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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

July 2010: 

Department of Defense: 

Additional Actions Needed to Improve Financial Management of Military 
Equipment: 

GAO-10-695: 

GAO Highlights: 

Highlights of GAO-10-695, a report to congressional committees. 

Why GAO Did This Study: 

Major defense acquisition programs (MDAP) are used to acquire, 
modernize, or extend the service life of the Department of Defenseís 
(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 DODís 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 DODís 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. 

What GAO Found: 

GAO found that weaknesses that impaired the departmentís 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. 

What GAO Recommends: 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-10-695] or key 
components. For more information, contact Asif A. Khan at (202) 512-
9095 or khana@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

DOD Has Actions Underway to Address Financial Management Weaknesses 
Related to Military Equipment, but Additional Actions Are Needed: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Objective, Scope, and Methodology: 

Appendix II: Comments from the Department of Defense: 

Appendix III: Documentation Reviewed to Identify Weaknesses That 
Impair DOD's Ability to Identify and Account for the Cost of Military 
Equipment: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 26, 2010: 

Congressional Committees: 

For years, GAO and other entities have reported on weaknesses that 
affect the Department of Defense's (DOD) ability to effectively manage 
its major defense acquisition programs (MDAP).[Footnote 1] Since 2003, 
DOD's portfolio of MDAPs has increased steadily from 77 to 98 and the 
cumulative estimated investment in these programs has grown from 
approximately $1.2 trillion to $1.7 trillion.[Footnote 2] MDAPs are 
used to acquire, modernize, or extend the service life of some of the 
department's most expensive assets, primarily military equipment such 
as aircraft, ships, tanks, and self-propelled weapons.[Footnote 3] 
Although MDAPs can include any major acquisition program that meets 
the dollar or other criteria necessary for MDAP designation, DOD 
officials stated that approximately 75 percent of the total number of 
MDAPs reported in July 2009 are likely to involve the acquisition of 
military equipment assets. While the department has reported over a 
trillion dollars in its military equipment investments on its 
financial statements, DOD acknowledged that the department lacks the 
process and system capabilities to reliably identify, aggregate, and 
report the full cost of these assets.[Footnote 4] 

Given the magnitude of DOD's military equipment assets and the 
inherent risk associated with managing large acquisition programs, 
having reliable and timely cost information is essential for proper 
planning and effective management and oversight. In August 2009, the 
DOD Comptroller directed that the department focus its limited 
financial management improvement resources and efforts on identifying 
and addressing weaknesses in areas deemed most useful to DOD managers. 
Specifically, the Comptroller prioritized efforts focused on ensuring 
the reliability of the department's budgetary information and property 
accountability records for mission critical assets, which includes 
military equipment. The DOD Comptroller stated that many difficult 
problems remain unresolved--including implementing compliant systems 
and valuing the department's significant investment in property, 
plant, and equipment--and will require the involvement of many 
functional groups across DOD. 

The Weapon Systems Acquisition Reform Act of 2009 (Pub. L. No. 111-
23), section 304(b), directed us to perform a review of weaknesses in 
DOD's operations that affect the reliability of financial information 
on assets acquired through MDAPs. Our objective was to identify 
previously reported weaknesses that impair DOD's ability to provide 
reliable cost information for military equipment acquired through 
MDAPs and determine what actions DOD has taken to address them. This 
report provides the results of our review. The act also requires our 
office to review the growth in operating and support costs of major 
weapon systems. We are issuing a separate report in response to that 
provision of the act. 

To address the objective, we searched databases of audit reports 
issued during calendar years 2005 through 2009 using key terms (e.g., 
military equipment) to identify weaknesses in business operations that 
impair DOD's ability to account for the cost of military equipment 
based on relevant federal financial accounting standards.[Footnote 5] 
We grouped the weaknesses into categories. We discussed with DOD 
officials the categories of weaknesses identified and obtained 
supporting documentation--such as memorandums, directives, and an 
independent validation and verification report for the military 
equipment valuation initiative--on their actions to address them. 
Using applicable criteria,[Footnote 6] we assessed whether the actions 
taken adequately addressed the identified weaknesses. To obtain 
clarification and explanations, as needed, we interviewed key 
department officials. Our detailed audit scope and methodology are 
presented in appendix I. We conducted this performance audit from 
October 2009 through July 2010 in accordance with generally accepted 
government auditing standards. Those standards require that we plan 
and perform the audit to obtain sufficient, appropriate evidence to 
provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We requested comments on a draft of this report from the 
Secretary of Defense or his designee. Written comments from the Office 
of the Under Secretary of Defense (Comptroller) are reprinted in 
appendix II. 

Background: 

DOD has acknowledged that process and system weaknesses impair its 
ability to account for the full cost of military equipment and that 
these weaknesses impede its ability to achieve financial statement 
auditability. DOD is required by various statutes to improve its 
financial management processes, controls, and systems to ensure that 
complete, reliable, consistent, and timely information is prepared and 
responsive to the information needs of agency management and oversight 
bodies, and to produce annual audited financial statements prepared in 
accordance with generally accepted accounting principles (GAAP) on the 
results of its operations and its financial position. [Footnote 7] 
Federal accounting standards, which are GAAP for federal government 
entities, require that the full cost of outputs (e.g., military 
equipment assets acquired) be reflected on agencies' financial 
statements.[Footnote 8] As stated earlier, full cost is the sum of 
direct and indirect costs to produce the output.[Footnote 9] The 
standards require that the cost of property, plant, and equipment, 
which includes military equipment, shall include all costs incurred to 
bring the asset to a form and location suitable for its intended use. 
[Footnote 10] Examples of these costs include amounts paid to vendors; 
labor and other direct or indirect productions costs; and direct costs 
of inspection, supervision, and administration of construction 
contracts and construction work[Footnote 11]. Federal accounting 
standards allow reporting entities to use reasonable estimates of 
historical cost to value their property, plant, and equipment while 
encouraging them to establish adequate controls and systems to 
reliably capture asset costs in the future.[Footnote 12] 

DOD is also required by law to provide, at least annually, Selected 
Acquisition Reports (SARs) to congressional defense committees on the 
status of its MDAPs.[Footnote 13] SARs are the primary means by which 
DOD reports the status of these programs to Congress. These reports 
are intended to provide Congress the information needed to perform its 
oversight functions. In general, SARs contain information on the cost 
estimates, schedule, and performance of a major acquisition program in 
comparison with baseline values established at program start. Specific 
information contained in the SARs includes: 

* program description, including the reasons for any significant 
changes in the total program cost for development and procurement 
reported in the previous SAR; 

* schedule milestones; 

* quantity of items to be purchased; 

* procurement unit cost;[Footnote 14] 

* contractor costs (initial contract price, the current price, and the 
price at completion); and: 

* technical and schedule variances. 

Congressional reporting through the SAR ceases after 90 percent of the 
items related to a particular MDAP have been delivered to the 
government, or after 90 percent of the planned expenditures under the 
program or subprogram have been made. After the program reaches the 90 
percent threshold, the items are no longer categorized as MDAPs and 
enter what is referred to as the sustainment period in which the cost 
of the units are categorized as Operations and Support. A program can 
be redesignated as an MDAP if planned modifications or upgrades to an 
asset meet the criteria for MDAP designation. 

DOD Has Actions Underway to Address Financial Management Weaknesses 
Related to Military Equipment, but Additional Actions Are Needed: 

Our review of prior reports, studies, and analyses to identify 
weaknesses in DOD's operations identified the following seven 
categories of weaknesses that impaired the department's ability to 
account for the cost of military equipment: (1) support for the 
existence, completeness, and cost of recorded assets is needed; (2) 
more detail is needed in DOD contracts to allocate costs to contract 
deliverables; (3) additional guidance is needed to help ensure 
consistency for asset accounting; (4) monitoring is needed to help 
ensure compliance with department policies; (5) departmentwide cost 
accounting requirements need to be defined; (6) departmentwide cost 
accounting capabilities need to be developed; and (7) systems 
integration is needed. 

DOD has begun actions to address these previously reported weaknesses; 
however, it acknowledges that additional actions are needed before 
these weaknesses are fully addressed. DOD officials--including the 
Deputy Director, Financial Improvement and Audit Readiness (FIAR) 
Directorate, Office of the Under Secretary of Defense (Comptroller), 
and the Deputy Director of Property and Equipment Policy within the 
Office of the Under Secretary of Defense for Acquisition, Technology, 
and Logistics (AT&L)--stated that the size and complexity of the 
department's operations make it difficult to reach consensus on how 
best to address the weaknesses. They acknowledged that the department 
is currently focused on verifying the reliability of information, 
other than cost, recorded in its property accountability systems. 
These officials told us that until the department fully addresses the 
weaknesses that prevent it from accurately and completely accounting 
for the cost of its military equipment, it will continue to rely on a 
methodology to estimate the cost of its military equipment assets for 
financial reporting purposes. The availability of timely, reliable, 
and useful financial information on the full costs associated with 
acquiring assets is an essential tool that assists both management and 
Congress in effective decision making such as determining how to 
allocate resources to programs. It also provides an important 
monitoring mechanism for evaluating program performance that can help 
strengthen oversight and accountability. 

The seven categories of weaknesses and DOD's actions to address them 
are as follows. 

