Environmental Liabilities: Long-Term Fiscal Planning Hampered by Control Weaknesses and Uncertainties in the Federal Government's Estimates

DOD concurred with this recommendation. DOD updated its November 20, 2006 Financial Improvement and Audit Readiness Plan to include a key milestone for developing a program to monitor the estimation and reporting process. It also stated that it would establish a workgroup to improve the financial reporting of environmental liabilities and to assist the military departments in meeting key milestones. In September 2015, DOD's Environmental Liability Working Group issued a Department-wide strategy for achieving audit readiness (Strategy Memorandum) for Environmental and Disposal Liabilities (EDL). The Strategy Memorandum replaced existing DOD Financial Management Regulation (FMR) Guidance governing EDL and will be incorporated into the next update of the FMR. The objective of the Strategy Memorandum is to provide a DOD-wide EDL audit readiness strategy including reporting requirements and guidance, and establishes the scope of EDL. The Strategy Memorandum includes elements for the review and approval, assessment and monitoring of EDL. As of the end of fiscal year 2017, each of the services had made progress in implementation of the new EDL guidance. DOD's actions address the intent of our recommendation.

DoD indicated it would now require its policy proponent offices to monitor the FASAB's proposed and new accounting standards and to publish updated guidance by the effective date of the new standard or publish a policy letter implementing new standards when it is not feasible to update the DOD Financial Management Regulations (FMR) before the effective date. As of February 2007, DOD issued desktop procedures that outlined its process and associated controls for timely identification of new federal accounting standards and communication of these changes to staff responsible for updating the FMR.

In February 2009, DOD updated its financial management regulations to require that DOD components provide detailed disclosures concerning the level of uncertainty regarding the accounting estimates used to calculate the reported environmental liabilities, including any uncertainties regarding environmental liability estimates resulting from BRAC closures. GAO verified DOD and its components disclosed the required information on uncertainties related to environmental liabilities in its 2008 and 2009 financial statements.

DOD stated it had instructed the Navy to include a step in its financial improvement plan to track the progress of reporting its environmental liabilities for spent nuclear fuel. The Navy established procedures in 2006 for estimating, updating and reporting the accrued liability for the cost of disposing of spent nuclear fuel in accordance with the DOD FMR and SSFAS No. 5 and began reporting this estimate in its fiscal year 2006 annual financial statements.

DOD stated that, for Navy ships and submarines placed into service on or after October 1, 1997, the Navy will begin to accrue the environmental liability over the life of the ships and submarines when placed into service rather than recognizing the full cost. DOD also stated it had instructed the Navy to include a step in its financial improvement plan to track the progress of reporting its environmental liabilities for ships and submarines. The Navy established procedures in 2006 directing that reporting an estimate for the accrued liability of cleanup costs for nuclear ships and submarines should be over the useful lives of these assets in accordance with SFFAS No. 6. The Navy began reporting this estimate in its fiscal year 2006 financial statements.

DOD concurred with this recommendation and stated that it has instructed the military departments to include a step in their financial improvement plans to comply with this recommendation. In September 2015, DOD's Environmental Liability Working Group issued a Department-wide strategy for achieving audit readiness (Strategy Memorandum) for Environmental and Disposal Liabilities (EDL). The Strategy Memorandum replaces existing DOD Financial Management Regulation (FMR) Guidance governing EDL and will be incorporated into the next update of the FMR. The objective of the Strategy Memorandum is to provide a DOD-wide EDL audit readiness strategy including reporting requirements and guidance, and establishes the scope of EDL. The Strategy Memorandum provides guidance on calculating environmental liabilities including the total cost to complete that is not currently funded, costs that are funded and obligated, and costs that are funded and not obligated. The Strategy Memorandum provides EDL guidance for all DOD-wide EDL that meet the criteria for financial reporting in accordance with Generally Accepted Accounting Principles. As of the end of fiscal year 2017, each of the services had made progress in implementation of the new EDL guidance. DOD's actions address the intent of our recommendation.

Energy officials concurred with the recommendation and indicated they reassessed their process and would change their procedures for the non-monetary legal rep. letter during the fiscal year 2006 financial statement audit. Specifically, Energy officials said that headquarters program offices will now send the field offices' summary evaluations and backup documentation on non-monetary contingencies to the office of the General Counsel (GC). GC will review the program offices' submissions, summaries, and backup documentation and advise the CFO as to whether it concurs. Following the FY 2006 audit, we obtained a copy of the memo from GC to the Assistant IG for corporate audits indicating that it concurred with the program offices' reports with a few exceptions which it spelled out in the memo. We reviewed GC's exceptions and found that all of the exceptions that would require financial statement disclosure were disclosed in DOE's FY 2006 financial statements. This included a case identified by GC which had not been originally reported by the program office. Consequently, we conclude that DOE has appropriately reassessed and improved its procedures, and that the new procedure was effective in improving DOE's financial statement disclosures.