Military Readiness: Air Force Plans to Replace Aging Personnel Recovery Helicopter Fleet

Since the 1980s, the Air Force has used its HH-60G Pave Hawk helicopters to conduct life-saving missions, including for personnel recovery and medical evacuations. The aging HH-60G inventory has shrunk over the years as a result of mishaps. As the inventory was declining, the Air Force began efforts to replace its fleet with the new Combat Rescue Helicopter.

The National Defense Authorization Act for fiscal year 2018 includes a provision for GAO to review HH-60G replacement programs. This report examines: (1) the maintenance condition and service life of the Air Force's HH-60G Pave Hawk helicopters; (2) the Air Force's schedule for fielding the new Combat Rescue Helicopter in the active and reserve components; and (3) any training challenges the Air Force has identified related to this schedule.

GAO analyzed flight hour and availability data and contracts and fielding schedule for new and refurbished personnel recovery helicopters for the Air Force. GAO also analyzed documentation, and interviewed officials from the Air Force Headquarters, the Air Force major commands, including the Air National Guard and Air Force Reserve, and training and test and evaluation units to discuss challenges the Air Force expects to face as it fields its new helicopters.

The material condition of the Air Forces' aging HH-60G fleet has declined and maintenance challenges have increased, in part due to extensions beyond the designed service life of the helicopters. About 68 percent of the 96-helicopter fleet were mission-capable as of fiscal year 2017, below the Air Force desired mission-capable rate of 75 percent. The fleet is experiencing maintenance challenges. For example, the helicopters undergoing depot-level maintenance spent an average of 332 days undergoing such maintenance in fiscal year 2017 compared with 233 days in fiscal year 2007, more than a 40-percent increase. Air Force officials attribute these challenges to the helicopters exceeding their initially planned service life. Currently, available helicopters across the fleet average about 7,100 flight hours about 18 percent more than their initial expected service life of 6,000 hours.

According to Air Force officials, the schedule for fielding the new Combat Rescue Helicopters generally prioritizes the replacement of helicopters with the highest number of flight hours; as a result, the active component is scheduled to begin receiving its new helicopters in fiscal year 2020, 6 years before the reserve component. In May 2018, the Air Force's active component HH-60Gs averaged about 2,000 more flight hours per helicopter than the reserve component. Under the fielding schedule, the Air National Guard squadrons are to receive new Combat Rescue Helicopters beginning in 2027, at the end of the fielding period. According to officials, in the meantime, to address aging helicopters in the Air National Guard, the Guard is scheduled to receive refurbished Army helicopters beginning in 2019. According to Air Force officials, these helicopters will have 3,000 or fewer flight hours and will be upgraded to the Air Force's HH-60G configuration. The Air Force officials explained that these helicopters are expected to increase reliability rates, reduce the need for unscheduled maintenance, and bridge the gap until the Air National Guard receives the new Combat Rescue Helicopters.

Due to the Air Force fielding schedule for the Combat Rescue Helicopters, the Air Force may face a challenge in supporting formal training for reserve component squadrons in fiscal year 2025 through 2028. The training squadrons at Kirtland and Nellis Air Force Bases conduct all formal HH-60G training for both the active and reserve components. By 2025, these training squadrons are scheduled to be completely transitioned to the new Combat Rescue Helicopters. Given the fielding schedule, the training squadrons will not have any legacy HH-60Gs for formal training for the reserve component. However, some squadrons in the reserve component are scheduled to continue flying HH-60Gs until 2028 and will still need formal training. Air Force reserve component officials did not concur with the new Combat Rescue Helicopter fielding schedule. However, Air Force officials said that they plan to maintain their fielding schedule because changing it would require renegotiation of the contract, likely increase costs, and possibly delay delivery of the new helicopters. Air Force officials acknowledged this potential training issue and told GAO that the Air Force was considering options to address it; including retaining some legacy HH-60Gs at a training squadron to provide training during any gap period.

GAO is not making any recommendations in this report. GAO requested comments from the DOD, but none were provided.

When U.S. pilots are shot down or U.S. servicemembers are stranded  behind enemy lines, the Air Force’s HH-60G Pave Hawk helicopter is a  combatant commander’s platform of choice to rescue them. The unique  and advanced capabilities of this helicopter and its highly trained crews  make it the Department of Defense’s (DOD) premier personnel recovery  helicopter. HH-60G units deploy frequently to support DOD personnel  recovery missions and other operations around the world, and in recent  years DOD has relied on these units to support medical evacuations in  Iraq and Afghanistan. Although the other military services fly similar  helicopters—such as the Army’s UH-60L—the HH-60G’s extensive  communication suite and ability to operate at high altitudes and conduct  in-flight refueling are some of the capabilities that make the HH-60G  uniquely suited for recovering personnel who may be isolated in enemy  territory. The HH-60G aircrew consists of two pilots and two special  mission aviators—personnel trained to operate both as flight engineers  and as gunners for the HH-60G’s two 50-caliber machine guns.

First fielded in the 1980s, the HH-60G Pave Hawk helicopter is aging and  in need of replacement. The HH-60G was initially designed to have a  service life of approximately 6,000 flight hours, according to officials, and  the Air Force procured 112 helicopters. As the helicopters aged and the  inventory shrunk as a result of mishaps, the Air Force planned to procure  a replacement helicopter—the Combat Search and Rescue Replacement  Vehicle. However, this replacement program was canceled in 2009. Since  then the inventory has continued to shrink and currently the Air Force has  96 HH-60G Pave Hawk helicopters, 16 fewer than required. The Air Force  is now planning to rebuild its inventory in two ways. First, the Air Force  procured 21 Army UH-60Ls, and those helicopters are being converted  into the HH-60G Pave Hawk configuration under the Air Force’s  Operational Loss Replacement program. Second, the Air Force is  purchasing 112 new Combat Recovery Helicopters (HH-60Ws) to replace  its fleet of HH-60G Pave Hawk helicopters by 2029.

The National Defense Authorization Act for Fiscal year 2018 included a  provision for us to review the Air Force’s HH-60G replacement programs,  which it defined as including both the Operational Loss Replacement and  Combat Rescue Helicopter programs. The provision included direction to  review the fielding schedule for the new Combat Rescue Helicopter. This  report examines (1) the maintenance condition and the service life of the  Air Force’s HH-60G Pave Hawk helicopters (2) the Air Force’s schedule  for fielding the Combat Rescue Helicopter in the active and reserve  components, and (3) any training challenges the Air Force has identified  related to this schedule. Appendix I provides a brief summary of the  National Commission on the Structure of the Air Force’s 2014 report to  the President and Congress, and the relationship of the Air Force’s HH-60  replacement programs to that report.

For objective one, we examined fiscal year 2013–2017 average “mission  capable rates,” which refer to the material condition of the aircraft  possessed by a squadron and their abilities to conduct their designed  missions. We compared the average squadron mission capable rates to  the Air Force desired mission capable rate. We also analyzed fiscal year  2013-2017 Air Force maintenance “code 3 breaks” data, defined by the  Air Force as an aircraft that lands and is unable to complete at least one  of its primary missions. According to Air Force policy, this metric primarily  indicates aircraft system reliability. To determine which “code 3 breaks”  were most common, we analyzed fiscal year 2013–2017 annual code 3  break reports across the HH-60G fleet. We also analyzed flight hour data  across the HH-60G fleet. Specifically, we analyzed flight-hour data by  component and major command and compared them with the initial  number of flight hours that Air Force officials stated the helicopters were  originally designed to fly.