Support for the existence, completeness, and cost of recorded assets 
is needed. DOD has not maintained the documentation needed to support 
the existence, completeness, and full cost of its military equipment 
assets. There were instances in which the department could not (1) 
trace assets recorded in its property accountability systems to actual 
physical assets, or (2) locate the records supporting the actual 
physical assets. Further, for assets included in the accounting 
system, DOD could not substantiate that all costs (e.g., acquisition, 
freight, inspection, and modification) had been captured and reported 
because of the lack of documentation (e.g., invoices). Standards for 
internal control call for transactions and other significant events to 
be accurately and timely recorded, as well as clearly documented, with 
the documentation being readily available for examination.[Footnote 
15] In addition, DOD policy requires that the components maintain all 
financial records documenting the acquisition of property, plant, and 
equipment in support of the department's Records Management Program. 
[Footnote 16] The components are also required to establish and 
maintain the Records Management Program, as well as periodically 
evaluate compliance. DOD stated that it has three ongoing initiatives 
to address this weakness--the military equipment valuation (MEV), the 
Proper Financial Accounting Treatment for Military Equipment 
(PFAT4ME), and the Wide Area Work Flow (WAWF). 

As allowed by federal accounting standards,[Footnote 17] DOD is using 
its MEV methodology to estimate the historical cost of its military 
equipment assets. The MEV methodology uses a combination of available 
data (budgetary and expenditure) to estimate the historical cost of 
military equipment assets. These estimated values were reported on the 
department's fiscal year 2006 through 2009 financial statements. 
However, the results of several DOD Inspector General (IG) audits and 
an evaluation by the Under Secretary for AT&L identified 
implementation issues that impaired the reliability of the derived 
cost estimates in part, because DOD was unable to provide 
documentation to substantiate the universe of assets subject to its 
valuation methodology.[Footnote 18] For example, both reported that, 
in some cases, assets were included in the valuation that no longer 
existed, and assets that existed were improperly excluded from the 
valuation. 

To address these concerns, in 2009 DOD initiated efforts--primarily 
physical inventories--to verify the reliability of information 
recorded in its property accountability systems. In May 2010, the DOD 
Comptroller issued guidance for the performance of the physical 
inventories and internal control testing.[Footnote 19] This guidance 
states that the components should verify critical information, such as 
individual item identifier, category/asset type, location, condition, 
utilization rate, and user organization. It also identifies the need 
to perform internal control testing. However, it does not specifically 
require verification that a unique identifier has been assigned to the 
asset and recorded in the Item Unique Identification (IUID) registry 
[Footnote 20] as required by DOD policy.[Footnote 21] The guidance 
also does not provide specific guidance to perform tests of internal 
controls (e.g., does not identify which controls to test or how to do 
so). DOD officials, including the Deputy Director, Financial 
Improvement and Audit Readiness (FIAR) Directorate, Office of the 
Under Secretary of Defense (Comptroller) agreed with our assessment. 
The FIAR Deputy Director further stated that it is difficult to 
provide specifics on the internal control testing to be performed in 
the above guidance so the department intends to establish a 2-day 
training course by the summer of 2010 that will provide instruction on 
how to identify and test controls. DOD plans to complete the 
verification of the existence and completeness of its military 
equipment property accountability records in fiscal year 
2015.[Footnote 22] Previously estimated military equipment values 
reported on its financial statements will be reassessed upon 
completion of verification efforts at each military department. 

In addition, the department issued its PFAT4ME policy in June 2006 
that requires all contracts be structured at the level of detail 
needed to provide supporting documentation regarding the cost of 
individual items delivered.[Footnote 23] The contract-related 
documentation (e.g., invoices, and receipt and acceptance documents) 
received electronically that results from performance of a contract is 
then to be input into a central repository within the WAWF, which 
became operational in fiscal year 1999, where it is maintained and 
available to help support full cost determinations. However, these 
efforts do not adequately address this weakness because they do not 
address the lack of supporting documentation for noncontract-related 
costs such as program management costs incurred. As stated earlier, 
DOD policy requires components to maintain supporting documentation 
for the full cost of acquired military equipment assets; however, DOD 
has not enforced components' compliance with its record management 
policy. Because it does not have the needed supporting documentation, 
the department has to rely on an estimation methodology to derive 
these assets' values. 

More detail is needed in DOD contracts to allocate costs to contract 
deliverables. DOD had not structured contracts at the level of detail 
needed to identify and assign costs to individual military equipment 
assets. Specifically, the contracts were not structured in a manner 
that facilitated application of the appropriate accounting treatment 
for costs, including the identification of those costs that should be 
captured as part of the full cost of a deliverable. Standards for 
internal control require that the agency identifies, captures, and 
distributes information at the sufficient level of detail that permits 
management to carry out its roles and responsibilities.[Footnote 24] 
DOD stated that the PFAT4ME and the Item Unique Identification (IUID) 
initiatives will address this weakness. PFAT4ME requires program 
managers to structure all contracts entered into after October 2006 in 
a manner to facilitate the appropriate accounting treatment of 
contract costs.[Footnote 25] To implement this initiative, DOD 
developed a training course on how to comply with the requirements 
outlined in its PFAT4ME policy.[Footnote 26] However, it is not a core 
or required course and DOD has not established a process to ensure 
that acquisition personnel affected by this policy, including program 
managers and business/financial management analysts, complete the 
course. 

In 2009, AT&L began to perform oversight activities to verify that the 
components were properly structuring the contracts; however, AT&L 
officials stated that they were not verifying whether program 
management offices were appropriately accounting for the cost of each 
deliverable. In addition, we found that DOD has not developed guidance 
for these oversight activities, including how often these reviews are 
to be performed, roles and responsibilities for this oversight, the 
steps to be performed, and the basis for selecting contracts for 
review. 

In addition, DOD policy requires contract deliverables, including 
military equipment, that meet predefined criteria, be assigned a 
unique item identifier.[Footnote 27] According to DOD officials 
responsible for the IUID initiative, the purpose of the unique item 
identifier is to facilitate asset accountability and tracking, 
including the identification and aggregation of related costs to 
derive the full cost of a contract deliverable.[Footnote 28] The 
department expected to fully implement IUID by fiscal year 2015; 
however, according to DOD officials, the department is not on target 
for achieving its timeline. These officials told us that the 
department has encountered difficulty in obtaining consensus from the 
components in implementing this initiative primarily due to the 
applicability of the IUID requirement to controlled inventory items. 
The Deputy for Program Development and Implementation, Defense 
Procurement and Acquisition Policy within AT&L explained that 
controlled inventory items--which encompass items such as ammunition 
and threaded fasteners and number in the hundreds of millions--were 
never intended to be assigned individual unique item identifiers. The 
department is currently in the process of clarifying this requirement. 
[Footnote 29] DOD has determined that if it does not modify the IUID 
policy to eliminate this requirement, it will not be able to fully 
implement IUID until fiscal year 2023. If the IUID requirements are 
revised to exclude these items, DOD expects to fully implement IUID by 
2017. DOD officials acknowledged that they have not yet developed 
policies and procedures that define how IUID will be used to identify 
and aggregate asset costs. 

Additional guidance is needed to help ensure consistency for asset 
accounting. DOD had not developed a policy and procedures requiring 
the components to account for the full costs of military equipment 
assets. Standards for internal control call for agencies to develop 
and implement appropriate policies, procedures, techniques, and 
mechanisms to ensure that management's directives are consistently 
carried out.[Footnote 30] DOD stated that the PFAT4ME, IUID, and the 
MEV methodology will address this weakness. AT&L officials, including 
the Deputy Director of Property and Equipment Policy, told us that 
they are working with the Federal Accounting Standards Advisory 
Board's Accounting and Auditing Policy Committee (AAPC) to develop 
full cost guidance. They also noted that AT&L has drafted guidance 
intended to supplement its PFAT4ME policy memorandum to assist 
managers in identifying the types of contract costs that should be 
included in determining the full cost of an asset, such as military 
equipment. According to these officials, this policy has not been 
finalized because the department has had difficulty reaching consensus 
regarding its cost accounting requirements. These officials stated 
that this draft guidance does not yet address noncontract-related 
costs, such as program management costs incurred directly by the 
military services and indirect costs. They did not provide a time 
frame for completing these efforts. 

As stated earlier, the department is currently relying on an 
estimation methodology referred to as MEV to report the cost of its 
military equipment. In order for management and auditors to rely upon 
the results of the methodology it is important that the methodology be 
implemented consistently. To help ensure consistency in the 
application of its estimating methodology, DOD developed business 
rules in 2005. In addition to the MEV implementation issues identified 
by the DOD IG, we identified inconsistencies in the business rules for 
estimating the cost of military equipment, which further impact the 
reliability of reported estimates. For example, the MEV full cost 
business rule states that all costs incurred to acquire and bring 
military equipment to a form and location for its intended use should 
be capitalized, including the direct costs of maintaining the program 
management office. However, the MEV program management office business 
rule states that program management office costs are immaterial and 
should be expensed. DOD officials agreed that there are 
inconsistencies in the business rules and acknowledged the need to 
revisit them. 

Monitoring is needed to help ensure compliance with department 
policies. DOD has not established adequate monitoring controls to 
assess compliance with applicable policies or the extent to which 
actions taken are achieving their intended objectives. For example, 
although DOD property accountability policies and regulations require 
DOD components to (1) perform periodic physical inventories and to 
reconcile the results to the associated property accountability 
records, and (2) track and maintain records for all government- 
furnished property in the possession of contractors, DOD management 
has not established needed monitoring controls to help ensure 
compliance. Standards for internal control require agencies to develop 
and implement ongoing monitoring activities over the internal control 
system to ensure adherence with policies and procedures.[Footnote 31] 
DOD financial management and AT&L officials, including the Deputy 
Director of Property and Equipment Policy within AT&L, stated that 
weaknesses in the department's ability to ensure compliance with 
property accountability requirements have impacted its ability to 
substantiate reported military equipment costs. As a result of the 
breakdowns in compliance with policies and regulations for recording 
and tracking property, property records used by the components for 
valuing its military equipment included assets that no longer existed, 
and did not include other assets that did exist. To address this 
concern, DOD is in the process of verifying its property 
accountability records by conducting physical inventories and internal 
control testing. As stated earlier, DOD has issued guidance, but it 
does not provide specifics as to the internal control testing to be 
performed. The DOD Comptroller told us that the department plans to 
complete this effort in fiscal year 2015. After completing this 
effort, effective ongoing monitoring activities are needed to ensure 
departmentwide compliance with policies designed to help maintain 
reliable property accountability records. 

