Internal Control Deficiencies Impaired the Navy’s Ability to Properly Record and Report Certain of Its Buildings

We identified internal control deficiencies that impaired the Navy’s ability  to assert that as of September 30, 2016, (1) buildings recorded in  iNFADS and reported as assets in Navy’s financial statements existed  and (2) all of the Navy’s buildings were recorded in iNFADS and correctly  reported as assets in Navy’s financial statements. As shown in figure 2,  the effects of these internal control deficiencies contributed to the Navy  (1) continuing to maintain records in iNFADS for buildings that had been  demolished, sometimes many years ago, and including these buildings as  assets in its financial statements; (2) excluding some of the buildings that  it owns from being recorded in iNFADS and reported as assets in its  financial statements; (3) erroneously reporting nonfunctional buildings as  assets in its financial statements; and (4) excluding certain buildings  from being reported as assets in its financial statements that met or  exceeded DOD’s capitalization threshold. Challenges the Navy Faces in Complying with Federal Accounting Standards for Valuing Its Buildings

The Navy faces several challenges in valuing its buildings in accordance  with federal accounting standards, including (1) finalizing documentation  of actual cost information for buildings that are acquired and placed in  service after the Navy’s opening balances have been established based  on alternative valuation methods permitted by SFFAS No. 50;   (2) capturing and recording costs of improvements that should be  reported; (3) consistently completing asset evaluations for each building  every 5 years as required by DOD Instruction 4165.14 to help ensure that  each building’s information in iNFADS is correct; and (4) determining  placed in service dates for previously unrecorded buildings that are  subsequently discovered/identified through physical inventories/asset  evaluations. Navy officials are aware of these challenges and have  various efforts under way to address them. Effective implementation of  these efforts is crucial to help address these challenges. The Navy has developed and is testing its  methodology to properly account for capital improvements to buildings. The  success of this methodology will be critical for capturing capital  improvements for buildings. An asset evaluation is a key Navy control to help ensure  that the information recorded in iNFADS is accurate. The Navy’s use of the date the building was found by inventory as the  placed in service date can substantially affect the information in iNFADS. Navy officials are aware of the challenges discussed above and have  various efforts under way to address them. Recommendations for Executive Action

We are making the following four recommendations to the Navy. Appendix I: Objectives, Scope, and Methodology

This engagement was initiated in connection with the statutory  requirement for GAO to audit the U.S. government’s consolidated  financial statements. The focus of this engagement was the United  States Navy’s (Navy) real property, specifically buildings, because the  Department of the Navy was the first military department to initially assert  real property audit readiness for existence and completeness. Our  objectives were to (1) determine the extent to which the Navy had internal  control deficiencies, if any, that may impair its ability to assert that its  buildings, as reported in its financial statements, exist and that the  information about the buildings is complete and adequately supported by  property records and (2) identify the challenges, if any, that the Navy  faces in valuing its buildings in accordance with federal accounting  standards. We  reviewed the results from prior real property audit readiness testing  conducted by a contractor that the Navy engaged to help it achieve audit  readiness for its real property. We performed data analyses of buildings  in the Navy’s accountable real property system, the internet Navy Facility  Assets Data Store (iNFADS) as of September 30, 2016.
Why GAO Did This Study

This engagement was initiated in connection with the statutory requirement for GAO to audit the U.S. government's consolidated financial statements. The 2018 National Defense Authorization Act requires that the Secretary of Defense ensure that a full audit is performed on the financial statements of DOD for each fiscal year and that the results be submitted to Congress no later than March 31 of the following fiscal year. The Navy was the first military department to assert real property audit readiness related to DOD's Financial Improvement and Audit Readiness effort.
For this report, GAO's objectives were to (1) determine the extent to which the Navy had internal control deficiencies, if any, that may impair its ability to assert that its buildings, as reported in its financial statements, exist and that the information about these buildings is complete and adequately supported by property records and (2) identify the challenges, if any, that Navy faces in valuing its buildings in accordance with federal accounting standards. GAO reviewed the Navy's policies and procedures for control activities over its buildings, performed data analyses, and tested a nongeneralizable sample of buildings. GAO also discussed with Navy officials the challenges in complying with federal accounting standards for valuing its buildings.

What GAO Found

Although the United States Navy (Navy) has taken actions to become audit ready for its real property, GAO identified internal control deficiencies that impaired the Navy's ability to assert that (1) buildings recorded in the internet Navy Facility Assets Data Store (iNFADS), the Navy's real property system, and reported as assets in its financial statements existed and (2) all of the Navy's buildings were recorded in iNFADS and correctly reported as assets in the Navy's financial statements. As shown in the figure below, the effects of these internal control deficiencies contributed to the Navy (1) continuing to maintain records in iNFADS for buildings that had been demolished, sometimes many years ago, and include these buildings as assets in its financial statements; (2) excluding some of the buildings it owns from being recorded in iNFADS and reported as assets in its financial statements; (3) erroneously reporting nonfunctional buildings as assets in its financial statements; and (4) excluding certain buildings from being reported as assets in its financial statements that met or exceeded the Department of Defense's (DOD) capitalization threshold.
The Navy has various efforts under way to address challenges in valuing its buildings for financial reporting in accordance with federal accounting standards. Navy officials have acknowledged that significant delays can sometimes occur in the Navy being able to complete supporting documentation of the final costs to properly report buildings in its financial statements. Additionally, implementation of the Navy's new methodology to properly account for capital improvements will be critical for capturing accurate costs for buildings. Furthermore, the Navy has not consistently completed a physical inventory (asset evaluation) for each building every 5 years as required by DOD policy. These asset evaluations are an important control to help ensure that the information recorded for buildings in iNFADS is accurate. Finally, the Navy also faces a challenge in determining the placed in service dates for those buildings found through inventory procedures. The Navy's use of the date the building was found rather than the estimated date the building was placed in service can substantially affect the accuracy of the information in the Navy's systems and financial statements. Navy officials are aware of these challenges and have various efforts under way to address them. Effective implementation of these efforts is crucial to help address these challenges.

What GAO Recommends

GAO is making four recommendations to the Navy to improve internal controls for its buildings by implementing needed written procedures and control activities. The Navy concurred with these recommendations.