oversight

Financial Management: Briefing on the Federal Aviation Administration Property, Plant, and Equipment Accountability Review

Published by the Government Accountability Office on 1999-06-11.

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

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-282876

      June 11,1999

      The Honorable John R. Kasich
      Chairman, Committee on the Budget
      House of Representatives


      Subject: Financial Manazzement:Briefing on the Federal Aviation Administration
               Prone&v, Plant. and Eauiwment Accountabilitv Review


      Dear Mr. Chairman:

      This letter responds to your request that we (1) identify the key issues the Federal Aviation
      Administration (FAA) must resolve in order to achieve accountability over its property, plant,
      and equipment (PP&E) and (2) determine the status of FAA’s efforts to resolve these issues.
      This letter summarizes the information provided during a May 19,1999, briefing to your office
      on these two areas. The briefing slides are enclosed.

      FAA. has spent billions of dollars on air traffic control modernization, of which a significant
      portion has resulted in the acquisition of PP&E. FAA is required to maintain accountability
      for these assets from the time they are acquired until their ultimate disposition.

      We concluded from analyzing the Department of Transportation (DOT) Office of Inspector
      General (OIG) workpapers related to its audit of the fiscal year 1998 ticial   statements that
      FAA’s systems, procedures, and controls do not ensure that accountability is maintained for
      PP&E on an ongoing basis. Further, many problems in PP&E result from the lack of a
      reliable system to accumulate the cost of projects and record these costs in appropriate
      PP&E accounts. The OIG found that substantial portions of the incurred costs were
      improperly charged to expense accounts instead of being recorded as assets and that FAA’s
      historical records necessary to support and permit the verification of PP&E balances are
      incomplete or inaccurate. Further, the OIG found that FAA does not move project costs from
      the work-in-process account to appropriate operating asset accounts in a timely manner.
      Although FAA has not actively focused on improvements in the past, it now has extensive
      efforts underway to establish historical PP&E costs and reduce the work-in-process backlog,
      It has also recently begun to address systems issues.                        I

      In January 1999, we designated FAA’s financial management as a high-risk area because of
      serious and long-standing accounting and financial reporting weaknesses. These
      weaknesses, including those described above, render FAA vulnerable to waste, fraud, and
      abuse; undermine its ability to manage its operations; and limit the reliability of financial




                                                           GAOMMD-99-208RBriefing on FAA PP&EAccountability
B-282876



information provided to the Congress. FAA’s high-risk designation means we will be giving
sustained attention to monitoring its efforts to correct its financial management deficiencies.

We conducted our work from July 1998 through May 1999 in accordance with generally
accepted government auditing standards. We requested comments on our draft briefing
slides from FAA.. We received some clarifying comments that we incorporated into our slides
as appropriate.

We are sending copies of this letter to Representative John Sprat& Ranking Minority Member
of your Committee; the Honorable Rodney Slater, Secretary of Transportation; the Honorable
Jane Garvey, Administrator, FAA; and Carl Schellenberg, Chief Financial Officer, FAA. We
are also sending copies of this letter to the Honorable Kenneth Mead, Inspector General,
DOT, and the Honorable Jacob Lew, Director, Office of Management and Budget. Copies will
also be made available to others upon request.

If you have any questions about this letter or the earlier briefing, please contact me at (202)
512-9508 or John Fretwell, Ass&ant Director, at (202) 512-9382.

Sincerely yours,




Linda M. Calbom
Director, Resources, Community,
 and Economic Development, Accounting
 and Financial Management Issues


Enclosure




(913860)



Page2                                                 GAOMMD-99-208RBriefingon.FAAPP&EAccountabiliiy
GAo   Accounting and Information Management
      Division


      FEDERAL AVIATION ADMINISTRATION


      Property, Plant, and Equipment
      Accountability Review

      Status Briefing for the House Budget Committee   .
      May 19,1999




1
GAo   Contents


       Objectives
       Scope and Methodology
       Background
       Major Issues
        l Work-in-Process
        l Real Property
        l Personal Property
       Actions BeinqI Taken by FAA




2
GA0           Objectives

          l    Identify the key issues FAA must resolve in
               order to achieve accountability over its
               Property, Plant, and Equipment (PP&E)
      :   l    Determine the status of FAA’s efforts to
               resolve key issues




3
GAo       Scope and Methodology

          l   Used OIG FY 1998 audit work results
                 0 Test counts
                l  Workpapers
                l Audit report and testimonies

      l       Made site visits to Chicago, Atlanta, New
              York, and Atlantic City
      0       Used FAA information
               l   Interviewed FAA officials
               l   Reviewed FAA documents
      l       Analyzed results
      l       Performed work from July 1998 through May
              1999 in accordance with GAGAS
GAo   Background--FY 1998 Financial Statement
      Audit Results
      Net PP&E reported at g/30/98 was $8.4 billion
       after depreciation--42 percent of total assets

      l   OIG unable to issue an opinion due in part to
          significant deficiencies in accounting for
          PP&E
      l   OIG reported that PP&E was significantly
          understated due to improper expensing of
          capital assets



5
GAo       Background--Comparison      of Budget to
          Reported PP&E
      l     FAA has reported spending approximately
           $25.7 billion on capital improvement
           programs from 1982-l 998
      l    At g/30/98 FAA reported $11.9 billion in
           gross PP&E (before depreciation)
      l    .FAA has not fully accounted for the $13.8
           billion difference