Departmentwide cost accounting requirements need to be defined. DOD 
has not defined its requirements for the identification and 
aggregation of cost information, which will be the foundation for its 
development of departmentwide cost accounting and management 
capabilities. Federal accounting standards require that the full cost 
of resources, which directly or indirectly contribute to the 
production of outputs (e.g., military equipment acquired), be 
reflected on an agency's financial statement. To ensure that costs are 
identified and accumulated in a consistent and comparable manner, 
entities should define their requirements and procedures for 
identifying, measuring, analyzing, and reporting costs.[Footnote 32] 
Since DOD has stated that it intends to support the identification, 
aggregation, accounting, and reporting of cost information through the 
implementation of the Enterprise Resource Planning (ERPs)[Footnote 
33], it is important that DOD define its cost accounting requirements 
to ensure that these systems provide these capabilities. Institute of 
Electrical and Electronics Engineers (IEEE)[Footnote 34] and the 
Software Engineering Institute at Carnegie Mellon recommend that 
organizations define their requirements, which are the specifications 
that system developers and program managers use to develop or acquire, 
implement, and test a system.[Footnote 35] This process should 
identify user requirements, as well as those needed for the definition 
of the system. It is critical that requirements be carefully defined 
and that they reflect how the organization's day-to-day operations are 
or will be carried out to meet mission needs. Improperly defined or 
incomplete requirements have been commonly identified as a root cause 
of system failure and systems that do not meet their cost, schedule, 
or performance goals. DOD Comptroller and Business Transformation 
Agency officials stated that the implementation of the ERPs and its 
Standard Financial Information Structure (SFIS) are intended to 
address this weakness. Comptroller and Business Transformation Agency 
and military department financial management and comptroller officials 
stated that most of the ERPs under development within the military 
departments have cost accounting management capabilities inherent in 
their design as required by DOD policy. [Footnote 36] 

Although agencies should first define their requirements, which are 
then used to evaluate the system's capabilities to determine if it 
will meet users' needs before it is developed or acquired, the 
department has not yet defined its cost accounting requirements at the 
major component level, including how SFIS will be used to support cost 
accounting in the existing and ERP system environments. They stated 
that the department has been unable to reach consensus on how to 
implement SFIS in support of cost accounting and management. SFIS is 
intended to be a comprehensive "common business language" that will 
standardize the financial reporting of information and data for 
budgeting, financial accounting, and cost/performance management. DOD 
has not yet determined how the SFIS data elements will be used to 
identify and aggregate cost information, nor has it established time 
frames for developing the cost accounting requirements and completing 
SFIS. 

Departmentwide cost accounting capabilities need to be developed. DOD 
had not developed departmentwide cost accounting capabilities to 
capture military equipment asset costs. Federal accounting standards 
require agencies to develop and implement cost accounting systems that 
provide the capability to collect cost information by responsibility 
segments, measure the full cost of outputs, provide information for 
performance measurement, integrate cost accounting and general 
financial accounting, provide appropriate and precise information, and 
accommodate special cost-management needs.[Footnote 37] DOD's legacy 
financial management and related business systems were not designed to 
meet current financial reporting requirements and do not provide 
adequate evidence for supporting material amounts on the financial 
statements or acquisition management decision making. These systems 
were designed to record and report information on the status of 
appropriations and support funds management, and not designed to 
collect and record financial information in compliance with federal 
accounting standards. DOD acknowledged that it does not yet have the 
capability to identify, aggregate, and capture the full costs of its 
military equipment and has stated that the ERPs are intended to 
provide this capability. 

We have previously reported on problems that DOD has encountered in 
its efforts to implement ERPs. In 2007, we reported that the Army 
lacked an integrated approach for implementing its ERPs, which could 
result in interoperability problems.[Footnote 38] In September 2008, 
the Army reported a similar finding.[Footnote 39] Specifically, the 
Army reported that interoperability problems were likely to occur due 
to the lack of common data definitions and structures between the 
Army's ERPs--General Fund Enterprise Business System (GFEBS), Global 
Combat Support System-Army (GCSS-Army), and Logistics Modernization 
Program (LMP)--thus resulting in the need for manual reconciliations 
and reduced efficiencies. The report concluded that the planned 
configuration of these systems may prevent the Army from receiving the 
intended benefits of an ERP, including financial transparency and cost 
accounting. Army officials stated that they are addressing these 
deficiencies, but did not provide a time line for completion. In July 
2009, Navy reported that its ERP did not yet provide the capability to 
aggregate cost information to derive the full cost of its military 
equipment and to segregate military equipment from other general 
property, plant, and equipment.[Footnote 40] The Navy Financial 
Management Officer stated that these deficiencies have not yet been 
addressed because of other priorities. DOD stated that ERPs are 
critical to transforming business operations within the military 
departments. 

Systems integration is needed. DOD had not fully integrated its 
property and logistics systems with acquisition and financial systems. 
DOD policy requires that its financial management systems are planned 
for and managed together, operated in an integrated fashion, and 
linked together electronically in an efficient and effective manner to 
provide reliable, timely, and accurate financial management 
information.[Footnote 41] The department's property and logistics 
systems were not designed to capture acquisition costs and the cost of 
modifications and upgrades, or to calculate depreciation. Many of the 
financial management systems in use are not fully integrated with 
other systems within the military components or departmentwide. The 
number of system interfaces and subsidiary and feeder systems, and the 
lack of standard data elements employed by each DOD component, make it 
difficult to cross-walk data between systems, share data, and ensure 
consistency and comparability of data. In March 2009, DOD reported 
that its legacy system environment does not facilitate the 
identification and aggregation of the full cost of its 
assets.[Footnote 42] DOD officials, including the Deputy Director of 
Property and Equipment Policy, AT&L, stated that the implementation of 
the ERPs and SFIS is intended to address this weakness. To facilitate 
information sharing for financial reporting purposes, in August 2005 
DOD issued a policy requiring systems, including ERPs, that contain 
financial information to provide the ability to capture and transmit 
information following the SFIS data structure or, if not, to 
demonstrate that this capability will be achieved through a cross-walk 
to the SFIS data structure.[Footnote 43] DOD components and agencies 
are required to report to the Business Transformation Agency (BTA) the 
extent to which SFIS requirements, as defined in the department's 
business enterprise architecture, are met. BTA officials, including 
the official responsible for the SFIS initiative, stated that the 
department is developing a process to validate the information 
included in the SFIS compliance reports submitted by the components 
and agencies but did not provide a time frame for completion. However, 
if certain SFIS requirements, such as cost accounting, are not clearly 
defined, including a determination of how cost information should be 
identified, aggregated, and managed within and across acquisition 
programs, the department's intent to achieve standardization and 
comparability of cost information will be at risk. Further, as stated 
above, the Army's ERPs--GFEBS, GCSS-Army, and LMP--may experience 
interoperability problems because of the lack of common data 
definitions and structures. In addition, DOD stated that it has not 
yet determined whether or how WAWF and the IUID will be integrated 
into the emerging ERP environment to facilitate the identification and 
aggregation of cost to address the agency's requirements. 

Conclusions: 

While DOD is relying on a methodology to estimate the cost of its 
military equipment, the department has various actions underway to 
begin laying a foundation for addressing weaknesses that currently 
impair its ability to identify, aggregate, and account for the full 
cost of its military equipment assets. For example, DOD has taken 
important steps such as requiring greater detail in contract-related 
documentation, such as invoices, and the assignment of unique 
identifiers to individual items to aid its ability to identify, 
aggregate, and account for the cost of acquired assets. An additional 
challenge that DOD faces is establishing the universe of assets 
subject to valuation and cost accounting. Previous audits and 
evaluations have showed that some assets that no longer existed were 
included while other existing assets were improperly excluded from 
DOD's property accountability records. This situation exists due to a 
combination of issues, including gaps in DOD's guidance and policies 
related to asset accountability, as well as a lack of compliance with 
existing policies and guidance. These examples illustrate the 
interconnection or dependency between the various asset accounting 
issues the department is facing and its related actions to improve its 
cost accounting financial management for military equipment. DOD has 
acknowledged that additional actions are needed before the department 
achieves cost accounting and management capabilities, but stated that 
its improvement efforts are not yet focused on achieving these 
capabilities. Additional efforts are needed to issue additional 
guidance regarding how to identify the full cost of an asset to 
supplement its PFAT4ME guidance and to identify and define 
departmentwide cost accounting requirements at the major component 
level, including what information is needed to manage cost within and 
across acquisition programs and support asset valuation and life-cycle 
management and how implementation of SFIS and the ERPs will support 
these requirements. Moreover, DOD needs to determine the extent to 
which certain actions currently underway, such as WAWF and IUID, will 
be utilized in the emerging ERP environment. Without additional 
actions and guidance, the department's current efforts are at risk of 
not meeting the intended objectives of providing cost accounting 
capabilities needed to reliably account for and report the full cost 
of its military equipment. 

Recommendations: 

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, we recommend that the Secretary of Defense 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 take the following nine 
actions: 

* 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. 

* 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. 

* 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 IUID registry. 

