated prior to  assertion.
Instead of addressing previous auditor-reported deficiencies and  developing effective controls over the accountability of PP&E, the  services generally focused on counting assets at a point in time as a  basis for asserting audit readiness. However, as discussed, without  effective controls, management cannot reasonably assure the ongoing  accuracy of the asset accountability records and routinely generate  timely, complete, and reliable financial information to manage its assets.  In addition, absent effective controls, auditors may need to count  substantially more items every year, at multiple locations, in order to  assess the reliability of assets recorded in DOD’s accountable property  systems. More extensive testing may not be practical given the volume of  PP&E assets. To illustrate, the Army has reported that it has  approximately 250,000 individual pieces of equipment spread out among  many bases all over the world.
Although the military services’ assertions for being audit ready are  reported in DOD’s semiannual FIAR Plan Status Report, the report does  not include information for decision makers about which assertions were  made based on counting assets at a point in time without correcting  internal controls or information about actions taken or progress made  toward correcting control deficiencies determined to be dealbreakers.  Without such information, DOD and congressional decision makers do  not have a complete status of DOD’s audit readiness or sufficient  information about improvements that still need to be made. For example,  the November 2015 FIAR Plan Status Report identified several audit  readiness dealbreakers for each of the services’ equipment. However,  other than a general statement that corrective actions needed to be  developed and implemented to correct internal control gaps, none of the  services provided specific actions taken or interim milestones of  intermediate progress made to remediate the dealbreakers. Likewise,  none of the services reported actions planned to overcome these  dealbreakers that may potentially delay audit readiness of their PP&E. As  we have previously reported, DOD components’ efforts to date to  implement the FIAR Guidance have not resulted in a fundamental  transformation of systems and operations necessary to resolve the  department’s long-standing financial management deficiencies.  Resolution of these deficiencies will be crucial to DOD’s efforts to meet  the September 30, 2017, target date for validating audit readiness of  DOD’s full financial statements.
The NDAA for Fiscal Year 2010 mandated that the semiannual report  include details of impediments to the department achieving audit  readiness, along with the department’s corrective action plans to resolve  the impediments. Additionally, going forward, standards for internal  control for the federal government require an entity to communicate to  internal and external decision makers significant matters relating to risks,  changes, or issues that affect the entity’s internal control system. DOD  officials have stated that they have chosen to include in the report  overarching impediments to financial statement audit readiness but have  not reported the details of services’ dealbreakers and remediation plans  because other sources of that information can be made available to  decision makers. However, not disclosing such information in the  semiannual Status Report decreases visibility of DOD’s audit readiness  efforts. As DOD continues to refine semiannual reporting, DOD officials  have stated that they are considering formatting changes for future Status  Reports, particularly information aimed toward addressing dealbreakers.  Reliable, useful, and timely information on DOD’s progress toward  meeting its audit readiness goals is important to assist Congress in  carrying out its oversight responsibilities.
section_title: DOD’s Plans for Valuing PP&E Are in the Early Stages of Development
paragraphs: In addition to establishing accountability for all of the department’s PP&E,  DOD and the military services must, under current accounting standards,  record asset values using an appropriate method of valuation—such as  historical cost—for its PP&E to be considered audit ready. However,  DOD faces challenges in developing appropriate values for its PP&E  because of systems and process deficiencies. The difficulty of that task is  exacerbated by the magnitude and uniqueness of DOD’s assets. For  example, DOD estimates that it needs to value over 440,000 real property  assets along with individual pieces of equipment that may number in the  several hundreds of thousands of items located at multiple installations  around the world. DOD has stated that many of its existing assets were  acquired decades ago, and acquisition cost documents required for  supporting valuation and audit were often not retained or cannot be  located.
Current federal accounting standards require PP&E assets to be valued  and recorded using the actual historical cost of an asset as its value and  allow reasonable estimates of historical cost as a substitute for actual  historical cost. The recorded value of each asset is to be depreciated  and reduced to a net value over the estimated useful life of the asset,  except for land, which is a nondepreciable asset.
To date, DOD has been unable to meet accounting standards for  valuation because of long-standing deficiencies in its information systems  and processes that prevent managers from obtaining the historical  acquisition cost as a basis for valuation or appropriately valuing its PP&E  by other means. For example, the DOD OIG reported that DOD does not  have property and logistics systems that record and maintain acquisition  costs, the cost of modifications and upgrades, or depreciation expense in  accordance with established accounting standards. Whether for valuing  its existing assets or new acquisitions, DOD has acknowledged that it  does not have effective business processes, systems, or controls for  recording, processing, or accurately reporting actual historical cost or a  reasonable method of estimating historical cost. DOD has reported that  fixing its long-standing systems deficiencies is a top priority as part of the  FIAR Plan’s strategy, and that there are many actions under way by the  services and the department to ultimately remediate such deficiencies.
