Department of Defense
Additional Actions Needed to Improve Financial Management of Military Equipment Gao ID: GAO-10-695 July 26, 2010Major defense acquisition programs (MDAP) are used to acquire, modernize, or extend the service life of the Department of Defense's (DOD) most expensive assets, primarily military equipment. The Weapon Systems Acquisition Reform Act of 2009 (P.L. 111-23), section 304(b), directed us to perform a review of weaknesses in DOD's operations that affect the reliability of financial information for assets acquired through MDAP. To do so, GAO identified and reviewed previously reported weaknesses that impair DOD's ability to provide reliable cost information for military equipment acquired through MDAPs, and determined what actions DOD has taken to address them. GAO searched databases of audit reports issued during calendar years 2005 through 2009 to identify previously reported weaknesses. Using applicable criteria, GAO assessed whether the actions taken by DOD adequately addressed these weaknesses.
GAO found that weaknesses that impaired the department's ability to identify, aggregate, and account for the full cost of military equipment it acquires comprised seven major categories. Specifically, DOD had not (1) maintained support for the existence, completeness, and cost of recorded assets; (2) structured its contracts at the level of detail needed to allocate costs to contract deliverables; (3) provided guidance to help ensure consistency for asset accounting; (4) implemented monitoring controls to help ensure compliance with department policies; (5) defined departmentwide cost accounting requirements; (6) developed departmentwide cost accounting capabilities; and (7) integrated its systems. Although the department has acknowledged that it is primarily focused on verifying the reliability of information, other than cost, recorded in its property accountability systems, DOD has begun actions to address these weaknesses and improve its capability to identify, aggregate, and account for the full cost of its military equipment. For example, DOD is requiring that acquisition contracts be structured in a manner that facilitates application of the appropriate accounting treatment for contract costs, including the identification of costs that should be captured as part of the full cost of a deliverable. In addition, it has also begun to require that all contract deliverables that meet defined criteria be assigned a unique item identifier to facilitate asset tracking and aggregation of costs, and that electronic contract-related documentation, such as the invoice and receipt/acceptance documents, be maintained in a central data repository to ensure the availability of supporting documentation. Moreover, the department has begun to identify cost accounting data elements within its Standard Financial Information Structure (SFIS) and requires that its business-related Enterprise Resource Planning (ERP) systems support this structure. These efforts are intended to improve data sharing and integration between business areas. DOD acknowledged that the actions taken to date do not yet provide the department with the capabilities it needs to identify, aggregate, and account for the full cost of its military equipment. For example, DOD has begun to develop ERPs but has not yet defined the cost accounting requirements to be used to evaluate if these ERPs will provide the functionality needed to support cost accounting and management. DOD stated that additional actions, sustained management focus, and the involvement of many functional groups across DOD are needed before weaknesses that impair its ability to account for the full cost of the military equipment it acquires are addressed. Until DOD defines its cost accounting requirements and completes the other actions it has taken (e.g., defining data elements in SFIS) to support cost accounting and management, DOD is at risk of not meeting its financial management objective to report the full cost of its military equipment. DOD has stated that until these actions are completed it will continue to rely on its military equipment valuation (MEV) methodology to estimate the cost of its military equipment for financial reporting purposes. GAO is making 11 recommendations intended to strengthen actions DOD has taken to begin improving its ability to identify, aggregate, and account for the cost of military equipment acquired through MDAPs. Specifically, our recommendations focused on the need to define departmentwide cost accounting requirements and develop the process and system capabilities needed to support cost accounting and management. DOD concurred with our recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Asif A. Khan Team: Government Accountability Office: Financial Management and Assurance Phone: No phone on recordGAO-10-695, Department of Defense: Additional Actions Needed to Improve Financial Management of Military Equipment
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2010:
Department of Defense:
Additional Actions Needed to Improve Financial Management of Military
Equipment:
GAO-10-695:
GAO Highlights:
Highlights of GAO-10-695, a report to congressional committees.
Why GAO Did This Study:
Major defense acquisition programs (MDAP) are used to acquire,
modernize, or extend the service life of the Department of Defense‘s
(DOD) most expensive assets, primarily military equipment. The Weapon
Systems Acquisition Reform Act of 2009 (P.L. 111-23), section 304(b),
directed us to perform a review of weaknesses in DOD‘s operations that
affect the reliability of financial information for assets acquired
through MDAP. To do so, GAO identified and reviewed previously
reported weaknesses that impair DOD‘s ability to provide reliable cost
information for military equipment acquired through MDAPs, and
determined what actions DOD has taken to address them. GAO searched
databases of audit reports issued during calendar years 2005 through
2009 to identify previously reported weaknesses. Using applicable
criteria, GAO assessed whether the actions taken by DOD adequately
addressed these weaknesses.
What GAO Found:
GAO found that weaknesses that impaired the department‘s ability to
identify, aggregate, and account for the full cost of military
equipment it acquires comprised seven major categories. Specifically,
DOD had not (1) maintained support for the existence, completeness,
and cost of recorded assets; (2) structured its contracts at the level
of detail needed to allocate costs to contract deliverables; (3)
provided guidance to help ensure consistency for asset accounting; (4)
implemented monitoring controls to help ensure compliance with
department policies; (5) defined departmentwide cost accounting
requirements; (6) developed departmentwide cost accounting
capabilities; and (7) integrated its systems.
Although the department has acknowledged that it is primarily focused
on verifying the reliability of information, other than cost, recorded
in its property accountability systems, DOD has begun actions to
address these weaknesses and improve its capability to identify,
aggregate, and account for the full cost of its military equipment.
For example, DOD is requiring that acquisition contracts be structured
in a manner that facilitates application of the appropriate accounting
treatment for contract costs, including the identification of costs
that should be captured as part of the full cost of a deliverable. In
addition, it has also begun to require that all contract deliverables
that meet defined criteria be assigned a unique item identifier to
facilitate asset tracking and aggregation of costs, and that
electronic contract-related documentation, such as the invoice and
receipt/acceptance documents, be maintained in a central data
repository to ensure the availability of supporting documentation.
Moreover, the department has begun to identify cost accounting data
elements within its Standard Financial Information Structure (SFIS)
and requires that its business-related Enterprise Resource Planning
(ERP) systems support this structure. These efforts are intended to
improve data sharing and integration between business areas.
DOD acknowledged that the actions taken to date do not yet provide the
department with the capabilities it needs to identify, aggregate, and
account for the full cost of its military equipment. For example, DOD
has begun to develop ERPs but has not yet defined the cost accounting
requirements to be used to evaluate if these ERPs will provide the
functionality needed to support cost accounting and management. DOD
stated that additional actions, sustained management focus, and the
involvement of many functional groups across DOD are needed before
weaknesses that impair its ability to account for the full cost of the
military equipment it acquires are addressed. Until DOD defines its
cost accounting requirements and completes the other actions it has
taken (e.g., defining data elements in SFIS) to support cost
accounting and management, DOD is at risk of not meeting its financial
management objective to report the full cost of its military
equipment. DOD has stated that until these actions are completed it
will continue to rely on its military equipment valuation (MEV)
methodology to estimate the cost of its military equipment for
financial reporting purposes.
What GAO Recommends:
GAO is making 11 recommendations intended to strengthen actions DOD
has taken to begin improving its ability to identify, aggregate, and
account for the cost of military equipment acquired through MDAPs.
Specifically, our recommendations focused on the need to define
departmentwide cost accounting requirements and develop the process
and system capabilities needed to support cost accounting and
management. DOD concurred with our recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-695] or key
components. For more information, contact Asif A. Khan at (202) 512-
9095 or khana@gao.gov.
[End of section]
Contents:
Letter:
Background:
DOD Has Actions Underway to Address Financial Management Weaknesses
Related to Military Equipment, but Additional Actions Are Needed:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendix I: Objective, Scope, and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: Documentation Reviewed to Identify Weaknesses That
Impair DOD's Ability to Identify and Account for the Cost of Military
Equipment:
Appendix IV: GAO Contact and Staff Acknowledgments:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 26, 2010:
Congressional Committees:
For years, GAO and other entities have reported on weaknesses that
affect the Department of Defense's (DOD) ability to effectively manage
its major defense acquisition programs (MDAP).[Footnote 1] Since 2003,
DOD's portfolio of MDAPs has increased steadily from 77 to 98 and the
cumulative estimated investment in these programs has grown from
approximately $1.2 trillion to $1.7 trillion.[Footnote 2] MDAPs are
used to acquire, modernize, or extend the service life of some of the
department's most expensive assets, primarily military equipment such
as aircraft, ships, tanks, and self-propelled weapons.[Footnote 3]
Although MDAPs can include any major acquisition program that meets
the dollar or other criteria necessary for MDAP designation, DOD
officials stated that approximately 75 percent of the total number of
MDAPs reported in July 2009 are likely to involve the acquisition of
military equipment assets. While the department has reported over a
trillion dollars in its military equipment investments on its
financial statements, DOD acknowledged that the department lacks the
process and system capabilities to reliably identify, aggregate, and
report the full cost of these assets.[Footnote 4]
Given the magnitude of DOD's military equipment assets and the
inherent risk associated with managing large acquisition programs,
having reliable and timely cost information is essential for proper
planning and effective management and oversight. In August 2009, the
DOD Comptroller directed that the department focus its limited
financial management improvement resources and efforts on identifying
and addressing weaknesses in areas deemed most useful to DOD managers.