* Develop and implement guidance on how the IUID will be used to 
identify, aggregate, and report asset cost information. 

* Classify the 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. 

* 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. 

* 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. 

* Review the MEV methodology business rules to identify 
inconsistencies and revise the rules as needed. 

* Assess the WAWF and IUID initiatives and determine the extent to 
which they will be utilized in the emerging ERP business systems 
environment. 

Additionally, we recommend that the Secretary of Defense 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, 
take the following two actions: 

* Define the cost accounting requirements at the major component 
level, including how SFIS data elements will be used to identify, 
aggregate, account for, and report cost information. 

* After defining the cost accounting requirements, 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 Comments and Our Evaluation: 

We received written comments on a draft of this report from the Under 
Secretary of Defense (Comptroller) which are reprinted in Appendix II. 
In commenting on the report, the Under Secretary stated the department 
agreed with the need to establish a framework that provides improved 
cost and management information that will support better management of 
Major Defense Acquisitions Programs (MDAP). The department concurred 
with the 11 recommendations and cited actions taken, under way, or 
planned to address them. 

In its response, the department emphasizes that it is sensitive to the 
cost of obtaining information solely for the purpose of proprietary 
financial reporting or audit compliance where this information is not 
otherwise used by management. It further states that DOD has concluded 
that it is not cost-effective to gather auditable data on the 
historical cost of military equipment systems for proprietary 
financial reporting and audit because the information is not used to 
manage. DOD has indicated that it will propose changes in department 
policies and instructions to accommodate this decision. These pending 
policy changes will likely impact DOD's implementation of our 
recommendations and so at some point we may need to assess DOD's 
corrective actions under the changed policies to determine whether the 
actions meet the intent of our recommendations. 

DOD acknowledges that there may be requirements for cost information 
related to acquisition-program lifecycle management, which the 
department will accommodate as appropriate. DOD also stated that it is 
working with federal standard setters to develop full-cost guidance 
that would guide its cost accounting efforts. The department will 
integrate this guidance into the ERPs and guide cost accounting 
efforts and will develop, coordinate, and issue policy and guidance on 
accounting for the full cost of military equipment consistent with our 
recommendations. We welcome DOD's decision to accommodate such 
requirements and contribute to revised guidance for cost-effectively 
serving management's information needs and reliable reporting on the 
cost of acquisition programs and assets acquired. 

It is also important to note that while federal accounting standards 
do not require agencies to collect historical, transaction-based cost 
data, they encourage agencies that estimate asset value, such as DOD, 
to establish the internal control practices and systems needed to 
capture and sustain such data for future acquisitions. We believe that 
this guidance reflects the importance of actual costs in providing 
reliable historical information for accountability to the American 
taxpayer and for management decision making as well. It is important 
to emphasize that our recommendations are focused not on gathering 
costs retrospectively but are intended to assist DOD in its efforts to 
develop the processes and systems needed to produce reliable 
information going forward. We believe that providing reliable 
information is likely to include capturing transaction-based costs as 
historical information for future management decisions and 
accountability reporting. 

The availability of timely, reliable, and useful financial information 
on the costs associated with acquiring assets is an essential tool 
that assists both management and Congress in effective decision making 
such as determining how to allocate resources to programs. It also 
provides an important monitoring mechanism for evaluating program 
performance that can help strengthen oversight and accountability. 

We are sending copies of this report to interested congressional 
committees; the Secretary of Defense; the Secretaries of the Army, the 
Navy, and the Air Force; the Deputy Secretary of Defense/Chief 
Management Officer; the Under Secretary of Defense (Comptroller)/Chief 
Financial Officer; the Under Secretary of Defense for Acquisition, 
Technology, and Logistics; the Under Secretary of the Army/Chief 
Management Officer; the Under Secretary of the Navy/Chief Management 
Officer; the Under Secretary of the Air Force/Chief Management 
Officer; and the Office of Management and Budget's Office of Federal 
Financial Management. This report is available at no charge on GAO's 
Web site at [hyperlink, http://www.gao.gov]. Should you or your staff 
have any questions concerning this report, please contact me at (202) 
512-9095 or khana@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report are listed in 
appendix IV. 

Signed by: 

Asif A. Khan: 
Director, Financial Management and Assurance: 

List of Committees: 

The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate: 

The Honorable Daniel Inouye:
Chairman:
The Honorable Thad Cochran:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate: 

The Honorable Ike Skelton:
Chairman:
The Honorable Howard McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives: 

The Honorable Norman D. Dicks:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives: 

[End of section] 

Appendix I: Objective, Scope, and Methodology: 

Our objective was to identify previously reported weaknesses that 
impair the Department of Defense's (DOD) ability to provide reliable 
cost information for military equipment acquired through major defense 
acquisition programs (MDAPs)[Footnote 44] and determine what actions 
DOD has taken to address them. 

To address this objective, we obtained an understanding of MDAPs, 
including the military equipment (i.e., weapon systems) assets 
acquired through such programs, by reviewing DOD guidance and 
interviewing officials from the Office of the Under Secretary of 
Defense for Acquisition, Technology, and Logistics.[Footnote 45] We 
identified and reviewed applicable federal financial accounting 
standards, and interviewed officials of the Federal Accounting 
Standards Advisory Board to obtain clarification on the changes made 
to Statement of Federal Financial Accounting Standards (SFFAS) 35. 
[Footnote 46] We searched databases of audit reports issued during 
calendar years 2005 through 2009 using key terms (e.g., military 
equipment; general property, plant, and equipment; financial 
management; weapons systems acquisition; and major defense acquisition 
programs).[Footnote 47] We reviewed the results of our search (e.g., 
reports, studies, and analyses) to identify weaknesses in business 
operations that, based on relevant federal financial accounting 
standards, impair DOD's ability to account for the cost of military 
equipment. We grouped these weaknesses into categories. To identify 
additional reports or relevant DOD studies and analyses and to obtain 
clarification, as needed, on reported weaknesses, we interviewed key 
department officials, including the following: 

* Deputy Director, Financial Improvement and Audit Readiness 
Directorate, Office of the Under Secretary of Defense (Comptroller); 

* Acting Deputy Director, Office of the Under Secretary of Defense for 
Acquisition, Technology, and Logistics; 

* representatives from the DOD's Inspector General Office; 

* representatives from the military services' offices of the Assistant 
Secretary, Financial Management and Comptroller, Financial Management 
Operations; and: 

* Chief Management Office representatives within DOD and the military 
services as required by section 304(b). 

See appendix III for the reports, studies, and analyses reviewed to 
identify the relevant weaknesses. 

We discussed with DOD officials the categories of weaknesses we 
identified as a result of our search of prior reports, studies, and 
analyses, and obtained supporting documentation--such as memorandums, 
directives, an independent validation and verification report for the 
military equipment valuation initiative, and gap analyses related to 
the Navy Enterprise Resource Planning effort--from DOD on its actions 
to address them. Using applicable criteria,[Footnote 48] we assessed 
whether the actions taken adequately addressed the identified 
weaknesses. We interviewed the DOD officials referred to above to 
obtain clarification and explanation of actions taken to address the 
weaknesses, including mechanisms and metrics used to monitor progress. 

We conducted this performance audit from October 2009 through July 
2010 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Defense: 

Under Secretary Of Defense: 
Comptroller: 
1100 Defense Pentagon: 	
WASHINGTON, DC 20301-1100	 

July 13, 2010: 
		
Mr. Asif A. Khan: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Khan: 

This is the Department of Defense (DoD) response to the Government 
Accountability Office (GAO) draft report GAO-10-695, "Department Of 
Defense: Additional Actions Needed to improve Financial Management of 
Military Equipment," dated June 15, 2010 (GAO Code 197089). Detailed 
comments are enclosed with this letter. 

The Department has begun laying a foundation for addressing weaknesses 
that currently impair our ability to identify. aggregate, and account 
for the full cost of military equipment assets. The Chief Management 
Officer is working with the Under Secretary of Defense (Comptroller); 
the Under Secretary of Defense (Acquisition. Technology, and 
Logistics); and the military department Chief Management Officers as 
appropriate to define Department-wide cost accounting requirements and 
develop the process and system capabilities needed to support better 
cost accounting and management. 

At the same time, the Department is sensitive to the cost of obtaining 
information solely for purposes of proprietary financial reporting or 
audit compliance where this information is not otherwise used by 
management. As recognized in your report, this is consistent with our 
current Financial Improvement/Audit Readiness (FIAR) priorities that
focus specifically on "Existence and Completeness" for military 
equipment. The Department has assessed the costs and associated 
benefits of reporting and auditing property cost information in 
financial statements and will finalize a business ease with
the results. The policies that are addressed in this audit report 
should provide cost-effective management information when future 
target systems have been implemented, capturing cost information as a 
byproduct of business processes. 

DoD agrees with the need to establish a framework that provides 
improved cost and management information that will support better 
management of Major Defense Acquisition Programs (MDAPs). The 
Department is already implementing solutions to address the report's 
recommendations as stated in our detailed responses. The Department 
values GAO's feedback and looks forward to continued collaboration to 
ensure that our efforts are as effective as possible. 

Thank you for the opportunity to comment. My point of contact for this 
effort is Mr. Joseph Quinn. lie can be reached at 703-607-0300 x131 or 
joseph.quinn@osd.mil. 

