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: According to Navy officials, sponsor owned material is a subset of Operating Materials and Supplies (OM&S) contained within the OM&S-Remainder (OM&S-R) account. The Navy's auditors have reported a material weakness related to the OM&S-R account since fiscal year 2005. Recently, the auditors reported that the Navy did not have adequate policies, procedures, internal controls, and supporting documentation to support the balance and reporting of the OM&S-R account. The Navy currently has efforts underway to address this material weakness with a target completion date of early fiscal year 2021.

    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: Closed - Implemented

    Comments: Navy's ammunition, or ordnance, is primarily procured by two Navy Budget Submitting Offices--Naval Air Systems Command and Naval Sea Systems Command--through the Navy's Enterprise Resource Planning (ERP). Upon delivery of the ordnance to the intended recipient, the ordnance is then removed from Navy's ERP system and entered in the Navy's ordnance Accountable Property System of Record (APSR), the Ordnance Information System (OIS). Upon entry in OIS, Navy personnel perform a front-end review of key supporting documentation; including, but not limited to, a review of contractor data, item description, and quantities, and cost documentation to validate the information being input into OIS is accurate and complete. Ordnance financial statement information is then manually transferred from OIS into the Navy's financial statements utilizing the Navy's Defense Departmental Reporting System-Data Collection Module (DDRS-DCM) process.

    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: Closed - Implemented

    Comments: The Navy has revised its procedures for classifying and reporting operating material and supplies deemed excess, obsolete, and unserviceable, to include ordnance (i.e. - ammunition), since the issuance of our report. The Statement of Federal Financial Accounting Standards Number 3 (SFFAS 3) states that the operating material and supplies category deemed excess, obsolete, and unserviceable shall be either (1) included in the operating materials and supplies line item on the face of the financial statements with separate disclosure in footnotes or (2) shown as a separate line item on the face of the financial statements. Based on review of the Navy's fiscal year 2016 annual financial report, the department is now reporting operating materials and supplies deemed excess, obsolete, and unserviceable in the operating materials and supplies line item on the face of the financial statements with separate disclosure in footnotes in accordance with federal accounting standards.

    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: Closed - Implemented

    Comments: The Navy revised its financial reporting procedures to properly account for operating material and supplies (OM&S) held by contractors. OM&S material held by contractors for use in the performance of maintenance is expensed while material held for a construction contract is capitalized to a construction in progress account upon issue by the Navy to the contractor. Additionally, the Navy reports operating material and supplies on its financial statements in one of three categories--held for use; held for repair; or excess, obsolete, or unserviceable. If the OM&S is not expensed or capitalized upon issue by the Navy to the contractor, then it is reported in one of the three financial statement line items, depending upon the materials intended use at time of issue.

    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: Regarding the first part of this recommendation, the Navy reports its ordnance within the Operating Materials and Supplies-Ordinance (OM&S-O) account and acknowledged in its most recent agency financial report (AFR) that valuation adjustments pertaining to repair cost are not currently calculated for ordnance. Also, the Navy's auditors have reported a material weakness related to the OM&S-O account since fiscal year 2005. Recently, the auditors reported that the Navy did not have adequate policies, procedures, and internal controls to effectively implement accounting standards related to its OM&S-O account. The Navy currently has efforts underway intended to address this material weakness with a target correction date of late fiscal year 2021. Regarding the second part of this recommendation, SFFAS 3 states that 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. Navy acknowledges, in its fiscal year 2019 AFR, that due to system limitations operating expenses are not always recognized when the items are consumed. The Navy also stated that efforts are underway to transition to the consumption method to properly recognize expenses; however, no target completion date was provided.

    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: Closed - Implemented

    Comments: Navy has developed and implemented new systems to track and report operating materials and supplies (OM&S), such as ordnance and uninstalled aircraft engines, since the issuance of our report. These new logistical systems--the Ordnance Information System and the Decision Knowledge Programming for Logistics Analysis and Technical Evaluation system, responsible for tracking ordnance and uninstalled aircraft engines, respectively--give Navy improved visibility over its OM&S and feed directly into its financial reporting systems. While the Navy acknowledges that work remains with respect to tracking and reporting all of its OM&S, the Navy has developed planned corrective actions that consider the issues discussed in our report. In Navy's bi-annual status updates to DOD's Financial Improvement and Audit Readiness (FIAR) Report, it discusses long-term system solutions to issues related to accounting and visibility over its OM&S. Furthermore, in internal status meetings, Navy reported planned long-term improvements to existing OM&S logistical systems. For example, interfacing Navy's electronic invoicing, receipt and acceptance, and property transfer system to OIS; thereby supporting future valuation efforts that are compliant with federal accounting standards. This effort is planned to be completed by fiscal year 2019.

    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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