DOD has acknowledged that process and system weaknesses impair its ability to account for the full cost of military equipment and that these weaknesses impede its ability to achieve financial statement auditability. DOD is required by various statutes to improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the information needs of agency management and oversight bodies, and to produce annual audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) on the results of its operations and its financial position. Federal accounting standards, which are GAAP for federal government entities, require that the full cost of outputs (e.g., military equipment assets acquired) be reflected on agencies’ financial statements. As stated earlier, full cost is the sum of direct and indirect costs to produce the output. The standards require that the cost of property, plant, and equipment, which includes military equipment, shall include all costs incurred to bring the asset to a form and location suitable for its intended use. Examples of these costs include amounts paid to vendors; labor and other direct or indirect productions costs; and direct costs of inspection, supervision, and administration of construction contracts and construction work. Federal accounting standards allow reporting entities to use reasonable estimates of historical cost to value their property, plant, and equipment while encouraging them to establish adequate controls and systems to reliably capture asset costs in the future. DOD is also required by law to provide, at least annually, Selected Acquisition Reports (SARs) to congressional defense committees on the status of its MDAPs. SARs are the primary means by which DOD reports the status of these programs to Congress. These reports are intended to provide Congress the information needed to perform its oversight functions. In general, SARs contain information on the cost estimates, schedule, and performance of a major acquisition program in comparison with baseline values established at program start. Specific information contained in the SARs includes: program description, including the reasons for any significant changes in the total program cost for development and procurement reported in the previous SAR; schedule milestones; quantity of items to be purchased; procurement unit cost; contractor costs (initial contract price, the current price, and the price at completion); and technical and schedule variances. Congressional reporting through the SAR ceases after 90 percent of the items related to a particular MDAP have been delivered to the government, or after 90 percent of the planned expenditures under the program or subprogram have been made. After the program reaches the 90 percent threshold, the items are no longer categorized as MDAPs and enter what is referred to as the sustainment period in which the cost of the units are categorized as Operations and Support. A program can be redesignated as an MDAP if planned modifications or upgrades to an asset meet the criteria for MDAP designation. Our review of prior reports, studies, and analyses to identify weaknesses in DOD’s operations identified the following seven categories of weaknesses that impaired the department’s ability to account for the cost of military equipment: (1) support for the existence, completeness, and cost of recorded assets is needed; (2) more detail is needed in DOD contracts to allocate costs to contract deliverables; (3) additional guidance is needed to help ensure consistency for asset accounting; (4) monitoring is needed to help ensure compliance with department policies; (5) departmentwide cost accounting requirements need to be defined; (6) departmentwide cost accounting capabilities need to be developed; and (7) systems integration is needed. DOD has begun actions to address these previously reported weaknesses; however, it acknowledges that additional actions are needed before these weaknesses are fully addressed. DOD officials—including the Deputy Director, Financial Improvement and Audit Readiness (FIAR) Directorate, Office of the Under Secretary of Defense (Comptroller), and the Deputy Director of Property and Equipment Policy within the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L)— stated that the size and complexity of the department’s operations make it difficult to reach consensus on how best to address the weaknesses. They acknowledged that the department is currently focused on verifying the reliability of information, other than cost, recorded in its property accountability systems. These officials told us that until the department fully addresses the weaknesses that prevent it from accurately and completely accounting for the cost of its military equipment, it will continue to rely on a methodology to estimate the cost of its military equipment assets for financial reporting purposes. The availability of timely, reliable, and useful financial information on the full costs associated with acquiring assets is an essential tool that assists both management and Congress in effective decision making such as determining how to allocate resources to programs. It also provides an important monitoring mechanism for evaluating program performance that can help strengthen oversight and accountability. The seven categories of weaknesses and DOD’s actions to address them are as follows. Support for the existence, completeness, and cost of recorded assets is needed. DOD has not maintained the documentation needed to support the existence, completeness, and