Specifically, the Comptroller prioritized efforts focused on ensuring
the reliability of the department's budgetary information and property
accountability records for mission critical assets, which includes
military equipment. The DOD Comptroller stated that many difficult
problems remain unresolved--including implementing compliant systems
and valuing the department's significant investment in property,
plant, and equipment--and will require the involvement of many
functional groups across DOD.
The Weapon Systems Acquisition Reform Act of 2009 (Pub. L. No. 111-
23), section 304(b), directed us to perform a review of weaknesses in
DOD's operations that affect the reliability of financial information
on assets acquired through MDAPs. Our objective was to identify
previously reported weaknesses that impair DOD's ability to provide
reliable cost information for military equipment acquired through
MDAPs and determine what actions DOD has taken to address them. This
report provides the results of our review. The act also requires our
office to review the growth in operating and support costs of major
weapon systems. We are issuing a separate report in response to that
provision of the act.
To address the objective, we searched databases of audit reports
issued during calendar years 2005 through 2009 using key terms (e.g.,
military equipment) to identify weaknesses in business operations that
impair DOD's ability to account for the cost of military equipment
based on relevant federal financial accounting standards.[Footnote 5]
We grouped the weaknesses into categories. We discussed with DOD
officials the categories of weaknesses identified and obtained
supporting documentation--such as memorandums, directives, and an
independent validation and verification report for the military
equipment valuation initiative--on their actions to address them.
Using applicable criteria,[Footnote 6] we assessed whether the actions
taken adequately addressed the identified weaknesses. To obtain
clarification and explanations, as needed, we interviewed key
department officials. Our detailed audit scope and methodology are
presented in appendix I. We conducted this performance audit from
October 2009 through July 2010 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 the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives. We requested comments on a draft of this report from the
Secretary of Defense or his designee. Written comments from the Office
of the Under Secretary of Defense (Comptroller) are reprinted in
appendix II.
Background:
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. [Footnote 7]
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.[Footnote 8] As stated earlier, full cost is the sum of
direct and indirect costs to produce the output.[Footnote 9] 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.
[Footnote 10] 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[Footnote 11]. 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.[Footnote 12]
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.[Footnote 13] 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;[Footnote 14]
* 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.
DOD Has Actions Underway to Address Financial Management Weaknesses
Related to Military Equipment, but Additional Actions Are Needed:
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.[Footnote
15] 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.
[Footnote 16] 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,[Footnote 17] 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.[Footnote 18] 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.[Footnote 19] 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
[Footnote 20] as required by DOD policy.[Footnote 21] 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.[Footnote 22] 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.[Footnote 23] 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. Standards for
internal control require that the agency identifies, captures, and
distributes information at the sufficient level of detail that permits
management to carry out its roles and responsibilities.[Footnote 24]
DOD stated that the PFAT4ME and the Item Unique Identification (IUID)
initiatives will address this weakness. PFAT4ME requires program
managers to structure all contracts entered into after October 2006 in
a manner to facilitate the appropriate accounting treatment of
contract costs.[Footnote 25] To implement this initiative, DOD
developed a training course on how to comply with the requirements
outlined in its PFAT4ME policy.[Footnote 26] However, it is not a core
or required course and DOD has not established a process to ensure
that acquisition personnel affected by this policy, including program
managers and business/financial management analysts, complete the
course.
In 2009, AT&L began to perform oversight activities to verify that the
components were properly structuring the contracts; however, AT&L
officials stated that they were not verifying whether program
management offices were appropriately accounting for the cost of each
deliverable. In addition, we found that DOD has not developed guidance
for these oversight activities, including how often these reviews are
to be performed, roles and responsibilities for this oversight, the
steps to be performed, and the basis for selecting contracts for
review.
In addition, DOD policy requires contract deliverables, including
military equipment, that meet predefined criteria, be assigned a
unique item identifier.[Footnote 27] According to DOD officials
responsible for the IUID initiative, the purpose of the unique item
identifier is to facilitate asset accountability and tracking,
including the identification and aggregation of related costs to
derive the full cost of a contract deliverable.[Footnote 28] The
department expected to fully implement IUID by fiscal year 2015;
however, according to DOD officials, the department is not on target
for achieving its timeline. These officials told us that the
department has encountered difficulty in obtaining consensus from the
components in implementing this initiative primarily due to the
applicability of the IUID requirement to controlled inventory items.
The Deputy for Program Development and Implementation, Defense
Procurement and Acquisition Policy within AT&L explained that
controlled inventory items--which encompass items such as ammunition
and threaded fasteners and number in the hundreds of millions--were
never intended to be assigned individual unique item identifiers. The
department is currently in the process of clarifying this requirement.
[Footnote 29] DOD has determined that if it does not modify the IUID
policy to eliminate this requirement, it will not be able to fully
implement IUID until fiscal year 2023. If the IUID requirements are
revised to exclude these items, DOD expects to fully implement IUID by
2017. DOD officials acknowledged that they have not yet developed
policies and procedures that define how IUID will be used to identify
and aggregate asset costs.
Additional guidance is needed to help ensure consistency for asset
accounting. DOD had not developed a policy and procedures requiring
the components to account for the full costs of military equipment
assets. Standards for internal control call for agencies to develop
and implement appropriate policies, procedures, techniques, and
mechanisms to ensure that management's directives are consistently
carried out.[Footnote 30] DOD stated that the PFAT4ME, IUID, and the
MEV methodology will address this weakness. AT&L officials, including
the Deputy Director of Property and Equipment Policy, told us that
they are working with the Federal Accounting Standards Advisory
Board's Accounting and Auditing Policy Committee (AAPC) to develop
full cost guidance. They also noted that AT&L has drafted guidance
intended to supplement its PFAT4ME policy memorandum to assist
managers in identifying the types of contract costs that should be
included in determining the full cost of an asset, such as military
equipment. According to these officials, this policy has not been
finalized because the department has had difficulty reaching consensus
regarding its cost accounting requirements. These officials stated
that this draft guidance does not yet address noncontract-related
costs, such as program management costs incurred directly by the
military services and indirect costs. They did not provide a time
frame for completing these efforts.
As stated earlier, the department is currently relying on an
estimation methodology referred to as MEV to report the cost of its
military equipment. In order for management and auditors to rely upon
the results of the methodology it is important that the methodology be
implemented consistently. To help ensure consistency in the
application of its estimating methodology, DOD developed business
rules in 2005. In addition to the MEV implementation issues identified
by the DOD IG, we identified inconsistencies in the business rules for
estimating the cost of military equipment, which further impact the
reliability of reported estimates. For example, the MEV full cost
business rule states that all costs incurred to acquire and bring
military equipment to a form and location for its intended use should
be capitalized, including the direct costs of maintaining the program
management office. However, the MEV program management office business
rule states that program management office costs are immaterial and
should be expensed. DOD officials agreed that there are
inconsistencies in the business rules and acknowledged the need to
revisit them.
Monitoring is needed to help ensure compliance with department
policies. DOD has not established adequate monitoring controls to
assess compliance with applicable policies or the extent to which
actions taken are achieving their intended objectives. For example,
although DOD property accountability policies and regulations require
DOD components to (1) perform periodic physical inventories and to
reconcile the results to the associated property accountability
records, and (2) track and maintain records for all government-
furnished property in the possession of contractors, DOD management
has not established needed monitoring controls to help ensure
compliance. Standards for internal control require agencies to develop
and implement ongoing monitoring activities over the internal control
system to ensure adherence with policies and procedures.[Footnote 31]
DOD financial management and AT&L officials, including the Deputy
Director of Property and Equipment Policy within AT&L, stated that
weaknesses in the department's ability to ensure compliance with
property accountability requirements have impacted its ability to
substantiate reported military equipment costs. As a result of the
breakdowns in compliance with policies and regulations for recording
and tracking property, property records used by the components for
valuing its military equipment included assets that no longer existed,
and did not include other assets that did exist. To address this
concern, DOD is in the process of verifying its property
accountability records by conducting physical inventories and internal
control testing. As stated earlier, DOD has issued guidance, but it
does not provide specifics as to the internal control testing to be
performed. The DOD Comptroller told us that the department plans to
complete this effort in fiscal year 2015. After completing this
effort, effective ongoing monitoring activities are needed to ensure
departmentwide compliance with policies designed to help maintain
reliable property accountability records.
