oversight

Financial Management: DOD's Approach to Financial Control Over Property Needs Structure

Published by the Government Accountability Office on 1997-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Deputy Secretary of
                  Defense



September 1997
                  FINANCIAL
                  MANAGEMENT
                  DOD’s Approach to
                  Financial Control Over
                  Property Needs
                  Structure




GAO/AIMD-97-150
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-275088

      September 30, 1997

      The Honorable John J. Hamre
      Deputy Secretary of Defense

      Dear Dr. Hamre:

      The Department of Defense (DOD) identified its long-standing problem with
      accurately reporting its real and personal property as a high-risk area as
      far back as fiscal year 1990. Recent financial statement audits continued to
      find unreliable financial balances of real and personal property. Further,
      the Department’s Federal Managers’ Financial Integrity Act (FMFIA) Annual
      Statement of Assurance1 for fiscal year 1996 indicated that accounting for
      real and personal property was still a problem area. DOD stated that a
      contributing factor was that its financial systems were not designed to
      satisfy accounting and reporting requirements.

      Federal accounting standards identify general property, plant, and
      equipment (PP&E)2 as a separate category of assets to be accounted for and
      reported in DOD’s financial statements. General PP&E includes assets such
      as mainframe computers, office equipment, and vehicles. DOD reported
      over $182 billion of general PP&E in its fiscal year 1996 financial statements,
      which represents over half of the more than $358 billion of general PP&E
      reported governmentwide for this period.

      In December 1994, the DOD Comptroller nominated the Defense Property
      and Accountability System (DPAS) to account for real and personal
      property throughout the Department in order to bring DOD assets under
      proper accountability and financial control, remedy its problem of
      inaccurate financial reporting and meet the objectives of recent financial
      management reform legislation. The selection of DPAS as the DOD migratory
      property system was approved by the Deputy Assistant Secretary of
      Defense for Command, Control, Communication and Intelligence in
      May 1995. The Chief Financial Officers (CFO) Act of 1990, as expanded by

      1
       FMFIA requires that the head of each executive agency provide an annual statement to the President
      and the Congress stating whether the systems of internal accounting and administrative control fully
      comply with standards issued by the Comptroller General.
      2
       According to Statement of Federal Financial Accounting Standards (SFFAS) No. 6, PP&E consists of
      tangible assets, including land, that has an estimated useful life of 2 years or more; is not intended for
      sale in the ordinary course of operations; and has been acquired or constructed with the intention of
      being used, or being available for use by the entity. General PP&E has one or more of the following
      characteristics: it could be used for alternative purposes (e.g., by other Federal programs, etc.) but is
      used to produce goods or services or to support the mission of the entity; it is used in business-type
      activities; or it is used by entities in activities whose costs can be compared to those of other entities
      performing similar activities (e.g., federal hospital services in comparison to other hospitals).



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                   the Government Management Reform Act (GMRA) of 1994, and federal
                   accounting standards,3 are aimed at gaining better control over
                   government operations, providing reliable costs and performance
                   measures for decision-making, and improving financial reporting. In
                   addition, the Federal Financial Management Improvement Act of 1996
                   requires agencies to comply with federal accounting standards, federal
                   financial management system requirements,4 and the U.S. Government
                   Standard General Ledger.5 Successfully meeting these requirements for
                   having reliable data is essential for ensuring effective management of
                   government activities, safeguarding assets entrusted to the federal
                   government, and achieving reliable financial reporting.

                   Our objectives were to determine whether (1) DPAS was designed to meet
                   functional accounting requirements6 for general PP&E and (2) DPAS was
                   implemented at the Defense Information System Agency’s (DISA) Defense
                   Megacenters in a manner that ensures it meets functional accounting
                   requirements for general PP&E. We chose DISA because it represents one
                   fourth of the sites where DPAS has been implemented. Through our work at
                   DISA, we also identified several opportunities for improvements to DOD’s
                   agencywide implementation strategy for DPAS.


                   As functionally designed, DPAS can provide financial control and generate
Results in Brief   information to account for most general PP&E. However, DPAS cannot yet
                   meet requirements that become effective for accounting periods beginning
                   after September 30, 1997. For example, DPAS does not contain the
                   information needed to meet new federal accounting standards for deferred
                   maintenance and environmental clean-up costs. These items will be
                   significant to the financial statements. Also, the DPAS design does not meet
                   several current DOD accounting requirements for certain minor types of
                   general PP&E. For example, DPAS does not have the information to meet the
                   requirements for recording depletion of natural resources, which
                   represent 1.2 percent of DOD’s total general PP&E. DPAS needs to be modified



                   3
                    The Federal Accounting Standards Advisory Board (FASAB) recommends accounting standards, and
                   the Office of Management and Budget (OMB), Treasury, and GAO decide whether to adopt the
                   recommended standards; if they are adopted, the standards are published by OMB and GAO.
                   4
                    Federal financial management system requirements are defined in OMB Circular A-127 and the Joint
                   Financial Management Improvement Program’s systems requirements series.
                   5
                     The purpose of the U.S. Government Standard General Ledger is to provide a uniform chart of
                   accounts and supporting transactions to be used to standardize federal agency accounting and to
                   support the preparation of standard external reports.
                   6
                    Functional accounting requirements are contained in Statements of Federal Financial Accounting
                   Standards and DOD Financial Management Regulations.
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             with the addition of data elements and financial transactions to meet new
             standards and requirements as well as the current ones not yet covered.

