DOD is subject to various environmental laws and regulations that govern restoration (cleanup) of contamination from past operations and control of hazardous waste related to active facilities (ongoing operations). DOD must also follow federal accounting standards and its own Financial Management Regulation (FMR) to ensure complete recognition and financial reporting of the associated liabilities. DOD has taken incremental steps in recent years to report a more complete picture of its environmental liabilities, but substantial issues remain in certain areas, including accounting for and reporting estimated cleanup costs for all ongoing and inactive/closed operations. The Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980 to provide a framework for cleanup of the nation’s worst hazardous waste sites. CERCLA focuses on the cleanup of inactive/closed hazardous waste sites and on making the parties responsible for generating and handling hazardous substances at these sites responsible for cleanup costs. In 1986, the Congress passed the Superfund Amendments and Reauthorization Act (SARA) which, among other things, established the DERP to implement DOD’s environmental cleanup activities. Through the DERP, a $2 billion per year program managed by the Deputy Under Secretary of Defense for Environmental Security (DUSD(ES)), DOD is cleaning up contamination at active military installations and former defense properties throughout the United States and restoring the land for new uses. DOD reports annually to the Congress on the status of DERP cleanup efforts and future funding requirements, largely based on data input from installations across the military services. DOD also uses installation DERP data to compile a significant portion of its environmental liabilities for financial statement reporting purposes. For fiscal year 2000, DOD reported approximately $18 billion on its financial statements for liabilities associated with DERP cleanup on active installations and formerly used defense sites. Subtitle C of the Resource Conservation and Recovery Act (RCRA) of 1976, as amended, provides hazardous waste management requirements for generators and transporters of waste and owners and operators of treatment, storage, and disposal facilities. Hazardous waste has properties that make it dangerous or capable of having a harmful effect on human health or the environment. Some types of hazardous waste are identified by their source, that is, by the specific industrial processes that produce the waste, such as electroplating, which generates sludge from the wastewater treatment. Other types are defined by certain characteristics that make the waste hazardous, such as whether it is flammable, corrosive, reactive, or toxic. Examples of related operations include hazardous waste landfills and incinerators, open burn/open detonation sites, and hazardous waste storage facilities. RCRA also regulates the operation and closure of underground storage tanks containing petroleum or hazardous substances and governs the cleanup of tank releases. Under RCRA, operators of facilities that treat, store, or dispose of hazardous waste must typically obtain an operating permit subject to regulatory oversight and periodic renewal. Figures 1 and 2 show examples of a hazardous waste storage bunker and underground storage tank regulated under RCRA. Two federal accounting standards, Statement of Federal Financial Accounting Standards (SFFAS) Nos. 5 and 6, establish the criteria for recognizing and reporting environmental liabilities. SFFAS No. 5, Accounting for Liabilities of the Federal Government, effective beginning in fiscal year 1997, defines a liability as a probable future outflow of resources due to a past government transaction or event. SFFAS No. 5 further states that recognition of a liability in the financial statements is required if it is both probable and measurable. SFFAS No. 6, Accounting for Property, Plant, and Equipment, supplements the requirements of SFFAS No. 5 with regard to PP&E cleanup costs, most notably those associated with general PP&E (e.g., landfills). Cleanup costs are defined as costs for removing, containing, and/or disposing of hazardous wastes or materials that, because of quantity, concentration, or physical or chemical characteristics, may pose a substantial present or potential hazard to human health or the environment. SFFAS No. 6, effective beginning in fiscal year 1998, requires that cleanup costs for general PP&E be allocated to operating periods in a “systematic and rational manner” based on use of the physical capacity of the associated PP&E (e.g., expected usable landfill area) whenever possible. If physical capacity is not applicable or estimable, cleanup costs may be accrued over the useful life of the associated PP&E. Regardless of allocation method, this accounting treatment should result in the accumulation of the total cleanup cost liability at the time when the PP&E ceases operation. The Office of the Under Secretary of Defense (Comptroller) issues the FMR, which contains DOD’s financial management policies and procedures. DOD FMR Volume 4, Chapter 13, Accrued Environmental and Nonenvironmental Disposal Cost Liabilities, prescribes the accounting policy for estimating and recognizing liabilities associated with the disposition of property, structures, equipment, munitions, and weapons. DOD FMR Volume 4, Chapter 14, Accrued Environmental Restoration (Cleanup) Liabilities, prescribes the accounting policy for estimating and recognizing liabilities associated with the containment, treatment, or removal of contamination. Chapter 14 specifies that cost estimates reported by installations to DUSD(ES) for preparation of budgetary requests and the DERP Annual Report to Congress shall be used by DOD components as the baseline for liability measurement for