DOD Financial Management: The Navy Needs to Improve Internal Control over Its Buildings
Released: 2018-05-10T00:00:00

Letter

Background

Navy’s Real Property Audit Assertions

DOD has defined audit readiness as having the capabilities in place that allow an auditor to plan and perform a full financial statement audit that results in actionable feedback to DOD. In DOD’s May 2016 FIAR Plan Status Report, the DON initially asserted that it would be audit ready with regard to real property (including construction-in-progress) for the existence and completeness assertions by June 2016 and with regard to the valuation assertion by March 2017. Subsequently, in DOD’s November 2016 FIAR Plan Status Report, the DON asserted that it would be audit ready for the existence, completeness, and valuation assertions by March 2017. In DOD’s May 2017 FIAR Plan Status Report, the DON reported that it had validated that the existence and completeness assertions for real property. Ultimately, the DON reported in DOD’s November 2017 FIAR Plan Status Report that it had achieved audit readiness for the existence and completeness assertions and was in the process of determining audit readiness for the valuation assertion.

Real Property Valuation Methods

In August 2016, the Federal Accounting Standards Advisory Board issued Statement of Federal Financial Accounting Standards (SFFAS) No. 50, which allows reporting entities to apply alternative valuation methods in establishing opening balances of general property, plant, and equipment (G-PP&E). Such alternative valuation methods may be applied in reporting periods beginning after September 30, 2016. SFFAS No. 50 permits each reporting entity to use alternative methods when presenting financial statements, or one or more line items, (1) for the first time or (2) after a period during which existing systems could not provide the information necessary for producing financial statements in accordance with generally accepted accounting principles (GAAP) without using alternative methods. SFFAS No. 50 permits reporting entities to apply an alternative method only once per line item after the period during which the existing systems could not provide the information for producing financial statements in accordance with GAAP. As of March 2018, the Navy has not made an unreserved assertion attesting that its opening balances of G-PP&E are reported in accordance with SFFAS No. 50. After opening balances are established using an alternative valuation method, federal accounting standards require historical cost to be used in valuing G-PP&E acquired or constructed.

Plant Replacement Value Being Used to Develop Opening Balances for the Navy’s Buildings

DOD already uses plant replacement value (PRV) for decision making and management purposes and has reported that it will use PRV to develop opening balances for the Navy’s buildings. Navy is also currently using PRV (an allowable alternative valuation method under SFFAS No. 50) for financial statement reporting of its buildings and plans to do so until the DON makes an unreserved assertion that its financial statements or its G-PP&E line item or reported assets classes are presented fairly in accordance with GAAP. PRV represents an estimate of the replacement cost in current year dollars to design and construct a facility to replace an existing facility at the same location. As such, the replacement (or construction) cost factor, generally applied to buildings as a dollar amount multiplied by square footage, is also indexed to increase or decrease the amount to account for other variations in costs for different geographic areas or complexity of the facility. Once the calculation prescribed by the formula has resulted in PRV, accumulated depreciation is computed based on the placed in service date. Figure 1 shows an example of the PRV formula being applied to an enlisted housing facility. The valuation adjustment factors, as shown below, vary by location and use of the building. Acquisitions and capital improvements made to existing buildings during subsequent financial periods are to be recorded at the actual cost of obtaining the asset or improvement and placing it into service.

Internal Control Activities

Internal control activities, as defined in Standards for Internal Control in the Federal Government, are the policies, procedures, and techniques that enforce management’s directives to achieve the entity’s objectives and address related risks. A deficiency in internal control exists when the design, implementation, or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to achieve control objectives and address related risks.

Internal Control Deficiencies Impaired the Navy’s Ability to Properly Record and Report Certain of Its Buildings

We identified internal control deficiencies that impaired the Navy’s ability to assert that as of September 30, 2016, (1) buildings recorded in iNFADS and reported as assets in Navy’s financial statements existed and (2) all of the Navy’s buildings were recorded in iNFADS and correctly reported as assets in Navy’s financial statements. As shown in figure 2, the effects of these internal control deficiencies contributed to the Navy (1) continuing to maintain records in iNFADS for buildings that had been demolished, sometimes many years ago, and including these buildings as assets in its financial statements; (2) excluding some of the buildings that it owns from being recorded in iNFADS and reported as assets in its financial statements; (3) erroneously reporting nonfunctional buildings as assets in its financial statements; and (4) excluding certain buildings from being reported as assets in its financial statements that met or exceeded DOD’s capitalization threshold.