To assess the reliability of the fiscal year 2013–2017 mission capable  rates, maintenance “code 3 break” data, and flight-hour data we  discussed with Air Force officials the processes used to collect the data  and the internal controls used to maintain the databases where the data  are maintained. We also conducted manual data testing on the flight-hour  data and did not find any missing data, outliers, or obvious errors. We  concluded that the data were sufficiently reliable for the purposes of  determining average mission capable rates, reported flight hours by  component, and the three most frequently-noted maintenance “code 3  breaks” between 2013 and 2017. To corroborate our understanding of Air  Force efforts to rebuild the personnel recovery helicopter inventory and  maintenance, and mission capable rate data, we conducted interviews  with officials from Air Force Headquarters, the Air Combat Command, the  Air National Guard, the Air Force Reserve, the formal training squadrons  at Kirtland and Nellis Air Force Base, and the Test and Evaluation  squadron at Nellis Air Force Base.

For objective two, we analyzed historical information from the Combat  Search and Rescue Replacement Vehicle helicopter program and from  the current Combat Rescue Helicopter fielding schedule. Specifically, we  analyzed the Combat Rescue Helicopter fielding schedule for fiscal years  2020 through 2029 to identify which helicopter squadrons would receive  the new Combat Rescue Helicopter and during which fiscal year.

For objective three, we analyzed the Air Combat Command fielding  schedule for both Operational Loss Replacement helicopters and Combat  Rescue Helicopters and we spoke with the Air Combat Command, the Air  National Guard, the Air Force Reserve, and the Air Education and  Training Command officials to discuss the positive aspects of the Air  Combat Command’s schedule, any concerns the officials had with the  schedule, and whether or not they had submitted any alternative  schedules. Based on some concerns that were raised by reserve  component officials, we reviewed and analyzed the Air Force training plan  for the Combat Rescue Helicopter and discussed it with Air Force training  officials. Specifically, we discussed expected differences between the  HH-60G and the Combat Rescue Helicopter training, and any potential  training gaps.

We conducted this performance audit from September 2017 to August  2018 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  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

According to Air Force officials, the Air Force has 82 HH-60G helicopters  designated to meet its personnel recovery mission requirements. The  remaining 14 HH-60Gs are designated for training and, development and  testing. Figure 1 shows the Air Force’s inventory of HH-60G Pave Hawk  helicopters as of May 2018.

The Air Combat Command is the lead command for personnel recovery  helicopters and as such has responsibility for all requirements associated  with the helicopters, and for program funding. Formal training of  helicopter aircrews takes place at Kirtland and Nellis Air Force Bases.  The formal training unit at Kirtland Air Force Base is the only integrated  unit with both active and reserve component forces, but the unit’s  helicopters are assigned to the active component. All other HH-60G Pave  Hawk units consist solely of active or solely of reserve component forces.  Figure 2 shows the locations and components of the HH-60G rescue  squadrons. It also shows the numbers of helicopters at each location.

It takes several years to fully train a helicopter pilot. Pilots spend about a  year and half in their general introductory and specialized helicopter  training. For Air Force HH-60 pilots, this initial qualification training occurs  at Kirtland Air Force Base. Following that, the pilots continue their training  at their assigned operational squadrons. According to weapons school  officials, a few experienced HH-60 pilots are selected to attend the HH-60  weapons school at Nellis Air Force Base where the pilots assist in the  development of tactics, techniques, and procedures for the HH-60  community. Figure 3 shows a typical training timeline for HH-60G pilots.

Air Force’s HH-60G Helicopters Have Experienced Declines in Condition and Increases in Maintenance Challenges, Due in Part to Extensions beyond the HH-60G’s Designed Service Life

The material condition of the Air Force’s HH-60G fleet has declined and  maintenance challenges have increased, in part due to extensions  beyond the initially designed service life of the helicopters. In November  2017, the Air Force’s HH-60Gs were about 5 percent below their desired  “mission capable” rate of 75 percent, which refers to the material  condition of a squadron’s possessed aircraft and their abilities to conduct  their designed missions. Mission capable rates have shown some year- to-year fluctuations, without any clear trends. However, for each of the  past 5 years, the helicopters’ mission capable rates have been below the  Air Force’s goal, and for fiscal year 2017, 68 percent of the 96 helicopter  fleet were mission capable.

As the helicopters have aged, the amount of time spent conducting  maintenance on them has increased. For example, according to Air Force  officials, in fiscal year 2013 the fleet averaged about 21 maintenance  manhours for every HH-60G flight hour. However, by fiscal year 2017, the  maintenance time spent had increased to an average of more than 25  maintenance manhours for every flight hour. According to officials, the  increased time conducting maintenance is a result of an aging helicopter  that requires more intensive maintenance. Further, according to officials,  in 2007 the average amount of time required to conduct more extensive  depot-level maintenance was 233 days, but by fiscal year 2017 it was 332  days, more than a 40 percent increase. Air Force maintenance data for  fiscal years 2013-2017 show that airframes, turboshaft engines, and flight  controls (see fig. 4) were the HH-60G elements that failed most often.  According to Air Force officials, these structural and major component  failures can require time-consuming maintenance that negatively affects  availability and mission capable rates.

According to Air Force flight-hour data, the average flight hours across  the HH-60G fleet have increased by nearly 20 percent from fiscal year  2013 through May 2018. Air Force officials stated that the HH-60G was  initially designed to have a service life of approximately 6,000 flight hours.  However, in May 2018, the fleet-wide average was approximately 7,100  flight hours, or about 18 percent more than their initial expected service  life. Table 1 shows that, as of May 2018, HH-60G training aircraft  averaged about 10,500 flight hours, while the primary mission and back  up aircraft averaged about 6,600 flight hours. The Air Force’s two  developmental and testing aircraft had an average of 5,500 flight hours.  According to Air Force officials, this is because developmental and testing  aircraft are flown to test specific aircraft elements and not on regular  missions. As flight hours increase more maintenance is required and  maintenance challenges increase, according to Air Force officials.

Air Force Fielding Schedule Delivers Combat Rescue Helicopters First to High Flight-Hour Squadrons

According to Air Force officials, the Combat Rescue Helicopter fielding  schedule, which was included in the contract for the new helicopters, was  designed to ensure that helicopters with the highest flying hours are  generally replaced first. The officials told us that this is why the active  component units, which have higher flying-hour averages, would begin  receiving their new Combat Rescue Helicopters in fiscal year 2020.  Based on the current Combat Rescue Helicopter fielding schedule, the Air  Force Reserve is scheduled to receive its new helicopters beginning in  fiscal year 2026. The Air National Guard is scheduled to receive  refurbished Operational Loss Replacement helicopters in fiscal year 2019  and the new Combat Rescue Helicopters beginning in fiscal year 2027.  The last Combat Rescue Helicopters are scheduled to be fielded to all  three components in fiscal year 2029. Figure 5 shows the timeline for the  transition to the new Combat Rescue Helicopters.

On average, the active component helicopters had about 2,000 more  flight hours per helicopter than the reserve component helicopters, in May  2018, as shown in figure 6. Specifically, the active component helicopters  had on average 7,700 flight-hours, while the reserve component  helicopters averaged 5,800 flight hours.

The active component helicopters in figure 6 include the Kirtland training  helicopters, which averaged about 10,600 flight hours per helicopter.  According to Air Force officials, due in part to the high number of flight  hours per aircraft, Kirtland is one of the first squadrons scheduled to  receive the new Combat Rescue Helicopters. Specifically, Kirtland is  scheduled to begin receiving its new helicopters in fiscal year 2020.

