DOD has been reporting problems with its data accuracy for real and personal property since at least 1990. The Department has provided a number of reasons for the unreliable reporting, including property systems that maintain item accountability not being integrated with financial accounting systems. In fiscal year 1995, the DOD Comptroller concluded that this lack of integration adversely affected the accuracy of accounting systems data and financial reporting. The DOD Comptroller also stated that general ledger control over property, which is necessary to ensure that all financial transactions are recorded in the official accounting records, is lacking or inadequate. Accordingly, the DOD Comptroller selected DPAS to remedy these deficiencies and had implemented the system at over 150 sites as of June 1997. The DOD Comptroller designated DPAS as the property accounting system for all DOD real and personal property in order to bring DOD assets under proper accountability and financial control. DPAS is expected to provide on-line capability to support all functions that are associated with property accountability and equipment management, as well as financial control and reporting. In addition, DPAS is expected to produce the financial transactions necessary to record additions, reductions, or changes in the value of capital assets to the various general ledgers used in DOD. DPAS is also the subsidiary ledger containing all the detailed property information necessary to support the general ledger summary totals. DPAS was adapted from the Army Materiel Command’s Installation Equipment Management System by the Army’s Industrial Logistics Systems Center (ILSC) personnel. Under the oversight of the DOD Comptroller, the Financial Systems Activity (from the Defense Finance and Accounting Service’s (DFAS) Columbus, Ohio, operating location) and ILSC are responsible for maintaining and enhancing (1) the DPAS software, (2) all systems documentation, such as the user’s manual, functional description, and system specifications, and (3) processing equipment required to host DPAS. The DOD Comptroller is responsible for defining all accounting requirements, including any new accounting requirements. One of the organizations where DPAS was implemented is DISA, the DOD agency responsible for information technology. One of DISA’s organizations is the Defense Megacenter business area which consists of a headquarters and 16 Defense Megacenters that provide information processing services to DOD customers on a fee-for-service basis. DPAS has been implemented at 39 DISA sites overall, including the 16 Defense Megacenters as of June 1997. The DOD Comptroller’s office published an overall Implementation Handbook for DPAS. The current version at the time of our review was dated April 1996. A specific implementation plan is also developed for each implementing agency, of which DISA is one. DISA’s implementation plan for DPAS was dated February 6, 1996. Some of the items included in the plan were (1) an implementation schedule, (2) a description of each organization’s responsibilities, (3) equipment requirements, and (4) a description of training to be provided. Also, the plan stated the Director, DISA, is responsible for specifying interface requirements for each DISA DPAS location and working with the DOD Comptroller’s implementation team to develop the required interfaces. To determine whether DPAS meets federal accounting standards, we used relevant public laws, Office of Management and Budget (OMB) Circulars, Statements of Federal Financial Accounting Standards (SFFAS), Joint Financial Management Improvement Program (JFMIP) publications, and DOD’s Financial Management Regulation (FMR). We also used our Draft Federal Financial Management System (FFMS) review methodologysections on Fixed Assets, Funds Control, General Ledger, and Cost Accounting to evaluate the financial control functions of DPAS and how general PP&E information is shared or exchanged with other financial areas such as cost accounting. Financial control functions include ensuring that the system design allows proper recording of transactions for general PP&E in the general ledger. It also includes ensuring the system has been implemented with adequate internal controls to ensure data accuracy. To evaluate DPAS as designed and implemented, we obtained and reviewed the DPAS system documentation and reviewed the DPAS Implementation Handbook. In addition, we reviewed DPAS implementation at the Huntsville DISA Defense Megacenter. We selected Huntsville because a DISA official stated that this center had the fewest implementation problems. At the time we began audit work, DISA was one of the larger DOD agencies that had implemented DPAS at multiple sites. We visited DFAS-Pensacola, Florida, and the DISA Financial Management Liaison Office (FMLO) in Pensacola to review how the DISA Defense Megacenter’s DPAS financial transactions were processed and to better understand the processing logic for the interface between DPAS and the DISA general ledger. DFAS Pensacola provides finance and accounting services to some DOD