The Navy Did Not Have Properly Designed Procedures and Related Control Activities to Reasonably Assure Proper Accounting for Its Demolished Buildings

While the Navy had written procedures for the multistep process for disposal of real property by demolition, these procedures and related control activities were not properly designed to reasonably assure that demolished buildings were recorded as disposed and removed from the accounting records. Specifically, the procedures and related control activities did not reasonably assure that RPAOs were provided with a signed demolition approval document and the related disposal form. Without these documents, an RPAO may not be aware that a building has been demolished and therefore may not take the appropriate actions to record the asset as disposed in iNFADS so that the asset record is subsequently removed from iNFADS at the end of the fiscal year and the asset is thereby not included in Navy’s financial statements.

When a building is designated for disposal, multiple parties are involved in the demolition process. This business process can involve the installation’s Public Works Department; the Regional Commander; the Facilities Engineering Command realty specialist; the Commander, Navy Installations Command; the demolition project manager; the demolition contractor; and the General Services Administration. The multiple functional offices involved in the disposal by demolition business process and the lack of communication between the offices can result in buildings being demolished without the RPAO’s knowledge. The Navy’s procedures for the disposal of real property by demolition state that the RPAO is to receive a signed demolition approval document from the installation’s Public Works Department. After the demolition has been completed, the project manager is to work with the demolition contractor (if applicable), the planner, and the RPAO to complete the disposal form. The RPAO, within 10 days of the completion of the demolition, is to upload supporting documentation about the disposed asset into iNFADS and create the iNFADS disposal record. The Navy’s procedures did not include a control activity, such as a step to verify the RPAO’s receipt of a signed demolition approval document and disposal form, to reasonably assure that the RPAOs are notified of all building demolitions. These notifications are critical so that each RPAO can properly account for a building by creating an iNFADS disposal record, which ultimately results in records for demolished buildings being deleted from iNFADS and therefore not included as assets in the financial statements.

During our testing of a nongeneralizable sample of buildings in iNFADS, we identified buildings that had been demolished prior to September 30, 2016, but were still recorded in iNFADS as of September 30, 2016, and therefore were reported as assets in Navy’s financial statements as of September 30, 2016. According to SFFAS No. 6, Accounting for Property, Plant, and Equipment, assets, including real property, shall be removed from the asset accounts along with the associated accumulated depreciation if the asset no longer provides service to the operations of the entity. The inclusion of demolished buildings in iNFADS results in inaccurate Navy real property records and can lead to an overstatement of reported balances for real property in Navy’s financial statements. Of the 40 buildings for which we performed book-to-floor tests for existence, we found that 4 had been destroyed and no longer physically existed but were still recorded in iNFADS and reported as assets in Navy’s financial statements. Because we used a nongeneralizable sample of buildings, results from the sample cannot be used to make inferences about all of the Navy’s buildings. The four demolished buildings are described below.

A six-car garage building had been demolished several years ago according to the Navy, but its operational status was shown as active in iNFADS as of September 30, 2016. Navy officials stated that while the actual demolition date for this building is not known, based on the demolition drawing for another building nearby, it appears to the Navy that the garage was demolished prior to 2001.

A marina shop building was demolished as of June 30, 2016, so that a new building could be constructed at the same location. As of September 30, 2016, the operational status of this marina shop was shown as active in iNFADS. The disposal of the marina shop building was not recorded in iNFADS until May 2017.

A storage building was demolished in February 2016 but was still recorded in iNFADS as of September 30, 2016. The RPAO was not notified that the building had been demolished until April 2016. After searching for the relevant paperwork, which could not be located, the RPAO prepared the disposal form that was dated December 20, 2016.

An aviation warehouse, which had previously been demolished, was still recorded in iNFADS as of September 30, 2016. According to Navy officials, the demolition package was initiated in 2013, but the warehouse needed to remain in iNFADS until the site restoration work was completed. Based on available information, the warehouse was demolished around May 2014. The site restoration work was completed in 2016, but the RPAO was never notified. According to supporting documentation, a search for the relevant paperwork was completed, after which the building was recorded in iNFADS as disposed in March 2017.