Sincerely, 

Signed by: 

Robert F. Hale: 

Enclosure: As stated: 

[End of letter] 

GAO Draft Report Dated June 15, 2010: 
GA0-10-695 (GAO Code 197089): 

"Department Of Defense: Additional Actions Needed To Improve Financial 
Management Of Military Equipment" 

Department Of Defense Comments To The GAO Recommendations: 

Recommendation 1: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller) (USD(C)); the Under Secretary of 
Defense (Acquisition, Technology, and Logistics) (USD(AT&L)); 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 arc 
maintaining documentation in support of the full cost of military 
equipment. (See page 19/GAO Draft Report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of weapon systems because the 
information is not used to manage. We will therefore not invest 
significant resources in an effort to capture, report. and audit data 
with no value and will propose appropriate changes in policies and 
instructions to accommodate this decision. There may, however. he 
other requirements for cost information related to acquisition program 
lifecycle management, and we will accommodate those requirements as is 
appropriate. 

In May 2010, the Department issued Financial Improvement and Audit 
Readiness (FIAR) guidance to the DoD Components requiring that they 
follow the FIAR Methodology (described in the guidance) when 
evaluating, testing. and improving their processes, controls, and 
systems. In accordance with the FIAR Methodology, the FIAR Directorate 
and DoD Inspector General will evaluate Component compliance with the 
retention requirements for supporting documentation. 

Recommendation 2: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(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. (See 
page 19/GAO Draft Report.) 

DoD Response: Concur. 

The Office of USD(AT&L) (OUSD(AT&L)) Property and Equipment Policy 
Office (PEPO) and Office of USD(C) (OUSD(C)) have developed metrics 
and are developing additional metrics to monitor compliance with the 
Department's physical inventory regulations, directives and policies. 
Further, PEPO and OUSD(C) are currently working with the Components to 
evaluate compliance with policies, procedures, and internal controls 
as part of the mission critical asset existence and completeness audit 
readiness priority. 

The Department is also working to define a consistent business process 
for maintaining records for government furnished property (GFP) in the 
possession of contractors. OUSD(AT&L)/DPAP issued policies in January 
2010 to establish new benchmarks for GFP and to establish requirements 
for tracking and maintaining records for contractor acquired 
government-owned property. The FIAR Directorate has established 
metrics to monitor Component compliance with policies related to 
tracking and maintaining records for GFP in the possession of 
contractors in support of validating process controls. 

Recommendation 3: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(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 an Unique Item Identifier (UII) are included in its Item Unique 
Identification (ILTID) registry. (See page 19/GAO Draft Report.) 

DoD Response: Concur. 

OUSD(AT&L) is currently coordinating with the appropriate DoD 
organizations to make revisions to guidance related to verification of 
information in property accountability records and the recording of 
UIIs in the IUID Registry. 

Recommendation 4: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(Acquisition. Technology, and Logistics); and the Military Department 
Chief Management Officers, as appropriate, to develop and implement 
guidance on how IUID will be used to identify, aggregate, and report 
asset cost information. (See page 19/GAO Draft report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report, and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may, 
however, be other requirements for cost information related to 
acquisition program lifecycle management, and we will accommodate 
those requirements as is appropriate. 

The Department will use IUIDs to enable the aggregation of managerial 
cost information across multiple systems based on specific 
requirements. The cost information will be in management information 
systems/data warehouses utilizing IUID as the primary key for pulling 
together the data. The Department plans to implement guidance on how 
IUID will be captured and utilized to record and report an asset's 
operational and financial information. 

Recommendation 5: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(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 personnel required to take the training have done so. (See page 
19/GAO Draft report.) 

DoD Response: Concur.
The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report. and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may. 
however, be other requirements for cost information related to 
acquisition program lift:cycle management, and we will accommodate 
those requirements as is appropriate. 

PFAT4ME will be recommended as a core course for acquisition personnel 
that require the training. The Department will determine who needs the 
training based on the roles and responsibilities of individual 
acquisition positions. The Department will also track attendance to 
ensure that personnel requiring the training take the course. 

Recommendation 6: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(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. (See page 
19 and 20/GAO Draft report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report. and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may, 
however, be other requirements for cost information related to 
acquisition program lifecycle management, and we will accommodate 
those requirements as is appropriate. 

OUSD(C) coordinated with OUSD(AT&L)/PEPO to establish a metric to 
assess compliance with the PFAT4ME policy. This metric is reported in 
the semiannual FIAR Plan Status Report. In the next update to FIAR 
Guidance, the FIAR Directorate will include guidance describing how 
often Components should perform reviews, Component roles and 
responsibilities, the steps to be performed by the Components, and the 
basis the Components should use for selecting contracts for review as 
part of their ongoing Manager's internal control program. 

Recommendation 7: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(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. (See page 20/GAO 
Draft report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report, and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may, 
however, be other requirements for cost information related to 
acquisition program lifecycle management, and we will accommodate 
those requirements as is appropriate. 

OUSD(AT&L)/PEPO is working with the Federal Accounting Standards 
Advisory Board (FASAB) Accounting and Auditing Policy Committee (AAPC) 
to develop full cost guidance that would be integrated into ERPs and 
guide cost accounting efforts. When AAPC completes its work, PEPO will 
develop, coordinate, and issue policy and guidance for accounting for 
the full cost of military equipment, to include the elements listed in 
the recommendation above. The Department is sensitive to the cost of 
obtaining information solely for purposes of proprietary financial 
reporting and audit, however recognizes that there may he value in 
cost accounting information that supports better management of MDAPs. 

Recommendation 8: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(Acquisition, Technology, and Logistics); and the Military Department 
Chief Management Officers, as appropriate, to review the Military 
Equipment Valuation (MEV) methodology business rules to identify 
inconsistencies and revise the rules as needed. (See page 20/GAO Draft 
report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report, and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may, 
however, be other requirements for cost information related to 
acquisition program lifecycle management. and we will accommodate 
those requirements as is appropriate. 

After meeting the Department's asset existence and completeness goals, 
the Department will review the MEV methodology business rules to 
identify inconsistencies and revise the rules as needed, particularly 
related to estimating the cost of military equipment., as part of its 
plans to achieve audit readiness. The Department will consider the 
recent Statements of Federal Financial Accounting Standards (SFFAS) 
No. 35 pertaining to the estimation of military equipment historical 
cost when reviewing the MEV methodology business rules. A cost-
effective estimating methodology for the historical cost of older 
weapon system assets will be pursued if appropriate. 

Recommendation 9: GAO recommends that the Secretary of Defense direct 
the Military Department Chief Management Officers in consultation with 
the DoD Chief Management Officer; the Under Secretary of Defense 
(Comptroller); and the Under Secretary of Defense (Acquisition, 
Technology, and Logistics), as appropriate, to define the component 
level cost accounting requirements, including how Standard Financial 
Information Structure (SFIS) data elements will be used to identify. 
aggregate, account for, and report cost information. (See page 20/GAO 
Draft report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report, and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may, 
however, be other requirements for cost information related to 
acquisition program lifecycle management, and we will accommodate 
those requirements as is appropriate. 

The Department included appropriate data fields within SFIS to provide 
a standard cost accounting capability. Within the SFIS data fields, 
the Department has already defined the standard data elements to 
aggregate costs managed at the DoD level, such as Major Acquisition 
Program and Contingency Code. These data fields were collaboratively
developed by OUSD(C), OUSD(AT&L), the Business Transformation Agency, 
and Military Departments. 

Data fields in SFIS also provide the Military Departments with the 
capability to capture and aggregate the costs of programs, projects 
and activities that they manage. These data fields and business rules 
are being defined by the Military Departments. as needed, as they 
deploy new business and financial systems. 

After meeting Department objectives for asset existence and 
completeness, the DoD Chief Management Officer, OUSD(C) and OUSD(AT&L) 
will work jointly with the Military Department Chief Management 
Officers as they define their data element requirements, since these 
requirements are unique to their mission and information needs. 

Recommendation 10: GAO recommends that the Secretary of Defense direct 
the Military Department Chief Management Officers in consultation with 
the DoD Chief Management Officer; the Under Secretary of Defense 
(Comptroller); and the Under Secretary of Defense (Acquisition, 
Technology, and Logistics), as appropriate, after defining the cost 
accounting requirements, to utilize the requirements as input to 
Enterprise Resource Planning (ERP) systems 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. (See page 20/GAO Draft report.) 

DoD Response: Concur. 

The Department has determined that it is not cost-effective to gather 
auditable data on the historical cost of military weapon systems 
because the information is not used to manage. We will therefore not 
invest significant resources in an effort to capture, report, and 
audit data with no value and will propose appropriate changes in 
policies and instructions to accommodate this decision. There may, 
however, be other requirements for cost information related to 
acquisition program lifecycle management, and we will accommodate 
those requirements as is appropriate. 

The Department's SFIS Governance Board, chaired by OUSD(C), will 
continue to oversee and work with the DoD Components as they define 
and implement cost accounting requirements to ensure they develop 
appropriate managerial cost accounting capabilities in their ERP 
systems. In addition, the Department will analyze existing ERP 
functionality requirements against the defined Department-level cost 
accounting requirements. After completing the analyses, the Department 
will update the requirements documents to ensure the ERPs are 
configured to capture and aggregate cost information for the DoD 
assets. 

Recommendation 11: GAO recommends that the Secretary of Defense direct 
the DoD Chief Management Officer to work jointly with the Under 
Secretary of Defense (Comptroller); the Under Secretary of Defense 
(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 ERP business systems 
environment. (See page 20/GAO Draft Report.) 

DoD Response: Concur. 

The Department will assess the WAWF and IUID initiatives and determine 
the extent to which they will be utilized in the emerging ERP business 
systems environment. 