             Implementation of DPAS at DISA did not ensure financial control and
             accurate reporting of general PP&E. For example, DPAS was not correctly
             interfaced with the accounting system due to errors in the interface
             program used to translate DPAS data to data understandable to DISA’s
             general ledger. This caused transactions to be recorded incorrectly in the
             general ledger, resulting in a material difference of over $118 million in
             property values between DPAS detailed records and the general ledger
             summary records. The problem with the interface program could have
             been mitigated if transactions using the standard general ledger accounts
             were created in DPAS. In addition, compensating controls, such as routine
             reconciliations between the two systems, were not in place.

             Many of the problems with the accuracy of property data experienced at
             DISA can be linked to several issues that affect DOD-wide implementation of
             DPAS. For example, DOD, as part of its DPAS strategic planning process, has
             not defined the roles, responsibilities, and relationships among the various
             DOD entities involved, including identification of needed manual and
             automated interfaces and related controls. This part of the strategic
             planning process is referred to as a concept of operations. In addition, DOD
             has not developed a detailed DPAS implementation schedule that identifies
             at what sites and when the system will be implemented. Rather, DOD has
             left it up to each military service to determine where, when, and how DPAS
             is to be implemented without providing adequate implementation
             guidance or ensuring that the implementation schedule includes all sites,
             making it unlikely that DPAS will be implemented across DOD by the
             Comptroller’s target date of 2000.


             DOD has been reporting problems with its data accuracy for real and
Background   personal property since at least 1990. The Department has provided a
             number of reasons for the unreliable reporting, including property systems
             that maintain item accountability not being integrated with financial
             accounting systems. In fiscal year 1995, the DOD Comptroller concluded
             that this lack of integration adversely affected the accuracy of accounting
             systems data and financial reporting. The DOD Comptroller also stated that
             general ledger control over property, which is necessary to ensure that all
             financial transactions are recorded in the official accounting records, is
             lacking or inadequate. Accordingly, the DOD Comptroller selected DPAS to




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remedy these deficiencies and had implemented the system at over 150
sites as of June 1997.

The DOD Comptroller designated DPAS as the property accounting system
for all DOD real and personal property7 in order to bring DOD assets under
proper accountability and financial control. DPAS is expected to provide
on-line capability to support all functions that are associated with property
accountability and equipment management, as well as financial control
and reporting. In addition, DPAS is expected to produce the financial
transactions necessary to record additions, reductions, or changes in the
value of capital assets to the various general ledgers used in DOD.8 DPAS is
also the subsidiary ledger containing all the detailed property information
necessary to support the general ledger summary totals.

DPAS  was adapted from the Army Materiel Command’s Installation
Equipment Management System by the Army’s Industrial Logistics
Systems Center (ILSC) personnel. Under the oversight of the DOD
Comptroller, the Financial Systems Activity (from the Defense Finance
and Accounting Service’s (DFAS) Columbus, Ohio, operating location) and
ILSC are responsible for maintaining and enhancing (1) the DPAS software,
(2) all systems documentation, such as the user’s manual, functional
description, and system specifications, and (3) processing equipment
required to host DPAS. The DOD Comptroller is responsible for defining all
accounting requirements, including any new accounting requirements.

One of the organizations where DPAS was implemented is DISA, the DOD
agency responsible for information technology. One of DISA’s organizations
is the Defense Megacenter business area which consists of a headquarters
and 16 Defense Megacenters that provide information processing services
to DOD customers on a fee-for-service basis. DPAS has been implemented at
39 DISA sites overall, including the 16 Defense Megacenters as of June 1997.

The DOD Comptroller’s office published an overall Implementation
Handbook for DPAS. The current version at the time of our review was
dated April 1996. A specific implementation plan is also developed for


7
  According to DOD’s Financial Management Regulation, Volume 4, real property includes land,
buildings, and related structures. Personal property includes weapons systems and other military
equipment. However, the DPAS program manager and DPAS documentation indicated that weapons
systems and tactical systems are not included in the DPAS design. The real and personal property
included in DPAS is consistent with the SFFAS No. 6 definition of general PP&E.
8
 As described in DOD’s Chief Financial Officer’s Financial Management Status Report and Five Year
Plan, finance and accounting systems lack a single standard transaction driven general ledger—an
essential ingredient for sound reliable financial reports.