Consistent with our findings, the Navy Office of Financial Operations, in preparing a white paper on real property accumulated depreciation, also found that there were buildings recorded as existing in iNFADS that did not exist. For this white paper, the Navy selected a generalizable sample of 650 real property assets, including buildings, to test. Noted in the white paper as of May 31, 2017, only 584 of the 650 sampled real property assets were able to be tested. Specifically, 51 could not be validated, and an additional 15 real property assets, or 2.5 percent of the sample, were found to not exist, but were still recorded in iNFADS as existing. Based on Navy’s testing, we estimated that 2.5 percent of real property in the Navy’s iNFADS database as of May 2016 no longer existed but had not been recorded in iNFADS as disposed.

The Navy Lacks Procedures and Related Control Activities to Reasonably Assure Proper Accounting for Certain Buildings

During some of our site visits, the RPAOs stated that some buildings acquired or constructed with non-military construction funds (Non- MILCON) and that cost under $750,000 were not recorded in iNFADS. A Navy official confirmed that there were issues with recording Non- MILCON construction costing $250,000 and above, but under $750,000, for financial reporting purposes. Specifically, buildings or capital improvements are sometimes built using other Non-MILCON funding, and in some cases, an entity other than NAVFAC spends the funds. The RPAOs therefore may not know of buildings constructed as Non-MILCON projects if NAVFAC was not involved in the construction project. For example, at one location, we observed a sentry house that had been constructed for the Navy using Non-MILCON funding around 2006. However, the sentry house was not recorded into iNFADS until 2014 when the building was identified as existing through the Navy’s physical inventory procedures.

NAVFAC did not have final procedures and related control activities to reasonably assure that buildings funded with Non-MILCON funding below $750,000 were consistently recorded in iNFADS and, if the cost exceeded the capitalization threshold, were reported as assets in the Navy’s financial statements. In 2015, the Navy began to develop both the process and system changes required to track construction-in-progress costs for the Navy’s Non-MILCON projects with costs greater than $750,000, so that the cost of the buildings associated with these projects would be properly recorded in iNFADS. In March 2017, NAVFAC updated its BMS process document with the steps for Non-MILCON buildings with costs greater than $750,000 and adopted the new guidance in May 2017.

According to NAVFAC officials, the Navy has already determined that an equivalent detailed process is needed for Navy Non-MILCON buildings costing less than $750,000 to reasonably assure that the RPAOs are aware of these projects. The RPAOs are not involved in project authorization or project funding and otherwise would be unaware of these Non-MILCON projects. As a result, the RPAOs may not know of Non- MILCON buildings acquired or constructed with operations and maintenance or other Non-MILCON funding under $750,000 and accordingly do not have documentation to record the buildings’ acquisitions in iNFADS. A BMS process document that addresses Non- MILCON projects costing under $750,000 is being developed. However, according to a Navy official, a completion date has not been set for finalizing this document. Until effective procedures are implemented, Navy buildings constructed with Non-MILCON funding costing less than $750,000 may not be timely recorded in iNFADS, which would cause iNFADS to have incomplete information. If the buildings are not recorded in iNFADS, the buildings will not be reported as assets in the financial statements, as required, when the cost of the building meets or exceeds the Navy’s capitalization threshold of $250,000.

The Navy Lacks Written Procedures and Related Control Activities to Reasonably Assure Proper Financial Reporting for Buildings Coded as Nonfunctional

NAVFAC did not have written procedures requiring buildings coded as nonfunctional in iNFADS to be excluded when accumulating data from iNFADS for financial reporting purposes, nor did it have related control activities to provide reasonable assurance that such buildings were excluded. As a result, the Navy incorrectly included the amounts associated with buildings coded as nonfunctional when accumulating iNFADS information for financial reporting purposes. Specifically, based on our aggregation of iNFADS data, the Navy erroneously reported 189 buildings coded as nonfunctional, amounting to $411 million in gross value, $403 million in accumulated depreciation, and $8 million in net book value, as assets in the financial statements as of September 30, 2016. For example, one building coded as nonfunctional that we observed during our site visits was constructed in 1909, with a PRV of over $5 million in iNFADS. The building has been vacant and unusable since September 11, 2002, but was included as an asset in the financial statements for fiscal year 2016.

