Department of Defense:

Additional Actions Needed to Improve Financial Management of Military Equipment

GAO-10-695: Published: Jul 26, 2010. Publicly Released: Jul 26, 2010.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and its actions have met the intent of the recommendation. According to a September 2013 memorandum, military equipment, once a separate category, will be merged with general equipment and will be valued for balance sheet presentation. As part of the Financial Improvement and Audit Readiness (FIAR) effort, DOD components will be evaluated as to the extent that supporting documentation for military equipment is readily available.

    Recommendation: 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, the Secretary of Defense should 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 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.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. As identified in a February 2014 memorandum, the department is continuing its efforts to resolve the identified material weakness over government-furnished property. DOD has met the intent of the recommendation for ongoing monitoring activities.

    Recommendation: 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, the Secretary of Defense should 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 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.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. In February 2011, DOD issued a Standard Operating Procedure, Acquisition/Procurement Guide for Unique Item Traceability Data Integrity, requiring that the unique item identifier be entered into DOD's Item Unique Identification (IUID) Registry.

    Recommendation: 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, the Secretary of Defense should 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 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 Item Unique Identification (IUID) registry.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and its actions have met the intent of the recommendation. As of May 2011, DOD Instruction 5000.64 states that the accountability of property will be enabled by the use of the item unique identification number (IUID) to identify, aggregate, and report asset cost information. The IUID is to be used as the primary key to enable the aggregation of managerial cost information across multiple systems. According to a January 2012 timeline, several implementation actions were planned from fiscal years 2012 through 2017.

    Recommendation: 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, the Secretary of Defense should 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 develop and implement guidance on how the IUID will be used to identify, aggregate, and report asset cost information.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. DOD determined that Proper Financial Accounting Treatment for Military Equipment (PFAT4ME) course, offered by the Defense Acquisition University (DAU), is appropriate for business financial management and contracting personnel and has designated it as a core plus course. According to DOD officials, the Office of the Under Secretary (Acquisition, Technology, and Logistics) monitored course attendance, and as of June 2014, there were 6,864 students that had taken the class since the course's inception. DOD officials stated that as updates are made to the PFAT4ME initiative to reflect recent equipment policy changes described in a September 2013 memorandum, the same updates will be made to the course curriculum to ensure that DAU students enrolled in the PFAT4ME course receive the most current training materials.

    Recommendation: 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, the Secretary of Defense should 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 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 such personnel take the training.

    Agency Affected: Department of Defense

  6. Status: Open

    Comments: DOD concurred with this recommendation. In September 2013, DOD officials stated that due to a shift in priorities, the monitoring of the Proper Financial Accounting Treatment for Military Equipment (PFAT4ME) was stopped so that departmental officials could lead the Financial Improvement and Audit Readiness (FIAR) Plan Wave 3 (existence & completeness of mission critical assets) efforts. As progress has been made over the past several years, the focus is shifting back to the PFAT4ME initiative and the monitoring of this initiative will begin again as part of Wave 4 of the FIAR Plan strategy. In June 2014, DOD officials stated that the PFAT4ME initiative is still ongoing and given recent DOD policy changes, including the removal of the military equipment definition and changes to capitalization thresholds, departmental officials understand that updates to the PFAT4ME document are necessary to ensure these latest policy changes are properly reflected in the PFAT4ME guidance.

    Recommendation: 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, the Secretary of Defense should 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 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.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and has met the intent of this recommendation. In September 2013, DOD developed and issued a policy memorandum directing that military equipment be combined into a single category called general equipment, an asset class of general property, plant and equipment. DOD's memorandum also provides the policy for valuing its military equipment, which allows for the use of reasonable estimates. This new policy was included in DOD's November 2013 Financial Improvement and Audit Readiness Guidance and DOD issued its General Equipment Valuation Estimation Methodologies implementing the new policy in February 2014.

    Recommendation: 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, the Secretary of Defense should 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 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.

    Agency Affected: Department of Defense

  8. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and has met the intent of this recommendation. DOD has issued its policy for valuing military equipment in its September 2013 memorandum. Military equipment will be included with general equipment and will be valued for balance sheet presentation. In February 2014, DOD issued its General Equipment Valuation Estimation Methodologies, which includes new business rules and a valuation methodology that states the recorded cost of assets are to include costs associated with getting the asset to a form and location suitable for its intended use.

    Recommendation: 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, the Secretary of Defense should 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 review the MEV methodology business rules to identify inconsistencies and revise the rules as needed.

    Agency Affected: Department of Defense

  9. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. In July 2012, DOD issued its Government Furnished Property Operating Guide which outlines and defines the Wide Area Workflow (WAWF) and Item Unique Identification (IUID) initiatives and the extent to which they are used in the Enterprise Resource Planning (ERP) business systems environment.

    Recommendation: 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, the Secretary of Defense should 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 assess the Wide Area Work Flow (WAWF) and IUID initiatives and determine the extent to which they will be utilized in the emerging Enterprise Resource Planning (ERP) business systems environment.

    Agency Affected: Department of Defense

  10. Status: Open

    Comments: DOD concurred with this recommendation. According to DOD officials, DOD has established the standard cost accounting data elements in the Standard Financial Information Structure (SFIS). As of July 2014, DOD military departments are defining the cost accounting requirements at the component level, but these processes are not complete for all three military departments. Therefore, the status of this recommendation is open.

    Recommendation: The Secretary of Defense should 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, to define the cost accounting requirements at the major component level, including how its Standard Financial Information Structure (SFIS) data elements will be used to identify, aggregate, account for, and report cost information.

    Agency Affected: Department of Defense

  11. Status: Open

    Comments: DOD's military departments are in the process of implementing ERPs. At least one of these ERPs does not currently include cost accumulation and reporting for military equipment assets. Therefore, the status of this recommendation is open as of July 2014.

    Recommendation: The Secretary of Defense should 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, after defining the cost accounting requirements, to 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 Affected: Department of Defense

 

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