	Background

Since 1997, DOD has been required to prepare annual audited  department-wide financial statements. However, our prior work has  shown that long-standing and pervasive financial management  weaknesses have precluded DOD from being auditable. The National Defense Authorization Act (NDAA) for Fiscal Year 2010  required that DOD develop and maintain the FIAR Plan. The FIAR Plan  must include specific actions DOD plans to take to help correct  deficiencies that impair DOD’s ability to prepare timely, reliable, and  complete financial management information and ensure that its financial  statements are validated as ready for audit by September 30, 2017. 1. The military services have asserted that some individually large-value and  high-visibility equipment (such as ships, submarines, and aircraft) are  ready for audit. However, they have also reported that they have not  completed validation of the accountability over certain key classes of  PP&E and therefore have not yet asserted audit readiness for such  assets, including land, government-furnished equipment, and IUS. Moreover, the Marine Corps (a  component of the Navy) has not yet asserted audit readiness for any of its  PP&E. While the military services have set target dates for asserting audit  readiness for its PP&E, almost all of the target dates have been delayed,  in some cases by multiple years, increasing the risk that DOD may not  complete audit readiness efforts by the target date of September 30,  2017. Additionally, DOD has acknowledged a set of control deficiencies,  identified as “dealbreakers,” that it reports are so severe that they could  prevent the services from demonstrating audit readiness or succeeding in  audits. DOD’s Plans for Valuing PP&E Are in the Early Stages of Development

In addition to establishing accountability for all of the department’s PP&E,  DOD and the military services must, under current accounting standards,  record asset values using an appropriate method of valuation—such as  historical cost—for its PP&E to be considered audit ready. For  example, DOD estimates that it needs to value over 440,000 real property  assets along with individual pieces of equipment that may number in the  several hundreds of thousands of items located at multiple installations  around the world. 2. Further, DOD  and the services have identified challenges in developing and  implementing valuation methodologies for existing assets, while  continuing to remedy systems and develop procedures to properly  account for the actual costs of newly acquired assets for each major  category of PP&E. Conclusions

DOD is responsible for over 70 percent of the federal government’s  reported PP&E, but DOD cannot accurately account for its PP&E assets. DOD’s inability to perform basic financial and accountability  functions is highlighted by its inability to prepare auditable financial  statements—one measure of good financial management. Congress has  required DOD to take steps to be ready for full financial audit by  September 30, 2017, and has mandated that DOD report on its status  and progress through the semiannual FIAR Plan Status Report. Although  DOD’s Status Reports have shown that several categories of PP&E are  ready for audit, its reporting does not provide clear visibility for Congress  and other decision makers regarding the extent to which DOD has  addressed underlying deficiencies in internal controls. However, the reports do not provide  adequate visibility over actions taken and progress made toward  correcting the dealbreakers. Without sufficient information about the  status of improvements in internal control, including information about  dealbreakers, DOD, congressional committees, and other decision  makers do not have a complete status of audit readiness or  improvements that still need to be made. Recommendations for Executive Action

We are making two recommendations to help provide better visibility of  DOD’s financial management status for decision makers and to improve  oversight of DOD’s audit readiness efforts to strengthen internal controls  and improve financial practices and processes. We recommend that the  Under Secretary of Defense (Comptroller), while developing other  formatting changes to be made in future reports, expand the semiannual  FIAR Plan Status Report to include  the extent to which assertions of audit readiness have been made  without assurance that related controls are effective and the details of  remediation activities taken and planned to correct the known internal  control deficiencies and  the details of military services’ actions taken and progress made  toward correcting the control deficiencies underlying the reported  dealbreakers. Appendix I: Objectives, Scope, and Methodology

The Senate report accompanying S.2410, a bill for the National Defense  Authorization Act for Fiscal Year 2015, included a provision for GAO to  conduct a review of the Department of Defense’s (DOD) plans to achieve  audit readiness with respect to its Property, Plant, and Equipment  (PP&E). The objectives of our review were to determine the reported  status of DOD’s and the military services’—the departments of the Army,  Navy (including the Marine Corps), and Air Force—(1) assertions of audit  readiness for PP&E asset accountability in accordance with the Financial  Improvement and Audit Readiness (FIAR) Guidance and (2) plans for  valuing PP&E assets.
Why GAO Did This Study