6
GAo   Background--Comparison         of Budget to
      Reported PP&E


      l   Some portion properly charged to expense
           l Terminated   or cancelled programs
           l Services unrelated to property acquisition
      l   Some portion is acquisition of spare parts
          (inventory)
      l   Through 4127199     an additional $3B has been
          identified to capitalize




7
GAo   Major Issues

      * FY 1998 financial statement audit disclosed
        serious weaknesses in accounting for
        reported property and equipment
         l Work-in-Process--$45     billion
         l Real Property--$2.6 billion
         l Personal Property--$4,6   billion




8
GAo   Work-in-Process--Issues    Identified During
      FY 1998 Audit
      OIG test results showed that

      l Completed project costs are not transferred
        out of work-in-process on a timely basis
         l $1.3 billion backlog at September 30, 1998

      . Audit trail does not always exist from
        recorded costs to supporting documentation
        (e,g., invoices, contracts)
      l Status of project completion was not

        accurate


9
GAo       Work-in-Process-Issues     Identified During
          FY 1998 Audit
      l    Controls not established to ensure timely
           implementation of recently updated
           capitalization policy
      l    Procedures and controls do, not exist to
           accumulate full costs by project for
           purchased items or services




IO
GAo   Work-in-Process--Issues      Identified During
      FY 1998 Audit
      l   Procedures not established to ensure
          database has correct beginning balances for
          the implementation of the planned cost
          accounting system
      l   Controls do not exist to ensure expenses are
          recorded in the appropriate fiscal year




11
GAo       Work-in-Process--Conclusions


      l    Backlog of completed projects remaining in
           work-in-process results in accounting
           misclassifications and unrecorded
           depreciation
      l    Lack of a reliable system for accumulating
           project costs continues to be a weakness in
           maintaining the accountability for all PP&E




12
GAo   Real Property-Issues       Identified Durhg FY
      1998 Audit
      .   Work-in-process backlog results in
          understatement of real property
      0   Documentation not maintained to support
          recorded values
           l For example, a power supply system was
             recorded at $20 million but only $3.6
             million in costs could be documented
          Asset activity not properly recorded
          l   For example, $1 million was recorded for a
            building demolished IO years ago
          System does not have the capability to
          calculate and track depreciation
13
GAo   Real Property--Conclusion


       Real property system does not accurately
       record and control land, buildings, and other
       structures




14
GAo       Personal Property--Issues    Identified During
          FY 1998 Audit
      l    Improper expensing of capital assets
            l For example, review of 5 systems
              identified over $1 billion in unrecorded
              assets
      l    Capitalization not timely
      l    Detailed accounting information not
           maintained
      l    Spare parts recorded as personal property




15
GAo       Personal Property-Issues     Identified During
          FY 1998 Audit


      l    Property systems not integrated with each
           other or the general ledger
      l    System maintains property records at an
           aggregated level rather than for individual
           parts
      l    System does not have the capability to
           calculate and track depreciation




16
GAo       Personal Property-Issues Identified During
          FY 1998 Audit

      l    Procedures not established to allocate
           technical support costs to specific projects
      l    Procedures for adjusting accounting records
           not established




17
GAo       Personal Property--Conclusions


      l    Recorded account balances were materially
           understated as of 9130198
      l    Personal property system, procedures, and
           controls do not ensure that accountability is
           maintained for equipment on an on-going
           bask




18
GAo   Actions Being Taken by FAA to Improve
      Accountability for PP&E

      Overall
      l Com.prehensive effort underway to identify
        all major PP&E assets and to develop
        accurate, supportable historical cost
        information for those assets
      l Estimated timeframe for completion
         l Work-in-process

            l Backlog--6/30/99

            l Documentation   for active jobs--g/30/99
         l Real property--g/30/99
         l Personal property--7/31/99
19
GAo   Actions Being Taken by FAA to Improve
      Accountability for PP&E
        Work-in-Process
        l $1.3 billion identified in completed project

          costs backlog as of 3!31/99
            l 99.5 percent of baseline

            l New backlog of approximately     $143
              million accumulated since 6/30/98
      l   Defined documentation requirements t0
          support costs
      l   Established process to monitor the
          timelin.ess of capitalizing the costs for
          commissioned systems

20
GAo   Actions Being Taken by FAA to Improve
      Accountability for PP&E
        Real Property
      l  Compiled supporting documentation for
         $674 million in assets as of 3!31/99
          l 84 percent complete

      l  Designed valuation model for certain assets
         where historical cost is not available
          l 25 percent complete as of 3!31/99




21
GAo   Actions Being Taken by FAA to Improve
      Accountability for PP&E
         Personal Property
        l Created prototype package for valuation
          using contracts as support for centrally
          procured equipment
           l Baseline used--amounts provided for the
             modernization of air traffic control facilities
             and equipment by project
      l   Completed analysis of $6.6 billion in major
          facility and equipment program costs as of
        4127199
         l 13 of 43 projects complete
22
GAo   Actions Being Taken by FAA to Improve
      Accountability for PP&E
      Systems Improvements
      l Process Improvement Plan has been
        developed to modify existing business
        practices to ensure progress achieved can
        be sustained over the long-term
      l Efforts continue to develop a cost accounting
        system that is capable of accumulating the
        full cost of program activities on a timely
        basis
         l Projected for partial implementation   by
            6/99 and full implementation by 3/01
23
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