Departmentwide cost accounting requirements need to be defined. DOD
has not defined its requirements for the identification and
aggregation of cost information, which will be the foundation for its
development of departmentwide cost accounting and management
capabilities. Federal accounting standards require that the full cost
of resources, which directly or indirectly contribute to the
production of outputs (e.g., military equipment acquired), be
reflected on an agency's financial statement. To ensure that costs are
identified and accumulated in a consistent and comparable manner,
entities should define their requirements and procedures for
identifying, measuring, analyzing, and reporting costs.[Footnote 32]
Since DOD has stated that it intends to support the identification,
aggregation, accounting, and reporting of cost information through the
implementation of the Enterprise Resource Planning (ERPs)[Footnote
33], it is important that DOD define its cost accounting requirements
to ensure that these systems provide these capabilities. Institute of
Electrical and Electronics Engineers (IEEE)[Footnote 34] and the
Software Engineering Institute at Carnegie Mellon recommend that
organizations define their requirements, which are the specifications
that system developers and program managers use to develop or acquire,
implement, and test a system.[Footnote 35] This process should
identify user requirements, as well as those needed for the definition
of the system. It is critical that requirements be carefully defined
and that they reflect how the organization's day-to-day operations are
or will be carried out to meet mission needs. Improperly defined or
incomplete requirements have been commonly identified as a root cause
of system failure and systems that do not meet their cost, schedule,
or performance goals. DOD Comptroller and Business Transformation
Agency officials stated that the implementation of the ERPs and its
Standard Financial Information Structure (SFIS) are intended to
address this weakness. Comptroller and Business Transformation Agency
and military department financial management and comptroller officials
stated that most of the ERPs under development within the military
departments have cost accounting management capabilities inherent in
their design as required by DOD policy. [Footnote 36]
Although agencies should first define their requirements, which are
then used to evaluate the system's capabilities to determine if it
will meet users' needs before it is developed or acquired, the
department has not yet defined its cost accounting requirements at the
major component level, including how SFIS will be used to support cost
accounting in the existing and ERP system environments. They stated
that the department has been unable to reach consensus on how to
implement SFIS in support of cost accounting and management. SFIS is
intended to be a comprehensive "common business language" that will
standardize the financial reporting of information and data for
budgeting, financial accounting, and cost/performance management. DOD
has not yet determined how the SFIS data elements will be used to
identify and aggregate cost information, nor has it established time
frames for developing the cost accounting requirements and completing
SFIS.
Departmentwide cost accounting capabilities need to be developed. DOD
had not developed departmentwide cost accounting capabilities to
capture military equipment asset costs. Federal accounting standards
require agencies to develop and implement cost accounting systems that
provide the capability to collect cost information by responsibility
segments, measure the full cost of outputs, provide information for
performance measurement, integrate cost accounting and general
financial accounting, provide appropriate and precise information, and
accommodate special cost-management needs.[Footnote 37] DOD's legacy
financial management and related business systems were not designed to
meet current financial reporting requirements and do not provide
adequate evidence for supporting material amounts on the financial
statements or acquisition management decision making. These systems
were designed to record and report information on the status of
appropriations and support funds management, and not designed to
collect and record financial information in compliance with federal
accounting standards. DOD acknowledged that it does not yet have the
capability to identify, aggregate, and capture the full costs of its
military equipment and has stated that the ERPs are intended to
provide this capability.
We have previously reported on problems that DOD has encountered in
its efforts to implement ERPs. In 2007, we reported that the Army
lacked an integrated approach for implementing its ERPs, which could
result in interoperability problems.[Footnote 38] In September 2008,
the Army reported a similar finding.[Footnote 39] Specifically, the
Army reported that interoperability problems were likely to occur due
to the lack of common data definitions and structures between the
Army's ERPs--General Fund Enterprise Business System (GFEBS), Global
Combat Support System-Army (GCSS-Army), and Logistics Modernization
Program (LMP)--thus resulting in the need for manual reconciliations
and reduced efficiencies. The report concluded that the planned
configuration of these systems may prevent the Army from receiving the
intended benefits of an ERP, including financial transparency and cost
accounting. Army officials stated that they are addressing these
deficiencies, but did not provide a time line for completion. In July
2009, Navy reported that its ERP did not yet provide the capability to
aggregate cost information to derive the full cost of its military
equipment and to segregate military equipment from other general
property, plant, and equipment.[Footnote 40] The Navy Financial
Management Officer stated that these deficiencies have not yet been
addressed because of other priorities. DOD stated that ERPs are
critical to transforming business operations within the military
departments.
Systems integration is needed. DOD had not fully integrated its
property and logistics systems with acquisition and financial systems.
DOD policy requires that its financial management systems are planned
for and managed together, operated in an integrated fashion, and
linked together electronically in an efficient and effective manner to
provide reliable, timely, and accurate financial management
information.[Footnote 41] The department's property and logistics
systems were not designed to capture acquisition costs and the cost of
modifications and upgrades, or to calculate depreciation. Many of the
financial management systems in use are not fully integrated with
other systems within the military components or departmentwide. The
number of system interfaces and subsidiary and feeder systems, and the
lack of standard data elements employed by each DOD component, make it
difficult to cross-walk data between systems, share data, and ensure
consistency and comparability of data. In March 2009, DOD reported
that its legacy system environment does not facilitate the
identification and aggregation of the full cost of its
assets.[Footnote 42] DOD officials, including the Deputy Director of
Property and Equipment Policy, AT&L, stated that the implementation of
the ERPs and SFIS is intended to address this weakness. To facilitate
information sharing for financial reporting purposes, in August 2005
DOD issued a policy requiring systems, including ERPs, that contain
financial information to provide the ability to capture and transmit
information following the SFIS data structure or, if not, to
demonstrate that this capability will be achieved through a cross-walk
to the SFIS data structure.[Footnote 43] DOD components and agencies
are required to report to the Business Transformation Agency (BTA) the
extent to which SFIS requirements, as defined in the department's
business enterprise architecture, are met. BTA officials, including
the official responsible for the SFIS initiative, stated that the
department is developing a process to validate the information
included in the SFIS compliance reports submitted by the components
and agencies but did not provide a time frame for completion. However,
if certain SFIS requirements, such as cost accounting, are not clearly
defined, including a determination of how cost information should be
identified, aggregated, and managed within and across acquisition
programs, the department's intent to achieve standardization and
comparability of cost information will be at risk. Further, as stated
above, the Army's ERPs--GFEBS, GCSS-Army, and LMP--may experience
interoperability problems because of the lack of common data
definitions and structures. In addition, DOD stated that it has not
yet determined whether or how WAWF and the IUID will be integrated
into the emerging ERP environment to facilitate the identification and
aggregation of cost to address the agency's requirements.
Conclusions:
While DOD is relying on a methodology to estimate the cost of its
military equipment, the department has various actions underway to
begin laying a foundation for addressing weaknesses that currently
impair its ability to identify, aggregate, and account for the full
cost of its military equipment assets. For example, DOD has taken
important steps such as requiring greater detail in contract-related
documentation, such as invoices, and the assignment of unique
identifiers to individual items to aid its ability to identify,
aggregate, and account for the cost of acquired assets. An additional
challenge that DOD faces is establishing the universe of assets
subject to valuation and cost accounting. Previous audits and
evaluations have showed that some assets that no longer existed were
included while other existing assets were improperly excluded from
DOD's property accountability records. This situation exists due to a
combination of issues, including gaps in DOD's guidance and policies
related to asset accountability, as well as a lack of compliance with
existing policies and guidance. These examples illustrate the
interconnection or dependency between the various asset accounting
issues the department is facing and its related actions to improve its
cost accounting financial management for military equipment. DOD has
acknowledged that additional actions are needed before the department
achieves cost accounting and management capabilities, but stated that
its improvement efforts are not yet focused on achieving these
capabilities. Additional efforts are needed to issue additional
guidance regarding how to identify the full cost of an asset to
supplement its PFAT4ME guidance and to identify and define
departmentwide cost accounting requirements at the major component
level, including what information is needed to manage cost within and
across acquisition programs and support asset valuation and life-cycle
management and how implementation of SFIS and the ERPs will support
these requirements. Moreover, DOD needs to determine the extent to
which certain actions currently underway, such as WAWF and IUID, will
be utilized in the emerging ERP environment. Without additional
actions and guidance, the department's current efforts are at risk of
not meeting the intended objectives of providing cost accounting
capabilities needed to reliably account for and report the full cost
of its military equipment.
Recommendations:
In order to enhance corrective actions underway within DOD to address
previously reported weaknesses and improve DOD's ability to provide
reliable information on the full cost of military equipment acquired
through MDAPs, we recommend that the Secretary of Defense direct the
DOD Chief Management Officer to work jointly with the Under Secretary
of Defense (Comptroller); the Under Secretary of Defense for
Acquisition, Technology, and Logistics; and the military department
Chief Management Officers, as appropriate, to take the following nine
actions:
* Enforce compliance with the department's records management policy
by periodically evaluating the extent to which the components are
maintaining documentation in support of the full cost of military
equipment.
* Establish and implement ongoing monitoring activities to enforce
compliance with the department's existing policies and procedures
requiring the components to (1) perform periodic physical inventories
and to reconcile the results to property accountability records after
completion of existing efforts to verify the reliability of the
property accountability records and (2) track and maintain records for
government-furnished property in the possession of contractors.
* Update the department's guidance regarding verification of
information in component property accountability records to include
verification that all assets recorded in the accountability records
that are required by DOD to have a Unique Item Identifier are included
in its IUID registry.
* Develop and implement guidance on how the IUID will be used to
identify, aggregate, and report asset cost information.
* Classify the PFAT4ME training as a core course for the department's
affected acquisition personnel, including program managers, and track
attendance to ensure that such personnel take the training.
* Develop and implement guidance to help ensure compliance with the
oversight activities for the PFAT4ME initiative, including how often
these reviews are to be performed, roles and responsibilities for
oversight, the steps to be performed, and the basis for selecting
contracts for review.
* Complete efforts to develop and implement a policy requiring the
components to account for the full cost of military equipment,
including guidance for what types of contract and other costs should
be included and for determining the appropriate accounting treatment
of these costs.
* Review the MEV methodology business rules to identify
inconsistencies and revise the rules as needed.
* Assess the WAWF and IUID initiatives and determine the extent to
which they will be utilized in the emerging ERP business systems
environment.