Since 1997, DOD has been required to prepare audited financial statements. However, long-standing and pervasive financial management weaknesses have precluded DOD from being auditable. The National Defense Authorization Act (NDAA) for Fiscal Year 2010 mandated that DOD develop and maintain a plan that among other things, describes the actions needed to ensure that its consolidated financial statements are audit ready by September 30, 2017.
The Senate report accompanying the NDAA for Fiscal Year 2015 included a provision for GAO to review DOD's plans to achieve audit readiness with respect to its PP&E. This report addresses the reported status of DOD's and the military services' (1) audit readiness assertions for PP&E asset accountability and (2) plans for valuing PP&E assets. GAO reviewed the FIAR Plan Status Reports and Guidance, documentation of assertions of audit readiness, and federal accounting standards and proposed changes, and interviewed DOD officials.

What GAO Found

The Department of Defense (DOD), reporting about $630 billion total Property, Plant, and Equipment (PP&E) net of accumulated depreciation as of September 30, 2015, is responsible for over 70 percent of the U.S. government's reported PP&E. However, as GAO and others have previously reported—and made recommendations to address—DOD's accountability over and ability to value its PP&E assets has for years been challenged by poorly designed internal controls, processes, and systems. These challenges are highlighted by DOD's inability to prepare auditable financial statements.
The military services have asserted audit readiness regarding PP&E accountability for some categories of PP&E. However, they have not yet asserted audit readiness for certain key categories of PP&E, including land, government-furnished equipment, and internal-use software. In addition, the Marine Corps (a component of the Navy) has not yet asserted audit readiness for any of its PP&E. While the services have set target dates for asserting audit readiness for these remaining assets, almost all of the target dates have been delayed in some cases by multiple years, increasing the risk that DOD may not complete audit readiness efforts by the target date of September 30, 2017.
DOD reports its audit readiness status and progress in its semiannual Financial Improvement and Audit Readiness (FIAR) Plan Status Report. However, the Status Report does not provide clear visibility for Congress and other decision makers regarding the extent to which DOD has addressed deficiencies in the related internal controls. For example, the military services have asserted audit readiness regarding PP&E accountability for some individually large-value and high-visibility equipment, such as ships and aircraft. However, the Status Report does not reflect that the services have often asserted audit readiness without evaluating or correcting the underlying internal control deficiencies. Similarly, DOD identified a number of deficiencies, referred to as dealbreakers, that it reports to be so severe that they could prevent the services from demonstrating audit readiness or succeeding in audits—such as the inability to produce a complete list of items the services own. However, DOD's Status Report does not provide adequate visibility over actions taken and progress made toward correcting those dealbreakers. Without greater visibility of DOD's audit readiness status and progress in its FIAR Plan Status Report, Congress and other decision makers may not have sufficient information to assess DOD's current audit readiness status and the improvements that still need to be made.
Regarding valuation, DOD is in the early stages of developing specific methodologies and procedures to value its existing PP&E assets. DOD estimates that it needs to value over 440,000 real property assets and several hundred thousand individual pieces of equipment. Proposed changes to federal accounting standards would provide DOD more options for estimating the value of its existing assets. However, DOD reported that previously identified systems and control deficiencies impair its ability to properly account for the actual costs of newly acquired assets, and identified fixing such deficiencies as a priority in the FIAR Plan.

What GAO Recommends

To help provide better visibility of DOD's financial management status and efforts, GAO recommends that DOD expand its semiannual FIAR Plan Status Report to include (1) audit assertions that have been made without correcting internal control deficiencies along with actions and plans to remediate the deficiencies and (2) details of military services' actions taken and progress made toward correcting the underlying deficiencies for reported dealbreakers. DOD agreed with these recommendations.