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.