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              each implementing agency, of which DISA is one. DISA’s implementation
              plan for DPAS was dated February 6, 1996. Some of the items included in
              the plan were (1) an implementation schedule, (2) a description of each
              organization’s responsibilities, (3) equipment requirements, and (4) a
              description of training to be provided. Also, the plan stated the Director,
              DISA, is responsible for specifying interface requirements for each DISA DPAS
              location and working with the DOD Comptroller’s implementation team to
              develop the required interfaces.


              To determine whether DPAS meets federal accounting standards, we used
Scope and     relevant public laws, Office of Management and Budget (OMB) Circulars,
Methodology   Statements of Federal Financial Accounting Standards (SFFAS), Joint
              Financial Management Improvement Program (JFMIP) publications, and
              DOD’s Financial Management Regulation (FMR). We also used our Draft
              Federal Financial Management System (FFMS) review methodology9
              sections on Fixed Assets, Funds Control, General Ledger, and Cost
              Accounting to evaluate the financial control functions of DPAS and how
              general PP&E information is shared or exchanged with other financial areas
              such as cost accounting. Financial control functions include ensuring that
              the system design allows proper recording of transactions for general PP&E
              in the general ledger. It also includes ensuring the system has been
              implemented with adequate internal controls to ensure data accuracy.

              To evaluate DPAS as designed and implemented, we obtained and reviewed
              the DPAS system documentation and reviewed the DPAS Implementation
              Handbook. In addition, we reviewed DPAS implementation at the Huntsville
              DISA Defense Megacenter. We selected Huntsville because a DISA official
              stated that this center had the fewest implementation problems. At the
              time we began audit work, DISA was one of the larger DOD agencies that had
              implemented DPAS at multiple sites.

              We visited DFAS-Pensacola, Florida, and the DISA Financial Management
              Liaison Office (FMLO) in Pensacola to review how the DISA Defense
              Megacenter’s DPAS financial transactions were processed and to better
              understand the processing logic for the interface between DPAS and the
              DISA general ledger. DFAS Pensacola provides finance and accounting
              services to some DOD activities. The FMLO serves as the liaison between
              DISA and DFAS on financial matters.



              9
               GAO’s draft methodology incorporates JFMIP’s systems requirements and will be finalized when
              JFMIP completes its development of the requirements. The FFMS methodology has been endorsed by
              the Chief Financial Officer Council as one method for reviewing systems.



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                    Our scope did not include assessing technical design and software
                    development issues, with the exception of DPAS’ integration with other
                    functional areas such as procurement. Also, our review was limited to the
                    financial control functions of DPAS and therefore did not include logistics
                    functions. We did not evaluate, from either a cost-benefit or a technical
                    standpoint, the DOD Comptroller’s selection of DPAS as a standard migration
                    system, nor did we assess whether there are viable alternatives to DPAS.

                    We reviewed documents and interviewed officials at the following
                    locations: (1) DISA headquarters, Arlington, Virginia, (2) DISA’s western
                    hemisphere office, Falls Church, Virginia, (3) DISA’s Defense Megacenter,
                    Huntsville, Alabama, (4) Industrial Logistics Systems Center at
                    Letterkenny Army Depot, Chambersburg, Pennsylvania,
                    (5) DFAS-Pensacola, Florida, (6) DFAS-Columbus, Ohio, and (7) Information
                    Technology Financial Management Directorate, Office of the Comptroller,
                    Arlington, Virginia.

                    We performed our work from August 1996 to August 1997 in accordance
                    with generally accepted government audit standards.

                    We requested written comments from the Secretary of Defense or his
                    designee on a draft of this report. The Acting Under Secretary of Defense
                    (Comptroller) provided us with written comments. These comments are
                    evaluated in the “Agency Comments and Our Evaluation” section and are
                    reprinted in appendix I.


                    DPAS is designed to provide information to account for most general PP&E.
As Designed, DPAS   This information is created based on information recorded in the DPAS
Can Process Most    property book. However, DPAS does not have the financial information to
General PP&E        process certain minor types of general PP&E, such as foreclosed assets and
                    the depletion of natural resources, in accordance with DOD policy and
Transactions        existing accounting requirements. Although DPAS, as DOD’s property
                    system, should be able to record all required transactions, the omitted
                    items do not affect a significant portion of DOD’s assets. For example,
                    natural resources represent only 1.2 percent of DOD’s total general PP&E.