financial statement purposes. DOD’s financial statements should provide a comprehensive reporting of its environmental liabilities since, unlike the DERP Annual Report to Congress, the ultimate source of funding does not impact financial reporting requirements. DOD reported approximately $63 billion in environmental liabilities in its fiscal year 2000 financial statements, which was comprised of cost estimates for: (1) cleanup of nontraining range sites—$23 billion, (2) chemical weapons disposal—$15 billion, (3) training range cleanup—$14 billion, and (4) disposal of nuclear-powered aircraft carriers/submarines— $11 billion. Included in the $23 billion component were $18 billion for DERP-funded cleanup, as well as $1.4 billion and $175 million disclosed separately by the Army and Air Force, respectively, for non-DERP cleanup on active installations. Army disclosed that of its reported $1.4 billion, approximately $500 million related to ongoing operations, including closure of open burn/open detonation sites. Army reported that the other $900 million related to elements that include RCRA corrective action/closure plans and underground storage tanks. Deficiencies in DOD’s reporting of environmental liabilities continue to be a major contributing factor to our inability to express an opinion on the federal government’s consolidated financial statements. For fiscal year 2000, we reported that DOD did not maintain adequate systems or have sufficient information to develop an accurate estimate of key components of its environmental and disposal liabilities. We found that the scope and magnitude of unreported cleanup costs for ongoing and inactive/closed operations were significant at the six installations we visited. Although the installations have a process in place to accumulate the data needed for DERP reporting, this process does not encompass all operations with probable and reasonably estimable cleanup costs. Working largely with personnel already responsible for DERP reporting, we identified over 200 sites with estimated cleanup costs in excess of $250 million, most of which had not been previously reported. The 6 installations we visited had a total of 221 ongoing and inactive/closed sites requiring cleanup. We identified the sites by using environmental site records maintained at the installations, which we substantiated through a combination of regulatory agency record review, visual inspection, and interviews with personnel from the respective regulatory agencies and installation environmental offices. At our request, the installation environmental offices readily prepared or provided cleanup cost estimates totaling approximately $259 million for all 221 sites. We found some sites at each installation already in various stages of cleanup, and some of these sites were being funded through the department’s environmental restoration accounts. Sites funded through these accounts are to be included in the DERP Annual Report to Congress and in DOD’s environmental liabilities reported in its financial statements. We confirmed that 45 of the 221 sites, with estimated cleanup costs of $61 million, were included in DERP reporting by the installations. The remaining 176 sites were not included in DERP reporting, and of the $259 million in estimated cleanup costs, $198 million, or 76 percent, was not reported through DERP and therefore likely not reported in DOD’s financial statements. Of the 176 unreported sites, 149 involved ongoing operations with total estimated cleanup costs of $91 million. The remaining 27 unreported sites were inactive and/or closed operations with total estimated cleanup costs of $107 million. Tables 1 and 2 provide additional details on the number/types of sites at the six installations, corresponding cleanup cost estimates, and reporting status. Appendix IV provides these data by installation. Based on our analysis of six installations, the amount of unreported environmental liabilities associated with ongoing and inactive/closed operations is significant. DOD stated in its fiscal year 1999 DERP Annual Report to Congress that it has over 1,500 funded active installations with approximately 6,000 sites in some stage of cleanup. We believe that other installations may have the same issues we found at the six we visited. In addition, given the deficiencies discussed later in this report regarding the real property records that we used to select the six installations we visited, some of the other installations could have even more significant cleanup costs than we identified. DOD issued accounting guidance for environmental liabilities in 1999 by adding new chapters to the FMR. However, neither of the separate chapters issued for asset disposal and restoration/cleanup liabilities adequately addresses the types of unreported liabilities that we identified. Volume 4, Chapter 13, of the FMR applies to costs associated with asset disposal. Many of the cases that we identified do not involve the actual disposal of assets, but rather closure of an operation and, where necessary, cleanup of the site for future use. Landfills are a good example of this scenario—rather than selling the property when landfill operations cease, DOD usually caps or covers the facility for closure and conducts postclosure monitoring of the site consistent with regulatory requirements, usually for a period of at least 30 years. We did not find the guidance needed to report the liability for landfills in Chapter 13. SFFAS No. 6 specifically states that cleanup includes closure and postclosure costs. Therefore, Volume 4, Chapter 14, of the FMR, which applies to restoration (cleanup) liabilities, should encompass the types of operations that we identified. However, as currently written, this chapter does not clearly indicate that closure and postclosure activities are elements of cleanup. Chapter 