CFO Act Financial Audits: Navy Plant Property Accounting and Reporting Is
Unreliable (Letter Report, 07/08/96, GAO/AIMD-96-65).

In March 1996, GAO reported that the Navy's fiscal year 1994
consolidated financial reports on general fund operations--which
included $78 billion for the Navy's plant property--were substantially
inaccurate because of at least $225 billion in errors, including upwards
of $25.6 billion in errors involving the Navy's plant property account
balances. (See GAO/AIMD-96-7.) GAO made more than a dozen
recommendations to avoid the mistakes made in preparing the Navy's
fiscal years 1994 consolidated financial reports on general fund
operations. This report describes in greater detail the factors
contributing to inaccurate reporting of the Navy's plant property
account balance. The report also recommends additional measures to
ensure that the Navy has reliable information with which to effectively
manage and control the billions of dollars the government has invested
in Navy plant property.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-65
     TITLE:  CFO Act Financial Audits: Navy Plant Property Accounting 
             and Reporting Is Unreliable
      DATE:  07/08/96
   SUBJECT:  Financial statement audits
             Financial records
             Accounting errors
             Federal property management
             Real property
             Accounting procedures
             Data integrity
             Internal controls
             Chief financial officers
             Federal agency accounting systems
IDENTIFIER:  Defense Business Operations Fund
             
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Cover
================================================================ COVER


Report to the Under Secretary of Defense (Comptroller), the Assistant
Secretary of the Navy for Financial Management, and the Director of
the Defense Finance and Accounting Service

July 1996

CFO ACT FINANCIAL AUDITS - NAVY
PLANT PROPERTY ACCOUNTING AND
REPORTING IS UNRELIABLE

GAO/AIMD-96-65

CFO Act Financial Audits - Navy

(918842)


Abbreviations
=============================================================== ABBREV

  CFO - Chief Financial Officers
  DAO - Defense Accounting Office
  DBOF - Defense Business Operations Fund
  DFAS - Defense Finance and Accounting Service
  DOD - Department of Defense
  NAVFAC - Naval Facilities Engineering Command

Letter
=============================================================== LETTER


B-271580

July 8, 1996

The Honorable John J.  Hamre
The Under Secretary of Defense (Comptroller)

The Honorable Deborah P.  Christie
The Navy Assistant Secretary for
 Financial Management
 and Comptroller

Mr.  Richard F.  Keevey
Director, Defense Finance and
 Accounting Service

On March 27, 1996, we reported\1

on the results of our review of the reliability of the Navy's fiscal
year 1994 consolidated financial reports on general fund operations. 
These financial reports, submitted to the Department of the Treasury,
included $78 billion for the Navy's plant property, comprising (1)
land, structures, and facilities, (2) nonmilitary equipment at shore
activities, (3) nonmilitary equipment the Navy has paid for but not
yet received, and (4) incomplete capital improvements to existing
Navy-owned buildings.  The last two items are referred to by the Navy
as plant property work-in-progress. 

At that time, we advised you that these financial reports were
substantially inaccurate due to a minimum of $225 billion in errors
covering many different areas, including at least $25.6 billion in
errors involving the Navy's plant property account balance.  We also
made more than a dozen recommendations to avoid the mistakes made in
preparing the Navy's fiscal year 1994 consolidated financial reports
on general fund operations. 

This report describes in greater detail the areas contributing to
inaccurate financial reporting of the Navy's plant property account
balance.  It also recommends additional actions needed to further
help ensure that the Navy has reliable information to effectively
manage and adequately control the billions of dollars the government
has invested in the Navy's plant property. 


--------------------
\1 CFO Act Financial Audits:  Increased Attention Must Be Given to
Preparing Navy's Financial Reports (GAO/AIMD-96-7, March 27, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The credibility and usefulness of the Navy's plant property financial
information was greatly diminished by the following four weaknesses
that contribute to, and are generally caused by, the basic
deficiencies underlying the Navy's substantial financial reporting
problems we reported in March 1996.  First, in preparing the Navy
fiscal year 1994 financial reports on general fund operations, $24.6
billion of real property was counted twice. 