activities. The FMLO serves as the liaison between DISA and DFAS on financial matters. Our scope did not include assessing technical design and software development issues, with the exception of DPAS’ integration with other functional areas such as procurement. Also, our review was limited to the financial control functions of DPAS and therefore did not include logistics functions. We did not evaluate, from either a cost-benefit or a technical standpoint, the DOD Comptroller’s selection of DPAS as a standard migration system, nor did we assess whether there are viable alternatives to DPAS. We reviewed documents and interviewed officials at the following locations: (1) DISA headquarters, Arlington, Virginia, (2) DISA’s western hemisphere office, Falls Church, Virginia, (3) DISA’s Defense Megacenter, Huntsville, Alabama, (4) Industrial Logistics Systems Center at Letterkenny Army Depot, Chambersburg, Pennsylvania, (5) DFAS-Pensacola, Florida, (6) DFAS-Columbus, Ohio, and (7) Information Technology Financial Management Directorate, Office of the Comptroller, Arlington, Virginia. We performed our work from August 1996 to August 1997 in accordance with generally accepted government audit standards. We requested written comments from the Secretary of Defense or his designee on a draft of this report. The Acting Under Secretary of Defense (Comptroller) provided us with written comments. These comments are evaluated in the “Agency Comments and Our Evaluation” section and are reprinted in appendix I. DPAS is designed to provide information to account for most general PP&E. This information is created based on information recorded in the DPAS property book. However, DPAS does not have the financial information to process certain minor types of general PP&E, such as foreclosed assets and the depletion of natural resources, in accordance with DOD policy and existing accounting requirements. Although DPAS, as DOD’s property system, should be able to record all required transactions, the omitted items do not affect a significant portion of DOD’s assets. For example, natural resources represent only 1.2 percent of DOD’s total general PP&E. Also, the DOD Comptroller has not yet provided guidance to ILSC on implementing federal accounting standards that become effective for periods beginning after September 30, 1997. In contrast to the omitted items referred to in the previous paragraph, implementation of these new standards may have a significant effect on DOD’s financial reporting. For example, accounting for deferred maintenance costs for assets such as buildings, facilities, and equipment is a new requirement under SFFAS No. 6 and therefore was not included in the original DPAS design. According to a DOD Comptroller official, DOD is currently updating its Financial Management Regulation to incorporate the new standards’ requirements. A DPAS project office official indicated that specific system changes to DPAS needed to meet the new standards cannot be identified until the DOD Financial Management Regulation is updated. The DPAS functional design can be modified to meet all current and pending property accounting requirements through changes that include the addition of data elements and financial transactions. DPAS as designed does not include the standard general ledger postings in its financial transactions. As a result, each site must determine the general ledger posting logic for DPAS financial transactions. The following are specific areas where DPAS should be expanded to meet these requirements. DPAS does not provide the capability to calculate the cost of a capital lease. Capital leases transfer substantially all the benefits and risks of ownership to the lessee. Agencies are required by federal accounting standards (SFFAS No. 5 currently in effect and SFFAS No. 6 effective October 1, 1997) to calculate the net present value of lease payments to determine the cost of capital leases. DPAS cannot track deferred maintenance costs. Deferred maintenance, as defined in SFFAS No. 6, paragraph 77, is maintenance that was not performed when it should have been or was scheduled to be and which, therefore, is put off or delayed for a future period. SFFAS No. 6 requires a line item on the statement of net cost with a note reference for deferred maintenance, if the amount is determined by management to be material. It also requires the activity to identify each major class of asset for which maintenance has been deferred and the method of measuring it. Also DOD’s draft Federal Accounting Standards and Requirements, dated February 24, 1997, which applies to Defense accounting systems, includes requirements to account for deferred maintenance. Further, DPAS does not allow the user to designate deferred maintenance as critical or noncritical. The standard allows the optional disclosure of deferred maintenance to be stratified between critical and noncritical amounts needed to return each major class of asset to its acceptable operating condition. If management elects to disclose critical and noncritical amounts, the disclosure shall include management’s definition of these categories.