14 defines cleanup as “…the containment, treatment, or removal of contamination that could pose a threat to public health and the environment.” As a result, this definition does not adequately address the types of operations that we identified, such as landfills, open burn/open detonation sites, and underground storage tanks. While Chapter 14 contains specific guidance on DERP cleanup and specifically references the site inventory and cost estimating guidance contained in the “DERP Management Guidance” document issued by DUSD(ES), it does not have equivalent guidance for non-DERP cleanup. As discussed previously, however, 176 (80 percent) of the 221 sites that we identified at the 6 installations, and 76 percent of the $259 million in estimated costs that we obtained for all sites, were not included in DERP reporting. Consequently, Chapter 14 would be further strengthened by specifically addressing non-DERP cleanup. Installation environmental offices at the six installations we visited maintain comprehensive records for their own sites and operations subject to cleanup requirements for regulatory purposes and have demonstrated that cleanup costs for ongoing and inactive/closed operations can be estimated. However, we found that corresponding real property records are not reliable and cost estimating methodologies are not standardized. Further, we found that DOD does not have the policies and formalized processes in place to systematically accumulate, maintain, and report site and cost data at a departmentwide level, as well as to ensure that these data are complete. As a result, DOD’s financial statements likely do not present an accurate, comprehensive report of its environmental liabilities as required by federal accounting standards. The installation environmental offices that we visited had extensive records that identify cleanup sites by size and type. We found that the initial identification of sites by each of the six installations was the result of extensive investigations conducted pursuant to federal, state, and/or local laws. For example, as part of the RCRA permitting process, installations perform a comprehensive environmental assessment of all operations to identify actual and potential cleanup sites. This process results in a RCRA Facility Assessment Report (RFA), which documents the results of the assessment and includes a detailed list of identified sites. Figures 3 and 4 show two examples of the types of sites identified in the RFA: an open burn/open detonation site and a landfill operation. The environmental offices at all six installations had extensive knowledge of the sites listed in their own RFA and periodically updated the data, as required by the permitting process, to reflect newly discovered sites and the current cleanup status of all sites. Underground storage tanks, which represented over half of the 221 sites, are registered through state and local regulatory agencies and installation environmental offices have records to identify them. Thus, these offices maintain detailed environmental site records related to the RFA, updated permitting data, and underground storage tanks. According to DOD, real property records should be a comprehensive source of data for all installation land, buildings, and related structures, regardless of whether or not cleanup requirements apply. As such, if properly maintained, they should contain information needed to ensure the accuracy of environmental site records, including data on site descriptions, in-service dates, and useful lives. Since both real property records and environmental office site records provide information needed to prepare DOD’s financial statements and are therefore subject to audit, periodic reconciliations between the two sets of records would help ensure their accuracy. However, we determined that the records maintained by each installation’s real property office were not being reconciled and did not agree with the environmental office site records that we had substantiated through review of regulatory agency records, visual inspection, and interviews. We investigated the differences and found significant errors in the real property records. These errors related to sites that were not properly added to or deleted from the real property records, as well as sites incorrectly categorized in the real property records. We found a total of 237 errors in the real property records related to operations with hazardous waste. As table 3 shows, 206 of the 237 errors, or 87 percent, resulted from additions and deletions that were not made. The 206 were comprised of 182 adjustments to add property that existed but was not recorded, and another 24 to delete property that was recorded but no longer existed at the installations. The remaining 31 errors related to property that had been incorrectly categorized in the real property records. For example, we found both underground and aboveground storage tanks categorized together, even though different cleanup and closure requirements apply to each type of tank. Appendix IV provides these data by installation. Because we used the installations’ real property records, which we have since found to be unreliable, as the basis for our selection of the six installations for this review, we may not have chosen installations from among those with the most significant cleanup costs as we intended. We found cases of significant numbers of additions and deletions not being made at some installations. For example, at Camp Pendleton Marine Corps Base, California, we identified 52 underground storage tanks that were not recorded in the real property records. At Fort Polk, Louisiana, the real property records showed 48 underground storage tanks, while the environmental site records showed only 16 in existence. Several real property office personnel cited