Second, the Navy had no assurance that all plant property from only
general fund activities was included in its fiscal year 1994
financial reports on general fund operations.  For example, these
reports excluded an indeterminable amount of plant property for as
many as 290 activities or more and improperly included $1.9 billion
in plant property that belonged to 21 Navy activities engaged in the
Defense Business Operations Fund (DBOF).\2 Neither the Navy nor the
Defense Finance and Accounting Service (DFAS) compared the activities
that had been included in the reports with the general fund
activities listed in the Navy Comptroller Manual (now entitled, the
Department of the Navy Financial Management Policy Manual).  This
fundamental control procedure would have detected the problems noted
above. 

Third, the $291 million reported as Navy plant property
work-in-progress was highly questionable.  For example, some Navy and
DFAS activities were not recording plant property work-in-progress
transactions as required.  Also, the plant property work-in-progress
account balances included millions of dollars in transactions that
the Navy had not promptly reviewed for transfer to plant property
on-hand accounts, as required by the Navy Comptroller Manual. 

Fourth, the Navy's logistics, custodial, and accounting records of
real property were often not reconciled on a timely basis, or in some
cases were never reconciled, which diminishes their usefulness for
both accurately reporting the account balance of this property and
controlling it.  In one instance, for over 20 years, the Navy's
financial reports overstated the real property account balance by
millions of dollars because plant property at a shipyard closed in
the 1970s had not been removed from the Navy's accounting records. 
Because this property was no longer carried in the Navy's logistic
records, a reconciliation between these records and the Navy's
accounting records would have identified this error. 


--------------------
\2 Navy DBOF activities include, for example, supply management,
naval shipyards, naval aviation depots, naval ordnance facilities,
public works centers, and research and development activities. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Several organizations are integrally involved in carrying out the
Navy's financial management and reporting, including:  (1) the Office
of the Navy's Assistant Secretary for Financial Management and
Comptroller, which has overall financial responsibility, (2) DFAS,
which reports to the Department of Defense (DOD) Comptroller and
provides accounting and disbursing services, and (3) Navy components,
which initiate and authorize financial transactions. 

To help strengthen financial management, the Chief Financial Officers
(CFO) Act of 1990 (Public Law 101-576) required that DOD prepare
financial statements for its trust funds, revolving funds, and
commercial activities, including those of the Navy.  In response to
experiences gained under the CFO Act, the Congress concluded that
agencywide financial statements contribute to cost-effective
improvements in government operations.  Accordingly, when the
Congress passed the Government Management Reform Act of 1994 (Public
Law 103-356), it expanded the CFO Act's requirement for audited
financial statements by requiring that all 24 CFO Act agencies,
including DOD, annually prepare and have audited agencywide financial
statements, beginning with those for fiscal year 1996. 

The Government Management Reform Act authorizes the Director of the
Office of Management and Budget to identify component organizations
of the 24 CFO Act agencies that will also be required to prepare
financial statements for their operations and have them audited. 
Consistent with the act's legislative history, the Office of
Management and Budget has indicated that it will identify the
military services as DOD components required to prepare financial
statements and have them audited.  Therefore, fiscal year 1996 is the
first year for which the Navy will be required to prepare servicewide
financial statements for its general funds. 


   SOME REAL PROPERTY WAS COUNTED
   TWICE
------------------------------------------------------------ Letter :3

At September 30, 1994, the Navy's reported real property account
balance was overstated by at least $24.6 billion because DFAS
personnel had erroneously double counted $23.9 billion of structures
and facilities and $700 million of land.  The DFAS, Cleveland Center,
personnel compiling these data did not realize that the Center had
received some of the same land and building accounting information
from two separate sources and had incorrectly included the
information from both of them in the consolidated financial reports. 

To help mitigate situations such as this, in September 1995, the DFAS
Director called for the DFAS center directors to take specific steps
to increase emphasis on basic internal controls.  In November 1995,
the DOD Comptroller clarified that DFAS and the Navy are both
required to perform quality control reviews of the financial reports
and statements.  We believe that full and effective implementation of
these directives could help to prevent future occurrences of double
counting, such as the one noted during our review.  For example, if
the Navy and DFAS had reviewed reported financial information in that
case, they would have found that real property was overstated. 