According to federal accounting standards, fully impaired assets, such as nonfunctional buildings, should not be included in an entity’s financial statements and related notes. Specifically, SFFAS No. 6, Accounting for Property, Plant, and Equipment, states that G-PP&E, which includes real property, shall be removed from the accounts along with the associated accumulated depreciation if the asset no longer provides service to the operations of the entity. Moreover, SFFAS No. 44, Accounting for Impairment of General Property, Plant, and Equipment Remaining in Use, reiterates the requirement of SFFAS No. 6 by stating that fully impaired assets should be removed from the G-PP&E accounts along with the associated accumulated depreciation if, prior to disposal, the asset no longer provides service in the operations of the entity.

Navy officials confirmed that they do not have written procedures or related control activities requiring buildings coded as nonfunctional in iNFADS to be excluded when accumulating iNFADS data for financial statement reporting purposes. As a result, for fiscal year 2016, the Navy erroneously included buildings coded as nonfunctional as assets on its financial statements. Navy officials agreed that nonfunctional buildings meet the impairment definition of SFFAS No. 6 and No. 44, as these buildings no longer provide service to Navy operations, and therefore should be removed from the G-PP&E accounts. For fiscal year 2017, Navy officials stated that nonfunctional buildings were reclassified from the asset class that includes buildings to the “Other” asset class. However, both asset classes were reported as G-PP&E on the balance sheet, and as a result, the nonfunctional buildings were again reported as assets in the G-PP&E line item in the Navy’s financial statements.

The Navy Lacks Written Procedures and Related Control Activities to Reasonably Assure Proper Financial Reporting for Buildings That Meet or Exceed DOD’s Capitalization Threshold

NAVFAC officials confirmed that they did not have written procedures and related control activities to reasonably assure that buildings recorded in iNFADS that met or exceeded DOD’s established capitalization threshold are properly included as assets in Navy’s financial statements. For financial reporting, the Navy’s policy is to capitalize buildings based on the established capitalization threshold in effect when each building was placed in service.

According to Navy officials, buildings placed in service from October 1, 2007, through September 30, 2013, should have been included as assets in the financial statements if the buildings were valued at or above $20,000, the capitalization threshold that was in place during that period. However, for buildings placed in service during this period, the Navy continued to use the previous capitalization threshold of $100,000 rather than the $20,000 threshold. An Office of the Secretary of Defense memorandum dated September 20, 2013, directed the services to increase the capitalization threshold to $250,000 for assets acquired and placed in service on or after October 1, 2013, and the Navy implemented this change. Further, the Navy incorrectly reported in the notes to its fiscal year 2016 and 2017 financial statements that the $20,000 capitalization threshold was used for real property.

Navy officials stated that when DOD’s capitalization threshold was changed to $20,000, the Navy did not adopt the reduced threshold pending an evaluation of changes needed to iNFADS and the development of procedures to implement the lower threshold. Because the Navy did not adopt DOD’s $20,000 capitalization threshold and instead continued to use the $100,000 threshold, buildings placed in service in fiscal years 2008 through 2013 with a value at or above $20,000 but less than $100,000 were not reported as assets in the Navy’s financial statements as of September 30, 2016, and in prior years. Navy officials could not quantify the effect on its financial statements that occurred based on the Navy’s use of the $100,000 capitalization threshold instead of the $20,000 threshold for fiscal years 2008 through 2013. Additionally, the Navy by not adopting DOD’s $20,000 capitalization threshold resulted in inconsistent reporting in DOD’s consolidated financial statements.

Challenges the Navy Faces in Complying with Federal Accounting Standards for Valuing Its Buildings

The Navy faces several challenges in valuing its buildings in accordance with federal accounting standards, including (1) finalizing documentation of actual cost information for buildings that are acquired and placed in service after the Navy’s opening balances have been established based on alternative valuation methods permitted by SFFAS No. 50; (2) capturing and recording costs of improvements that should be reported; (3) consistently completing asset evaluations for each building every 5 years as required by DOD Instruction 4165.14 to help ensure that each building’s information in iNFADS is correct; and (4) determining placed in service dates for previously unrecorded buildings that are subsequently discovered/identified through physical inventories/asset evaluations. Navy officials are aware of these challenges and have various efforts under way to address them. Effective implementation of these efforts is crucial to help address these challenges.