Among the reserve component, the Air National Guard helicopters have  an average of about 6,200 flight hours while the Air Force Reserve  helicopters have an average of about 5,500 flight-hours per aircraft.  However, the Combat Rescue Helicopter fielding schedule shows that the  Air National Guard squadrons are last to receive the new Combat Rescue  Helicopters. According to Air Force officials, to address the later fielding  of the new Combat Rescue Helicopters to the Air National Guard,  beginning in fiscal year 2019 the Air Force is replacing all of the Air  National Guard’s helicopters with refurbished Army helicopters. These  helicopters will be upgraded to the Air Force’s HH-60G configuration and  will each have 3,000 or fewer flight hours. These refurbished helicopters  are commonly referred to as the Operational Loss Replacement  helicopters. According to Air Force officials the Operational Loss  Replacement helicopters are expected to increase squadron helicopter  reliability and are expected to reduce unscheduled maintenance until the  Air National Guard squadrons receive their new Combat Rescue  Helicopters.

The Air Force Has Identified Potential Training Challenges, but Would Likely Incur Costs If It Adjusted the Fielding Schedule for Its Combat Rescue Helicopters

Due to the Air Force fielding schedule for the Combat Rescue  Helicopters, the Air Force may face a challenge in supporting formal  training for its reserve component squadrons during fiscal years 2025  through 2028. The rescue squadrons at Kirtland and Nellis Air Force  Bases conduct all formal HH-60G training, and by fiscal year 2025, are  scheduled to transition to providing formal training for the new Combat  Rescue Helicopters. Specifically, these formal training units are  scheduled to completely transition to the Combat Rescue Helicopter and  will have divested all of their legacy HH-60G aircraft, as shown in figure 7.  However, other squadrons will continue to fly the HH-60G aircraft after  fiscal year 2025. Specifically, seven rescue squadrons will fly the legacy  HH-60Gs in fiscal year 2025, and some will continue flying the HH-60Gs  until fiscal year 2028 and so will continue to need formal training to fly that  helicopter throughout that period.

According to the Combat Rescue Helicopter fielding schedule shown in  figure 8, the reserve component squadrons will receive most of their  Combat Rescue Helicopters between fiscal years 2026 through 2028.  The Air National Guard squadrons will not receive their primary mission  Combat Rescue Helicopters until fiscal year 2028. This is 3 years after  the formal training units at Kirtland and Nellis will have stopped training  students on the legacy HH-60Gs.

The Air Force Reserve and Air National Guard did not concur with the  Combat Rescue Helicopter fielding schedule. Reserve Component  officials said they did not concur, in part, because the Air Force did not  coordinate the fielding schedule prior to the contract’s approval in 2014.  However, according to Headquarters Air Force officials, the Combat  Rescue Helicopter fielding schedule was coordinated with and approved  by all components prior to the 2014 contract being approved. Further, Air  Force officials stated they plan to maintain the fielding schedule because  changing it would require the renegotiation of the contract and would  likely result in increased costs and possibly a delay in delivery of the new  helicopters. The Combat Rescue Helicopter contract was developed as a  fixed-price contract. According to Air Force officials, as part of this fixed- price contract, specific terms such as base locations and order of delivery  were predetermined.

According to Air Force officials, while the Combat Rescue Helicopter  contract does allow for some variation in the quantity of helicopters  procured each year, there is no location and order variation permitted  without the renegotiation of price. According to the Air Force, any  changes outside the included variation of the number of aircraft to be  purchased in a given year (i.e. change in the order or location of the  bases) would negate the firm-fixed prices in the year where the change  occurred, and in all the remaining years of the contract. Specifically, if  changes are made to the order or location of the bases, potential contract  line items that could increase include base level spares, readiness spares  packages, support equipment, interim supply support and field support  representatives for both aircraft and training systems. According to Air  Force officials, fielding schedule changes could also put at risk the ability  to provide timely funding for the military construction projects necessary  to house new simulators at the rescue squadrons’ bases. These officials  stated that the current Combat Rescue Helicopter fixed-price contract is  ahead of schedule and within budget, as of June 2018. Air Force officials  said they expect to have new helicopters by March 2020, 3 months ahead  of schedule. They also said that if changes are made to the order of  deliveries under the contract, the contract would have to be renegotiated  which would, in turn, likely slow the delivery of the new helicopters and  increase contract costs.

Air Force officials acknowledge that based on the current fielding  schedule there is a potential training gap that will occur in fiscal years  2025 through 2028 when the formal training units will no longer have any  HH-60Gs available to train the reserve component. As of June 2018, Air  Force officials told us that the Air Force was considering a number of  options to address future training issues, including the following:

The Air Force would provide legacy HH-60G helicopters, for a limited  time, to the Air National Guard squadron at Kirtland Air Force Base.  This would allow the Air National Guard to continue providing initial  and requalification training on the legacy HH-60G helicopters for  several years after the active component portion of the formal training  unit at Kirtland Air Force Base has divested its legacy HH-60G  helicopters.

The Air Force would require personnel that have completed training  on the Combat Rescue Helicopter at Kirtland Air Force Base to then  receive additional training for the legacy platform at their home  stations if their squadrons are still flying the HH-60Gs.

We provided a draft of this report to DOD for review and comment. DOD  told us that they had no comments on the draft report.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense and the Secretary of the Air Force.  In addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-3489 or at pendletonj@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 II.

Appendix I: The National Commission on the Structure of the Air Force Report and Recommendation Implementation

Following disagreements over the Air Force’s proposals to reduce aircraft  and Air National Guard end strength, the National Defense Authorization  Act for Fiscal Year 2013 established the National Commission on the  Structure of the Air Force. The act required the commission to conduct a  study to determine whether, and how, the Air Force structure should be  modified to best fulfill mission requirements in a manner consistent with  available resources. In January 2014, the commission issued its final  report, which included 42 recommendations. The Air Force agreed with  41 of the 42 commission’s recommendations. The recommendations  varied in size, scope, and duration, and they focused on a range of topics  from personnel policies and systems to determining the appropriate  balance between the active and reserve component. However, as we  reported in 2016 many of the recommendations were interrelated and the  Air Force grouped the recommendations into various lines of effort and  assigned senior officials responsibility for tracking the implementation of  each line of effort. The “Total Force Continuum” has half (21) of the  commission’s 42 recommendations. Recommendation 11 is part of this  line of effort and it states:  As the Air Force acquires new equipment, force integration plans  should adhere to the principle of proportional and concurrent fielding  across the components. This means that, in advance of full  integration, new equipment will arrive at Air Reserve Component units  simultaneously with its arrival at Active Component units in the  proportional share of each component. As the Air Force Reserve and  Active Component become fully integrated, the Air Force should  ensure that the Air National Guard receives new technology  concurrent with the integrated units. The Air Force should no longer  recapitalize by cascading equipment from the Active Component to  the Reserve Components.

In accordance with Section 1055 of the Carl Levin and Howard P. “Buck”  McKeon National Defense Authorization Act for Fiscal Year 2015, the Air Force provided the congressional defense committees with annual  responses to the commission’s recommendations.

In its initial response, the Air Force stated that it was embracing the  commission’s intent and viewed the recommendations as a holistic  approach to improving the service. With regard to recommendation 11,  the Air Force stated that it agreed in principle with the recommendation  and would make every attempt to concurrently and proportionally equip all  components to be the most capable force within today’s constrained  resources.

In its 2017 response, the Air Force cited the Combat Rescue Helicopters  as one of the examples of how it is implementing recommendation 11.  Specifically, the Air Force reported that its future fielding of the CRH  shows the Air Force’s commitment to concurrent and proportional fielding  of equipment amongst its components. Headquarters, Air Force officials  elaborated on this response in response to our request for clarification,  stating that the Air Force was replacing all its personnel recovery  helicopters—for both its active and reserve component units—under a  single contract and that it would not cascade any of its active component  helicopters to its reserve component units. As of August 2017, the Air  Force stated it had completed its review of recommendation 11 and it  updated its Air Force Policy Directive 10-3, Operational Utilization of the  Air Reserve Component Forces in November 2017, to better reflect the  intent of the recommendation.