   INCLUSION OF ALL PLANT PROPERTY
   FROM ONLY GENERAL FUND
   ACTIVITIES WAS NOT ASSURED
------------------------------------------------------------ Letter :4

The Navy Comptroller Manual, which governs accounting and financial
policy for the Navy's plant property, classifies and lists Navy
activities as involving either general fund operations or DBOF
operations.  The Navy and DFAS, Cleveland Center, did not have
effective processes in place to ensure that all financial information
on plant property from only general fund activities was included in
the Navy's consolidated financial reports on general fund operations
or that plant property from DBOF operations was excluded. 

To compile consolidated financial reports on the Navy's general fund
operations, a basic control would be to ensure that the reported
figures include financial information received from all of the Navy
activities identified in the manual as involving general fund
operations.  However, neither the Navy nor DFAS, Cleveland Center,
used the listing as a control to help ensure the accuracy and
completeness of the Navy's fiscal year 1994 consolidated financial
reports on general fund operations. 

Although the Navy Comptroller Manual needs updating, as discussed
later, it was the best available information at the time of our
review and listed 1,226 general fund activities at September 30,
1994.  Our comparison of the list and the information used to compile
the Navy's fiscal year 1994 consolidated financial reports on general
fund operations showed that the reports (1) included $34.9 billion
for plant property at 936 activities that the manual listed as
general fund activities but (2) did not include an indeterminable
amount of plant property for the other 290 activities listed in the
manual. 

Also, the financial reports improperly included $1.9 billion in plant
property that belonged to 21 Navy activities engaged in DBOF
operations.  We identified these activities through discussions with
Navy and DBOF officials.  The activities had mistakenly reported to
DFAS that their plant property related to general fund operations,
and neither the Navy nor DFAS, Cleveland Center, detected the error. 

Navy activities engaged in general fund operations report their plant
property account balances to either the Defense Accounting Office
(DAO)-Norfolk or DAO-San Diego (DFAS now refers to the DAOs as
operating locations).  These DAOs compile the activity-level data and
submit it to DFAS, Cleveland Center, which prepares both financial
reports on the Navy's general fund operations and Navy DBOF financial
statements. 

The DAOs did not compare the listings of reporting activities with
those listed in the Navy Comptroller Manual when accumulating the
data.  Nor did DFAS, Cleveland Center, consult the listings when
consolidating the Navy's fiscal year 1994 financial reports on its
general fund operations.  Officials from both the Navy Comptroller's
office and DFAS, Cleveland Center, told us that they had not used the
listing when the fiscal year 1994 financial reports on the Navy's
general fund operations were prepared because the listing was
inaccurate and outdated. 

Our work verified that the listing was inaccurate and outdated.  We
found that the reported plant property account balance included $607
million related to 47 general fund activities that were not listed in
the manual.  Also, the reports included $739 million related to 57
activities that the manual indicated were no longer operating. 

Updating the manual is the joint responsibility of the Comptroller of
the Navy; DFAS, Cleveland Center; and the Naval Industrial Resources
Support Activity, which maintains and reports information on
government furnished property.  According to the Navy and DFAS,
because of downsizing and consolidating of activities, updating the
manual section on plant property reporting responsibilities was about
a year behind schedule. 

In March 1996, we recommended that the Navy and DFAS require
financial information to be reviewed thoroughly to determine its
reasonableness, accuracy, and completeness.  When implementing this
recommendation, an updated Navy Comptroller Manual listing of general
fund activities could be used to review the Navy's financial reports
for accuracy and completeness.  In concurring with the recommendation
to thoroughly review this financial information, the DOD Deputy Chief
Financial Officer said that the DOD Comptroller's November 1995
clarification of the finance and accounting roles and
responsibilities of DOD components and DFAS requires a review of
reported financial information.  Thus, both the Navy and DFAS are now
required to verify the accuracy and completeness of financial
reports.  Also, the September 1995 DFAS Director's guidance calls for
ensuring that component reports of property, equipment, and inventory
are promptly submitted and certified as to accuracy. 


   REPORTED PLANT PROPERTY
   WORK-IN-PROGRESS ACCOUNT
   BALANCE WAS NOT CREDIBLE
------------------------------------------------------------ Letter :5

The Navy's plant property account to control in-transit property and
incomplete capital improvements (plant property work-in-progress) had
a highly questionable $291 million balance.  We found that (1) some
Navy and DFAS activities were not properly recording plant property
work-in-progress transactions and (2) many Navy activities had
difficulty resolving millions of dollars of in-transit property
recorded in their plant property work-in-progress accounts. 
Consequently, these accounts were not useful in providing accurate
information to ensure the prompt receipt of in-transit property or
monitoring the completion of capital improvements, as intended. 