Finalizing the DD-1354 for Buildings Being Valued at Cost

As we have previously reported, each completed military construction project includes the DD-1354, Transfer and Acceptance of DOD Real Property, to formally transfer ownership from the constructing entity to the acquiring entity. The final version of the DD-1354 documents the final total cost of the project in iNFADS, the source of real property information for financial reporting. Navy officials acknowledge that significant delays may occur in getting to the final version of the DD-1354, which occurs after all costs are determined. If there are issues such as cost overruns or contract disputes, the delays in completing the final version of the form can be substantial. The Navy considers these substantial delays in getting to the final version of the DD-1354 to be an obstacle to timely documenting the final costs of buildings that are acquired and placed in service after the Navy’s opening balances have been established, based on alternative valuation methods permitted by SFFAS No. 50. During our site visits when we tested 79 buildings, we identified 13 buildings, either constructed or with capital improvements made from 2012 through 2016, for which a final DD-1354 had not yet been completed.

According to several RPAOs we interviewed, getting to the final version of the DD-1354 is a complicated process, requiring coordination among multiple responsible parties and units, and determines all costs associated with the construction. For example, a complex project that involves the construction and demolition of multiple buildings makes the allocation of the construction costs among the buildings of the project considerably challenging.

Recording Capital Improvements

According to SFFAS No. 6, costs associated with capital improvements— those that extend the useful life of a building or improve its capacity—are to be recorded in the accountable real property system if the actual cost exceeds the capitalization threshold. Navy officials reported that one obstacle to capitalizing the costs of improvements is determining the actual costs associated with the projects for capital improvements that are made after the opening balances are established using alternative valuation methods. The Navy has developed and is testing its methodology to properly account for capital improvements to buildings. This methodology uses an automated link from the Facilities Information System (which has the construction-in-progress account) to iNFADS. The success of this methodology will be critical for capturing capital improvements for buildings.

The inability to account for the total costs associated with capital improvements to buildings after the opening balances have been established using alternative valuation methods would result in the undervaluing of the total actual cost and annual depreciation expense associated with the buildings. Once PRV is used to establish the opening balance for buildings, the Navy must accurately record capital improvements in iNFADS in order to appropriately value the buildings and record the correct depreciation expense.

Performing Timely Asset Evaluations

We observed that the Navy has taken steps to improve the quality of its asset evaluations by completing and maintaining supporting documentation. However, we found that the Navy has not consistently completed asset evaluations for each building every 5 years as required by DOD policy. An asset evaluation is a key Navy control to help ensure that the information recorded in iNFADS is accurate. While the Navy issued a revised BMS process document formalizing asset evaluations procedures, these evaluations have not been performed every 5 years as required. Specifically, in a June 30, 2017, Navy analysis, the Navy determined that while an asset evaluation is required to be performed every 5 years, the asset evaluations had not been done for more than 5 years for 17.4 percent of real property, including buildings. When asset evaluations are not done every 5 years for each building, there is an increased risk that information in iNFADS may not be accurate. In addition, as a part of asset evaluations, Navy personnel verify key information, including the square footage of buildings that is used for the PRV calculation. The Navy has efforts under way to perform asset evaluations for those buildings for which these evaluations had not been completed in a 5-year period, including using contractors to help complete the asset evaluations.

Determining Placed in Service Dates for Buildings Found by Inventory

As stated in DOD’s Financial Management Regulation, real property assets and capital improvements to these assets are to be capitalized as of the date each asset was placed in service. Navy officials occasionally identify existing buildings that have not been recorded in iNFADS and are referred to as buildings found by inventory. These buildings are often identified through NAVFAC’s asset evaluations and periodic virtual inventories. For these buildings, the placed in service dates may not be known. While DOD and the Navy have subsequently developed procedures for determining the placed in service dates for buildings found by inventory, for some Navy buildings, the placed in service date recorded in iNFADS was the date the building was found, rather than the actual placed in service date.