In response to requests from DOD, FASAB, the body responsible for  issuing federal accounting standards, undertook a project to address  PP&E accounting issues. FASAB’s proposed standard, which would help  DOD establish beginning account balances for PP&E, was submitted to  the FASAB sponsors (OMB, the Department of the Treasury, and GAO)  on May 5, 2016, for a 90-day review, which will end on August 3, 2016.  The proposed standard includes general approaches to the valuation of  opening balances, which would allow DOD to use an alternative valuation  method for existing assets that would substitute for actual or estimated  historical costs, including the following:  1.  For buildings, structures, facilities, and equipment, FASAB is  proposing to allow DOD to use deemed cost under several different  methods, such as using replacement cost or fair value.   2.  For land and land rights, FASAB is proposing to allow DOD to use the  following alternative methods: (1) exclude land and land rights on the  balance sheet and instead require disclosure of acreage information  or (2) recognize opening balances of land and land rights at deemed  cost.  3.  For internal-use software, FASAB is proposing to allow DOD to use  the following alternative methods: (1) deemed cost for existing IUS or  (2) excluding existing IUS from opening balances and only recording  the actual cost of new acquisitions—referred to as prospective  capitalization.
The proposed accounting standard would permit DOD to apply alternative  valuation methods only to establish opening balances for its existing  PP&E. Under the standards, DOD would still be required to develop  systems and procedures to capture and report the historical costs of  newly acquired or constructed PP&E.
In anticipation of being allowed to use these alternative valuation  methods, DOD is developing plans to value the majority of its assets with  alternative methods. DOD has established working groups charged with  (1) developing an approach for establishing valuation methodologies and  (2) developing documentation standards for the valuation process for all  of its PP&E; however, it is early in the process of determining and  implementing such alternative valuation methodologies. Further, DOD  and the services have identified challenges in developing and  implementing valuation methodologies for existing assets, while  continuing to remedy systems and develop procedures to properly  account for the actual costs of newly acquired assets for each major  category of PP&E. Some of those challenges include the following:
Equipment. DOD has established an overarching plan for how to  value its equipment. However, its application to specific equipment  types has not been determined. DOD has identified the following  challenges to equipment valuation: (1) numerous configurations of  highly complex equipment and weapons systems make them difficult  to value, for example, the valuation of enormous costly structures  such as Navy ships will be a complex task involving valuing  thousands of components that are used to build or modify these ships;  (2) certain equipment and weapons systems have been significantly  modified, upgraded, or overhauled to the extent that such  modifications are considered capital improvements that are required  to be capitalized as part of the asset; and (3) enormous quantities of  deployed equipment are located worldwide, posing an increased  logistical challenge to valuing all assets.
Real property. DOD has not yet finalized an alternative valuation  methodology for real property, including capital improvements. DOD  has stated that it does not have systems in place to track capital  improvements and has not maintained documentation to support  capital improvement costs. As reported by DOD to FASAB, most of its  systems used for acquisition of and accounting for real property and  capital improvements have either never been audited or have had  significant deficiencies or material weaknesses reported. DOD has  cited several complicating factors for valuing its real property,  including (1) multiple organizations and systems involved in acquiring  real property and capital improvement projects and (2) the lack of  consistent processes or documented processes for retaining source  documentation related to real property.
IUS. DOD has not yet established an alternative valuation  methodology for IUS. DOD has stated that identification and valuation  of IUS is one of the major challenges to asset valuation.
Valuation alternatives currently being proposed by FASAB, assuming  they are adopted as accounting standards, hold the potential to allow  DOD to develop an acceptable initial valuation for its PP&E. However,  DOD acknowledges that it must still continue to remedy its systems and  processes to properly capture and account for the historical costs of  newly acquired assets and develop sufficient documentation to enable an  audit to be performed. If it is not able to timely implement valuation  methodologies for existing assets and remediate identified deficiencies in  its PP&E systems, there is an increased risk that DOD may not be able to  properly value its assets and be audit ready by the end of fiscal year  2017.
Asset valuation—though a significant challenge for DOD—is required for  financial reporting. But beyond financial reporting, there are advantages  to tracking and maintaining the records of the historical cost of assets. For  example, federal accounting standards indicate that recording and  tracking assets—and recognizing the cost of those assets through  depreciation expense over their estimated useful lives—helps managers  assess the performance of an entity. Additionally, reliable, useful, and  timely financial and performance information provides DOD financial  managers, Congress, and other decision makers the information they  need to make difficult resource allocation decisions and to help ensure  that DOD is operating effectively and efficiently.