The plant property work-in-progress account is designed to
temporarily account for both nonmilitary equipment a Navy activity
has paid for but not yet received and incomplete capital improvements
to existing Navy-owned buildings.  The Navy Comptroller Manual
specifies that all plant property assets are to be recorded first in
a work-in-progress account, with the balance then transferred to a
plant property on-hand account within 2 months of in-transit property
being received or 6 months of capital improvements being completed. 

First, we found the following instances where the Navy and DFAS were
not properly recording plant property work-in-progress transactions
in accordance with the Navy Comptroller Manual's requirements. 

  -- The Naval Sea Systems Command and the Naval Air Systems Command
     miscoded disbursement transactions for nonmilitary equipment
     purchases by 75 Navy activities.  As a result, the disbursements
     for these assets were recorded as neither plant property
     work-in-progress nor nonmilitary equipment but erroneously as
     expenditures for consumable items. 

  -- The plant property accounting staff at the Naval Submarine Base
     in Bangor, Washington, stated they were unaware of the
     requirement to, and thus did not, record incomplete capital
     improvements to existing buildings in the plant property
     work-in-progress account.  As a result, for example, $290,000
     relating to 22 garages being added to on-base housing had not
     been recorded in the base's plant property work-in-progress
     account. 

  -- DAO-San Diego's computer system was not programmed to record
     construction on existing buildings to a Navy activity's plant
     property work-in-progress account.  Thus, its work-in-progress
     account balance did not accumulate the correct data for these
     assets. 

When situations such as these occur, the Navy's financial reports are
misstated.  Further, the failure to properly use plant property
work-in-progress accounts essentially circumvents an internal control
feature designed to help ensure that nonmilitary equipment in-transit
is received and to help monitor completion of capital improvement
projects. 

Second, our analysis of the $291 million plant property
work-in-progress reported on the Navy's fiscal year 1994 consolidated
financial reports on general fund operations showed that about 73
percent, or $211.2 million, was related to five Navy activities.  In
at least the following two cases, the September 30, 1994, reported
plant property work-in-progress account balances were questionable. 

  -- The Naval Intelligence Command reported over $84 million in
     plant property work-in-progress, which is (1) an increase of
     more than 2,000 percent from the prior year and (2) inconsistent
     with the $370,000 account balance it reported for nonmilitary
     equipment and the $0 balance reported for other real property. 

  -- The Naval Criminal Investigative Service reported over $30
     million in plant property work-in-progress, which is (1) an
     increase of more than 165 percent over the year before and (2)
     inconsistent with the Service's other reported plant
     property--about $400,000 in nonmilitary equipment. 

We discussed with officials of these activities the questionable
nature of the amounts recorded for these accounts, which could have
been identified by comparing year-to-year balances.  They confirmed
that these account balances were incorrect and said that the
activities were attempting to resolve them. 

Further, our visits at other Navy activities identified additional
instances where plant property work-in-progress accounts had grown
substantially and resolving the large outstanding balances was a
problem.  Examples include the following: 

  -- At the Fleet Combat Training Center-Atlantic, Virginia Beach,
     Virginia, the plant property work-in-progress account balance
     had been reported at about $29 million for 2 consecutive fiscal
     years ending with September 30, 1993, and had increased during
     the following 6 months to over $62 million.  A concerted effort
     by the Center's civil engineering staff reduced this amount, but
     at September 30, 1994, over $34 million remained in the account. 

  -- At the Tactical Training Group-Atlantic, Virginia Beach,
     Virginia, the plant property official said that resolving plant
     property work-in-progress was a problem.  For instance, a
     persistent effort by the Center from November 1991 to September
     1993, was necessary to fully resolve $3.5 million in
     transactions recorded in its plant property work-in-progress
     account as relating to land and buildings.  The group owns no
     land or buildings and less than $200,000 in nonmilitary
     equipment. 

Plant property officials at other Navy activities--including those at
the Naval Base in Norfolk, Virginia; the Naval Air Station in
Millington, Tennessee; and the U.S.  Naval Academy in Annapolis,
Maryland--pointed to several factors contributing to problems such as
these and making their resolution difficult. 

