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Department of Defense: Additional Actions Needed to Improve Financial Management of Military Equipment.

GAO-10-695 July 26, 2010

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

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Asif A. Khan Team: Government Accountability Office: Financial Management and Assurance Phone: No phone on record

Recommendations for Executive Action

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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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

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Categories: July 27, 2010, Accountability, Accounting standards, Assets, Cost accounting, Cost accounting standards compliance, Defense economic analysis, Defense procurement, Documentation, Federal property management, Financial analysis, Financial management systems, Information resources management, Internal controls, Military materiel, Military procurement, Monitoring, Property and supply management, Requirements definition, Risk management
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