Additionally, we recommend that the Secretary of Defense direct the
military department Chief Management Officers, in consultation with
the Under Secretary of Defense (Comptroller) and the Under Secretary
of Defense for Acquisition, Technology, and Logistics, as appropriate,
take the following two actions:
* Define the cost accounting requirements at the major component
level, including how SFIS data elements will be used to identify,
aggregate, account for, and report cost information.
* After defining the cost accounting requirements, utilize the
requirements as input to the ERPs to help ensure that the ERPs will
provide the capability to identify and aggregate cost information for
the department's assets in accordance with DOD's defined requirements.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the Under
Secretary of Defense (Comptroller) which are reprinted in Appendix II.
In commenting on the report, the Under Secretary stated the department
agreed with the need to establish a framework that provides improved
cost and management information that will support better management of
Major Defense Acquisitions Programs (MDAP). The department concurred
with the 11 recommendations and cited actions taken, under way, or
planned to address them.
In its response, the department emphasizes that it is sensitive to the
cost of obtaining information solely for the purpose of proprietary
financial reporting or audit compliance where this information is not
otherwise used by management. It further states that DOD has concluded
that it is not cost-effective to gather auditable data on the
historical cost of military equipment systems for proprietary
financial reporting and audit because the information is not used to
manage. DOD has indicated that it will propose changes in department
policies and instructions to accommodate this decision. These pending
policy changes will likely impact DOD's implementation of our
recommendations and so at some point we may need to assess DOD's
corrective actions under the changed policies to determine whether the
actions meet the intent of our recommendations.
DOD acknowledges that there may be requirements for cost information
related to acquisition-program lifecycle management, which the
department will accommodate as appropriate. DOD also stated that it is
working with federal standard setters to develop full-cost guidance
that would guide its cost accounting efforts. The department will
integrate this guidance into the ERPs and guide cost accounting
efforts and will develop, coordinate, and issue policy and guidance on
accounting for the full cost of military equipment consistent with our
recommendations. We welcome DOD's decision to accommodate such
requirements and contribute to revised guidance for cost-effectively
serving management's information needs and reliable reporting on the
cost of acquisition programs and assets acquired.
It is also important to note that while federal accounting standards
do not require agencies to collect historical, transaction-based cost
data, they encourage agencies that estimate asset value, such as DOD,
to establish the internal control practices and systems needed to
capture and sustain such data for future acquisitions. We believe that
this guidance reflects the importance of actual costs in providing
reliable historical information for accountability to the American
taxpayer and for management decision making as well. It is important
to emphasize that our recommendations are focused not on gathering
costs retrospectively but are intended to assist DOD in its efforts to
develop the processes and systems needed to produce reliable
information going forward. We believe that providing reliable
information is likely to include capturing transaction-based costs as
historical information for future management decisions and
accountability reporting.
The availability of timely, reliable, and useful financial information
on the 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.
We are sending copies of this report to interested congressional
committees; the Secretary of Defense; the Secretaries of the Army, the
Navy, and the Air Force; the Deputy Secretary of Defense/Chief
Management Officer; the Under Secretary of Defense (Comptroller)/Chief
Financial Officer; the Under Secretary of Defense for Acquisition,
Technology, and Logistics; the Under Secretary of the Army/Chief
Management Officer; the Under Secretary of the Navy/Chief Management
Officer; the Under Secretary of the Air Force/Chief Management
Officer; and the Office of Management and Budget's Office of Federal
Financial Management. This report is available at no charge on GAO's
Web site at [hyperlink, http://www.gao.gov]. Should you or your staff
have any questions concerning this report, please contact me at (202)
512-9095 or khana@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 IV.
Signed by:
Asif A. Khan:
Director, Financial Management and Assurance:
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel Inouye:
Chairman:
The Honorable Thad Cochran:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Howard McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable Norman D. Dicks:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Objective, Scope, and Methodology:
Our objective was to identify previously reported weaknesses that
impair the Department of Defense's (DOD) ability to provide reliable
cost information for military equipment acquired through major defense
acquisition programs (MDAPs)[Footnote 44] and determine what actions
DOD has taken to address them.
To address this objective, we obtained an understanding of MDAPs,
including the military equipment (i.e., weapon systems) assets
acquired through such programs, by reviewing DOD guidance and
interviewing officials from the Office of the Under Secretary of
Defense for Acquisition, Technology, and Logistics.[Footnote 45] We
identified and reviewed applicable federal financial accounting
standards, and interviewed officials of the Federal Accounting
Standards Advisory Board to obtain clarification on the changes made
to Statement of Federal Financial Accounting Standards (SFFAS) 35.
[Footnote 46] We searched databases of audit reports issued during
calendar years 2005 through 2009 using key terms (e.g., military
equipment; general property, plant, and equipment; financial
management; weapons systems acquisition; and major defense acquisition
programs).[Footnote 47] We reviewed the results of our search (e.g.,
reports, studies, and analyses) to identify weaknesses in business
operations that, based on relevant federal financial accounting
standards, impair DOD's ability to account for the cost of military
equipment. We grouped these weaknesses into categories. To identify
additional reports or relevant DOD studies and analyses and to obtain
clarification, as needed, on reported weaknesses, we interviewed key
department officials, including the following:
* Deputy Director, Financial Improvement and Audit Readiness
Directorate, Office of the Under Secretary of Defense (Comptroller);
* Acting Deputy Director, Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics;
* representatives from the DOD's Inspector General Office;
* representatives from the military services' offices of the Assistant
Secretary, Financial Management and Comptroller, Financial Management
Operations; and:
* Chief Management Office representatives within DOD and the military
services as required by section 304(b).
See appendix III for the reports, studies, and analyses reviewed to
identify the relevant weaknesses.
We discussed with DOD officials the categories of weaknesses we
identified as a result of our search of prior reports, studies, and
analyses, and obtained supporting documentation--such as memorandums,
directives, an independent validation and verification report for the
military equipment valuation initiative, and gap analyses related to
the Navy Enterprise Resource Planning effort--from DOD on its actions
to address them. Using applicable criteria,[Footnote 48] we assessed
whether the actions taken adequately addressed the identified
weaknesses. We interviewed the DOD officials referred to above to
obtain clarification and explanation of actions taken to address the
weaknesses, including mechanisms and metrics used to monitor progress.
We conducted this performance audit from October 2009 through July
2010 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 the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Department of Defense:
Under Secretary Of Defense:
Comptroller:
1100 Defense Pentagon:
WASHINGTON, DC 20301-1100
July 13, 2010:
Mr. Asif A. Khan:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Khan:
This is the Department of Defense (DoD) response to the Government
Accountability Office (GAO) draft report GAO-10-695, "Department Of
Defense: Additional Actions Needed to improve Financial Management of
Military Equipment," dated June 15, 2010 (GAO Code 197089). Detailed
comments are enclosed with this letter.
The Department has begun laying a foundation for addressing weaknesses
that currently impair our ability to identify. aggregate, and account
for the full cost of military equipment assets. The Chief Management
Officer is working with the Under Secretary of Defense (Comptroller);
the Under Secretary of Defense (Acquisition. Technology, and
Logistics); and the military department Chief Management Officers as
appropriate to define Department-wide cost accounting requirements and
develop the process and system capabilities needed to support better
cost accounting and management.
At the same time, the Department is sensitive to the cost of obtaining
information solely for purposes of proprietary financial reporting or
audit compliance where this information is not otherwise used by
management. As recognized in your report, this is consistent with our
current Financial Improvement/Audit Readiness (FIAR) priorities that
focus specifically on "Existence and Completeness" for military
equipment. The Department has assessed the costs and associated
benefits of reporting and auditing property cost information in
financial statements and will finalize a business ease with
the results. The policies that are addressed in this audit report
should provide cost-effective management information when future
target systems have been implemented, capturing cost information as a
byproduct of business processes.
DoD agrees with the need to establish a framework that provides
improved cost and management information that will support better
management of Major Defense Acquisition Programs (MDAPs). The
Department is already implementing solutions to address the report's
recommendations as stated in our detailed responses. The Department
values GAO's feedback and looks forward to continued collaboration to
ensure that our efforts are as effective as possible.
Thank you for the opportunity to comment. My point of contact for this
effort is Mr. Joseph Quinn. lie can be reached at 703-607-0300 x131 or
joseph.quinn@osd.mil.
Sincerely,
Signed by:
Robert F. Hale:
Enclosure: As stated:
[End of letter]
GAO Draft Report Dated June 15, 2010:
GA0-10-695 (GAO Code 197089):
"Department Of Defense: Additional Actions Needed To Improve Financial
Management Of Military Equipment"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller) (USD(C)); the Under Secretary of
Defense (Acquisition, Technology, and Logistics) (USD(AT&L)); and the
Military Department Chief Management Officers, as appropriate, to
enforce compliance with the Department's records management policy by
periodically evaluating the extent to which the components arc
maintaining documentation in support of the full cost of military
equipment. (See page 19/GAO Draft Report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of weapon systems because the
information is not used to manage. We will therefore not invest
significant resources in an effort to capture, report. and audit data
with no value and will propose appropriate changes in policies and
instructions to accommodate this decision. There may, however. he
other requirements for cost information related to acquisition program
lifecycle management, and we will accommodate those requirements as is
appropriate.
In May 2010, the Department issued Financial Improvement and Audit
Readiness (FIAR) guidance to the DoD Components requiring that they
follow the FIAR Methodology (described in the guidance) when
evaluating, testing. and improving their processes, controls, and
systems. In accordance with the FIAR Methodology, the FIAR Directorate
and DoD Inspector General will evaluate Component compliance with the
retention requirements for supporting documentation.