They told us, for example, that DAOs assign plant property
work-in-progress to Navy activities when payments are made for such
items.  Quarterly plant property reports to Navy activities from the
DAOs show amounts for all types of plant property, including
work-in-progress.  To identify items to be transferred to a plant
property on-hand account, the activities are to match these reports
with property received and construction completed.  However, the
detailed supporting records needed for this comparison, such as the
disbursing vouchers the DAOs prepare, are often not available at the
activity level. 

Also, they told us that large plant property work-in-progress account
balances can result from data coding errors made by DAO disbursing
personnel, causing in-transit property and incomplete construction to
be recorded in the wrong activity's property records.  These
officials and DFAS accounting personnel said that errors can go
undetected, and thus not be resolved, for years because, for
instance, (1) they require a significant amount of time to identify
and correct and are often given a low priority and (2) property
accounting clerks lack training on resolving outstanding
transactions. 


   REAL PROPERTY RECORDS DIFFERED
   AND WERE NOT RECONCILED
------------------------------------------------------------ Letter :6

The Navy and DFAS maintain separate logistical, custodial, and
accounting records for real property, which comprises more than a
reported $17 billion in land, structures, and facilities.  We found
that information is entered separately into each of these three
independently maintained sets of records.  They are often not
reconciled on a timely basis or, in some instances, never reconciled,
resulting in undetected and uncorrected errors and unreliable
financial information. 

The Naval Facilities Engineering Command (NAVFAC) maintains
logistical records of real property located at all Navy activities. 
Because the commanding officer of each Navy activity is accountable
for real property under his or her custody, each activity maintains
real property custodial records.  DFAS, through the DAOs, maintains
the Navy's official real property accounting records. 

The Navy Comptroller Manual requires Navy activities to quarterly
compare their real property custodial records with (1) official Navy
accounting records and (2) NAVFAC logistical records.  Any errors
identified through these reconciliations are to be investigated and
corrected. 

The Navy's consolidated financial reports on general fund operations
at September 30, 1994, included $17.2 billion as the account balance
for real property.  This information was prepared using the Navy's
official accounting records, which included the real property for 371
Navy activities.  However, as of the same date, NAVFAC's logistical
records included information on 406 general fund activities reporting
$17.7 billion of real property. 

To determine the reasons for this difference, we reviewed the real
property records at 10 activities that, for fiscal year 1994, had a
total difference of $203 million between DFAS records and NAVFAC
records.  The following illustrates the types of errors identified at
these activities. 

  -- After the Boston Naval Shipyard was closed in the 1970s, NAVFAC
     removed the balance of the shipyard's real property accounts. 
     However, DAO-Norfolk officials said they had not been notified
     of the shipyard's closing; thus, they had not removed the
     shipyard's $52 million in real property from DAO records. 

  -- According to NAVFAC records, the Naval Training Center in
     Bainbridge, Maryland, had $37 million in land and buildings
     on-hand but under sales contract.  However, Navy officials told
     us that this real property was excluded from the Navy's fiscal
     year 1994 financial reports because, before the sales contract
     was executed, DAO-Norfolk erroneously removed the activity from
     the list of reporting activities.  Conversely, NAVFAC's records
     included $18.9 million for Bainbridge Training Center buildings
     that had been demolished.  DAO and NAVFAC records were corrected
     when we advised officials of these errors. 

  -- At DAO-Great Lakes, where the Navy's real property accounting
     records differed from NAVFAC logistic records by $124 million at
     September 30, 1994, plant property accounting staff did not
     demonstrate a basic understanding of Navy and DFAS plant
     property accounting and reconciliation procedures.  In one case,
     for example, the DFAS staff said that a Navy activity did not
     tell them a difference existed.  In another instance, we were
     told that a DFAS supervisor could not find property records to
     support an activity's reported plant property.  Rather than
     contact the activity, the staff stopped reporting the property. 

Problems such as these are long-standing.  In 1989, we recommended\3
that the Navy's financial records and NAVFAC's central inventory of
real property be reconciled to identify errors and help ensure
accuracy.  The Naval Audit Service has consistently reported similar
problems in its audits of Navy DBOF financial statements under the
CFO Act.  For example, these audits found that the failure to
reconcile Navy DBOF records and NAVFAC records resulted in a $134
million understatement of real property in Navy DBOF fiscal year 1992
financial statements.  Differences were found between these records
in fiscal years 1991 and 1994 as well. 