                    Also, the DOD Comptroller has not yet provided guidance to ILSC on
                    implementing federal accounting standards that become effective for
                    periods beginning after September 30, 1997. In contrast to the omitted
                    items referred to in the previous paragraph, implementation of these new
                    standards may have a significant effect on DOD’s financial reporting. For



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    example, accounting for deferred maintenance costs for assets such as
    buildings, facilities, and equipment is a new requirement under SFFAS No. 6
    and therefore was not included in the original DPAS design. According to a
    DOD Comptroller official, DOD is currently updating its Financial
    Management Regulation to incorporate the new standards’ requirements.
    A DPAS project office official indicated that specific system changes to DPAS
    needed to meet the new standards cannot be identified until the DOD
    Financial Management Regulation is updated.

    The DPAS functional design can be modified to meet all current and
    pending property accounting requirements through changes that include
    the addition of data elements and financial transactions. DPAS as designed
    does not include the standard general ledger postings in its financial
    transactions. As a result, each site must determine the general ledger
    posting logic for DPAS financial transactions.

    The following are specific areas where DPAS should be expanded to meet
    these requirements.

•   DPAS  does not provide the capability to calculate the cost of a capital lease.
    Capital leases transfer substantially all the benefits and risks of ownership
    to the lessee. Agencies are required by federal accounting standards (SFFAS
    No. 5 currently in effect and SFFAS No. 6 effective October 1, 1997) to
    calculate the net present value of lease payments to determine the cost of
    capital leases.
•   DPAS cannot track deferred maintenance costs. Deferred maintenance, as
    defined in SFFAS No. 6, paragraph 77, is maintenance that was not
    performed when it should have been or was scheduled to be and which,
    therefore, is put off or delayed for a future period. SFFAS No. 6 requires a
    line item on the statement of net cost with a note reference for deferred
    maintenance, if the amount is determined by management to be material.
    It also requires the activity to identify each major class of asset for which
    maintenance has been deferred and the method of measuring it. Also DOD’s
    draft Federal Accounting Standards and Requirements, dated February 24,
    1997, which applies to Defense accounting systems, includes requirements
    to account for deferred maintenance.

    Further, DPAS does not allow the user to designate deferred maintenance
    as critical or noncritical. The standard allows the optional disclosure of
    deferred maintenance to be stratified between critical and noncritical
    amounts needed to return each major class of asset to its acceptable
    operating condition. If management elects to disclose critical and



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                           noncritical amounts, the disclosure shall include management’s definition
                           of these categories.

                       •   DPAS  does not provide features to record, value and report foreclosed
                           property, or record any increase or decrease in the value of these assets.
                           SFFAS No. 3 (effective October 1, 1993) contains explicit guidance on
                           recognizing, valuing, disposing, and disclosing each of these assets. Also
                           DOD’s draft Federal Accounting Standards and Requirements, dated
                           February 24, 1997, which applies to defense accounting systems, includes
                           requirements to account for foreclosed property.
                       •   DPAS does not have the capability to provide a transaction to the
                           accounting system to record gain or loss amounts. For example,
                           SFFAS No. 6 requires that the net realizable value of an asset be used to
                           calculate a gain or loss upon disposal or exchange with a non-federal
                           entity.
                       •   DPAS does not provide the ability to record the total estimated
                           environmental clean-up costs for an asset when it is placed in service, or
                           upon discovery of the need for clean up, nor to periodically update these
                           costs. Also, the capability is not provided to calculate the annual expense
                           and accrued liability amounts. SFFAS No. 5 requires recognition of the
                           liability for cleanup from federal operations resulting in hazardous waste.
                           SFFAS No. 6 contains detailed guidance for accounting for clean-up costs
                           and recognizing the annual expense and accrued liability amounts.
                       •   DPAS does not provide features to deplete assets such as natural resources.
                           While SFFAS No. 6 does not address natural resources, DOD’s FMR, Volume 4,
                           requires DOD activities to use the depletion of natural resources account
                           when management deems that depletion accounting is necessary.


                           An objective of implementing DPAS DOD-wide is to ensure financial control
Implementation of          and accurate reporting of general PP&E. Figure 1 illustrates how, in general,
DPAS at DISA Does          information must flow among property and related systems to ensure
Not Ensure Financial       financial control over property. Although the DPAS design allows it to be
                           implemented as shown in figure 1, which gives DOD the ability to have a
Control and Accurate       fully automated property system that assures financial control and data
Reporting                  integrity, DISA’s implementation of DPAS failed to achieve this objective.




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Figure 1: Financial Control Over
Property
                                       Supply/Procurement                                                  Core Accountinga




                                                                       Property Book
                                                                                                               Receiving



                                   a
                                   Core accounting includes general ledger, funds, receipt, payment, and cost management.




                                   Financial control over property is established when detailed transactions
                                   maintained at one location are also maintained in a summary form in the
                                   financial records—referred to as the general ledger. For example, when it
                                   is determined that property is needed, the property book officer notifies
                                   both the supply/procurement officer and core accounting personnel. When
                                   the contract is issued, procurement personnel, in turn, notify both the
                                   property book officer to expect the item and core accounting, which
                                   includes the general ledger. When the item is received, receiving personnel
                                   notify both the property book officer and core accounting officials.