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Michael Ferren, Assistant  Director; Vincent Buquicchio; Mae Jones; Leigh Ann Sheffield; Mike  Silver; and Nicole Volchko made key contributions to this report.


DOD Financial Management: The Navy Needs to Improve Internal Control over Its Buildings

This engagement was initiated in connection with the statutory requirement for GAO to audit the U.S. government's consolidated financial statements. The 2018 National Defense Authorization Act requires that the Secretary of Defense ensure that a full audit is performed on the financial statements of DOD for each fiscal year and that the results be submitted to Congress no later than March 31 of the following fiscal year. The Navy was the first military department to assert real property audit readiness related to DOD's Financial Improvement and Audit Readiness effort.

For this report, GAO's objectives were to (1) determine the extent to which the Navy had internal control deficiencies, if any, that may impair its ability to assert that its buildings, as reported in its financial statements, exist and that the information about these buildings is complete and adequately supported by property records and (2) identify the challenges, if any, that Navy faces in valuing its buildings in accordance with federal accounting standards. GAO reviewed the Navy's policies and procedures for control activities over its buildings, performed data analyses, and tested a nongeneralizable sample of buildings. GAO also discussed with Navy officials the challenges in complying with federal accounting standards for valuing its buildings.

Although the United States Navy (Navy) has taken actions to become audit ready for its real property, GAO identified internal control deficiencies that impaired the Navy's ability to assert that (1) buildings recorded in the internet Navy Facility Assets Data Store (iNFADS), the Navy's real property system, and reported as assets in its financial statements existed and (2) all of the Navy's buildings were recorded in iNFADS and correctly reported as assets in the Navy's financial statements. As shown in the figure below, the effects of these internal control deficiencies contributed to the Navy (1) continuing to maintain records in iNFADS for buildings that had been demolished, sometimes many years ago, and include these buildings as assets in its financial statements; (2) excluding some of the buildings it owns from being recorded in iNFADS and reported as assets in its financial statements; (3) erroneously reporting nonfunctional buildings as assets in its financial statements; and (4) excluding certain buildings from being reported as assets in its financial statements that met or exceeded the Department of Defense's (DOD) capitalization threshold.

The Navy has various efforts under way to address challenges in valuing its buildings for financial reporting in accordance with federal accounting standards. Navy officials have acknowledged that significant delays can sometimes occur in the Navy being able to complete supporting documentation of the final costs to properly report buildings in its financial statements. Additionally, implementation of the Navy's new methodology to properly account for capital improvements will be critical for capturing accurate costs for buildings. Furthermore, the Navy has not consistently completed a physical inventory (asset evaluation) for each building every 5 years as required by DOD policy. These asset evaluations are an important control to help ensure that the information recorded for buildings in iNFADS is accurate. Finally, the Navy also faces a challenge in determining the placed in service dates for those buildings found through inventory procedures. The Navy's use of the date the building was found rather than the estimated date the building was placed in service can substantially affect the accuracy of the information in the Navy's systems and financial statements. Navy officials are aware of these challenges and have various efforts under way to address them. Effective implementation of these efforts is crucial to help address these challenges.

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

The Department of Defense’s (DOD) financial management has been on  our High-Risk List since 1995 because of, among other things, long- standing, uncorrected deficiencies with its financial management  systems, business processes, and material internal control and financial  reporting weaknesses. These deficiencies prevent DOD from having  auditable financial statements, which is one of the three major  impediments preventing us from expressing an opinion on the accrual- based consolidated financial statements of the U.S. government.

The effects of DOD’s financial management problems extend beyond  financial reporting and negatively affect DOD’s ability to manage the  department and make sound decisions on mission and operations. For  example, we found that DOD cannot fully determine the number, size,  and costs of its leases for its leased facilities because the inventory  system that DOD uses to report on its leased assets contains some  inaccurate and incomplete data.

DOD’s reported property, plant, and equipment represent more than 70  percent of the U.S. government’s reported property, plant, and  equipment. DOD manages a global real property portfolio that it reported  consists of approximately 562,000 facilities—including barracks,  commissaries, data centers, office buildings, laboratories, and  maintenance depots—located on about 4,800 sites worldwide and  covering more than 24.9 million acres. With a DOD-estimated  replacement value of about $880 billion, this infrastructure is critical to  maintaining military readiness, and the estimated cost to build and  maintain it represents a significant financial commitment. However, DOD  remains one of the few federal entities that cannot demonstrate its ability  to accurately account for and reliably report its costs or assets.

DOD has undertaken several financial management improvement  initiatives over the years to address deficiencies in business systems,  processes, and controls through its Financial Improvement and Audit  Readiness (FIAR) Plan. In addition to the FIAR Plan, the 2010 National  Defense Authorization Act (NDAA) required, until December 2017, that  DOD provide semiannual reports to the congressional defense  committees on the status of the implementation of the FIAR Plan. The  2018 NDAA repealed the requirement for the FIAR Plan and semiannual  status reports and codified a requirement for DOD to submit a Financial  Improvement and Audit Remediation Plan to Congress by June 30, 2019,  and annually thereafter. DOD is further required to prepare a  consolidated corrective action plan management summary on the status  of key corrective action plans and to brief the congressional defense  committees semiannually on the status of the corrective action plans.

The results of prior audits, including ours, have raised concerns about the  data reliability of certain key categories of the military services’ general  property, plant, and equipment. In addition, the Department of the Navy’s  (DON) inability to accurately account for real property assets, specifically  its buildings, continues to be a primary impediment to it receiving an  auditor’s opinion on its financial statements. One of the previously  identified material weaknesses reported by the independent auditors for  fiscal year 2017 related to real property. Specifically, the independent  auditors reported that the DON had insufficient internal controls and  supporting documentation for real property and construction-in-progress.  The DON consists of two services—the United States Navy (Navy) and  the United States Marine Corps. The DON was the first military  department to initially assert real property audit readiness for existence  and completeness. According to the Navy’s accountable real property  system, the internet Navy Facility Assets Data Store (iNFADS), the Navy  owned 35,308 and 35,600 buildings as of September 30, 2017, and  September 30, 2016, respectively.

This engagement was initiated in connection with the statutory  requirement for GAO to audit the U.S. government’s consolidated  financial statements. Our objectives were to (1) determine the extent to  which the Navy had internal control deficiencies, if any, that may impair its  ability to assert that its buildings, as reported in its financial statements,  exist and that the information about the buildings is complete and  adequately supported by property records and (2) identify the challenges,  if any, that the Navy faces in valuing its buildings in accordance with  federal accounting standards.

To address our objectives, we interviewed DOD and Navy officials and  reviewed regulations, instructions, policies, and procedures, including the  Naval Facilities Engineering Command’s (NAVFAC) desk-top  procedures, to identify control activities over buildings. We reviewed the  results from prior testing conducted by a contractor that the Navy  engaged to help it achieve audit readiness for its real property. We also  performed data analyses of building data elements contained in iNFADS  as of September 30, 2016. To assess the reliability of data we used, we  reviewed relevant Navy documentation, interviewed knowledgeable  officials, reviewed policies and procedures regarding collecting and  maintaining the data, and performed data analyses to look for logical  inconsistencies. We concluded that the data elements we used from  iNFADS were sufficiently reliable for the purposes of selecting a  nongeneralizable sample of buildings to test during our site visits. We  selected the Norfolk and San Diego geographic areas for site visits  because of the numerous bases in each area and the proximity of the 5  installations to one another in both areas. Finally, we conducted site visits  in Norfolk and San Diego to understand the processes followed and  documents used to record real property transactions, test the buildings  selected in our nongeneralizable samples, and review the available  supporting documentation for the selected buildings.

