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. 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. 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. In addition, DOD policy requires contract deliverables, including military  equipment, that meet predefined criteria, be assigned a unique item  identifier. Departmentwide cost accounting requirements need to be defined. 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), it is  important that DOD define its cost accounting requirements to ensure that  these systems provide these capabilities. 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. 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. 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. 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. 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) and determine what actions DOD has  taken to address them. 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;  tained an understanding of MDAPs,  weapons systems acquisition; and major defense acquisition programs). Using applicable criteria, we assessed whether the actions  taken adequately addressed the identified weaknesses.
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.