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

Letter

Background

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.

DOD Has Actions Underway to Address Financial Management Weaknesses Related to Military Equipment, but Additional Actions Are Needed

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.

Conclusions

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.

Recommendations

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.

Agency Comments and Our Evaluation

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.

Appendix I: Objective, Scope, and Methodology

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.

Appendix II: Comments from the Department of Defense

Appendix III: Documentation Reviewed to Identify Weaknesses That Impair DOD’s Ability to Identify and Account for the Cost of Military Equipment

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.

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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.

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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.

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0.

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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.

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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.

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Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

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.