                                   This duality provides not just financial control, such as ensuring accurate
                                   recording of purchase price, but also operational control, such as
                                   recording the location and condition of the asset. Ensuring data accuracy
                                   in this process requires that the transaction be edited for the processing
                                   requirements of each system. In addition, if data reside in two systems,
                                   periodic reconciliations must be performed to ensure that the data in the
                                   two systems remain in balance.

                                   The only automated interface implemented for DPAS at DISA is between the
                                   property book and the core accounting system. There is no interface
                                   between DPAS and procurement, and interfaces between DPAS and the other
                                   functions, such as receiving, are manual. As such, achieving operational
                                   and financial control over assets is highly dependent on the accuracy of
                                   data that are manually processed or maintained, and on manual
                                   compensating controls, such as routine reconciliations.




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                                  As shown in figure 2, the DISA procurement system—the Automated
                                  Contract Preparation System (ACPS)—did not send information to the
                                  property book, DPAS, at the same time it was sent to the core accounting
                                  system. According to DISA officials, the interface between ACPS and DPAS
                                  was not built because it would have required an extensive interface
                                  development effort. The absence of this interface, either automated or
                                  manual, means that DPAS is not used to record initial procurement
                                  activities. Therefore, DPAS data cannot be completely reconciled with DISA’s
                                  core accounting system data.


Figure 2: Property Accounting
Function as Implemented at DISA
                                    Procurement system                       Procurement documents         Core accounting
                                     Automated Contract                                                     Industrial Fund
                                     Preparation System                                                   Accounting System
                                          (ACPS)                                                                (IFAS)


                                                                                         Interface
                                                                Financial                program
                                                              transactions


                                       Property book
                                                                                                                 Receiving
                                      Defense Property
                                                                                        Rejected                 documents
                                    Accountability System
                                                                                      transactions
                                          (DPAS)

                                                                       Procurement
                                                                        documents

                                                              Receiving
                                                              documents             At sites, (manual)
                                                                                         receiving



                                  Legend
                                        Manual interface
                                        Automated interface




                                  We found over $100 million in differences between the values shown in the
                                  DPAS detailed property records and the summary- level records maintained
                                  in the DISA general ledger. Although the DISA Financial Management Liaison
                                  Office representative was aware of the differences and was preparing
                                  reconciliation procedures, he could not explain the reasons for the
                                  differences, nor had a reconciliation been attempted at the time of our
                                  review. As discussed below, one cause was DPAS transactions were



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    incorrectly recorded in the DISA general ledger. As of May 31, 1997, DISA
    had submitted journal vouchers totaling over $118 million to correct the
    differences.

    We identified the following DPAS implementation problems at DISA. These
    contributed to the material difference discussed above and have the
    potential to erode both operational and financial control over property.

•   DPAS transactions were incorrectly recorded in the DISA general ledger. The
    DISA general ledger contained items that were recorded incorrectly due to
    errors in the automated interface program which allows DPAS to
    communicate directly with DISA’s general ledger. This interface program
    contains processing rules10 for recording DPAS transactions based on the
    transaction function code and certain other fields in DPAS as increases or
    decreases in the appropriate DISA general ledger accounts. Because these
    processing rules are neither included in DPAS nor the DOD Comptroller’s
    DPAS Implementation Handbook, DISA developed general ledger processing
    rules for the interface program. However, errors in the processing rules
    resulted in increases being recorded as decreases and decreases as
    increases in the balance of assets held. For example, transfers-in of assets
    were recorded as decreases instead of increases. As a result of our work,
    DISA and DFAS officials began taking actions to correct the interface
    program and the account balances.
•   Procedures were not adequate to ensure control of rejected transactions.
    In order to ensure control of rejected transactions, ideally, data should be
    edited for all systems at the original point of entry, and those which failed
    the edits should be placed in a suspense file.11 If all edits are not
    performed at the original point of entry, additional edits can be included in
    automated interface programs and a second suspense file created. DISA
    used edits in the interface programs, but failed to set up the needed
    suspense file. Therefore, DISA cannot ensure that DPAS transactions rejected
    in the automated interface program to the general ledger were corrected
    and recorded properly in the general ledger.
•   Reconciliations were not performed. Internal controls were not in place to
    ensure that discrepancies were corrected promptly. DISA was not
    performing reconciliations between DPAS and its general ledger. For
    example, transactions had been posted incorrectly to the DISA general
    ledger as decreases instead of increases, as noted in our first example

    10
     Processing rules lay out the specific debit and credit postings to general ledger accounts in a double
    entry accounting system in accordance with the U.S. Government Standard General Ledger.
    11
     A DPAS project office official indicated that site-specific edits could be added by making a program
    change request. The official indicated that such changes would not be difficult to make or to maintain.