section_title: Conclusions
paragraphs: DOD is responsible for over 70 percent of the federal government’s  reported PP&E, but DOD cannot accurately account for its PP&E assets.  Significant financial and related business management control  deficiencies adversely affect DOD’s ability to manage and perform its  mission. DOD’s inability to perform basic financial and accountability  functions is highlighted by its inability to prepare auditable financial  statements—one measure of good financial management. Congress has  required DOD to take steps to be ready for full financial audit by  September 30, 2017, and has mandated that DOD report on its status  and progress through the semiannual FIAR Plan Status Report. Although  DOD’s Status Reports have shown that several categories of PP&E are  ready for audit, its reporting does not provide clear visibility for Congress  and other decision makers regarding the extent to which DOD has  addressed underlying deficiencies in internal controls. Further, the Status  Reports identify certain control deficiencies, or dealbreakers, that are so  severe they could prevent the services from demonstrating audit  readiness or succeeding in audits. However, the reports do not provide  adequate visibility over actions taken and progress made toward  correcting the dealbreakers. Without sufficient information about the  status of improvements in internal control, including information about  dealbreakers, DOD, congressional committees, and other decision  makers do not have a complete status of audit readiness or  improvements that still need to be made.
section_title: Recommendations for Executive Action
paragraphs: We are making two recommendations to help provide better visibility of  DOD’s financial management status for decision makers and to improve  oversight of DOD’s audit readiness efforts to strengthen internal controls  and improve financial practices and processes. We recommend that the  Under Secretary of Defense (Comptroller), while developing other  formatting changes to be made in future reports, expand the semiannual  FIAR Plan Status Report to include  the extent to which assertions of audit readiness have been made  without assurance that related controls are effective and the details of  remediation activities taken and planned to correct the known internal  control deficiencies and  the details of military services’ actions taken and progress made  toward correcting the control deficiencies underlying the reported  dealbreakers.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for review and comment. In its  written comments, reprinted in appendix II, DOD concurred with our  recommendations and stated that its May 2016 FIAR Plan Status Report  will provide an increased level of detail regarding critical aspects of  achieving audit readiness. DOD further stated that it would use the  recommendations to develop and, where appropriate, enhance future  semiannual Status Reports to include greater visibility into the progress  and impediments related to PP&E audit readiness. Specifically, DOD  stated that the Office of the Under Secretary of Defense (Comptroller) will  work with the military departments to ensure that their audit readiness  plans include specific milestones for addressing internal control  deficiencies. If effectively implemented, DOD’s actions should provide  better visibility to Congress and other decision makers in assessing  DOD’s plans and actions.
We are sending copies of this report to the Secretary of Defense; the  Under Secretary of Defense (Comptroller)/Chief Financial Officer; the  Deputy Chief Financial Officer; the Director, Financial Improvement and  Audit Readiness; the Director of the Defense Finance and Accounting  Service; the Director of the Office of Management and Budget; and  appropriate congressional committees. In addition, the report is available  at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (404) 679-1873 or cordreyw@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff members who made key  contributions to this report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Senate report accompanying S.2410, a bill for the National Defense  Authorization Act for Fiscal Year 2015, included a provision for GAO to  conduct a review of the Department of Defense’s (DOD) plans to achieve  audit readiness with respect to its Property, Plant, and Equipment  (PP&E). The objectives of our review were to determine the reported  status of DOD’s and the military services’—the departments of the Army,  Navy (including the Marine Corps), and Air Force—(1) assertions of audit  readiness for PP&E asset accountability in accordance with the Financial  Improvement and Audit Readiness (FIAR) Guidance and (2) plans for  valuing PP&E assets.
To address the first objective, we reviewed the reported status of the  military services’ efforts to become audit ready regarding their accounting  for General Fund PP&E. We interviewed Army, Navy, and Air Force  officials and analyzed documentation to gain an understanding of their  processes and systems used to document and report their PP&E  accountability audit readiness assertions. We evaluated the  documentation the military services prepared to support their assertions  using the FIAR Guidance relevant to the period an assertion was made.  We obtained and documented DOD’s PP&E accountability assertion  status as reported in the most recent November 2015 FIAR Plan Status  Report and reviewed the supporting documentation for the reported FIAR  status to determine whether they complied with the November 2013 FIAR  Guidance. We also reviewed the semiannual FIAR Plan Status Reports  issued from November 2010 to November 2015 in order to track the  overall progress of the military services’ PP&E audit readiness assertions.  We obtained and reviewed audit reports issued by the DOD Office of  Inspector General and service auditors regarding the reliability of DOD’s  asset accountability records and the effectiveness of their internal  controls.
To address our second objective, we obtained a list of all PP&E asset  types and identified the systems used to track PP&E valuation  information. We conducted interviews with DOD officials responsible for  valuing PP&E to determine the status of the valuation process, what  valuation methodologies were being planned, and whether supporting  documentation was available. We obtained and documented the status of  DOD’s PP&E valuation assertion as reported in the November 2015 FIAR  Status Report. We also monitored the Federal Accounting Standards  Advisory Board’s proceedings and discussions regarding proposed  accounting standards for the valuation of PP&E.
We conducted this performance audit from November 2014 to May 2016  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 that  the 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: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Paul Kinney (Assistant Director),  Shawkat Ahmed (Auditor-in-Charge), Joshua Edelman, and Robert  Sharpe made key contributions to this report. Also contributing to this  report were Francis Colantonio, Doreen Eng, Maxine Hattery, Jason  Kelly, Sharon Kittrell, and Jared Minsk.