OUSD(AT&L) has led WAWF and RED initiatives; has established clear 
regulatory requirements for IUID and WAWF; and has been scorecarding 
WAWF and IUID implementation for the last 2 years. As a result of 
these working groups, the long-term enterprise architecture related to 
property accountability will be better defined, and the Department 
will determine the extent to which WAWF and IUID will be integrated 
into the ERPs for accountability purposes. The DoD Investment Review 
Board is relining compliance criteria to ensure Automated Information 
Systems (AIS) compliance includes the ERPs. 

Further, the Deputy Chief Financial Officer (DCFO) co-chairs the 
Investment Review Board that monitors compliance criteria for ERPs. In 
addition, OUSD(C) works closely with other DoD organizations to 
address WAWF and MID issues through working groups (e.g., Procure-to-
Pay Working Group, Commercial Pay Council, Tri-Domain Working Group). 

Comments On The Content Of The Draft Audit Report: 

Military Equipment Property Accountability Records: 

DOD plans to complete the verification of the existence and 
completeness or its military equipment property accountability records 
in fiscal year 2015. Verification of Component existence and 
completeness assertions will occur in 2011 for Air Force, 2013 for 
Navy, and 2015 for Army. 

Use of Estimates to Report Costs: 

Page 4 of the draft audit report includes the following: "Federal 
accounting standards allow for the use of estimates to report the 
costs of property, plant, and equipment, if an agency lacks adequate 
controls and systems to reliably capture the cost of these assets." 
However, SFFAS 35, Estimating the Historical Cost of General Property, 
Plant, and Equipment, does not limit the use of estimation 
methodologies when an agency lacks adequate controls and systems to 
reliably capture the cost of these assets. Rather. SFFAS 35 states 
"reasonable estimates of historical cost may be used to value G-PP&E 
assets." 

SFFAS 35 amends SFFAS 6 and 23 to clarify that reasonable estimates of 
original transaction data for historical cost may be used to value G-
PP&E. Reasonable estimates may he used upon initial capitalization as 
entities implement the G-PP&E accounting requirements for the first 
time, as well as by those entities who previously implemented G-PP&E 
accounting. 

SFFAS 35 also clarifies that agencies should report their G-PP&E based 
on historical cost information in accordance with the asset 
recognition and measurement provisions of SFFAS 6, as amended. 
However, reasonable estimates of historical cost may be used to value 
G-PP&E assets. SFFAS 35 also allows the use of reasonable estimates 
when an entity determines it is necessary to revalue G-PP&E assets 
previously reported. 

[End of section] 

Appendix III: Documentation Reviewed to Identify Weaknesses That 
Impair DOD's Ability to Identify and Account for the Cost of Military 
Equipment: 

Government Accountability Office: 

Financial Management: Achieving Financial Statement Auditability in 
the Department of Defense. [hyperlink, 
http://www.gao.gov/products/GAO-09-373]. Washington, D.C.: May 6, 2009. 

DOD's High-Risk Areas: Actions Needed to Reduce Vulnerabilities and 
Improve Business Outcomes. [hyperlink, 
http://www.gao.gov/products/GAO-09-460T]. Washington, D.C.: March 12, 
2009. 

Defense Business Transformation: Status of Department of Defense 
Efforts to Develop a Management Approach to Guide Business 
Transformation. [hyperlink, http://www.gao.gov/products/GAO-09-272R]. 
Washington, D.C.: January 9, 2009. 

DOD Business Transformation: Air Force's Current Approach Increases 
Risk That Asset Visibility Goals and Transformation Priorities Will 
Not Be Achieved. [hyperlink, http://www.gao.gov/products/GAO-08-866]. 
Washington, D.C.: August 8, 2008. 

Fiscal Year 2007 U.S. Government Financial Statements: Sustained 
Improvement in Financial Management Is Crucial to Improving 
Accountability and Addressing the Long-Term Fiscal Challenge. 
[hyperlink, http://www.gao.gov/products/GAO-08-926T]. Washington, 
D.C.: June 26, 2008. 

Defense Business Transformation: Sustaining Progress Requires 
Continuity of Leadership and an Integrated Approach. [hyperlink, 
http://www.gao.gov/products/GAO-08-462T]. Washington, D.C.: February 
7, 2008. 

Defense Business Transformation: A Full-time Chief Management Officer 
with a Term Appointment Is Needed at DOD to Maintain Continuity of 
Effort and Achieve Sustainable Success. [hyperlink, 
http://www.gao.gov/products/GAO-08-132T]. October 16, 2007. 

Defense Business Transformation: Achieving Success Requires a Chief 
Management Officer to Provide Focus and Sustained Leadership. 
[hyperlink, http://www.gao.gov/products/GAO-07-1072]. Washington, 
D.C.: September. 5, 2007. 

Financial Management: Long-standing Financial Systems Weaknesses 
Present a Formidable Challenge. [hyperlink, 
http://www.gao.gov/products/GAO-07-914]. Washington, D.C.: August 3, 
2007. 

DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be Enhanced 
by Linkage to Outcomes, Progress in Transforming Business Operations, 
and Reexamination of Logistics Governance and Strategy. [hyperlink, 
http://www.gao.gov/products/GAO-07-1064T]. Washington, D.C.: July 10, 
2007. 

Defense Business Transformation: A Comprehensive Plan, Integrated 
Efforts, and Sustained Leadership Are Needed to Assure Success. 
[hyperlink, http://www.gao.gov/products/GAO-07-229T]. Washington, 
D.C.: November 16, 2006. 

Department of Defense: Sustained Leadership Is Critical to Effective 
Financial and Business Management Transformation. [hyperlink, 
http://www.gao.gov/products/GAO-06-1006T]. Washington, D.C.: August 3, 
2006. 

Department of Defense, Office of Inspector General: 

Independent Auditor's Report on the DOD Agency-Wide FY 2009 and FY 
2008 Basic Financial Statements. D-2010-016. Arlington, Va.: November 
12, 2009. 

Independent Auditor's Report on the Department of the Navy General 
Fund FY 2009 and FY 2008 Basic Financial Statements. D-2010-014. 
Arlington, Va.: November 8, 2009. 

Independent Auditor's Report on the Department of the Navy Working 
Capital Fund FY 2009 and FY 2008 Basic Financial Statements. D-2010- 
012. Arlington, Va.: November 8, 2009. 

Independent Auditor's Report on the Army General Fund FY 2009 and FY 
2008 Basic Financial Statements. D-2010-010. Arlington, Va.: November 
8, 2009. 

Independent Auditor's Report on the Army Working Capital Fund FY 2009 
and FY 2008 Basic Financial Statements. D-2010-009. Arlington, Va.: 
November 8, 2009. 

Independent Auditor's Report on the Air Force Working Capital Fund FY 
2009 and FY 2008 Basic Financial Statements. D-2010-008. Arlington, 
Va.: November 8, 2009. 

Independent Auditor's Report on the Air Force General Fund FY 2009 and 
FY 2008 Basic Financial Statements. D-2010-006. Arlington, Va.: 
November 8, 2009. 

Internal Controls over Government Property in the Possession of 
Contractors at Two Army Locations. D-2009-089. Arlington Va.: June 18, 
2009. 

Independent Auditor's Report on the Department of Defense FY 2008 and 
FY 2007 Basic Financial Statements. D-2009-021. Arlington, Va.: 
November 12, 2008. 

Independent Auditor's Report on the Army Working Capital Fund FY 2008 
and FY 2007 Basic Financial Statements. D-2009-020. Arlington, Va.: 
November 8, 2008. 

Independent Auditor's Report on the Army General Fund FY 2008 and FY 
2007 Basic Financial Statements. D-2009-018. Arlington, Va.: November 
8, 2008. 

Independent Auditor's Report on the Air Force Working Capital Fund FY 
2008 and FY 2007 Basic Financial Statements. D-2009-017. Arlington, 
Va.: November 8, 2008. 

Independent Auditor's Report on the Air Force General Fund FY 2008 and 
FY 2007 Basic Financial Statements. D-2009-016. Arlington, Va.: 
November 8, 2008. 

Independent Auditor's Report on the Department of the Navy Working 
Capital Fund FY 2008 and FY 2007 Basic Financial Statements. D-2009- 
012. Arlington, Va.: November 8, 2008. 

Independent Auditor's Report on the Department of the Navy General 
Fund FY 2008 and FY 2007 Basic Financial Statements. D-2009-010. 
Arlington, Va.: November 8, 2008. 

Report of Marine Corps Internal Controls Over Military Equipment 
Funds. D-2007-122. Arlington, Va.: September 11, 2007. 

Vendor Pay Disbursement Cycle, Air Force General Fund: Financial 
Accounting. D-2007-059. Arlington, Va.: February 8, 2007. 

Financial Management: Contracts Classified as Unreconcilable by the 
Defense Finance and Accounting Service Columbus. D-2005-040. 
Arlington, Va.: March 14, 2005. 

Implementation of a Cost-Accounting System for Visibility of Weapon 
Systems Life-Cycle Costs. D-2001-164. Arlington, Va.: August 1, 2001. 

Naval Audit Service: 

Management of Special Tooling and Special Test Equipment at Naval Air 
Systems Command. N2009-0026. Washington, D.C.: April 24, 2009. 

U.S. Army Audit Agency: 

Logistics Modernization Program System Federal Financial Management 
Improvement Act of 1996 Compliance - First Deployment Functionality. A-
2007-0205-FFM. Alexandria, Va.: September 7, 2007. 

Management of Government-Furnished Property, Fort Hood, Texas. A-2005- 
0126-FFE. Alexandria, Va: March 4, 2005. 

Air Force Audit Agency: 

Comprehensive Engine Management System Controls. F2005-0004-FB2000. 
Washington, D.C.: April 27, 2005. 

Department of Defense: 

Agency Financial Report for Fiscal Year 2009. Washington, D.C.: 
November 16, 2009. 