For the site visits, we selected a nongeneralizable sample of a total of 40  buildings from the iNFADS real property system, 20 from 5 Norfolk-area  installations and 20 from 5 San Diego-area Navy installations that we  visited, to test through observation whether these buildings existed (book- to-floor). We met with the real property accountable officers (RPAO) at  the 10 installations we visited. In addition to testing for existence, we  compared the descriptions of the buildings in iNFADS with the buildings  that we observed. For example, if the date the building was placed in  service was recent, we would observe whether it was a newer building.  We also selected a nongeneralizable sample of an additional 39 buildings  while at the installations to perform floor-to-book tests to test the  completeness of Navy’s recorded buildings in iNFADS.

To identify the challenges the Navy faces in valuing its buildings in  accordance with federal accounting standards, we reviewed federal  accounting standards and the Navy’s documents for recording assets into  iNFADS and interviewed agency officials responsible for financial  reporting and real property management, including the RPAOs at the  installations we visited. While our audit objectives focused on certain control activities related to (1) the existence and completeness of the  Navy’s buildings as reported in its financial statements and the  completeness and adequacy of supporting property records for those  buildings and (2) the valuation of the Navy’s buildings in accordance with  federal accounting standards, we did not evaluate all control activities and  other components of internal control. If we had done so, additional  deficiencies may or may not have been identified that could affect the  control activities evaluated as part of this audit. See appendix I for  additional details on our audit scope and methodology.

We conducted this performance audit from September 2016 to May 2018  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 that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

DOD has defined audit readiness as having the capabilities in place that  allow an auditor to plan and perform a full financial statement audit that  results in actionable feedback to DOD. In DOD’s May 2016 FIAR Plan  Status Report, the DON initially asserted that it would be audit ready with  regard to real property (including construction-in-progress) for the  existence and completeness assertions by June 2016 and with regard to  the valuation assertion by March 2017. Subsequently, in DOD’s  November 2016 FIAR Plan Status Report, the DON asserted that it would  be audit ready for the existence, completeness, and valuation assertions  by March 2017. In DOD’s May 2017 FIAR Plan Status Report, the DON  reported that it had validated that the existence and completeness  assertions for real property. Ultimately, the DON reported in DOD’s  November 2017 FIAR Plan Status Report that it had achieved audit  readiness for the existence and completeness assertions and was in the  process of determining audit readiness for the valuation assertion.

In August 2016, the Federal Accounting Standards Advisory Board issued  Statement of Federal Financial Accounting Standards (SFFAS) No. 50,  which allows reporting entities to apply alternative valuation methods in  establishing opening balances of general property, plant, and equipment  (G-PP&E). Such alternative valuation methods may be applied in  reporting periods beginning after September 30, 2016. SFFAS No. 50  permits each reporting entity to use alternative methods when presenting  financial statements, or one or more line items, (1) for the first time or   (2) after a period during which existing systems could not provide the  information necessary for producing financial statements in accordance  with generally accepted accounting principles (GAAP) without using  alternative methods. SFFAS No. 50 permits reporting entities to apply an  alternative method only once per line item after the period during which  the existing systems could not provide the information for producing  financial statements in accordance with GAAP. As of March 2018, the  Navy has not made an unreserved assertion attesting that its opening  balances of G-PP&E are reported in accordance with SFFAS No. 50.  After opening balances are established using an alternative valuation  method, federal accounting standards require historical cost to be used in  valuing G-PP&E acquired or constructed.

Plant Replacement Value Being Used to Develop Opening Balances for the Navy’s Buildings

DOD already uses plant replacement value (PRV) for decision making  and management purposes and has reported that it will use PRV to  develop opening balances for the Navy’s buildings. Navy is also currently  using PRV (an allowable alternative valuation method under SFFAS No.  50) for financial statement reporting of its buildings and plans to do so  until the DON makes an unreserved assertion that its financial statements  or its G-PP&E line item or reported assets classes are presented fairly in  accordance with GAAP. PRV represents an estimate of the replacement  cost in current year dollars to design and construct a facility to replace an  existing facility at the same location. As such, the replacement (or  construction) cost factor, generally applied to buildings as a dollar amount  multiplied by square footage, is also indexed to increase or decrease the  amount to account for other variations in costs for different geographic  areas or complexity of the facility. Once the calculation prescribed by the  formula has resulted in PRV, accumulated depreciation is computed  based on the placed in service date. Figure 1 shows an example of the  PRV formula being applied to an enlisted housing facility. The valuation  adjustment factors, as shown below, vary by location and use of the  building. Acquisitions and capital improvements made to existing  buildings during subsequent financial periods are to be recorded at the  actual cost of obtaining the asset or improvement and placing it into  service.

Internal control activities, as defined in Standards for Internal Control in  the Federal Government, are the policies, procedures, and techniques  that enforce management’s directives to achieve the entity’s objectives  and address related risks. A deficiency in internal control exists when  the design, implementation, or operation of a control does not allow  management or personnel, in the normal course of performing their  assigned functions, to achieve control objectives and address related  risks.

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

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

The Navy Did Not Have Properly Designed Procedures and Related Control Activities to Reasonably Assure Proper Accounting for Its Demolished Buildings

While the Navy had written procedures for the multistep process for  disposal of real property by demolition, these procedures and related  control activities were not properly designed to reasonably assure that  demolished buildings were recorded as disposed and removed from the  accounting records. Specifically, the procedures and related control  activities did not reasonably assure that RPAOs were provided with a  signed demolition approval document and the related disposal form.  Without these documents, an RPAO may not be aware that a building has  been demolished and therefore may not take the appropriate actions to  record the asset as disposed in iNFADS so that the asset record is  subsequently removed from iNFADS at the end of the fiscal year and the  asset is thereby not included in Navy’s financial statements.

When a building is designated for disposal, multiple parties are involved  in the demolition process. This business process can involve the  installation’s Public Works Department; the Regional Commander; the  Facilities Engineering Command realty specialist; the Commander, Navy  Installations Command; the demolition project manager; the demolition  contractor; and the General Services Administration. The multiple  functional offices involved in the disposal by demolition business process  and the lack of communication between the offices can result in buildings  being demolished without the RPAO’s knowledge. The Navy’s procedures  for the disposal of real property by demolition state that the RPAO is to  receive a signed demolition approval document from the installation’s  Public Works Department. After the demolition has been completed, the  project manager is to work with the demolition contractor (if applicable),  the planner, and the RPAO to complete the disposal form. The RPAO,  within 10 days of the completion of the demolition, is to upload supporting  documentation about the disposed asset into iNFADS and create the  iNFADS disposal record. The Navy’s procedures did not include a  control activity, such as a step to verify the RPAO’s receipt of a signed  demolition approval document and disposal form, to reasonably assure  that the RPAOs are notified of all building demolitions. These notifications  are critical so that each RPAO can properly account for a building by  creating an iNFADS disposal record, which ultimately results in records  for demolished buildings being deleted from iNFADS and therefore not  included as assets in the financial statements.

During our testing of a nongeneralizable sample of buildings in iNFADS,  we identified buildings that had been demolished prior to September 30,  2016, but were still recorded in iNFADS as of September 30, 2016, and  therefore were reported as assets in Navy’s financial statements as of  September 30, 2016. According to SFFAS No. 6, Accounting for  Property, Plant, and Equipment, assets, including real property, shall be  removed from the asset accounts along with the associated accumulated  depreciation if the asset no longer provides service to the operations of the entity. The inclusion of demolished buildings in iNFADS results in  inaccurate Navy real property records and can lead to an overstatement  of reported balances for real property in Navy’s financial statements. Of  the 40 buildings for which we performed book-to-floor tests for existence,  we found that 4 had been destroyed and no longer physically existed but  were still recorded in iNFADS and reported as assets in Navy’s financial  statements. Because we used a nongeneralizable sample of buildings,  results from the sample cannot be used to make inferences about all of  the Navy’s buildings. The four demolished buildings are described below.