Recommendation 2: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition, Technology, and Logistics); and the Military Department
Chief Management Officers. as appropriate, to establish and implement
ongoing monitoring activities to enforce compliance with the
Department's existing policies and procedures requiring the components
to (1) perform periodic physical inventories and to reconcile the
results to property accountability records after completion of
existing efforts to verify the reliability of the property
accountability records; and (2) track and maintain records for
government-furnished property in the possession of contractors. (See
page 19/GAO Draft Report.)
DoD Response: Concur.
The Office of USD(AT&L) (OUSD(AT&L)) Property and Equipment Policy
Office (PEPO) and Office of USD(C) (OUSD(C)) have developed metrics
and are developing additional metrics to monitor compliance with the
Department's physical inventory regulations, directives and policies.
Further, PEPO and OUSD(C) are currently working with the Components to
evaluate compliance with policies, procedures, and internal controls
as part of the mission critical asset existence and completeness audit
readiness priority.
The Department is also working to define a consistent business process
for maintaining records for government furnished property (GFP) in the
possession of contractors. OUSD(AT&L)/DPAP issued policies in January
2010 to establish new benchmarks for GFP and to establish requirements
for tracking and maintaining records for contractor acquired
government-owned property. The FIAR Directorate has established
metrics to monitor Component compliance with policies related to
tracking and maintaining records for GFP in the possession of
contractors in support of validating process controls.
Recommendation 3: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition. Technology, and Logistics); and the Military Department
Chief Management Officers, as appropriate. to update the Department's
guidance regarding verification of information in component property
accountability records to include verification that all assets
recorded in the accountability records that are required by DoD to
have an Unique Item Identifier (UII) are included in its Item Unique
Identification (ILTID) registry. (See page 19/GAO Draft Report.)
DoD Response: Concur.
OUSD(AT&L) is currently coordinating with the appropriate DoD
organizations to make revisions to guidance related to verification of
information in property accountability records and the recording of
UIIs in the IUID Registry.
Recommendation 4: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition. Technology, and Logistics); and the Military Department
Chief Management Officers, as appropriate, to develop and implement
guidance on how IUID will be used to identify, aggregate, and report
asset cost information. (See page 19/GAO Draft report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report, and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may,
however, be other requirements for cost information related to
acquisition program lifecycle management, and we will accommodate
those requirements as is appropriate.
The Department will use IUIDs to enable the aggregation of managerial
cost information across multiple systems based on specific
requirements. The cost information will be in management information
systems/data warehouses utilizing IUID as the primary key for pulling
together the data. The Department plans to implement guidance on how
IUID will be captured and utilized to record and report an asset's
operational and financial information.
Recommendation 5: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition, Technology, and Logistics); and the Military Department
Chief Management Officers, as appropriate, to classify the
Proper Financial Accounting Treatment for Military Equipment (PFAT4ME)
training as a core course for the Department's affected acquisition
personnel, including program managers, and track attendance to ensure
that personnel required to take the training have done so. (See page
19/GAO Draft report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report. and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may.
however, be other requirements for cost information related to
acquisition program lift:cycle management, and we will accommodate
those requirements as is appropriate.
PFAT4ME will be recommended as a core course for acquisition personnel
that require the training. The Department will determine who needs the
training based on the roles and responsibilities of individual
acquisition positions. The Department will also track attendance to
ensure that personnel requiring the training take the course.
Recommendation 6: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition, Technology, and Logistics): and the Military Department
Chief Management Officers, as appropriate, to develop and implement
guidance to help ensure compliance with the oversight activities for
the PFAT4ME initiative, including how often these reviews are to be
performed, roles and responsibilities for oversight, the steps to be
performed, and the basis for selecting contracts for review. (See page
19 and 20/GAO Draft report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report. and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may,
however, be other requirements for cost information related to
acquisition program lifecycle management, and we will accommodate
those requirements as is appropriate.
OUSD(C) coordinated with OUSD(AT&L)/PEPO to establish a metric to
assess compliance with the PFAT4ME policy. This metric is reported in
the semiannual FIAR Plan Status Report. In the next update to FIAR
Guidance, the FIAR Directorate will include guidance describing how
often Components should perform reviews, Component roles and
responsibilities, the steps to be performed by the Components, and the
basis the Components should use for selecting contracts for review as
part of their ongoing Manager's internal control program.
Recommendation 7: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition, Technology, and Logistics); and the Military Department
Chief Management Officers, as appropriate, to complete efforts to
develop and implement a policy requiring the components to account for
the full cost of military equipment, including guidance for what types
of contract and other costs should be included and for determining the
appropriate accounting treatment of these costs. (See page 20/GAO
Draft report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report, and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may,
however, be other requirements for cost information related to
acquisition program lifecycle management, and we will accommodate
those requirements as is appropriate.
OUSD(AT&L)/PEPO is working with the Federal Accounting Standards
Advisory Board (FASAB) Accounting and Auditing Policy Committee (AAPC)
to develop full cost guidance that would be integrated into ERPs and
guide cost accounting efforts. When AAPC completes its work, PEPO will
develop, coordinate, and issue policy and guidance for accounting for
the full cost of military equipment, to include the elements listed in
the recommendation above. The Department is sensitive to the cost of
obtaining information solely for purposes of proprietary financial
reporting and audit, however recognizes that there may he value in
cost accounting information that supports better management of MDAPs.
Recommendation 8: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition, Technology, and Logistics); and the Military Department
Chief Management Officers, as appropriate, to review the Military
Equipment Valuation (MEV) methodology business rules to identify
inconsistencies and revise the rules as needed. (See page 20/GAO Draft
report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report, and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may,
however, be other requirements for cost information related to
acquisition program lifecycle management. and we will accommodate
those requirements as is appropriate.
After meeting the Department's asset existence and completeness goals,
the Department will review the MEV methodology business rules to
identify inconsistencies and revise the rules as needed, particularly
related to estimating the cost of military equipment., as part of its
plans to achieve audit readiness. The Department will consider the
recent Statements of Federal Financial Accounting Standards (SFFAS)
No. 35 pertaining to the estimation of military equipment historical
cost when reviewing the MEV methodology business rules. A cost-
effective estimating methodology for the historical cost of older
weapon system assets will be pursued if appropriate.
Recommendation 9: GAO recommends that the Secretary of Defense direct
the Military Department Chief Management Officers in consultation with
the DoD Chief Management Officer; the Under Secretary of Defense
(Comptroller); and the Under Secretary of Defense (Acquisition,
Technology, and Logistics), as appropriate, to define the component
level cost accounting requirements, including how Standard Financial
Information Structure (SFIS) data elements will be used to identify.
aggregate, account for, and report cost information. (See page 20/GAO
Draft report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report, and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may,
however, be other requirements for cost information related to
acquisition program lifecycle management, and we will accommodate
those requirements as is appropriate.
The Department included appropriate data fields within SFIS to provide
a standard cost accounting capability. Within the SFIS data fields,
the Department has already defined the standard data elements to
aggregate costs managed at the DoD level, such as Major Acquisition
Program and Contingency Code. These data fields were collaboratively
developed by OUSD(C), OUSD(AT&L), the Business Transformation Agency,
and Military Departments.
Data fields in SFIS also provide the Military Departments with the
capability to capture and aggregate the costs of programs, projects
and activities that they manage. These data fields and business rules
are being defined by the Military Departments. as needed, as they
deploy new business and financial systems.
After meeting Department objectives for asset existence and
completeness, the DoD Chief Management Officer, OUSD(C) and OUSD(AT&L)
will work jointly with the Military Department Chief Management
Officers as they define their data element requirements, since these
requirements are unique to their mission and information needs.
Recommendation 10: GAO recommends that the Secretary of Defense direct
the Military Department Chief Management Officers in consultation with
the DoD Chief Management Officer; the Under Secretary of Defense
(Comptroller); and the Under Secretary of Defense (Acquisition,
Technology, and Logistics), as appropriate, after defining the cost
accounting requirements, to utilize the requirements as input to
Enterprise Resource Planning (ERP) systems to help ensure that the
ERPs will provide the capability to identify and aggregate cost
information for the Department's assets in accordance with DOD's
defined requirements. (See page 20/GAO Draft report.)
DoD Response: Concur.
The Department has determined that it is not cost-effective to gather
auditable data on the historical cost of military weapon systems
because the information is not used to manage. We will therefore not
invest significant resources in an effort to capture, report, and
audit data with no value and will propose appropriate changes in
policies and instructions to accommodate this decision. There may,
however, be other requirements for cost information related to
acquisition program lifecycle management, and we will accommodate
those requirements as is appropriate.
The Department's SFIS Governance Board, chaired by OUSD(C), will
continue to oversee and work with the DoD Components as they define
and implement cost accounting requirements to ensure they develop
appropriate managerial cost accounting capabilities in their ERP
systems. In addition, the Department will analyze existing ERP
functionality requirements against the defined Department-level cost
accounting requirements. After completing the analyses, the Department
will update the requirements documents to ensure the ERPs are
configured to capture and aggregate cost information for the DoD
assets.
Recommendation 11: GAO recommends that the Secretary of Defense direct
the DoD Chief Management Officer to work jointly with the Under
Secretary of Defense (Comptroller); the Under Secretary of Defense
(Acquisition, Technology, and Logistics); and the Military Department
Chief Management Officers, as appropriate, to assess the Wide Area
Work Flow (WAWF) and IUID initiatives and determine the extent to
which they will be utilized in the emerging ERP business systems
environment. (See page 20/GAO Draft Report.)