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                            above, since processing began in September 1996. These posting errors
                            went unresolved because reconciliations were not performed. The DPAS
                            Implementation Handbook said that reconciliations should be performed
                            but did not provide guidance on how to perform them nor state how often
                            or who should perform them. DISA was developing reconciliation
                            procedures but as of July 1997 they were not finalized.
                        •   The DPAS financial transaction for equipment in transit was not used. DISA
                            does not use the financial transaction for equipment in transit which DPAS
                            provides. Equipment in transit information updates the general ledger to
                            provide visibility over assets that are no longer under a site’s physical
                            control but for which the site is still accountable. However, when DISA
                            assets are moved from one site to another, instead of processing an
                            equipment in transit transaction, the assets remain in the DISA general PP&E
                            asset accounts until the receiving activity indicates receipt of the asset. If a
                            physical inventory were taken, assets identified as lost might actually be in
                            transit to another location. DOD FMR, Volume 4, requires that equipment in
                            transit be recorded as such in an agency’s accounting system when
                            transfer begins and that the equipment be removed from the account only
                            when it is received and accepted by the gaining activity. The DPAS
                            Implementation Handbook did not specifically require users to use certain
                            DPAS financial transactions.



                            Many of the problems experienced at DISA and resulting in inaccurate
DOD Does Not Have a         property data can be linked to several issues that affect DOD-wide
Detailed DPAS               implementation of DPAS. Specifically, DOD has not completed its strategic
Implementation              planning process for agencywide systems integration, which would
                            include defining how the property function is accomplished and the
Strategy                    responsibilities of all involved parties. Also, DOD’s implementation strategy
                            for DPAS relies on the services and Defense agencies to determine where
                            and when to implement the system, with no overall oversight to ensure
                            that the DOD Comptroller’s stated goal of full implementation by the year
                            2000 is met. Finally, as illustrated by the problems we found at DISA, the
                            DPAS Implementation Handbook lacks specific guidance on several
                            important factors, such as reconciliations.


Concept of Operations       Development of a concept of operations for DOD’s property function would
Would Help Ensure           help ensure that DPAS is able to achieve data accuracy and the financial
Functionality               control it was designed to produce, in both DOD’s current and future




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operating environments. As we stated in our June 1997 letter12 on DFAS’
draft Federal Accounting Standards and Requirements, the strategic
planning process for systems should include a concept of operations that
delineates how the property function is (or will be) accomplished and
defines the roles, responsibilities, and relationships among the various DOD
entities involved. Validating DPAS and the services’ and Defense agencies’
related property systems against the concept of operations would allow
DOD to determine whether each system is appropriately interfaced, either
manually or automated, with other systems to provide data accuracy and
property accountability.

In addition, for the concept of operations to be useful, it should
encompass (1) all financial management functions related to property not
just those under the control of the DOD Comptroller and (2) both current
and future property operations to document how DOD is working today and
obtain mutual agreement from all of the parties on how DOD will conduct
its property operations in the future. Not preparing a concept of
operations may result in development efforts in other business areas being
incompatible with DPAS, the selected property system. For example, during
the course of our audit we learned that Air Force officials have expressed
concern as to whether DPAS will fit into their planned functionality.

In the absence of an overall concept of operations that would lay out how
the system is to be implemented to maintain data accuracy, each
implementing site essentially is charged with developing its own concept
of operations with no assurance of adequate controls or consistency
among sites. When DPAS was selected as DOD’s standard property system, it
was anticipated that it would be interfaced with a single standard system
in each business area such as accounting, supply, and procurement. Under
this scenario, a limited number of automated interfaces would need to be
developed. However, due to the long-term nature of DOD’s standard
systems development effort, DOD is currently using multiple systems in
these areas and will continue to do so for the foreseeable future. For
example, DOD has at least 76 procurement systems. DOD plans to replace 10
of these systems with the Standard Procurement System. However, the
standard system will not be fully implemented until at least 2001.

Currently, data accuracy at DOD can be maintained either through
automated interfaces with numerous nonstandard systems or through
manual procedures such as reconciliations between stand-alone systems.


12
 Financial Management: Comments on DFAS’ Draft Federal Accounting Standards and Requirements
(GAO/AIMD-97-108R, June 16, 1997).



Page 13                             GAO/AIMD-97-150 DOD Financial Control Over Property
                          B-275088




                          According to JFMIP systems standards, interfaces should be electronic
                          unless the number of transactions is so small that it is not cost beneficial
                          to automate the interface. In either case, reconciliations, including
                          automated matching, between systems should be maintained to ensure
                          accuracy of the data. In general, manual interfaces that rely on the
                          physical keying and rekeying of data substantially increase the opportunity
                          for error and create the need for manual compensating controls.