According to previous guidance, if a placed in service date could not be identified through the due diligence process, then the building was recorded as placed in service as of the date it was found. The Navy’s BMS process document for real property found by inventory, dated October 25, 2016, stated each building found by inventory is to be recorded with an estimated placed in service date determined using the criteria provided in DOD’s February 2015 guidance. We were told that until December 2016, any building found by inventory was recorded with a placed in service date of the day the building was found.

The Navy’s use of the date the building was found by inventory as the placed in service date can substantially affect the information in iNFADS. For example, one of the buildings in our nongeneralizable sample was an old, abandoned maintenance shed. However, based on the iNFADS property record, the building appeared to be a relatively new building based on the recorded placed in service date of August 16, 2016, the date it was found by inventory (see fig. 3). As a result, the building is recorded in iNFADS on August 16, 2016, the placed in service date and therefore the accumulated depreciation would be less than a building with an older placed in service date. The complete, timely, and accurate recording of the placed in service date information enables ensures reliable and accurate reporting of real property information in DOD’s financial statements.

Navy officials are aware of the challenges discussed above and have various efforts under way to address them. Effective implementation of these efforts is crucial to help address these challenges.

Conclusions

The Navy’s inability to accurately account for real property assets, specifically its buildings, continues to be a material weakness reported by independent auditors. Inadequate procedures and internal control deficiencies prevent the Navy from accurately recording and reporting its buildings and knowing how many buildings it actually owns. Some buildings recorded in the Navy’s accountable real property system, iNFADS, do not exist. Similarly, the Navy does not have adequate procedures and related controls to reasonably assure that all Non- MILCON buildings and capital improvements costing less than $750,000 are recorded in iNFADS. Additionally, the Navy erroneously reported nonfunctional buildings as assets in its financial statements and excluded certain buildings that met or exceeded DOD’s capitalization threshold as assets in its financial statements. As a result of these deficiencies, the Navy does not have adequate information to support reliable reporting of real property in its annual financial statements, and DOD, Congress, and others do not have reliable, useful, and timely information for decision making.

Recommendations for Executive Action

We are making the following four recommendations to the Navy.

The Commander of NAVFAC should develop and implement procedures and related control activities for real property disposed of by demolition to provide reasonable assurance that the RPAOs timely receive a signed demolition approval document and disposal form, so that demolished buildings are recorded as disposals in iNFADS and removed at the end of the fiscal year. (Recommendation 1)

The Commander of NAVFAC should finalize and implement written procedures and related control activities to reasonably assure that all buildings costing less than $750,000 and funded with Non-MILCON funding are recorded in the Navy’s iNFADS and therefore included as assets in the financial statements if they meet or exceed the Navy’s capitalization threshold. (Recommendation 2)

The Commander of NAVFAC should develop and implement written procedures and related control activities to reasonably assure that buildings coded as nonfunctional in iNFADS are excluded for financial statement reporting purposes. (Recommendation 3)

The Commander of NAVFAC should develop and implement written procedures and related control activities related to DOD’s capitalization thresholds and outline the specific information to be accumulated from iNFADS to reasonably assure that real property assets are properly reported for financial statement reporting purposes. (Recommendation 4)

Agency Comments

We provided a draft of this report to the Navy for comment. In its comments, reproduced in appendix II, the Navy concurred with our four recommendations.

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 Office of the Assistant Secretary of Defense (Energy, Installations, and Environment), the Assistant Secretary of the Navy (Energy, Installations and Environment), the Assistant Secretary of the Navy (Financial Management & Comptroller), 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. Key contributors to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This engagement was initiated in connection with the statutory requirement for GAO to audit the U.S. government’s consolidated financial statements. The focus of this engagement was the United States Navy’s (Navy) real property, specifically buildings, because the Department of the Navy was the first military department to initially assert real property audit readiness for existence and completeness. Our objectives were to (1) determine the extent to which the Navy had internal control deficiencies, if any, that may impair its ability to assert that its buildings, as reported in its financial statements, exist and that the information about the buildings is complete and adequately supported by property records and (2) identify the challenges, if any, that the Navy faces in valuing its buildings in accordance with federal accounting standards.