DoD Response: Concur.
The Department will assess the WAWF and IUID initiatives and determine
the extent to which they will be utilized in the emerging ERP business
systems environment.
OUSD(AT&L) has led WAWF and RED initiatives; has established clear
regulatory requirements for IUID and WAWF; and has been scorecarding
WAWF and IUID implementation for the last 2 years. As a result of
these working groups, the long-term enterprise architecture related to
property accountability will be better defined, and the Department
will determine the extent to which WAWF and IUID will be integrated
into the ERPs for accountability purposes. The DoD Investment Review
Board is relining compliance criteria to ensure Automated Information
Systems (AIS) compliance includes the ERPs.
Further, the Deputy Chief Financial Officer (DCFO) co-chairs the
Investment Review Board that monitors compliance criteria for ERPs. In
addition, OUSD(C) works closely with other DoD organizations to
address WAWF and MID issues through working groups (e.g., Procure-to-
Pay Working Group, Commercial Pay Council, Tri-Domain Working Group).
Comments On The Content Of The Draft Audit Report:
Military Equipment Property Accountability Records:
DOD plans to complete the verification of the existence and
completeness or its military equipment property accountability records
in fiscal year 2015. Verification of Component existence and
completeness assertions will occur in 2011 for Air Force, 2013 for
Navy, and 2015 for Army.
Use of Estimates to Report Costs:
Page 4 of the draft audit report includes the following: "Federal
accounting standards allow for the use of estimates to report the
costs of property, plant, and equipment, if an agency lacks adequate
controls and systems to reliably capture the cost of these assets."
However, SFFAS 35, Estimating the Historical Cost of General Property,
Plant, and Equipment, does not limit the use of estimation
methodologies when an agency lacks adequate controls and systems to
reliably capture the cost of these assets. Rather. SFFAS 35 states
"reasonable estimates of historical cost may be used to value G-PP&E
assets."
SFFAS 35 amends SFFAS 6 and 23 to clarify that reasonable estimates of
original transaction data for historical cost may be used to value G-
PP&E. Reasonable estimates may he used upon initial capitalization as
entities implement the G-PP&E accounting requirements for the first
time, as well as by those entities who previously implemented G-PP&E
accounting.
SFFAS 35 also clarifies that agencies should report their G-PP&E based
on historical cost information in accordance with the asset
recognition and measurement provisions of SFFAS 6, as amended.
However, reasonable estimates of historical cost may be used to value
G-PP&E assets. SFFAS 35 also allows the use of reasonable estimates
when an entity determines it is necessary to revalue G-PP&E assets
previously reported.
[End of section]
Appendix III: Documentation Reviewed to Identify Weaknesses That
Impair DOD's Ability to Identify and Account for the Cost of Military
Equipment:
Government Accountability Office:
Financial Management: Achieving Financial Statement Auditability in
the Department of Defense. [hyperlink,
http://www.gao.gov/products/GAO-09-373]. Washington, D.C.: May 6, 2009.
DOD's High-Risk Areas: Actions Needed to Reduce Vulnerabilities and
Improve Business Outcomes. [hyperlink,
http://www.gao.gov/products/GAO-09-460T]. Washington, D.C.: March 12,
2009.
Defense Business Transformation: Status of Department of Defense
Efforts to Develop a Management Approach to Guide Business
Transformation. [hyperlink, http://www.gao.gov/products/GAO-09-272R].
Washington, D.C.: January 9, 2009.
DOD Business Transformation: Air Force's Current Approach Increases
Risk That Asset Visibility Goals and Transformation Priorities Will
Not Be Achieved. [hyperlink, http://www.gao.gov/products/GAO-08-866].
Washington, D.C.: August 8, 2008.
Fiscal Year 2007 U.S. Government Financial Statements: Sustained
Improvement in Financial Management Is Crucial to Improving
Accountability and Addressing the Long-Term Fiscal Challenge.
[hyperlink, http://www.gao.gov/products/GAO-08-926T]. Washington,
D.C.: June 26, 2008.
Defense Business Transformation: Sustaining Progress Requires
Continuity of Leadership and an Integrated Approach. [hyperlink,
http://www.gao.gov/products/GAO-08-462T]. Washington, D.C.: February
7, 2008.
Defense Business Transformation: A Full-time Chief Management Officer
with a Term Appointment Is Needed at DOD to Maintain Continuity of
Effort and Achieve Sustainable Success. [hyperlink,
http://www.gao.gov/products/GAO-08-132T]. October 16, 2007.
Defense Business Transformation: Achieving Success Requires a Chief
Management Officer to Provide Focus and Sustained Leadership.
[hyperlink, http://www.gao.gov/products/GAO-07-1072]. Washington,
D.C.: September. 5, 2007.
Financial Management: Long-standing Financial Systems Weaknesses
Present a Formidable Challenge. [hyperlink,
http://www.gao.gov/products/GAO-07-914]. Washington, D.C.: August 3,
2007.
DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be Enhanced
by Linkage to Outcomes, Progress in Transforming Business Operations,
and Reexamination of Logistics Governance and Strategy. [hyperlink,
http://www.gao.gov/products/GAO-07-1064T]. Washington, D.C.: July 10,
2007.
Defense Business Transformation: A Comprehensive Plan, Integrated
Efforts, and Sustained Leadership Are Needed to Assure Success.
[hyperlink, http://www.gao.gov/products/GAO-07-229T]. Washington,
D.C.: November 16, 2006.
Department of Defense: Sustained Leadership Is Critical to Effective
Financial and Business Management Transformation. [hyperlink,
http://www.gao.gov/products/GAO-06-1006T]. Washington, D.C.: August 3,
2006.
Department of Defense, Office of Inspector General:
Independent Auditor's Report on the DOD Agency-Wide FY 2009 and FY
2008 Basic Financial Statements. D-2010-016. Arlington, Va.: November
12, 2009.
Independent Auditor's Report on the Department of the Navy General
Fund FY 2009 and FY 2008 Basic Financial Statements. D-2010-014.
Arlington, Va.: November 8, 2009.
Independent Auditor's Report on the Department of the Navy Working
Capital Fund FY 2009 and FY 2008 Basic Financial Statements. D-2010-
012. Arlington, Va.: November 8, 2009.
Independent Auditor's Report on the Army General Fund FY 2009 and FY
2008 Basic Financial Statements. D-2010-010. Arlington, Va.: November
8, 2009.
Independent Auditor's Report on the Army Working Capital Fund FY 2009
and FY 2008 Basic Financial Statements. D-2010-009. Arlington, Va.:
November 8, 2009.
Independent Auditor's Report on the Air Force Working Capital Fund FY
2009 and FY 2008 Basic Financial Statements. D-2010-008. Arlington,
Va.: November 8, 2009.
Independent Auditor's Report on the Air Force General Fund FY 2009 and
FY 2008 Basic Financial Statements. D-2010-006. Arlington, Va.:
November 8, 2009.
Internal Controls over Government Property in the Possession of
Contractors at Two Army Locations. D-2009-089. Arlington Va.: June 18,
2009.
Independent Auditor's Report on the Department of Defense FY 2008 and
FY 2007 Basic Financial Statements. D-2009-021. Arlington, Va.:
November 12, 2008.
Independent Auditor's Report on the Army Working Capital Fund FY 2008
and FY 2007 Basic Financial Statements. D-2009-020. Arlington, Va.:
November 8, 2008.
Independent Auditor's Report on the Army General Fund FY 2008 and FY
2007 Basic Financial Statements. D-2009-018. Arlington, Va.: November
8, 2008.
Independent Auditor's Report on the Air Force Working Capital Fund FY
2008 and FY 2007 Basic Financial Statements. D-2009-017. Arlington,
Va.: November 8, 2008.
Independent Auditor's Report on the Air Force General Fund FY 2008 and
FY 2007 Basic Financial Statements. D-2009-016. Arlington, Va.:
November 8, 2008.
Independent Auditor's Report on the Department of the Navy Working
Capital Fund FY 2008 and FY 2007 Basic Financial Statements. D-2009-
012. Arlington, Va.: November 8, 2008.
Independent Auditor's Report on the Department of the Navy General
Fund FY 2008 and FY 2007 Basic Financial Statements. D-2009-010.
Arlington, Va.: November 8, 2008.
Report of Marine Corps Internal Controls Over Military Equipment
Funds. D-2007-122. Arlington, Va.: September 11, 2007.
Vendor Pay Disbursement Cycle, Air Force General Fund: Financial
Accounting. D-2007-059. Arlington, Va.: February 8, 2007.
Financial Management: Contracts Classified as Unreconcilable by the
Defense Finance and Accounting Service Columbus. D-2005-040.
Arlington, Va.: March 14, 2005.
Implementation of a Cost-Accounting System for Visibility of Weapon
Systems Life-Cycle Costs. D-2001-164. Arlington, Va.: August 1, 2001.
Naval Audit Service:
Management of Special Tooling and Special Test Equipment at Naval Air
Systems Command. N2009-0026. Washington, D.C.: April 24, 2009.
U.S. Army Audit Agency:
Logistics Modernization Program System Federal Financial Management
Improvement Act of 1996 Compliance - First Deployment Functionality. A-
2007-0205-FFM. Alexandria, Va.: September 7, 2007.