                          Although a relatively small organization such as DISA could use manual
                          procedures, if effectively implemented, to maintain data accuracy, such
                          procedures would be too labor-intensive and inefficient on a DOD-wide
                          basis. However, the DOD Comptroller’s implementation strategy relies on
                          individual sites to specify property system interfaces and determine how
                          data accuracy is to be maintained. Therefore, DOD has no assurance that
                          automated interfaces and automated matching processes will be
                          developed wherever cost-effective and in accordance with an overall
                          strategy and that manual controls will be maintained where necessary.


DOD Does Not Have an      Although DOD has established a goal of achieving financial control over its
Implementation Schedule   assets by the year 2000, the DOD Comptroller does not have a schedule to
                          implement DPAS consistently at all sites by that date. DOD has not identified
                          its universe of DPAS users—those sites in the services and Defense
                          agencies that must use DPAS to ensure control over property is
                          maintained—DOD-wide. Rather, the DOD Comptroller has left it up to each
                          military service and Defense agency to identify where and when they want
                          to implement DPAS without providing time frames for identification of sites
                          or ensuring that the correct sites are identified. Thus, DOD could not tell us
                          how many sites remain to be implemented and associated time frames for
                          meeting its year 2000 goal. A complete implementation schedule would
                          also help ensure that the DPAS program office is able to allocate its
                          resources to adequately support the implementation schedule.


DOD’s Implementation      In addition, the guidance DOD has developed for implementing DPAS is
Handbook Could Be         inadequate, as illustrated by the problems we found at DISA. Specifically,
Improved                  the DPAS Implementation Handbook does not provide instruction for
                          accurately posting DPAS transactions to the general ledger. This may result
                          in inconsistent and inaccurate reporting of DOD property. Further, the
                          Handbook does not specify that all transactions generated by DPAS, which
                          are applicable to the agency, should be used. Inaccurate and inconsistent
                          financial reporting may result. Also, the Handbook states that



                          Page 14                       GAO/AIMD-97-150 DOD Financial Control Over Property
                      B-275088




                      reconciliations should be performed but does not specify how or by
                      whom. Failure to perform reconciliations, as we found at DISA, may result
                      in inaccurate data going undetected.


                      As designed, DPAS produces transactions to provide financial control and
Conclusions           to account for most general PP&E, but needs to be enhanced to meet all
                      applicable federal accounting standards. Also, issues related to the need
                      for planning and implementation guidance must be addressed. As
                      evidenced by DISA’s implementation problems, DOD has not defined how
                      the property function is to be performed or provided implementation
                      guidance to ensure internal controls are in place. DOD implementation
                      strategy relies on individual sites to determine whether and what
                      interfaces to develop—automated or manual—and establish necessary
                      controls. Given the size and complexity of DOD, this approach is unlikely to
                      result in an efficient and cost-effective implementation of DPAS by the year
                      2000.


                      To ensure that DPAS meets the DOD Comptroller’s stated goal of achieving
Recommendations       financial control and accountability over general PP&E by the year 2000, we
                      recommend that the Deputy Secretary of Defense take the following steps.

                  •   Develop, in consultation with the appropriate Assistant Secretaries, a
                      concept of operations that (1) lays out how the property function is to be
                      accomplished, including identification of needed manual and automated
                      interfaces and related controls, and (2) defines for both the current and
                      future operating environments the roles, responsibilities, and relationships
                      among the various DOD entities involved, such as the Comptroller’s office,
                      DFAS, DOD component agencies, and the military services.
                  •   Develop a detailed DPAS implementation plan that includes a schedule that
                      identifies at what sites and when the system will be implemented.
                  •   Revise the DPAS Implementation Handbook to (1) specify the complete
                      financial transactions for posting DPAS data to the general ledger,
                      (2) include specific guidance on how and when to perform reconciliations
                      and who should be performing them, including automated matching of
                      DPAS records to the general ledger, where appropriate, and (3) require that
                      all financial transactions generated by DPAS, such as equipment in transit,
                      be used.
                  •   Expand DPAS functionality to ensure it includes transactions to meet all
                      current and pending requirements related to property found in federal
                      accounting standards and DOD financial management regulations.



                      Page 15                      GAO/AIMD-97-150 DOD Financial Control Over Property
                     B-275088




                     Transactions produced by DPAS for updating the general ledger should
                     reflect the posting logic for both the debit and credit in accordance with
                     the U.S. Government Standard General Ledger.

                     In addition, to resolve the implementation problems specific to DISA, we
                     recommend that the Director, DISA, (1) submit a request to the DPAS project
                     office to include appropriate additional transaction edits required by DISA
                     for general ledger processing, (2) correct the interface program, and
                     (3) finalize procedures for reconciliation of DISA’s general ledger accounts
                     for property to DPAS property records, including provisions to ensure
                     timely reconciliations are accomplished and general ledger control is
                     maintained over general PP&E.