problems in receiving the proper documentation from the base engineer or other installation personnel to prompt an adjustment to the real property records. We identified these significant errors despite existing requirements that installations perform periodic inventories of real property assets. We also found that policies regarding the recording of land-related assets were not consistently applied by the installations. For example, at two of the installations visited—Fort Carson, Colorado, and Cherry Point Marine Corps Air Station, North Carolina—we found that the installations’ real property offices did not always record assets related to land (e.g., landfills, open burn/open detonation sites, and fire training pits) in their records as required. For these two installations, we identified 33 additions that should have been made. However, we noted that the Fort Polk and Camp Pendleton real property offices did record landfills and other land-related assets. We found other inconsistencies in the recording of active and inactive/closed facilities in the real property records. For example, at several installations, active facilities were included in the records but inactive/closed facilities still incurring closure and postclosure costs were not included. Additionally, we noted instances where several real property assets located in the same vicinity were recorded as one asset. For example, at Fort Polk, the real property records showed one 160,000-gallon underground storage tank. After further review and inquiry, we determined that there were actually four separate 40,000-gallon tanks at that location. The remaining 31 errors that we found involved assets being incorrectly categorized in the real property records. For example, at Fort Polk, we identified 20 aboveground storage tanks that were categorized as underground storage tanks. Because different cleanup and closure requirements apply to each type of tank, the installations’ real property records must categorize these assets separately to support the environmental site records. The errors that we identified are symptoms of a lack of formal communication between the real property and environmental offices at some installations. Proper coordination between the property management and environmental management communities is critical to ensuring consistent and reliable tracking and reporting for financial management, regulatory compliance, and other purposes. The environmental offices at the 6 installations that we visited were able to provide us with estimates of future cleanup costs for all 221 sites. However, DOD does not have standardized and validated methodologies for developing cleanup cost estimates and installation personnel used a variety of methods to develop those estimates. The methods used by the installation environmental offices included: (1) applying different costing models, including Remedial Action Cost Engineering and Requirements (RACER) and Means Cost Estimating, (2) tailoring cost estimates from prior closures to the specific characteristics (e.g., location, technology, type of waste, capacity) of the new site and adjusting for inflation, (3) relying on staff expertise and experience in cleanup cost estimating, and (4) using an average of prior actual costs. The installations’ use of various costing methods resulted in significant variances in cleanup cost estimates for operations with similar cleanup requirements. For example, Fort Polk adjusted a recent removal contract and estimated the cost to remove a 5,000-gallon underground storage tank at approximately $43,000, while Camp Pendleton estimated the cost to remove a 20,000-gallon underground tank at only $13,000 by using an average of past removal costs. Based on inquiries of installation personnel responsible for the separate cost estimates, we could not identify a reason for the significant variance other than the different estimation methods that were used. Until DOD develops and validates standard methodologies for estimating cleanup costs, there is no assurance that these cost estimates will be comparable and reliable for decisionmaking and budget planning. DOD already has guidance in effect (DOD Instruction 5000.61; DOD Modeling and Simulation Verification, Validation, and Accreditation) which requires that cost models be validated to ensure that the results produced can be relied upon. DOD lacks leadership to ensure comprehensive reporting of the cleanup costs for ongoing operations and certain inactive/closed operations on active installations. While the Office of the Deputy Under Secretary of Defense (Environmental Security) was created in 1993 as the office responsible for environmental cleanup within DOD, its primary focus has been on the cleanup of operations covered and reported by the DERP. Although the requirements for reporting liabilities for non-DERP cleanup have existed for years, DOD has not established adequate or consistent policies to reliably develop the required cleanup cost estimates or to ensure those estimates are maintained, accumulated, and reported in its financial statements. DOD also lacks procedures for periodic communication between environmental, real property, and accounting personnel to ensure that site and cost information is accurate and complete. We made this same observation in our recent report on cleanup cost estimates for DOD training ranges. Although detailed information exists to identify operations requiring cleanup and to estimate the related cleanup costs at the six installations we visited, DOD does not have a comprehensive, controlled process to capture, summarize, maintain, and report this data for all operations. DOD currently has a structured process in place to compile and report site and cost data for DERP cleanups; however, the department is not using this process for all cleanup costs