Management of Government-Furnished Property, Fort Hood, Texas. A-2005-
0126-FFE. Alexandria, Va: March 4, 2005.
Air Force Audit Agency:
Comprehensive Engine Management System Controls. F2005-0004-FB2000.
Washington, D.C.: April 27, 2005.
Department of Defense:
Agency Financial Report for Fiscal Year 2009. Washington, D.C.:
November 16, 2009.
Department of Defense Fiscal Year 2009 Report on Reliability.
Washington, D.C.: September 30, 2009.
Financial Improvement and Audit Readiness Plan (FIAR Plan). March 30,
2009.
Department of Defense, Office of the Secretary of Defense. Linking
Financial Data to Contract Documents. Washington, D.C.: March 18, 2009.
Fiscal Year 2008 Agency Financial Report. Washington, D.C.: November
17, 2008.
U.S. Department of Defense 2008 Enterprise Transition Plan (ETP).
Washington, D.C.: September 30, 2008.
Office of the Under Secretary of Defense for Acquisition, Technology,
and Logistics. Annual Statement Required under the Federal Managers'
Financial Integrity Act (FMFIA) of 1982. Washington, D.C.: June 27,
2008.
Office of the Under Secretary of Defense (Comptroller). Summary of
Business Rule for Group or Composite Depreciation. October 24, 2006.
Office of the Under Secretary of Defense (Comptroller). Summary of
Business Rule with Corresponding Analysis on the Department of Defense
Military Equipment Capitalization Threshold. October 24, 2006.
Office of the Under Secretary of Defense (Comptroller). Summary of
Business Rule for Recording Program Management Office (PMO) Costs.
October 24, 2006.
Office of the Under Secretary of Defense for Acquisition, Technology,
and Logistics, Property and Equipment Policy. Internal Validation and
Verification Project: Military Equipment Valuation Property and
Equipment Policy. June 13, 2006.
Office of the Under Secretary of Defense (Comptroller). Summary of
Business Rules for Accounting for and Reporting of Military Equipment:
Componentization. June 8, 2005.
Transforming Department of Defense Financial Management: A Strategy
for Change. Washington, D.C.: April 13, 2001.
Department of the Army:
U.S. Army. Fiscal Year 2009 United States Army Annual Financial
Statement. Washington, D.C.: November 2009.
Secretary of the Army to the Secretary of Defense. Fiscal Year (FY)
2009 Statement of Assurance on Internal Controls as Required Under the
Federal Managers' Financial Integrity Act of 1982. Washington, D.C.:
August 17, 2009.
U.S. Army. Fiscal Year 2008 United States Army Annual Financial
Statement. Washington, D.C.: November 2008.
U.S. Army Program Executive Office Enterprise Information Systems.
U.S. Army ERP Phase III Analysis Brief. Fort Belvoir, Va.: September
26, 2008.
Secretary of the Army to the Secretary of Defense. Fiscal Year (FY)
2008 Statement of Assurance on Internal Controls as Required Under the
Federal Managers' Financial Integrity Act of 1982. Washington, D.C.:
August 13, 2008.
Department of the Navy:
Fiscal Year 2009 Department of the Navy Annual Financial Report.
Washington D.C.: October 2009.
Under Secretary of the Navy to the Secretary of Defense. Annual
Statement Required Under the Federal Managers' Financial Integrity Act
(FMFIA). Washington, D.C.: August 25, 2009.
Science Applications International Corporation (SAIC)/Eagan,
McAllister, Associates, Inc. (EMA) for the Department of the Navy
Financial Improvement Program, Naval Air Systems Command. Gap Analysis
Study: NAVAIR Management of Operation Materials and Supplies, General
Equipment, and Military Equipment in Navy ERP, Lexington Park, MD:
July 31, 2009.
Department of the Navy Annual Financial Report Fiscal Year 2008.
Washington D.C.: October 2008.
Secretary of the Navy to the Secretary of Defense. Annual Statement
Required Under the Federal Managers' Financial Integrity Act (FMFIA).
Washington, D.C.: August 28, 2008.
Department of the Air Force:
Acquire to Retire Process: OMB Circular A-123 Appendix A, Part II
Internal Controls over Financial Reporting. December 18, 2009.
United States Air Force Annual Financial Statement 2009. Washington,
D.C.: November 2009.
United States Air Force Annual Financial Statement 2008. Washington,
D.C.: November 2008.
Acting Secretary of the Air Force to the Secretary of Defense. Annual
Statement Required Under the Federal Managers' Financial Integrity Act
(FMFIA) of 1982. Washington, D.C.: August 26, 2008.
Secretary of the Air Force to the Secretary of Defense. Annual
Statement Required under the Federal Managers' Financial Integrity
Act. Washington, D.C.: August 24, 2009.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Asif A. Khan, (202) 512-9095 or khana@gao.gov:
Acknowledgments:
In addition to the contact person named above, key contributors to
this reports were Evelyn Logue, Assistant Director; Vanessa Estevez;
Maxine Hattery; John Lopez; Chris Martin; Heather Rasmussen; Darby
Smith; and Omar Torres.
[End of section]
Footnotes:
[1] [1] MDAPs are programs that are estimated by the Under Secretary
of Defense for Acquisition, Technology, and Logistics to require an
eventual total expenditure for research development, test, and
evaluation of more that $365 million, including all planned
increments, based on fiscal year 2000 constant dollars (approximately
$509 million in fiscal year 2010 dollars); $2.190 billion of
procurement funding, including all planned increments (approximately
$3.054 billion in fiscal year 2010 dollars); or are designated as a
major defense acquisition program by the milestone decision authority.
See DOD Instruction 5000.02, Operation of the Defense Acquisition
System (Dec. 2, 2008); Under Secretary of Defense (AT&L), Memorandum,
Subject: Directive-Type Memorandum (DTM) 09-027 - Implementation of
the Weapon Systems Acquisition Reform Act of 2009 (Dec. 4, 2009).
[2] This represents a 42 percent increase in fiscal year 2009 dollars.
Fiscal year 2010 information will be available after September 30,
2010.
[3] Military equipment are weapon systems that can be used directly by
the Armed Forces to carry out battlefield missions.
[4] Full cost is the sum of direct and indirect costs. Direct costs
are costs that can be specifically identified with an output,
including salaries and benefits for employees working directly on the
output, materials, supplies, and costs with facilities and equipment
used exclusively to produce the output. Indirect costs are costs that
are not specifically identifiable with any output and may include
costs for general administration, research and technical support, and
operations and maintenance for buildings and equipment. See Statement
of Federal Financial Accounting Standards (SFFAS) 4, "Managerial Cost
Accounting Standards and Concepts" (Washington, D.C.: July 31, 1995).
[5] Statement of Federal Financial Accounting Standards (SFFAS) 4:
"Managerial Cost Accounting Standards and Concepts" (Washington, D.C.:
July 31, 1995); SFFAS 6: Accounting for Property, Plant, and
Equipment, (Washington, D.C.: Nov. 30, 1995, as amended); SFFAS 8:
Supplementary Stewardship Reporting (Washington, D.C.: June 11, 1996,
as amended); SFFAS 23, Eliminating the Category National Defense
Property, Plant, and Equipment (Washington, D.C.: May 2003); and SFFAS
35, Estimating the Historical Cost of General Property, Plant, and
Equipment--Amending Statements of Federal Financial Accounting
Standards 6 and 23 (Washington, D.C.: Oct. 14, 2009).
[6] See for example, SFFAS 4; SFFAS 6; SFFAS 8; SFFAS 23; SFFAS 35;
GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999); Institute of Electrical and
Electronics Engineers, Inc., Recommended Practice for Software
Requirements Specifications, IEEE Std. 830-1998 (New York, N.Y.: June
25, 1998) and Guide for Information Technology--System Definition--
Concept of Operations (ConOps) Document, IEEE Std. 1362- 1998 (New
York, N.Y.: Mar. 19, 1998, reaffirmed Dec. 5, 2007); and Software
Engineering Institute, Capability Maturity Model Integration for
Development, Version 1.2 (Pittsburgh, Pa.: August 2006).
[7] These statutes include the Chief Financial Officers Act, the
Government Management Reform Act of 1994, the Federal Financial
Management Improvement Act of 1996, and various annual authorization
and appropriations act provisions.
[8] SFFAS 34, The Hierarchy of Generally Accepted Accounting
Principles, Including the Application of Standards Issued by the
Financial Accounting Standards Board (Washington, D.C.: July 28,
2009); and SFFAS 4.
[9] SFFAS 4.
[10] SFFAS 6.
[11] Each of these costs may be funded through different
appropriations or other accounts, so recognizing and recording the
full cost of an asset may involve more than the costs recorded an MDAP
budgetary account that covers an individual MDAP asset.
[12] SFFAS 35.
[13] DOD is required to submit SARs to Congress at the end of each
fiscal year quarter on current major defense acquisition programs,
although certain exceptions apply. SARs for the first quarter of a
fiscal year are known as comprehensive annual SARs. Each comprehensive
annual SAR is required to be submitted within 60 days after the date
on which the President transmits the budget to Congress for the
following fiscal year. 10 U.S.C. § 2432(b)(1), (c)(4), (f).
[14] Equals the total of all funds programmed to be available for
obligation for procurement for the program, divided by the number of
fully configured end items to be procured.
[15] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[16] DOD Financial Management Regulation Volume 1, Chapter 9,
Financial Records Retention (April 2009); and DOD Directive 5015.2,
DOD Records Management Program (Mar. 6, 2000).