To address our first objective, we interviewed Department of Defense (DOD) and Navy officials and reviewed relevant documentation, including the Naval Facilities Engineering Command’s (NAVFAC) Business Management System (BMS) process documents, which are similar to desktop procedures, to identify control activities over buildings. We reviewed the results from prior real property audit readiness testing conducted by a contractor that the Navy engaged to help it achieve audit readiness for its real property. We performed data analyses of buildings in the Navy’s accountable real property system, the internet Navy Facility Assets Data Store (iNFADS) as of September 30, 2016. To assess the reliability of data we used, we reviewed relevant Navy documentation, interviewed knowledgeable officials, reviewed policies and procedures regarding collecting and maintaining the data, performed data analyses to look for logical inconsistencies, and traced a nongeneralizable sample of buildings to supporting documents. We concluded that the data elements we used from iNFADS were sufficiently reliable for the purposes of selecting a nongeneralizable sample of buildings to test.

We selected the Norfolk and San Diego geographic areas for site visits because of the numerous bases in each area and the proximity of 5 installations to one another in each of the areas. We analyzed data from the iNFADS database as of September 30, 2016, to select buildings that fit our selection criteria for our nongeneralizable sample of buildings for book-to-floor testing from these two geographic areas. These selection criteria included age of the buildings (both older and newer buildings); square footage of the buildings, including small buildings (such as sentry houses) and large buildings (such as training facilities and barracks); cost per square foot of the buildings, including lower cost (such as warehouses) and higher cost (sentry houses with sophisticated electronics); use of the buildings, to include a variety of uses (such as electrical substations, training facilities, and offices); and operational status code of the buildings, including active and nonfunctional.

We conducted site visits in Norfolk and San Diego to interview real property accountable officers (RPAO), observe buildings, and review the available supporting documents for the sample buildings. We tested 40 buildings book to floor by visiting these buildings at 10 Navy installations across two geographic areas. During our site visits, we also selected a nongeneralizable sample of a total of 39 buildings on Navy installations to be tested floor to book—19 from 5 Norfolk and 20 from 5 San Diego areas. We met with the RPAOs at each of the10 installations and tested by observation whether the 40 buildings selected for book-to-floor testing existed. In addition to testing for existence, we compared the descriptions of the buildings in iNFADS with the buildings that we observed. For example, if the placed in service date in iNFADS was recent, we would observe whether it was a newer building. We selected a nongeneralizable sample of buildings for floor-to-book testing based on proximity to the buildings we had selected for book-to-floor testing. For the 39 buildings that we tested floor to book, we reviewed available supporting documents.

We also reviewed a Navy Office of Financial Operations white paper on the risk and potential amount of material misstatement of accumulated depreciation on the Navy’s general fund consolidated balance sheet. This white paper presented the results of a statistical sample for which 15 selected real property assets were excluded from testing because the assets no longer existed. Two social science specialists with expertise in research design and statistics reviewed the methodology and sampling used in this study and found them to be sufficient for the purposes of estimating the proportion of Navy real property assets reported as existing in iNFADS that did not exist as of May 31, 2017. We used the sampling information in the study to create a confidence interval around the estimate of the proportion of buildings at the 95 percent confidence level.

To address our second objective, we reviewed federal accounting standards, including Statement of Federal Financial Accounting Standard (SFFAS) No. 50, and the Navy’s documents for recording assets into iNFADS. We also interviewed agency officials responsible for financial reporting and real property management, including the RPAOs at the installations we visited, to identify the challenges the Navy faces in recording buildings at actual cost once the opening balances have been established according to SFFAS No. 50.

While our audit objectives focused on certain control activities related to (1) the existence and completeness of the Navy’s buildings as reported in its financial statements and the completeness and adequacy of supporting property records for those buildings and (2) the valuation of the Navy’s buildings in accordance with federal accounting standards, we did not evaluate all control activities and other components of internal control. If we had done so, additional deficiencies may or may not have been identified that could impair the effectiveness of the control activities evaluated as part of this audit.

We conducted this performance audit from September 2016 to May 2018 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.

Appendix II: Comments from the Department of the Navy

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, the following individuals made key contributions to this report: Paul Kinney (Assistant Director), Marcia Carlsen, Dennis Clarke, Francine DelVecchio, Maxine Hattery, Jason Kelly, Jared Minsk, Lisa Motley, Robert Sharpe, Sandra Silzer, and Shana Wallace.