associated with ongoing and inactive/closed operations. Since many of the same installation personnel manage DERP and non-DERP cleanups, the current framework could be expanded to encompass both. In addition, DOD is not routinely coordinating between installation property management and environmental management personnel. Consequently, DOD is not properly maintaining its real property records or reconciling them with environmental site records. These issues exist primarily because DOD does not have adequate guidance and leadership to ensure that: (1) all future cleanup costs are identified and reported as part of an overall approach to managing all of its environmental liabilities, and (2) real property records are properly maintained and coordinated with environmental site records. As our work reveals, the guidance and procedures must be developed and implemented with effective coordination across the environmental, property management, and accounting communities. Until DOD addresses the issues discussed in this report, particularly in the areas of guidance and leadership, we cannot assure the Congress that DOD’s reported environmental liabilities can be relied on for long-range budget planning decisions. We recommend that the Secretary of Defense designate a focal point with the appropriate authority to oversee and manage the reporting of DOD’s liability for the cleanup of all ongoing and inactive/closed operations. We recommend that the Secretary of Defense require the DOD Comptroller to revise the FMR to include: (1) an expanded definition of cleanup, consistent with SFFAS No. 6, that includes closure/postclosure activities, and (2) guidance that addresses all restoration/cleanup liabilities, regardless of funding source or type of operation, in accordance with federal accounting standards. We recommend that the Secretary of Defense require the Deputy Under Secretary of Defense (Installations and Environment) to ensure that (1) existing errors in real property records are corrected, and (2) real property and environmental site records are periodically reconciled. We also recommend that the Secretary of Defense require the designated focal point to work with the appropriate DOD organizations to develop guidance and procedures to implement the revised FMR requirements, to include the following: (1) standardized and validated methodologies for estimating cleanup costs, and (2) a comprehensive, controlled process to systematically capture, summarize, maintain, and report the cleanup sites and costs resulting from all operations known to result in hazardous waste. On October 11, 2001, we received DOD’s comments, dated August 29, 2001, which addressed a draft of this report. In commenting on the draft, DOD concurred with the overall intent of our recommendations and fully concurred with our specific recommendation to designate a focal point to oversee and manage the reporting of DOD’s liability for the cleanup of all ongoing and inactive/closed operations. DOD partially concurred with the remaining three recommendations. Our response to DOD’s partial concurrences is included in appendix III. In addition, DOD expressed concern that some aspects of the report were misleading due to its interpretation of certain terms used in the report. Specifically, DOD objected to the use of the term “cleanup” and instead preferred what it stated were the more precise terms of “environmental restoration” and “accrued environmental disposal cost.” However, the term “cleanup,” as used in this report (see footnote 1), is defined by federal accounting standards to include specific activities and costs encompassing more than just environmental restoration and/or disposal costs. To limit a discussion of cleanup costs to only those related to restoration and disposal inappropriately narrows the applicability of the accounting standard. In accordance with the definition of cleanup and the scope of the accounting standard, the estimated cost to clean up the 221 ongoing and inactive/closed sites identified in the report are for those actions required by federal, state, and/or local statutes to remove, contain, and/or dispose of (1) hazardous waste from property, or (2) material and/or property that consists of hazardous waste at permanent or temporary closure or shutdown of associated PP&E. If the required action—which in accordance with the accounting standard may include, but is not limited to, decontamination, decommissioning, site restoration, site monitoring, closure, and postclosure costs—has not been accomplished, the liability for the future costs still remains. Therefore, the liability for the estimated future costs to clean up the 221 sites in the report includes future closure and postclosure costs based on requirements in current operating permits, as well as liabilities for the remaining closure and postclosure costs of inactive/closed operations, and closure costs for underground storage tanks. Included also are liabilities for remaining costs of decontamination and/or site restoration required by corrective actions for previous contamination of inactive/closed operations. DOD acknowledged that it did not fully estimate all of its environmental cleanup costs, but believes our report overstates the extent of the underestimation. However, our report focuses only on the results of our reviews conducted at six specific DOD installations and the extent of likely understatement by those installations. As discussed in the body of this report, 76 percent of the total estimated cleanup for the six installations, or $198 million, was not included in DERP reporting and therefore, likely not reported in financial statements. In addition, DOD stated that our report did not acknowledge a liability of $1.5 billion reported in its fiscal year 2000 financial statements for the types of activities