A six-car garage building had been demolished several years ago  according to the Navy, but its operational status was shown as active  in iNFADS as of September 30, 2016. Navy officials stated that while  the actual demolition date for this building is not known, based on the  demolition drawing for another building nearby, it appears to the Navy  that the garage was demolished prior to 2001.

A marina shop building was demolished as of June 30, 2016, so that a  new building could be constructed at the same location. As of  September 30, 2016, the operational status of this marina shop was  shown as active in iNFADS. The disposal of the marina shop building  was not recorded in iNFADS until May 2017.

A storage building was demolished in February 2016 but was still  recorded in iNFADS as of September 30, 2016. The RPAO was not  notified that the building had been demolished until April 2016. After  searching for the relevant paperwork, which could not be located, the  RPAO prepared the disposal form that was dated December 20,  2016.

An aviation warehouse, which had previously been demolished, was  still recorded in iNFADS as of September 30, 2016. According to Navy  officials, the demolition package was initiated in 2013, but the  warehouse needed to remain in iNFADS until the site restoration work  was completed. Based on available information, the warehouse was  demolished around May 2014. The site restoration work was  completed in 2016, but the RPAO was never notified. According to  supporting documentation, a search for the relevant paperwork was  completed, after which the building was recorded in iNFADS as  disposed in March 2017.

Consistent with our findings, the Navy Office of Financial Operations, in  preparing a white paper on real property accumulated depreciation, also  found that there were buildings recorded as existing in iNFADS that did  not exist. For this white paper, the Navy selected a generalizable  sample of 650 real property assets, including buildings, to test. Noted in  the white paper as of May 31, 2017, only 584 of the 650 sampled real  property assets were able to be tested. Specifically, 51 could not be  validated, and an additional 15 real property assets, or 2.5 percent of the  sample, were found to not exist, but were still recorded in iNFADS as  existing. Based on Navy’s testing, we estimated that 2.5 percent of real  property in the Navy’s iNFADS database as of May 2016 no longer  existed but had not been recorded in iNFADS as disposed.

The Navy Lacks Procedures and Related Control Activities to Reasonably Assure Proper Accounting for Certain Buildings

During some of our site visits, the RPAOs stated that some buildings  acquired or constructed with non-military construction funds (Non- MILCON) and that cost under $750,000 were not recorded in iNFADS.  A Navy official confirmed that there were issues with recording Non- MILCON construction costing $250,000 and above, but under $750,000,  for financial reporting purposes. Specifically, buildings or capital  improvements are sometimes built using other Non-MILCON funding, and  in some cases, an entity other than NAVFAC spends the funds. The  RPAOs therefore may not know of buildings constructed as Non-MILCON  projects if NAVFAC was not involved in the construction project. For  example, at one location, we observed a sentry house that had been  constructed for the Navy using Non-MILCON funding around 2006.  However, the sentry house was not recorded into iNFADS until 2014  when the building was identified as existing through the Navy’s physical  inventory procedures.

NAVFAC did not have final procedures and related control activities to  reasonably assure that buildings funded with Non-MILCON funding below  $750,000 were consistently recorded in iNFADS and, if the cost exceeded  the capitalization threshold, were reported as assets in the Navy’s  financial statements. In 2015, the Navy began to develop both the  process and system changes required to track construction-in-progress  costs for the Navy’s Non-MILCON projects with costs greater than  $750,000, so that the cost of the buildings associated with these projects  would be properly recorded in iNFADS. In March 2017, NAVFAC updated  its BMS process document with the steps for Non-MILCON buildings with  costs greater than $750,000 and adopted the new guidance in May 2017.

According to NAVFAC officials, the Navy has already determined that an  equivalent detailed process is needed for Navy Non-MILCON buildings  costing less than $750,000 to reasonably assure that the RPAOs are  aware of these projects. The RPAOs are not involved in project  authorization or project funding and otherwise would be unaware of these  Non-MILCON projects. As a result, the RPAOs may not know of Non- MILCON buildings acquired or constructed with operations and  maintenance or other Non-MILCON funding under $750,000 and  accordingly do not have documentation to record the buildings’  acquisitions in iNFADS. A BMS process document that addresses Non- MILCON projects costing under $750,000 is being developed. However,  according to a Navy official, a completion date has not been set for  finalizing this document. Until effective procedures are implemented,  Navy buildings constructed with Non-MILCON funding costing less than  $750,000 may not be timely recorded in iNFADS, which would cause  iNFADS to have incomplete information. If the buildings are not recorded  in iNFADS, the buildings will not be reported as assets in the financial  statements, as required, when the cost of the building meets or exceeds  the Navy’s capitalization threshold of $250,000.

The Navy Lacks Written Procedures and Related Control Activities to Reasonably Assure Proper Financial Reporting for Buildings Coded as Nonfunctional

NAVFAC did not have written procedures requiring buildings coded as  nonfunctional in iNFADS to be excluded when accumulating data from  iNFADS for financial reporting purposes, nor did it have related control  activities to provide reasonable assurance that such buildings were  excluded. As a result, the Navy incorrectly included the amounts  associated with buildings coded as nonfunctional when accumulating  iNFADS information for financial reporting purposes. Specifically, based  on our aggregation of iNFADS data, the Navy erroneously reported 189  buildings coded as nonfunctional, amounting to $411 million in gross  value, $403 million in accumulated depreciation, and $8 million in net  book value, as assets in the financial statements as of September 30,  2016. For example, one building coded as nonfunctional that we  observed during our site visits was constructed in 1909, with a PRV of  over $5 million in iNFADS. The building has been vacant and unusable  since September 11, 2002, but was included as an asset in the financial  statements for fiscal year 2016.

According to federal accounting standards, fully impaired assets, such as  nonfunctional buildings, should not be included in an entity’s financial  statements and related notes. Specifically, SFFAS No. 6, Accounting for  Property, Plant, and Equipment, states that G-PP&E, which includes real  property, shall be removed from the accounts along with the associated  accumulated depreciation if the asset no longer provides service to the  operations of the entity. Moreover, SFFAS No. 44, Accounting for  Impairment of General Property, Plant, and Equipment Remaining in Use,  reiterates the requirement of SFFAS No. 6 by stating that fully impaired  assets should be removed from the G-PP&E accounts along with the  associated accumulated depreciation if, prior to disposal, the asset no  longer provides service in the operations of the entity.

Navy officials confirmed that they do not have written procedures or  related control activities requiring buildings coded as nonfunctional in  iNFADS to be excluded when accumulating iNFADS data for financial  statement reporting purposes. As a result, for fiscal year 2016, the Navy  erroneously included buildings coded as nonfunctional as assets on its  financial statements. Navy officials agreed that nonfunctional buildings  meet the impairment definition of SFFAS No. 6 and No. 44, as these  buildings no longer provide service to Navy operations, and therefore  should be removed from the G-PP&E accounts. For fiscal year 2017,  Navy officials stated that nonfunctional buildings were reclassified from  the asset class that includes buildings to the “Other” asset class.  However, both asset classes were reported as G-PP&E on the balance  sheet, and as a result, the nonfunctional buildings were again reported as  assets in the G-PP&E line item in the Navy’s financial statements.

The Navy Lacks Written Procedures and Related Control Activities to Reasonably Assure Proper Financial Reporting for Buildings That Meet or Exceed DOD’s Capitalization Threshold

NAVFAC officials confirmed that they did not have written procedures and  related control activities to reasonably assure that buildings recorded in  iNFADS that met or exceeded DOD’s established capitalization threshold  are properly included as assets in Navy’s financial statements. For  financial reporting, the Navy’s policy is to capitalize buildings based on  the established capitalization threshold in effect when each building was  placed in service.