[17] Statement of Federal Financial Accounting Standards (SFFAS) 35,
Estimating the Historical Cost of General Property, Plant, and
Equipment--Amending Statements of Federal Financial Accounting
Standards 6 and 23 (Washington, D.C.: Oct. 14, 2009); SFFAS 23,
Eliminating the Category National Defense Property, Plant, and
Equipment (Washington, D.C.: May 2003); and SFFAS 6: Accounting for
Property, Plant, and Equipment (Washington, D.C.: Nov. 30, 1995, as
amended).
[18] Department of Defense, Office of the Inspector General, Internal
Controls Over the Department of the Navy Military Equipment Baseline
Valuation Effort, D-2009-008 (Arlington, Va.: Oct. 31, 2008);
Memorandum Report on Internal Controls Over the U.S. Special
Operations Command Military Equipment Baseline Valuation Effort, D-
2008-103 (Arlington, Va.: June 13, 2008); Memorandum Report on
Internal Controls Over the Air Force Military Equipment Baseline
Valuation Effort, D-2008-074 (Arlington, Va.: Apr. 1, 2008); Air Force
Military Equipment Baseline Valuation, F2007-0009-FB3000 (Washington,
D.C.: May 29, 2007); Military Equipment Baseline-Electronic Pods,
F2007-0003-FB3000 (Washington, D.C.: Jan. 19, 2007); Financial
Management: Report on Development of the DOD Baseline for Military
Equipment, D-2005-114 (Arlington, Va.: Sept. 30, 2005); Financial
Management: Report on the Review of the Development of the DOD
Baseline for Military Equipment, D-2005-112 (Arlington, Va.: Sept. 30,
2005); and the Department of Defense, Property and Equipment Policy,
Office of Undersecretary of Defense for Acquisition, Technology, and
Logistics, Internal Validation and Verification Project: Military
Equipment Valuation (June 13, 2006).
[19] DOD, Fiscal Year 2010 Financial Improvement and Audit Readiness
(FIAR) Guidance ( May 15, 2010).
[20] The IUID Registry is the central repository for IUID information
that captures specific information on the acquired item (e.g., what
the item is, how and when it was acquired, and the initial unit cost
of the item).
[21] Department of Defense Instruction 5000.02, Operation of the
Defense Acquisition System (Dec. 8, 2008).
[22] According to DOD's Comptroller, Air Force plans to complete
efforts to verify the existence and completeness of its military
equipment property accountability records in 2011, followed by Navy in
2013, and Army in 2015.
[23] Under Secretary of Defense for Acquisition, Technology, and
Logistics memorandum, Proper Accounting Treatment for Military
Equipment (June 30, 2006).
[24] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[25] Under Secretary of Defense for Acquisition, Technology, and
Logistics memorandum, Proper Accounting Treatment for Military
Equipment (June 30, 2006).
[26] The course is entitled Structuring Procurement Requests to
Facilitate Proper Financial Accounting Treatment for Military
Equipment and is available through the Defense Acquisition University.
[27] Under Secretary of Defense for Acquisition, Technology, and
Logistics, DOD Instruction 8320.04, Item Unique Identification (IUID)
Standards for Tangible Personal Property (June 16, 2008), requires
that an item unique identifier be applied to an item if one or more of
the following criteria are met: (1) the item has a unit acquisition
cost of $5,000 or more; (2) the item has a unit acquisition cost of
less than $5,000 and is identified by the requiring activity as DOD
serially managed, mission essential, or controlled inventory; (3) the
item has a unit acquisition cost of less than $5,000 and the requiring
activity determines that permanent identification is required; and (4)
regardless of value, (a) any DOD serially managed subassembly,
component, or part embedded within an item and (b) the parent item
that contains the embedded subassembly, component, or part.
[28] Under Secretary of Defense for Acquisition, Technology, and
Logistics, DOD Instruction 5000.02, Operation of the Defense
Acquisition System (Dec. 8, 2008).
[29] DOD Instruction 8320.04.
[30] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[31] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[32] SFFAS 4 and 6.
[33] ERPs are automated systems that utilize commercial off-the-shelf
(COTS) software consisting of multiple, integrated functional modules
that perform a variety of business-related tasks such as payroll,
general ledger accounting, and supply chain management.
[34] The IEEE is a nonprofit, technical professional organization that
develops standards for a broad range of global industries, including
the information technology and information assurance industries, and
is a leading source for defining best practices.
[35] IEEE Stds 830-1998 and 1362-1998; and Software Engineering
Institute, Capability Maturity Model Integration for Development,
Version 1.2 (Pittsburgh, Pa.: August 2006).
[36] DOD, Financial Management Regulation, Volume 4, Chapter 19,
Managerial Cost Identification (May 19, 2010).
[37] SFFAS 4.
[38] GAO, Defense Business Transformation: A Comprehensive Plan,
Integrated Efforts, and Sustained Leadership Are Needed to Assure
Success, [hyperlink, http://www.gao.gov/products/GAO-07-229T]
(Washington, D.C.: Nov. 16, 2006).
[39] U.S. Army Program Executive Office Enterprise Information
Systems, U.S. Army ERP Phase III Analysis Decision Brief (Sept. 26,
2008).
[40] Science Applications International Corporation/Eagan, McAllister,
Associates, Inc., Gap Analysis Study: NAVAIR Management of Operation
Materials and Supplies, General Equipment, and Military Equipment in
Navy ERP for the Department of the Navy Financial Improvement Program,
Naval Air Systems Command (Lexington Park, Md.: July 31, 2009).
[41] DOD Financial Management Regulation, Volume 1, Chapter 3, Federal
Financial Management Improvement Act of 1996 Compliance, Evaluation,
and Reporting (October 2008); and DOD Directive 5000.01, The Defense
Acquisition System (May 12, 2003) certified current as of November 20,
2007. Financial management systems include the financial systems and
the financial portions of mixed systems necessary to support financial
management, including automated and manual processes, procedures,
controls, data, hardware, software, and support personnel dedicated to
the operation and maintenance of system functions.
[42] DOD, Financial Improvement and Audit Readiness Plan (FIAR Plan)
(Mar. 30, 2009).
[43] Department of Defense Memorandum, Standard Financial Information
Structure (SFIS) Implementation Policy (Aug. 4, 2005).
[44] MDAPs are programs that are estimated by the Under Secretary of
Defense for Acquisition, Technology, and Logistics to require an
eventual total expenditure for research development, test, and
evaluation of more that $365 million, including all planned
increments, based on fiscal year 2000 constant dollars (approximately
$509 million in fiscal year 2010 dollars); $2.190 billion of
procurement funding, including all planned increments (approximately
$3.054 billion in fiscal year 2010 dollars); or are designated as a
major defense acquisition program by the milestone decision authority.
See DOD Instruction 5000.02, Operation of the Defense Acquisition
System (Dec. 2, 2008); Under Secretary of Defense (AT&L), Memorandum,
Subject: Directive-Type Memorandum (DTM) 09-027 - Implementation of
the Weapon Systems Acquisition Reform Act of 2009 (Dec. 4, 2009).
[45] The guidance reviewed included DOD Directive 5000.01,The Defense
Acquisition System, (May 12, 2003); DOD Instruction 5000.02, Operation
of the Defense Acquisition System (Dec. 2, 2008); DOD Instruction,
8320.04, Item Unique Identification (IUID) Standards for Tangible
Personal Property (June 16, 2008); DOD Instruction 8320.04, Item
Unique Identification (IUID) Standards for Tangible Personal Property
(June 16, 2008); DOD Instruction 5000.64, Accountability and
Management of DOD-Owned Equipment and Other Accountable Property (Nov.
2, 2006); and the Undersecretary of Defense for Acquisition,
Technology, and Logistics Memorandum, Proper Financial Accounting
Treatment for Military Equipment (June 30, 2006).
[46] Statement of Federal Financial Accounting Standards (SFFAS) 4:
Managerial Cost Accounting Standards and Concepts (Washington, D.C.:
July 31, 1995); SFFAS 6: Accounting for Property, Plant, and Equipment
(Washington, D.C.: Nov. 30, 1995, as amended); SFFAS 8: Supplementary
Stewardship Reporting (Washington, D.C.: June 11, 1996, as amended);
SFFAS 23, Eliminating the Category National Defense Property, Plant,
and Equipment (Washington, D.C.: May 2003); and SFFAS 35, Estimating
the Historical Cost of General Property, Plant, and Equipment--
Amending Statements of Federal Financial Accounting Standards 6 and 23
(Washington, D.C.: Oct. 14, 2009).
[47] Audit report databases searched were those of GAO, the DOD
Inspector General, the Naval Audit Service, the U.S. Army Audit
Agency, and the Air Force Audit Agency.
[48] See for example, SFFAS 4, SFFAS 6, SFFAS 8, SFFAS 23, SFFAS 35;
GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999); Institute of Electrical and
Electronics Engineers, Inc., Recommended Practice for Software
Requirements Specifications, IEEE Std. 830-1998 (New York, N.Y.:, June
25, 1998) and Guide for Information Technology--System Definition--
Concept of Operations (ConOps) Document, IEEE Std. 1362- 1998 (New
York, N.Y.: Mar. 19, 1998, reaffirmed Dec. 5, 2007); and Carnegie
Mellon Software Engineering Institute, Capability Maturity Model
Integration for Development, Version 1.2 (Pittsburgh, Pa.: August
2006).
[End of section]
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