Department of Defense Fiscal Year 2009 Report on Reliability. 
Washington, D.C.: September 30, 2009. 

Financial Improvement and Audit Readiness Plan (FIAR Plan). March 30, 
2009. 

Department of Defense, Office of the Secretary of Defense. Linking 
Financial Data to Contract Documents. Washington, D.C.: March 18, 2009. 

Fiscal Year 2008 Agency Financial Report. Washington, D.C.: November 
17, 2008. 

U.S. Department of Defense 2008 Enterprise Transition Plan (ETP). 
Washington, D.C.: September 30, 2008. 

Office of the Under Secretary of Defense for Acquisition, Technology, 
and Logistics. Annual Statement Required under the Federal Managers' 
Financial Integrity Act (FMFIA) of 1982. Washington, D.C.: June 27, 
2008. 

Office of the Under Secretary of Defense (Comptroller). Summary of 
Business Rule for Group or Composite Depreciation. October 24, 2006. 

Office of the Under Secretary of Defense (Comptroller). Summary of 
Business Rule with Corresponding Analysis on the Department of Defense 
Military Equipment Capitalization Threshold. October 24, 2006. 

Office of the Under Secretary of Defense (Comptroller). Summary of 
Business Rule for Recording Program Management Office (PMO) Costs. 
October 24, 2006. 

Office of the Under Secretary of Defense for Acquisition, Technology, 
and Logistics, Property and Equipment Policy. Internal Validation and 
Verification Project: Military Equipment Valuation Property and 
Equipment Policy. June 13, 2006. 

Office of the Under Secretary of Defense (Comptroller). Summary of 
Business Rules for Accounting for and Reporting of Military Equipment: 
Componentization. June 8, 2005. 

Transforming Department of Defense Financial Management: A Strategy 
for Change. Washington, D.C.: April 13, 2001. 

Department of the Army: 

U.S. Army. Fiscal Year 2009 United States Army Annual Financial 
Statement. Washington, D.C.: November 2009. 

Secretary of the Army to the Secretary of Defense. Fiscal Year (FY) 
2009 Statement of Assurance on Internal Controls as Required Under the 
Federal Managers' Financial Integrity Act of 1982. Washington, D.C.: 
August 17, 2009. 

U.S. Army. Fiscal Year 2008 United States Army Annual Financial 
Statement. Washington, D.C.: November 2008. 

U.S. Army Program Executive Office Enterprise Information Systems. 
U.S. Army ERP Phase III Analysis Brief. Fort Belvoir, Va.: September 
26, 2008. 

Secretary of the Army to the Secretary of Defense. Fiscal Year (FY) 
2008 Statement of Assurance on Internal Controls as Required Under the 
Federal Managers' Financial Integrity Act of 1982. Washington, D.C.: 
August 13, 2008. 

Department of the Navy: 

Fiscal Year 2009 Department of the Navy Annual Financial Report. 
Washington D.C.: October 2009. 

Under Secretary of the Navy to the Secretary of Defense. Annual 
Statement Required Under the Federal Managers' Financial Integrity Act 
(FMFIA). Washington, D.C.: August 25, 2009. 

Science Applications International Corporation (SAIC)/Eagan, 
McAllister, Associates, Inc. (EMA) for the Department of the Navy 
Financial Improvement Program, Naval Air Systems Command. Gap Analysis 
Study: NAVAIR Management of Operation Materials and Supplies, General 
Equipment, and Military Equipment in Navy ERP, Lexington Park, MD: 
July 31, 2009. 

Department of the Navy Annual Financial Report Fiscal Year 2008. 
Washington D.C.: October 2008. 

Secretary of the Navy to the Secretary of Defense. Annual Statement 
Required Under the Federal Managers' Financial Integrity Act (FMFIA). 
Washington, D.C.: August 28, 2008. 

Department of the Air Force: 

Acquire to Retire Process: OMB Circular A-123 Appendix A, Part II 
Internal Controls over Financial Reporting. December 18, 2009. 

United States Air Force Annual Financial Statement 2009. Washington, 
D.C.: November 2009. 

United States Air Force Annual Financial Statement 2008. Washington, 
D.C.: November 2008. 

Acting Secretary of the Air Force to the Secretary of Defense. Annual 
Statement Required Under the Federal Managers' Financial Integrity Act 
(FMFIA) of 1982. Washington, D.C.: August 26, 2008. 

Secretary of the Air Force to the Secretary of Defense. Annual 
Statement Required under the Federal Managers' Financial Integrity 
Act. Washington, D.C.: August 24, 2009. 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Asif A. Khan, (202) 512-9095 or khana@gao.gov: 

Acknowledgments: 

In addition to the contact person named above, key contributors to 
this reports were Evelyn Logue, Assistant Director; Vanessa Estevez; 
Maxine Hattery; John Lopez; Chris Martin; Heather Rasmussen; Darby 
Smith; and Omar Torres. 

[End of section] 

Footnotes: 

[1] [1] MDAPs are programs that are estimated by the Under Secretary 
of Defense for Acquisition, Technology, and Logistics to require an 
eventual total expenditure for research development, test, and 
evaluation of more that $365 million, including all planned 
increments, based on fiscal year 2000 constant dollars (approximately 
$509 million in fiscal year 2010 dollars); $2.190 billion of 
procurement funding, including all planned increments (approximately 
$3.054 billion in fiscal year 2010 dollars); or are designated as a 
major defense acquisition program by the milestone decision authority. 
See DOD Instruction 5000.02, Operation of the Defense Acquisition 
System (Dec. 2, 2008); Under Secretary of Defense (AT&L), Memorandum, 
Subject: Directive-Type Memorandum (DTM) 09-027 - Implementation of 
the Weapon Systems Acquisition Reform Act of 2009 (Dec. 4, 2009). 

[2] This represents a 42 percent increase in fiscal year 2009 dollars. 
Fiscal year 2010 information will be available after September 30, 
2010. 

[3] Military equipment are weapon systems that can be used directly by 
the Armed Forces to carry out battlefield missions. 

[4] Full cost is the sum of direct and indirect costs. Direct costs 
are costs that can be specifically identified with an output, 
including salaries and benefits for employees working directly on the 
output, materials, supplies, and costs with facilities and equipment 
used exclusively to produce the output. Indirect costs are costs that 
are not specifically identifiable with any output and may include 
costs for general administration, research and technical support, and 
operations and maintenance for buildings and equipment. See Statement 
of Federal Financial Accounting Standards (SFFAS) 4, "Managerial Cost 
Accounting Standards and Concepts" (Washington, D.C.: July 31, 1995). 

[5] Statement of Federal Financial Accounting Standards (SFFAS) 4: 
"Managerial Cost Accounting Standards and Concepts" (Washington, D.C.: 
July 31, 1995); SFFAS 6: Accounting for Property, Plant, and 
Equipment, (Washington, D.C.: Nov. 30, 1995, as amended); SFFAS 8: 
Supplementary Stewardship Reporting (Washington, D.C.: June 11, 1996, 
as amended); SFFAS 23, Eliminating the Category National Defense 
Property, Plant, and Equipment (Washington, D.C.: May 2003); and SFFAS 
35, Estimating the Historical Cost of General Property, Plant, and 
Equipment--Amending Statements of Federal Financial Accounting 
Standards 6 and 23 (Washington, D.C.: Oct. 14, 2009). 

[6] See for example, SFFAS 4; SFFAS 6; SFFAS 8; SFFAS 23; SFFAS 35; 
GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999); Institute of Electrical and 
Electronics Engineers, Inc., Recommended Practice for Software 
Requirements Specifications, IEEE Std. 830-1998 (New York, N.Y.: June 
25, 1998) and Guide for Information Technology--System Definition--
Concept of Operations (ConOps) Document, IEEE Std. 1362- 1998 (New 
York, N.Y.: Mar. 19, 1998, reaffirmed Dec. 5, 2007); and Software 
Engineering Institute, Capability Maturity Model Integration for 
Development, Version 1.2 (Pittsburgh, Pa.: August 2006). 

[7] These statutes include the Chief Financial Officers Act, the 
Government Management Reform Act of 1994, the Federal Financial 
Management Improvement Act of 1996, and various annual authorization 
and appropriations act provisions. 

[8] SFFAS 34, The Hierarchy of Generally Accepted Accounting 
Principles, Including the Application of Standards Issued by the 
Financial Accounting Standards Board (Washington, D.C.: July 28, 
2009); and SFFAS 4. 

[9] SFFAS 4. 

[10] SFFAS 6. 

[11] Each of these costs may be funded through different 
appropriations or other accounts, so recognizing and recording the 
full cost of an asset may involve more than the costs recorded an MDAP 
budgetary account that covers an individual MDAP asset. 

[12] SFFAS 35. 

[13] DOD is required to submit SARs to Congress at the end of each 
fiscal year quarter on current major defense acquisition programs, 
although certain exceptions apply. SARs for the first quarter of a 
fiscal year are known as comprehensive annual SARs. Each comprehensive 
annual SAR is required to be submitted within 60 days after the date 
on which the President transmits the budget to Congress for the 
following fiscal year. 10 U.S.C. ß 2432(b)(1), (c)(4), (f). 

[14] Equals the total of all funds programmed to be available for 
obligation for procurement for the program, divided by the number of 
fully configured end items to be procured. 

[15] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[16] DOD Financial Management Regulation Volume 1, Chapter 9, 
Financial Records Retention (April 2009); and DOD Directive 5015.2, 
DOD Records Management Program (Mar. 6, 2000). 