covered by the report. We disagree. Our draft report clearly stated that the Army disclosed $1.4 billion for non-DERP cleanup on active installations. Although we continue to believe that we appropriately concluded that the Air Force’s disclosure of $175 million in non-DERP cleanup was not significant to its financial statements, we have modified our report to specifically identify this amount. Further, DOD stated that many of the statements made in this report were speculative and lacked supporting evidence. We disagree and have addressed DOD’s specific concerns in appendix III. Overall, we reiterate our position that our findings and conclusions are well-supported by our results at the six installations we visited, as well as the systemic weaknesses we identified in the areas of DOD-wide reporting systems, record-keeping coordination and maintenance, guidance in reporting environmental cleanup liabilities, and leadership and focus. Further, as explained in the introduction to the report and in appendix I, we intended to use a representative sample to respond to our requester’s question regarding the magnitude of cleanup costs associated with DOD’s ongoing operations. However, because DOD did not have a comprehensive system for identifying, summarizing, maintaining, and reporting cleanup costs for ongoing operations, DOD was unable to provide us with a reliable population from which to select a representative sample. Instead, we selected two installations from each of the three military services as examples and our conclusions about the magnitude of unreported liabilities relate only to those six installations. We are sending copies of this report to the Ranking Minority Member, House Committee on the Budget, and to other interested congressional committees. We are also sending copies to the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Under Secretary of Defense (Comptroller); the Deputy Under Secretary of Defense for Installations and Environment; and the Director of the Office of Management and Budget. Copies will be made available to others upon request. Please contact me at (202) 512-9095 if you or your staff have any questions about this report. Other GAO contacts and key contributors to this report are listed in appendix V. Our objectives were to determine: (1) the scope of ongoing DOD operations with potentially significant cleanup costs, (2) the potential magnitude of costs to clean up and dispose of the hazardous waste resulting from those operations, and (3) the availability of data for developing cleanup cost estimates. Our review, with the exception of training ranges and weapons systems (national defense PP&E), included all ongoing and inactive/closed operations on six active installations known to result in hazardous waste and subject to federal, state, and/or local laws or regulations requiring removal, containment, or disposal of that waste. Compliance with federal accounting standards requires the recognition of a liability if a future outlay of resources is both probable and reasonably estimable. To determine if a cleanup liability was probable, we reviewed federal financial accounting standards, environmental laws and regulations, and DOD accounting guidance that address environmental cleanup requirements. We also interviewed DOD officials responsible for financial reporting and environmental program management and regional Environmental Protection Agency (EPA) officials responsible for overseeing the administration of federal environmental laws and regulations applicable to DOD operations. To determine if a cleanup liability was reasonably estimable, we interviewed state regulatory agency personnel responsible for administering federal, state, and local environmental laws and regulations that regulate DOD activities and similar commercial waste management operations. We obtained information on plans for cleanup, closure, and postclosure monitoring required as part of the permitting of waste management operations for both DOD and similar commercial activities. We also obtained information on cost estimates to accomplish those plans for commercial activities. To determine the potential scope of DOD operations requiring environmental cleanup, we obtained the real property databases of each military service and extracted the assets whose category descriptions (e.g., hazardous waste storage facility) indicated an association with a hazardous or solid waste management or underground storage tank operation. Because DOD did not have a centralized or comprehensive system for identifying, summarizing, maintaining, and reporting the cleanup costs associated with all of its ongoing operations, we could not use representative sampling techniques to determine the full scope and magnitude of its related liability. Therefore, as agreed with our requester, we selected 6 of the more than 1,500 active installations reported by DOD to use as examples. To make preliminary planning decisions about the potential magnitude of the DOD-wide estimated future cleanup costs for the operations indicated by the real property extracts, we conducted a telephone survey of the regulatory officials from 13 states to determine an average estimated cleanup cost for similar commercial waste management operations. We applied the average commercial costs, making assumptions about operational status and remaining useful lives, to the extracted real property assets, and ranked individual installations in order of the resulting potential total cleanup costs. We then selected six DOD installations, two from each military service, to conduct on-site reviews of the actual scope and magnitude of the estimated future cleanup costs of their operations known to result in hazardous waste. With one exception, which was selected for its geographical location, the remaining five installations