Most recently, in March 1996, we recommended that the Navy and DFAS
place a high priority on implementing basic required financial
controls, including reconciliations of accounts and records.  The DOD
Deputy Chief Financial Officer agreed with our recommendation and
said that the DOD Comptroller's November 1995 guidance specifies the
roles and responsibilities of DFAS and its customers with respect to
reconciliations and resolution of discrepancies.  Additionally, the
September 1995 DFAS Director's guidance addresses DFAS's
responsibility for performing reconciliations of account balances. 


--------------------
\3 Financial Reporting:  Navy's 1986 Consolidated Report on Financial
Position Is Unreliable (GAO/AFMD-89-18, April 6, 1989). 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

The Navy's fiscal year 1994 accounting and reporting for plant
property were highly unreliable.  Accurately reporting the Navy's
plant property account balance is especially important to help ensure
the reliability of the consolidated financial statements DOD is
statutorily required to prepare, beginning with those for fiscal year
1996. 

The recommendations we made in March 1996 were directed at avoiding
the mistakes made in preparing the Navy's fiscal year 1994
consolidated financial reports and overarch many of the basic control
weaknesses discussed in this report.  These weaknesses underscore the
need for the Navy and DFAS to fully and effectively implement the
improvements that we recommended and that are required by the DOD
Comptroller's and the DFAS Director's recent guidance.  Additional
specific actions are also necessary to improve plant property
accounting and reporting. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

We recommend that the Navy Assistant Secretary for Financial
Management and Comptroller and the DFAS Director require that

  -- by September 30, 1996, the Navy Comptroller Manual provision
     that lists the Navy's activities engaged in general fund
     operations and DBOF operations be updated and accurately
     maintained;

  -- the Navy and DFAS, Cleveland Center, use this listing as one
     analytical procedure to help ensure that the plant property
     account balances reported in the Navy's financial reports are
     complete and include information from only general fund
     activities;

  -- Navy activities and DFAS routinely monitor plant property
     work-in-progress accounts and promptly review and resolve large
     balances;

  -- Navy activities promptly request, and DFAS expeditiously
     provide, information to assist in transferring plant property
     work-in-progress items to on-hand accounts and in correcting
     errors; and

  -- Navy activities and DFAS personnel be trained to identify and
     resolve work-in-progress and other plant property problems. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

In written comments on a draft of this report, DOD generally
concurred with our findings and recommendations.  DOD said that
groups have been established to identify and resolve issues involving
the consistency of report information and establish and monitor a
plan of action and milestones for improving property reporting and
accounting.  Also, DOD said that DFAS, Cleveland, has begun a
training program for the plant property staff at various DAOs. 

DOD concurred with each of our recommendations and cited several
planned corrective measures.  For example, DOD said that improvements
will be made to

  -- accurately maintain and periodically update information on all
     Navy activities that own plant property;

  -- develop a checklist to identify Navy and Marine Corps activities
     engaged in general fund operations, which will be used to help
     ensure that Navy reports provided to DFAS, Cleveland, are
     complete and include the appropriate general fund reporting
     activities;

  -- reiterate to all DFAS and Navy activities the policy on clearing
     work-in-progress accounts and ensure that work-in-progress
     information is promptly reconciled and recorded in DFAS
     financial records; and

  -- train plant property personnel, which has already begun at
     several DFAS locations. 

DOD concurred with two of our four findings.  DOD partially concurred
with two of the findings because it said that references were unclear
for two figures cited in our draft report:  (1) the 1,226 general
fund activities shown in the Navy Comptroller Manual at the time of
our review and (2) the $291 million plant property work-in-progress
account balance.  We provided a DFAS, Cleveland, representative with
specific references in the Navy Comptroller Manual and the Navy's
consolidated financial statements for fiscal year 1994 that we used
as sources for these data. 

Also regarding our findings, DOD said that DFAS is emphasizing the
need for internal and quality controls, such as identifying Navy and
Marine Corps activities engaged in general fund operations.  DOD also
said that it is the goal of DFAS, the Navy, and the Marine Corps to
develop and implement automated and integrated system interfaces for
tracking work-in-progress accounts.  Further, DOD said that the Navy
recognizes that it should have removed property it no longer
maintained from Navy records but had failed to do so. 