[17] Statement of Federal Financial Accounting Standards (SFFAS) 35, 
Estimating the Historical Cost of General Property, Plant, and 
Equipment--Amending Statements of Federal Financial Accounting 
Standards 6 and 23 (Washington, D.C.: Oct. 14, 2009); SFFAS 23, 
Eliminating the Category National Defense Property, Plant, and 
Equipment (Washington, D.C.: May 2003); and SFFAS 6: Accounting for 
Property, Plant, and Equipment (Washington, D.C.: Nov. 30, 1995, as 
amended). 

[18] Department of Defense, Office of the Inspector General, Internal 
Controls Over the Department of the Navy Military Equipment Baseline 
Valuation Effort, D-2009-008 (Arlington, Va.: Oct. 31, 2008); 
Memorandum Report on Internal Controls Over the U.S. Special 
Operations Command Military Equipment Baseline Valuation Effort, D-
2008-103 (Arlington, Va.: June 13, 2008); Memorandum Report on 
Internal Controls Over the Air Force Military Equipment Baseline 
Valuation Effort, D-2008-074 (Arlington, Va.: Apr. 1, 2008); Air Force 
Military Equipment Baseline Valuation, F2007-0009-FB3000 (Washington, 
D.C.: May 29, 2007); Military Equipment Baseline-Electronic Pods, 
F2007-0003-FB3000 (Washington, D.C.: Jan. 19, 2007); Financial 
Management: Report on Development of the DOD Baseline for Military 
Equipment, D-2005-114 (Arlington, Va.: Sept. 30, 2005); Financial 
Management: Report on the Review of the Development of the DOD 
Baseline for Military Equipment, D-2005-112 (Arlington, Va.: Sept. 30, 
2005); and the Department of Defense, Property and Equipment Policy, 
Office of Undersecretary of Defense for Acquisition, Technology, and 
Logistics, Internal Validation and Verification Project: Military 
Equipment Valuation (June 13, 2006). 

[19] DOD, Fiscal Year 2010 Financial Improvement and Audit Readiness 
(FIAR) Guidance ( May 15, 2010). 

[20] The IUID Registry is the central repository for IUID information 
that captures specific information on the acquired item (e.g., what 
the item is, how and when it was acquired, and the initial unit cost 
of the item). 

[21] Department of Defense Instruction 5000.02, Operation of the 
Defense Acquisition System (Dec. 8, 2008). 

[22] According to DOD's Comptroller, Air Force plans to complete 
efforts to verify the existence and completeness of its military 
equipment property accountability records in 2011, followed by Navy in 
2013, and Army in 2015. 

[23] Under Secretary of Defense for Acquisition, Technology, and 
Logistics memorandum, Proper Accounting Treatment for Military 
Equipment (June 30, 2006). 

[24] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[25] Under Secretary of Defense for Acquisition, Technology, and 
Logistics memorandum, Proper Accounting Treatment for Military 
Equipment (June 30, 2006). 

[26] The course is entitled Structuring Procurement Requests to 
Facilitate Proper Financial Accounting Treatment for Military 
Equipment and is available through the Defense Acquisition University. 

[27] Under Secretary of Defense for Acquisition, Technology, and 
Logistics, DOD Instruction 8320.04, Item Unique Identification (IUID) 
Standards for Tangible Personal Property (June 16, 2008), requires 
that an item unique identifier be applied to an item if one or more of 
the following criteria are met: (1) the item has a unit acquisition 
cost of $5,000 or more; (2) the item has a unit acquisition cost of 
less than $5,000 and is identified by the requiring activity as DOD 
serially managed, mission essential, or controlled inventory; (3) the 
item has a unit acquisition cost of less than $5,000 and the requiring 
activity determines that permanent identification is required; and (4) 
regardless of value, (a) any DOD serially managed subassembly, 
component, or part embedded within an item and (b) the parent item 
that contains the embedded subassembly, component, or part. 

[28] Under Secretary of Defense for Acquisition, Technology, and 
Logistics, DOD Instruction 5000.02, Operation of the Defense 
Acquisition System (Dec. 8, 2008). 

[29] DOD Instruction 8320.04. 

[30] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[31] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[32] SFFAS 4 and 6. 

[33] ERPs are automated systems that utilize commercial off-the-shelf 
(COTS) software consisting of multiple, integrated functional modules 
that perform a variety of business-related tasks such as payroll, 
general ledger accounting, and supply chain management. 

[34] The IEEE is a nonprofit, technical professional organization that 
develops standards for a broad range of global industries, including 
the information technology and information assurance industries, and 
is a leading source for defining best practices. 

[35] IEEE Stds 830-1998 and 1362-1998; and Software Engineering 
Institute, Capability Maturity Model Integration for Development, 
Version 1.2 (Pittsburgh, Pa.: August 2006). 

[36] DOD, Financial Management Regulation, Volume 4, Chapter 19, 
Managerial Cost Identification (May 19, 2010). 

[37] SFFAS 4. 

[38] GAO, Defense Business Transformation: A Comprehensive Plan, 
Integrated Efforts, and Sustained Leadership Are Needed to Assure 
Success, [hyperlink, http://www.gao.gov/products/GAO-07-229T] 
(Washington, D.C.: Nov. 16, 2006). 

[39] U.S. Army Program Executive Office Enterprise Information 
Systems, U.S. Army ERP Phase III Analysis Decision Brief (Sept. 26, 
2008). 

[40] Science Applications International Corporation/Eagan, McAllister, 
Associates, Inc., Gap Analysis Study: NAVAIR Management of Operation 
Materials and Supplies, General Equipment, and Military Equipment in 
Navy ERP for the Department of the Navy Financial Improvement Program, 
Naval Air Systems Command (Lexington Park, Md.: July 31, 2009). 

[41] DOD Financial Management Regulation, Volume 1, Chapter 3, Federal 
Financial Management Improvement Act of 1996 Compliance, Evaluation, 
and Reporting (October 2008); and DOD Directive 5000.01, The Defense 
Acquisition System (May 12, 2003) certified current as of November 20, 
2007. Financial management systems include the financial systems and 
the financial portions of mixed systems necessary to support financial 
management, including automated and manual processes, procedures, 
controls, data, hardware, software, and support personnel dedicated to 
the operation and maintenance of system functions. 

[42] DOD, Financial Improvement and Audit Readiness Plan (FIAR Plan) 
(Mar. 30, 2009). 

[43] Department of Defense Memorandum, Standard Financial Information 
Structure (SFIS) Implementation Policy (Aug. 4, 2005). 

[44] MDAPs are programs that are estimated by the Under Secretary of 
Defense for Acquisition, Technology, and Logistics to require an 
eventual total expenditure for research development, test, and 
evaluation of more that $365 million, including all planned 
increments, based on fiscal year 2000 constant dollars (approximately 
$509 million in fiscal year 2010 dollars); $2.190 billion of 
procurement funding, including all planned increments (approximately 
$3.054 billion in fiscal year 2010 dollars); or are designated as a 
major defense acquisition program by the milestone decision authority. 
See DOD Instruction 5000.02, Operation of the Defense Acquisition 
System (Dec. 2, 2008); Under Secretary of Defense (AT&L), Memorandum, 
Subject: Directive-Type Memorandum (DTM) 09-027 - Implementation of 
the Weapon Systems Acquisition Reform Act of 2009 (Dec. 4, 2009). 

[45] The guidance reviewed included DOD Directive 5000.01,The Defense 
Acquisition System, (May 12, 2003); DOD Instruction 5000.02, Operation 
of the Defense Acquisition System (Dec. 2, 2008); DOD Instruction, 
8320.04, Item Unique Identification (IUID) Standards for Tangible 
Personal Property (June 16, 2008); DOD Instruction 8320.04, Item 
Unique Identification (IUID) Standards for Tangible Personal Property 
(June 16, 2008); DOD Instruction 5000.64, Accountability and 
Management of DOD-Owned Equipment and Other Accountable Property (Nov. 
2, 2006); and the Undersecretary of Defense for Acquisition, 
Technology, and Logistics Memorandum, Proper Financial Accounting 
Treatment for Military Equipment (June 30, 2006). 

[46] Statement of Federal Financial Accounting Standards (SFFAS) 4: 
Managerial Cost Accounting Standards and Concepts (Washington, D.C.: 
July 31, 1995); SFFAS 6: Accounting for Property, Plant, and Equipment 
(Washington, D.C.: Nov. 30, 1995, as amended); SFFAS 8: Supplementary 
Stewardship Reporting (Washington, D.C.: June 11, 1996, as amended); 
SFFAS 23, Eliminating the Category National Defense Property, Plant, 
and Equipment (Washington, D.C.: May 2003); and SFFAS 35, Estimating 
the Historical Cost of General Property, Plant, and Equipment--
Amending Statements of Federal Financial Accounting Standards 6 and 23 
(Washington, D.C.: Oct. 14, 2009). 

[47] Audit report databases searched were those of GAO, the DOD 
Inspector General, the Naval Audit Service, the U.S. Army Audit 
Agency, and the Air Force Audit Agency. 

[48] See for example, SFFAS 4, SFFAS 6, SFFAS 8, SFFAS 23, SFFAS 35; 
GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999); Institute of Electrical and 
Electronics Engineers, Inc., Recommended Practice for Software 
Requirements Specifications, IEEE Std. 830-1998 (New York, N.Y.:, June 
25, 1998) and Guide for Information Technology--System Definition--
Concept of Operations (ConOps) Document, IEEE Std. 1362- 1998 (New 
York, N.Y.: Mar. 19, 1998, reaffirmed Dec. 5, 2007); and Carnegie 
Mellon Software Engineering Institute, Capability Maturity Model 
Integration for Development, Version 1.2 (Pittsburgh, Pa.: August 
2006). 

[End of section] 

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