were selected from the top five in each service with what appeared to be the highest potential cleanup costs. Appendix II lists the primary locations where we performed our review. To determine the scope and related future cleanup cost estimates of waste management operations and underground storage tanks for the six individual DOD installations selected, we conducted on-site reviews at the state regulatory agencies having jurisdiction over each installation, and at each selected DOD installation. Our objective at each state regulatory agency was to obtain an understanding of the nature, scope, and cleanup requirements of the waste management activities at each selected DOD installation. To accomplish this, we: (1) interviewed relevant state regulatory agency officials, (2) reviewed oversight, permitting, and compliance documents for the DOD installations, and (3) if available, obtained and reviewed documentation of cleanup cost estimates for similar commercial operations. Our objectives at each of the six DOD installations visited were to: substantiate and supplement the information and insight gained at the determine the scope of ongoing and inactive/closed operations requiring cleanup at each installation, determine the estimated cleanup costs for these operations, and determine the extent to which these cleanup costs are currently being reported for budgetary planning and financial statement purposes. To accomplish our objectives, we: (1) interviewed installation environmental officials and reviewed supporting documentation evidencing operations and their status, (2) reconciled listings of operations and/or related assets and their status, obtained from the regulator, to installation environmental office records, (3) physically observed the existence and status of selected operations and the related PP&E, (4) obtained future cleanup cost estimates prepared by the environmental office, (5) compared our findings to installation reporting for DERP purposes, and (6) reconciled our PP&E extracts from the military service real property databases, and supplemental information provided by installation real property office records, to environmental office records of operations requiring cleanup. We summarized the data obtained and analyzed the results of our review by individual installation and environmental category (see appendix IV). We did not independently verify the reliability of the cleanup cost estimates, nor did we verify the existence or cleanup status of all relevant operations at each installation visited. Except as noted above, our work was conducted in accordance with generally accepted government auditing standards from August 2000 through May 2001. On October 11, 2001, we received DOD’s comments, dated August 29, 2001, which addressed a draft of this report. DOD’s comments are discussed in the “Agency Comments and Our Evaluation” section and are reprinted in appendix III, which also includes our detailed response to DOD’s specific comments. Other individuals were contacted via telephone and electronic mail. The following are GAO’s comments on the letter dated August 29, 2001 (received October 11, 2001), from the Department of Defense. 1. See the “Agency Comments and Our Evaluation” section of this report. 2. Chapter 14 of DOD’s FMR, “Accrued Environmental Restoration (Cleanup) Liabilities,” is intended to provide guidance in accounting for and accruing a liability for the costs associated with the containment, treatment, or removal of contamination that could cause a threat to public health and the environment. However, the included guidance centers around environmental cleanup primarily relating to restoration activities and costs. Chapter 13 of DOD’s FMR, “Accrued Environmental And Non-environmental Disposal Cost Liabilities,” provides guidance in accounting for and accruing a liability for the costs associated with the disposal of property, structures, equipment, munitions, and weapons. As stated in the “Agency Comments and Our Evaluation” section, the federal accounting standard requirement to account for environmental cleanup cost encompasses more than the restoration and disposal costs guidance currently provided by the FMR. Regardless of the terminology used, we continue to recommend that the FMR address the broad range of activities included in the scope of the federal accounting standard, such as closure and postclosure monitoring costs. 3. On May 15, 2001, DOD created the new position referred to in its comment letter, the Deputy Under Secretary of Defense (Installations and Environment), within the Acquisition, Technology and Logistics office. Because DOD has combined responsibility for both real property and environmental issues in this position, we modified our recommendation to require the Deputy Under Secretary of Defense (Installations and Environment) to correct errors in real property records and to reconcile those records with environmental site records. 4. We have modified the report to clarify the definition of “standard” as used in this report and to change the word “methodology” to “methodologies.” The underground storage tank example in our report illustrates how the use of nonstandard methodologies can result in inconsistent and incomparable cost estimates. 