full cost of its military equipment assets. There were instances in which the department could not (1) trace assets recorded in its property accountability systems to actual physical assets, or (2) locate the records supporting the actual physical assets. Further, for assets included in the accounting system, DOD could not substantiate that all costs (e.g., acquisition, freight, inspection, and modification) had been captured and reported because of the lack of documentation (e.g., invoices). Standards for internal control call for transactions and other significant events to be accurately and timely recorded, as well as clearly documented, with the documentation being readily available for examination. In addition, DOD policy requires that the components maintain all financial records documenting the acquisition of property, plant, and equipment in support of the department’s Records Management Program. The components are also required to establish and maintain the Records Management Program, as well as periodically evaluate compliance. DOD stated that it has three ongoing initiatives to address this weakness—the military equipment valuation (MEV), the Proper Financial Accounting Treatment for Military Equipment (PFAT4ME), and the Wide Area Work Flow (WAWF). As allowed by federal accounting standards, DOD is using its MEV methodology to estimate the historical cost of its military equipment assets. The MEV methodology uses a combination of available data (budgetary and expenditure) to estimate the historical cost of military equipment assets. These estimated values were reported on the department’s fiscal year 2006 through 2009 financial statements. However, the results of several DOD Inspector General (IG) audits and an evaluation by the Under Secretary for AT&L identified implementation issues that impaired the reliability of the derived cost estimates in part, because DOD was unable to provide documentation to substantiate the universe of assets subject to its valuation methodology. For example, both reported that, in some cases, assets were included in the valuation that no longer existed, and assets that existed were improperly excluded from the valuation. To address these concerns, in 2009 DOD initiated efforts—primarily physical inventories—to verify the reliability of information recorded in its property accountability systems. In May 2010, the DOD Comptroller issued guidance for the performance of the physical inventories and internal control testing. This guidance states that the components should verify critical information, such as individual item identifier, category/asset type, location, condition, utilization rate, and user organization. It also identifies the need to perform internal control testing. However, it does not specifically require verification that a unique identifier has been assigned to the asset and recorded in the Item Unique Identification (IUID) registry as required by DOD policy. The guidance also does not provide specific guidance to perform tests of internal controls (e.g., does not identify which controls to test or how to do so). DOD officials, including the Deputy Director, Financial Improvement and Audit Readiness (FIAR) Directorate, Office of the Under Secretary of Defense (Comptroller) agreed with our assessment. The FIAR Deputy Director further stated that it is difficult to provide specifics on the internal control testing to be performed in the above guidance so the department intends to establish a 2-day training course by the summer of 2010 that will provide instruction on how to identify and test controls. DOD plans to complete the verification of the existence and completeness of its military equipment property accountability records in fiscal year 2015. Previously estimated military equipment values reported on its financial statements will be reassessed upon completion of verification efforts at each military department. In addition, the department issued its PFAT4ME policy in June 2006 that requires all contracts be structured at the level of detail needed to provide supporting documentation regarding the cost of individual items delivered. The contract-related documentation (e.g., invoices, and receipt and acceptance documents) received electronically that results from performance of a contract is then to be input into a central repository within the WAWF, which became operational in fiscal year 1999, where it is maintained and available to help support full cost determinations. However, these efforts do not adequately address this weakness because they do not address the lack of supporting documentation for noncontract- related costs such as program management costs incurred. As stated earlier, DOD policy requires components to maintain supporting documentation for the full cost of acquired military equipment assets; however, DOD has not enforced components’ compliance with its record management policy. Because it does not have the needed supporting documentation, the department has to rely on an estimation methodology to derive these assets’ values. More detail is needed in DOD contracts to allocate costs to contract deliverables. DOD had not structured contracts at the level of detail needed to identify and assign costs to individual military equipment assets. Specifically, the contracts were not structured in a manner that facilitated application of the appropriate accounting treatment for costs, including the identification of those costs that should be captured as part of the full cost of a deliverable.