Financial Management:

Improvements Needed in the Navy's Reporting of General Fund Inventory

GAO-01-37R: Published: Oct 27, 2000. Publicly Released: Oct 27, 2000.

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The Navy improved the reporting of its general fund inventory on its fiscal year 1999 financial statement. The Navy properly accounted for equipment and supplies that were not reported in the prior year's statement, which included inventories held by contractors and the Coast Guard. Improvements in the Navy's financial reporting, however, are still needed. GAO found many errors and omissions that continue to affect the accuracy of the Navy's financial reporting. This report summarizes the issues that the Navy needs to address as it compiles its fiscal year 2000 financial information.

Recommendations for Executive Action

  1. Status: Open

    Comments: Although the Department of the Navy updated its data call procedures in June 2016, it has not yet implemented a review process to ensure it is correctly reported. We will continue to follow-up on this recommendation.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should develop a review process so that data call information on sponsor owned material is correctly reported.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

  2. Status: Closed - Implemented

    Comments: On June 23, 2016, the Department of the Navy issued a memorandum requiring that all Department of the Navy Budget Submitting Offices produce and retain an asset listing of its Operating Material and Supplies--to include sponsor owned material--on a quarterly basis. The asset listing will provide details of the assets being reported and diminish the use of estimated values reported on the Department of the Navy's financial statements. The memorandum states that the asset's cost basis, such as moving average cost or latest acquisition cost, should be included in the listing as well. Further, the June 2016 memorandum requires that the Budget Submitting Offices maintain and archive all original documents in a readily available location to support managerial as well as auditor review.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should document the basis of any estimates of sponsor owned material to facilitate managerial reporting and auditor review.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

  3. Status: Open

    Comments: While the Department of the Navy has improved its logistics tracking of ammunition through the implementation of its Ordnance Information System--a web-based system that manages all ground conventional ammunition and aviation ordnance--the Department acknowledges that it currently has no review process in place to ensure all types of ammunition are included in its financial statements. Further, a July 26, 2016, Department of Defense Inspector General report found that inadequate policies and procedures, including failure to perform quarterly reconciliations, increased the risk that material amounts of Army-held, Navy-owned ammunition could be misreported or omitted from the Department of the Navy's financial statements. We will continue to follow-up on this recommendation.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should develop a review process for ammunition reporting so that all types of ammunition are included in the Navy's financial reports including air-launched guided missile support items and anti-submarine rocket material.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

  4. Status: Open

    Comments: The Statement of Federal Financial Accounting Standards Number 3 and the Department of Defense Financial Management Regulation require that Operating Material and Supplies within the Excess, Obsolete, and Unserviceable category be valued at their estimated net realizable value. However, the Department of Defense Material Management Regulation used for inventory reporting and not financial statement reporting, does not contain a provision to devalue Excess, Obsolete, and Unserviceable items. Instead, these items are to be reported at full cost. The Department of the Navy acknowledges there is conflicting policy guidance between the Department of Defense Financial Management Regulation and the Department of Defense Material Management Regulation. While the Department of the Navy contends it is currently following the Department of Defense Financial Management Regulation and is devaluing its Excess, Obsolete, and Unserviceable ammunition, the department is devaluing it to zero. This is opposed to what is required in federal accounting standards which state that Operating Material and Supplies should be reported at their estimated net realizable value. As of the date of our follow-up, there is no planned corrective action underway. We will continue to follow-up on this recommendation.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should properly classify and disclose ammunition in the "excess, obsolete, and unserviceable" categories in accordance with Statement of Federal Financial Accounting Standard (SFFAS) No. 3.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

  5. Status: Open

    Comments: The Department of the Navy maintains that any material provided to a contractor for use in the construction of an asset is in the hands of an end user and does not report it as an asset on its balance sheet. This is in opposition to what DCAA concluded were the requirements of the Statement of Federal Financial Accounting Standards Number 3 (SFFAS No. 3). We will continue to follow-up on this recommendation and the related issues.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should review the reporting of contractor held material to determine what portion of the $11.3 billion reported should not be classified as inventory and determine proper financial statement classification. This should include coordination with the Department of Defense (DOD)-wide Defense Contract Audit Agency project that is reviewing property in the possession of contractors.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

  6. Status: Open

    Comments: With respect to the first item (1) of this recommendation, the Department of the Navy's corrective actions are ongoing. As of July 2016, the Navy was performing an analysis to develop a reasonable methodology to account for ammunition held in various condition codes; the analysis is not expected to be completed until the end of fiscal year 2016. With respect to the second item (2) of this recommendation, the Statement of Federal Financial Accounting Standards Number 3 (SFFAS No. 3) states that Operating Materials and Supplies (OM&S) should be accounted for using the consumption method; in that materials are to be reported as an asset until they are issued to an end user for consumption in normal operations, at which point they would be expensed. The Department of the Navy acknowledges, in its fiscal year 2015 financial statements, that due to current system limitations, the consumption method of accounting for all of the Navy's OM&S is not feasible, although efforts are underway to transition to the consumption method for the recognition OM&S expenses. Currently, Navy expense OM&S supplies for the smaller combatant command ships, as opposed to recognizing them as an asset on the balance sheet and then expensed when consumed in the normal course of operations. We will continue to follow-up on this recommendation and both the related issues in future Navy Operating Material and Supplies audit work.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should revise the Navy's policies for compiling its financial statements so that they are in accordance with federal accounting standards and the DOD Financial Management Regulation. Specifically: (1) ammunition items needing repair and those categorized as excess, obsolete, and unserviceable should be revalued appropriately to comply with SFFAS No. 3 and the DOD Financial Management Regulation; and (2) shipboard inventories aboard smaller combatant ships should be reported as operating materials and supplies in accordance with federal accounting standards.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

  7. Status: Open

    Comments: While the Department of the Navy has made progress in accounting for its Inventory and Related Property--to include Operating Material and Supplies (OM&S)--long term solutions have yet to be fully developed and implemented. For example, the tracking and accounting for certain OM&S items, such as ordnance and uninstalled aircraft engines, have improved due to the implementation of new logistic tracking systems. However, the Navy acknowledges that it is just beginning to assess other aspects of its reportable OM&S portfolio. We will continue to follow-up on this recommendation.

    Recommendation: The Senior Civilian Official for the Office of the Assistant Secretary of the Navy should consider the issues discussed in this letter in the development and implementation of the long-term systems solution for proper accounting and improved visibility of the Navy's inventory.

    Agency Affected: Department of Defense: Department of the Navy: Office of the Assistant Secretary of the Navy (Financial Management): Senior Civilian Official

 

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