5. We disagree that the report’s conclusions about the significance of DOD’s unreported liabilities are not supported. As discussed in the body of our report and in the “Agency Comments and Our Evaluation” section, the unreported environmental cleanup liability for the six installations visited was 76 percent of the total estimated cleanup costs for these locations. The report’s “Conclusions” section points out the lack of and/or weaknesses in DOD-wide reporting systems, record- keeping coordination and maintenance, and leadership and guidance in reporting environmental cleanup liabilities. When considered in light of these DOD-wide weaknesses, we believe the unreported cleanup liabilities found at the visited installations are more than adequate support for our conclusion. Nevertheless, in response to DOD’s concern, we have modified our report to state that until DOD addresses the issues discussed in this report, particularly in the areas of guidance and leadership, we cannot assure the Congress that DOD’s reported environmental liabilities can be relied on for long-range budget planning decisions. Further, as stated in footnote 12 to our report, federal accounting standards do not require DOD to record the entire cleanup cost of ongoing operations as a liability on its current financial statements. However, those same accounting standards (SFFAS No. 6, par. 109) would require disclosure of the unrecognized portion of estimated total cleanup costs. In other words, DOD would be required to disclose in the footnotes to its financial statements that portion of the estimated total liability of $91 million for environmental cleanup of ongoing operations not reported as a liability on its financial statements. 6. We agree that the scope of our work did not include an audit of all the real property records at the installations visited and have clarified the wording of our report to address only the relevant real property records. 7. DOD is correct in observing that we were purposely trying to survey the installations with the highest potential costs. In lieu of using a representative sample (which was not possible due to problems in identifying a reliable population from DOD’s records, as discussed in comment 8), we selected, with one exception, two installations in each service from the top five having the highest potential environmental cleanup cost. This was an attempt to obtain as complete an understanding as possible of the broad range of cleanup activities that may be associated with DOD’s ongoing operations. Further details on our methodology are disclosed in appendix I, “Objectives, Scope, and Methodology.” Our assessment of potential environmental cleanup costs for individual installations was based on data obtained from DOD’s real property records. Review of this data during our installation visits disclosed significant errors in the relevant real property records, which in turn caused the initial determinations of potential cleanup costs to be unreliable. Thus, we could no longer be certain whether other DOD installations would have had higher potential cleanup costs than those selected. 8. We disagree with DOD that our methodology deviated from standard governmental auditing procedures. Audit sampling is applicable only when the auditor expects to draw a conclusion about a population. Because DOD did not have a comprehensive system for identifying, summarizing, maintaining, and reporting cleanup cost for ongoing operations, DOD could not provide a reliable population from which to select a representative sample. Instead, as stated in the body of our report and more fully disclosed in appendix I, “Objectives, Scope, and Methodology,” we selected two installations from each of the three military services as examples, and reached conclusions about the magnitude of unreported liabilities for only those six installations. Our selection was not intended to be a representative sample of DOD installations and we drew no conclusions about any population based solely on the results of our review of the six installations. 9. We have modified the report to disclose the amount actually reported by the Air Force. 10. Because DOD could not provide us with detailed lists of all the costs that comprise its reported liability, we have modified the report to indicate that estimated cleanup costs not reported through DERP were “not likely” to have been reported in DOD’s financial statements. We also clarified our support for this issue in footnote 13. Staff making key contributions to this report were Fannie Bivins, Francine DelVecchio, Steve Lipscomb, David Merrill, Sheila Miller, Octavia Parks, Lisa Powell, Ben Severson, and Patrick Tobo. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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Summary: GAO examined the environmental cleanup costs of ongoing operations of the Department of Defense (DOD). These include general property, plant, and equipment facilities or other assets that are being operated or are in use at DOD installations. GAO found that DOD has not developed policies, procedures, and methodologies to ensure that cleanup costs required for all of its ongoing and inactive or closed operations are identified, consistently estimated, and appropriately reported. As a result, DOD's financial statements and environmental reports continue to underreport environmental liabilities and related long-term budgetary needs. The military installations GAO visited had a total of 221 sites with estimated cleanup costs of $259 million. Of these, only 45 sites with estimated cleanup costs of $61 million were being reported for the Defense Environmental Restoration Program Annual Report to Congress, and only that amount was likely included in DOD's financial statements. GAO found DOD was not reporting 149 sites related to ongoing operations with estimated cleanup costs of $91 million and 27 inactive and closed operations with estimated cleanup costs of $107 million. The environmental offices at the six installations GAO visited had comprehensive records for the installation sites subject to cleanup requirements. Although these records were reasonably accurate, the records used to maintain accountability over related land, buildings, and structures were significantly flawed. If properly maintained, the real property records should play a significant role in ensuring the accuracy of environmental site records.