According to Navy officials, buildings placed in service from October 1,  2007, through September 30, 2013, should have been included as assets  in the financial statements if the buildings were valued at or above  $20,000, the capitalization threshold that was in place during that period.  However, for buildings placed in service during this period, the Navy  continued to use the previous capitalization threshold of $100,000 rather  than the $20,000 threshold. An Office of the Secretary of Defense  memorandum dated September 20, 2013, directed the services to  increase the capitalization threshold to $250,000 for assets acquired and  placed in service on or after October 1, 2013, and the Navy implemented  this change. Further, the Navy incorrectly reported in the notes to its fiscal  year 2016 and 2017 financial statements that the $20,000 capitalization  threshold was used for real property.

Navy officials stated that when DOD’s capitalization threshold was  changed to $20,000, the Navy did not adopt the reduced threshold  pending an evaluation of changes needed to iNFADS and the  development of procedures to implement the lower threshold. Because  the Navy did not adopt DOD’s $20,000 capitalization threshold and  instead continued to use the $100,000 threshold, buildings placed in  service in fiscal years 2008 through 2013 with a value at or above  $20,000 but less than $100,000 were not reported as assets in the Navy’s  financial statements as of September 30, 2016, and in prior years. Navy officials could not quantify the effect on its financial statements that  occurred based on the Navy’s use of the $100,000 capitalization  threshold instead of the $20,000 threshold for fiscal years 2008 through  2013. Additionally, the Navy by not adopting DOD’s $20,000 capitalization  threshold resulted in inconsistent reporting in DOD’s consolidated  financial statements.

Challenges the Navy Faces in Complying with Federal Accounting Standards for Valuing Its Buildings

The Navy faces several challenges in valuing its buildings in accordance  with federal accounting standards, including (1) finalizing documentation  of actual cost information for buildings that are acquired and placed in  service after the Navy’s opening balances have been established based  on alternative valuation methods permitted by SFFAS No. 50;   (2) capturing and recording costs of improvements that should be  reported; (3) consistently completing asset evaluations for each building  every 5 years as required by DOD Instruction 4165.14 to help ensure that  each building’s information in iNFADS is correct; and (4) determining  placed in service dates for previously unrecorded buildings that are  subsequently discovered/identified through physical inventories/asset  evaluations. Navy officials are aware of these challenges and have  various efforts under way to address them. Effective implementation of  these efforts is crucial to help address these challenges.

Finalizing the DD-1354 for Buildings Being Valued at Cost

As we have previously reported, each completed military construction  project includes the DD-1354, Transfer and Acceptance of DOD Real  Property, to formally transfer ownership from the constructing entity to the  acquiring entity. The final version of the DD-1354 documents the final  total cost of the project in iNFADS, the source of real property information  for financial reporting. Navy officials acknowledge that significant delays  may occur in getting to the final version of the DD-1354, which occurs  after all costs are determined. If there are issues such as cost overruns or  contract disputes, the delays in completing the final version of the form  can be substantial. The Navy considers these substantial delays in  getting to the final version of the DD-1354 to be an obstacle to timely  documenting the final costs of buildings that are acquired and placed in  service after the Navy’s opening balances have been established, based  on alternative valuation methods permitted by SFFAS No. 50. During our  site visits when we tested 79 buildings, we identified 13 buildings, either  constructed or with capital improvements made from 2012 through 2016,  for which a final DD-1354 had not yet been completed.

According to several RPAOs we interviewed, getting to the final version of  the DD-1354 is a complicated process, requiring coordination among  multiple responsible parties and units, and determines all costs  associated with the construction. For example, a complex project that  involves the construction and demolition of multiple buildings makes the  allocation of the construction costs among the buildings of the project  considerably challenging.

According to SFFAS No. 6, costs associated with capital improvements— those that extend the useful life of a building or improve its capacity—are  to be recorded in the accountable real property system if the actual cost  exceeds the capitalization threshold. Navy officials reported that one  obstacle to capitalizing the costs of improvements is determining the  actual costs associated with the projects for capital improvements that are  made after the opening balances are established using alternative  valuation methods. The Navy has developed and is testing its  methodology to properly account for capital improvements to buildings.  This methodology uses an automated link from the Facilities Information  System (which has the construction-in-progress account) to iNFADS. The  success of this methodology will be critical for capturing capital  improvements for buildings.

The inability to account for the total costs associated with capital  improvements to buildings after the opening balances have been  established using alternative valuation methods would result in the  undervaluing of the total actual cost and annual depreciation expense  associated with the buildings. Once PRV is used to establish the opening  balance for buildings, the Navy must accurately record capital  improvements in iNFADS in order to appropriately value the buildings and  record the correct depreciation expense.

We observed that the Navy has taken steps to improve the quality of its  asset evaluations by completing and maintaining supporting  documentation. However, we found that the Navy has not consistently  completed asset evaluations for each building every 5 years as required  by DOD policy. An asset evaluation is a key Navy control to help ensure  that the information recorded in iNFADS is accurate. While the Navy  issued a revised BMS process document formalizing asset evaluations  procedures, these evaluations have not been performed every 5 years as  required. Specifically, in a June 30, 2017, Navy analysis, the Navy  determined that while an asset evaluation is required to be performed  every 5 years, the asset evaluations had not been done for more than 5  years for 17.4 percent of real property, including buildings. When asset  evaluations are not done every 5 years for each building, there is an  increased risk that information in iNFADS may not be accurate. In  addition, as a part of asset evaluations, Navy personnel verify key  information, including the square footage of buildings that is used for the  PRV calculation. The Navy has efforts under way to perform asset  evaluations for those buildings for which these evaluations had not been  completed in a 5-year period, including using contractors to help complete  the asset evaluations.

Determining Placed in Service Dates for Buildings Found by Inventory

As stated in DOD’s Financial Management Regulation, real property  assets and capital improvements to these assets are to be capitalized as  of the date each asset was placed in service. Navy officials occasionally  identify existing buildings that have not been recorded in iNFADS and are  referred to as buildings found by inventory. These buildings are often  identified through NAVFAC’s asset evaluations and periodic virtual  inventories. For these buildings, the placed in service dates may not be  known. While DOD and the Navy have subsequently developed  procedures for determining the placed in service dates for buildings found  by inventory, for some Navy buildings, the placed in service date  recorded in iNFADS was the date the building was found, rather than the  actual placed in service date.

According to previous guidance, if a placed in service date could not be  identified through the due diligence process, then the building was  recorded as placed in service as of the date it was found. The Navy’s  BMS process document for real property found by inventory, dated  October 25, 2016, stated each building found by inventory is to be  recorded with an estimated placed in service date determined using the  criteria provided in DOD’s February 2015 guidance. We were told that  until December 2016, any building found by inventory was recorded with  a placed in service date of the day the building was found.

The Navy’s use of the date the building was found by inventory as the  placed in service date can substantially affect the information in iNFADS.  For example, one of the buildings in our nongeneralizable sample was an  old, abandoned maintenance shed. However, based on the iNFADS  property record, the building appeared to be a relatively new building  based on the recorded placed in service date of August 16, 2016, the  date it was found by inventory (see fig. 3). As a result, the building is  recorded in iNFADS on August 16, 2016, the placed in service date and  therefore the accumulated depreciation would be less than a building with  an older placed in service date. The complete, timely, and accurate  recording of the placed in service date information enables ensures  reliable and accurate reporting of real property information in DOD’s  financial statements.

Navy officials are aware of the challenges discussed above and have  various efforts under way to address them. Effective implementation of  these efforts is crucial to help address these challenges.