                     In written comments on a draft of this report, DOD’s Acting Under
Agency Comments      Secretary of Defense (Comptroller) stated that the Department generally
and Our Evaluation   agreed with the report findings and recommendations. The letter also
                     stated that the Department will provide comments on each
                     recommendation later.

                     Although DOD generally agreed with the report findings and
                     recommendations, DOD stated that it believes that it is erroneous to find
                     deficiencies in DPAS’ ability to comply with requirements that have not
                     been finalized by the Federal Accounting Standards Advisory Board
                     (FASAB) and for which implementation instructions have not been issued
                     by the Office of Management and Budget (OMB).

                     All accounting requirements for general PP&E which are addressed in this
                     report, as were developed by FASAB, were approved by GAO, OMB, and
                     Treasury and issued by GAO and OMB in 1995. These requirements are
                     currently in effect or will become effective October 1, 1997. OMB guidance
                     in Bulletin No. 97-01, Form and Content of Agency Financial Statements,
                     was issued October 16, 1996 for the preparation of financial statements for
                     the fiscal year ending September 30, 1998.

                     In commenting on our draft report, DOD asked that we clarify that the DISA
                     posting problem did not involve a deficiency in the internal operations of
                     DPAS. We believe that the implementation issue which arose at DISA could
                     have been mitigated if the DPAS design included the standard general
                     ledger posting logic. Because all DOD general ledgers do not currently use
                     the U.S. Government Standard General Ledger, any crosswalks required to
                     enter DPAS transactions in these nonstandard general ledgers should be in



                     Page 16                       GAO/AIMD-97-150 DOD Financial Control Over Property
B-275088




interface programs. In response to DOD’s comments, we clarified our
recommendation to include that transactions produced by DPAS for
updating the general ledger should reflect the posting logic for both the
debit and credit in accordance with the U.S. Government Standard
General Ledger.


This report contains recommendations to you. Within 60 days of the date
of this letter, we would appreciate receiving a written statement on actions
taken to address these recommendations.

We are sending copies of this letter to the Chairmen and Ranking Minority
Members of the Senate Committee on Armed Services, the House
Committee on National Security, the Senate Committee on Governmental
Affairs, the House Committee on Government Reform and Oversight, and
the Senate and House Committees on Appropriations. We are also sending
copies to the Director of the Office of Management and Budget; the Acting
Under Secretary of Defense (Comptroller); the Acting Director, Defense
Finance and Accounting Service; and the Director, Defense Information
System Agency. Copies will be made available to others upon request.

Please contact me at (202) 512-9095 if you have any questions concerning
this report. Major contributors to this report are listed in appendix II.

Sincerely yours,




Lisa G. Jacobson
Director, Defense Audits




Page 17                       GAO/AIMD-97-150 DOD Financial Control Over Property
Contents



Letter                                                                                              1


Appendix I                                                                                         20

Comments From the
Department of
Defense
Appendix II                                                                                        22

Major Contributors to
This Report
Figures                 Figure 1: Financial Control Over Property                                   9
                        Figure 2: Property Accounting Function as Implemented at DISA              10




                        Abbreviations

                        ACPS      Automated Contract Preparation System
                        CFO       Chief Financial Officer
                        DFAS      Defense Finance and Accounting Service
                        DISA      Defense Information System Agency
                        DOD       Department of Defense
                        DPAS      Defense Property Accountability System
                        FASAB     Federal Accounting Standards Advisory Board
                        FFMS      Federal Financial Management System
                        FMFIA     Federal Managers’ Financial Integrity Act
                        FMLO      Financial Management Liaison Office
                        FMR       Financial Management Regulation
                        GMRA      Government Management and Reform Act
                        ILSC      Industrial Logistics Systems Center
                        JFMIP     Joint Financial Management Improvement Program
                        OMB       Office of Management and Budget
                        PP&E      property, plant, and equipment
                        SFFAS     Statement of Federal Financial Accounting Standards


                        Page 18                    GAO/AIMD-97-150 DOD Financial Control Over Property
Page 19   GAO/AIMD-97-150 DOD Financial Control Over Property
Appendix I

Comments From the Department of Defense




Now on p. 1.




Now on p. 3.




               Page 20   GAO/AIMD-97-150 DOD Financial Control Over Property
Appendix I
Comments From the Department of Defense




Page 21                         GAO/AIMD-97-150 DOD Financial Control Over Property
Appendix II

Major Contributors to This Report


                       Janett P. Smith, Assistant Director
Accounting and         William D. Grindstaff, Assistant Director
Information            James L. Ariail, Jr., Senior Auditor
Management Division,   Francine DelVecchio, Communications Analyst

Washington, D.C.
                       J. Jose Watkins, Senior Evaluator
Norfolk Regional       Susan J. Schildkret, Evaluator
Office                 V. Malvern Saavedra, Evaluator




(918883)               Page 22                      GAO/AIMD-97-150 DOD Financial Control Over Property
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