The Navy’s inability to accurately account for real property assets,  specifically its buildings, continues to be a material weakness reported by  independent auditors. Inadequate procedures and internal control  deficiencies prevent the Navy from accurately recording and reporting its  buildings and knowing how many buildings it actually owns. Some  buildings recorded in the Navy’s accountable real property system,  iNFADS, do not exist. Similarly, the Navy does not have adequate  procedures and related controls to reasonably assure that all Non- MILCON buildings and capital improvements costing less than $750,000  are recorded in iNFADS. Additionally, the Navy erroneously reported  nonfunctional buildings as assets in its financial statements and excluded  certain buildings that met or exceeded DOD’s capitalization threshold as  assets in its financial statements. As a result of these deficiencies, the  Navy does not have adequate information to support reliable reporting of  real property in its annual financial statements, and DOD, Congress, and  others do not have reliable, useful, and timely information for decision  making.

We are making the following four recommendations to the Navy.

The Commander of NAVFAC should develop and implement  procedures and related control activities for real property disposed of  by demolition to provide reasonable assurance that the RPAOs timely  receive a signed demolition approval document and disposal form, so  that demolished buildings are recorded as disposals in iNFADS and  removed at the end of the fiscal year. (Recommendation 1)

The Commander of NAVFAC should finalize and implement written  procedures and related control activities to reasonably assure that all  buildings costing less than $750,000 and funded with Non-MILCON  funding are recorded in the Navy’s iNFADS and therefore included as  assets in the financial statements if they meet or exceed the Navy’s  capitalization threshold. (Recommendation 2)

The Commander of NAVFAC should develop and implement written  procedures and related control activities to reasonably assure that  buildings coded as nonfunctional in iNFADS are excluded for financial  statement reporting purposes. (Recommendation 3)

The Commander of NAVFAC should develop and implement written  procedures and related control activities related to DOD’s  capitalization thresholds and outline the specific information to be  accumulated from iNFADS to reasonably assure that real property  assets are properly reported for financial statement reporting  purposes. (Recommendation 4)

We provided a draft of this report to the Navy for comment. In its  comments, reproduced in appendix II, the Navy concurred with our four  recommendations.

We are sending copies of this report to the Secretary of Defense, the  Under Secretary of Defense (Comptroller)/Chief Financial Officer, the  Deputy Chief Financial Officer, the Office of the Assistant Secretary of  Defense (Energy, Installations, and Environment), the Assistant Secretary  of the Navy (Energy, Installations and Environment), the Assistant  Secretary of the Navy (Financial Management & Comptroller), the  Director of the Office of Management and Budget, and appropriate  congressional committees. In addition, the report is available at no charge  on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (404) 679-1873 or cordreyw@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 III.

Appendix I: Objectives, Scope, and Methodology

This engagement was initiated in connection with the statutory  requirement for GAO to audit the U.S. government’s consolidated  financial statements. The focus of this engagement was the United  States Navy’s (Navy) real property, specifically buildings, because the  Department of the Navy was the first military department to initially assert  real property audit readiness for existence and completeness. Our  objectives were to (1) determine the extent to which the Navy had internal  control deficiencies, if any, that may impair its ability to assert that its  buildings, as reported in its financial statements, exist and that the  information about the buildings is complete and adequately supported by  property records and (2) identify the challenges, if any, that the Navy  faces in valuing its buildings in accordance with federal accounting  standards.

To address our first objective, we interviewed Department of Defense  (DOD) and Navy officials and reviewed relevant documentation, including  the Naval Facilities Engineering Command’s (NAVFAC) Business  Management System (BMS) process documents, which are similar to  desktop procedures, to identify control activities over buildings. We  reviewed the results from prior real property audit readiness testing  conducted by a contractor that the Navy engaged to help it achieve audit  readiness for its real property. We performed data analyses of buildings  in the Navy’s accountable real property system, the internet Navy Facility  Assets Data Store (iNFADS) as of September 30, 2016. To assess the  reliability of data we used, we reviewed relevant Navy documentation,  interviewed knowledgeable officials, reviewed policies and procedures  regarding collecting and maintaining the data, performed data analyses to  look for logical inconsistencies, and traced a nongeneralizable sample of  buildings to supporting documents. We concluded that the data elements  we used from iNFADS were sufficiently reliable for the purposes of  selecting a nongeneralizable sample of buildings to test.

We selected the Norfolk and San Diego geographic areas for site visits  because of the numerous bases in each area and the proximity of 5  installations to one another in each of the areas. We analyzed data from  the iNFADS database as of September 30, 2016, to select buildings that  fit our selection criteria for our nongeneralizable sample of buildings for  book-to-floor testing from these two geographic areas. These selection  criteria included age of the buildings (both older and newer buildings);  square footage of the buildings, including small buildings (such as  sentry houses) and large buildings (such as training facilities and  barracks);  cost per square foot of the buildings, including lower cost (such as  warehouses) and higher cost (sentry houses with sophisticated  electronics); use of the buildings, to include a variety of uses (such as electrical  substations, training facilities, and offices); and operational status code of the buildings, including active and  nonfunctional.

We conducted site visits in Norfolk and San Diego to interview real  property accountable officers (RPAO), observe buildings, and review the  available supporting documents for the sample buildings. We tested 40  buildings book to floor by visiting these buildings at 10 Navy installations  across two geographic areas. During our site visits, we also selected a  nongeneralizable sample of a total of 39 buildings on Navy installations to  be tested floor to book—19 from 5 Norfolk and 20 from 5 San Diego  areas. We met with the RPAOs at each of the10 installations and tested  by observation whether the 40 buildings selected for book-to-floor testing  existed. In addition to testing for existence, we compared the descriptions  of the buildings in iNFADS with the buildings that we observed. For  example, if the placed in service date in iNFADS was recent, we would  observe whether it was a newer building. We selected a nongeneralizable  sample of buildings for floor-to-book testing based on proximity to the  buildings we had selected for book-to-floor testing. For the 39 buildings  that we tested floor to book, we reviewed available supporting  documents.

We also reviewed a Navy Office of Financial Operations white paper on  the risk and potential amount of material misstatement of accumulated  depreciation on the Navy’s general fund consolidated balance sheet.  This white paper presented the results of a statistical sample for which 15  selected real property assets were excluded from testing because the  assets no longer existed. Two social science specialists with expertise in  research design and statistics reviewed the methodology and sampling  used in this study and found them to be sufficient for the purposes of  estimating the proportion of Navy real property assets reported as  existing in iNFADS that did not exist as of May 31, 2017. We used the  sampling information in the study to create a confidence interval around  the estimate of the proportion of buildings at the 95 percent confidence  level.

To address our second objective, we reviewed federal accounting  standards, including Statement of Federal Financial Accounting Standard  (SFFAS) No. 50, and the Navy’s documents for recording assets into  iNFADS. We also interviewed agency officials responsible for financial reporting and real property management, including the RPAOs at the  installations we visited, to identify the challenges the Navy faces in  recording buildings at actual cost once the opening balances have been  established according to SFFAS No. 50.

While our audit objectives focused on certain control activities related to  (1) the existence and completeness of the Navy’s buildings as reported in  its financial statements and the completeness and adequacy of  supporting property records for those buildings and (2) the valuation of  the Navy’s buildings in accordance with federal accounting standards, we  did not evaluate all control activities and other components of internal  control. If we had done so, additional deficiencies may or may not have  been identified that could impair the effectiveness of the control activities  evaluated as part of this audit.

Appendix II: Comments from the Department of the Navy

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, the following individuals made  key contributions to this report: Paul Kinney (Assistant Director), Marcia  Carlsen, Dennis Clarke, Francine DelVecchio, Maxine Hattery, Jason  Kelly, Jared Minsk, Lisa Motley, Robert Sharpe, Sandra Silzer, and  Shana Wallace.