DOD said that most of its planned corrective actions will be
accomplished within the next year and that many are planned to be
completed by September 30, 1996.  We believe that DOD's planned
actions will fulfill the intent of our recommendations.  Adhering to
the projected completion schedule will help to improve the accuracy
and completeness of the Navy's financial statements for general fund
operations for fiscal year 1996 and subsequent fiscal years. 

The full text of DOD's comments is provided in appendix II. 


---------------------------------------------------------- Letter :9.1

Our work was done as part of a broad-based review of various aspects
of the Navy's financial management operations between August 1993 and
February 1996 and was conducted in accordance with generally accepted
government auditing standards.  Our scope and methodology are
discussed in appendix I and the locations where we conducted audit
work are listed in appendix III. 

We are sending copies of this report to the Chairmen and the Ranking
Minority Members of the Senate Committee on Governmental Affairs and
the House Committee on Government Reform and Oversight, as well as
its Subcommittee on Government Management, Information, and
Technology.  We are also sending copies to the Secretary of Defense,
the Secretary of the Treasury, and the Director of the Office of
Management and Budget.  We will make copies available to others upon
request. 

If you or your staffs have any questions, please contact me at (202)
512-9095.  Major contributors to this report are listed in appendix
IV. 

Lisa G.  Jacobson
Director, Defense Financial Audits


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To gain an understanding of the systems and procedures used to
account for and report on plant property, we reviewed applicable Navy
Comptroller guidance, DOD and DFAS regulations, and instructions
promulgated by Navy commands and activities.  Also, we interviewed
cognizant Navy, DFAS, and Treasury officials and discussed plant
property management and reporting with cognizant Navy shore activity
officials. 

To evaluate the DFAS, Cleveland Center's, process for compiling the
Navy's plant property account balance, we obtained and analyzed the
detailed schedules for the fiscal years 1993 and 1994 Navy plant
property account balance reported by DFAS, Cleveland Center, and its
DAOs.  Specifically, we

  -- compared the number of Navy activities reporting general fund
     plant property to those listed in the Navy Comptroller Manual,
     volume 2, chapter 5;

  -- compared the account balance of each reporting activity for the
     2 fiscal years to identify trends or fluctuations; and

  -- traced the reported account balance to the supporting
     documentation from the DAOs. 

We visited NAVFAC, Alexandria, Virginia, its Facilities Support
Office in Port Hueneme, California, and its Southwest Engineering
Field Division, San Diego, California, to examine how NAVFAC's
central real property database (the Navy Facility Assets Data Base)
works and interfaces with Navy activities and DAOs for reporting on
land, facilities, and structures.  We also visited the Naval
Industrial Resources Support Activity in Philadelphia, Pennsylvania,
to determine what property it reported to DFAS, Cleveland Center, for
inclusion in the Navy's financial reports. 

To analyze the amounts reported by Navy for plant property
work-in-progress, we obtained the plant property amounts reported for
each activity by class--land, buildings, nonmilitary equipment, and
work-in-progress.  We contacted seven of the activities whose plant
property work-in-progress amount appeared to be incorrect when
compared with its other reported plant property amounts.  At the
activities we visited (see appendix III), we examined property
accounting procedures and compliance with Navy Comptroller
requirements, such as accounting for work-in-progress,
reconciliations, and physical inventories. 

To compare and analyze the account balances and reporting activities
among different sources of data that should agree, we obtained the
consolidated financial report on general fund operations on real
property as reported to DFAS, Cleveland Center, and compared it to
NAVFAC's real property logistics records. 

For September 30, 1993 and 1994, we compared the detail of the
reported account balances of land and facilities provided by DFAS,
Cleveland Center, with those in NAVFAC's records to determine if they
agreed.  We did not verify the accuracy of the information in
NAVFAC's database because, at the time of our work, the Naval Audit
Service was reviewing the reasonableness of the database for
estimating costs and savings resulting from base closure and
realignment recommendations.  In a February 1995 report, The Navy's
Implementation of The 1995 Base Closure and Realignment Process, the
Service said that the NAVFAC database was a reasonably accurate
source of information for that purpose. 

We requested comments on a draft of this report from the Secretary of
Defense or his designee.  The DOD Deputy Chief Financial Officer
provided us with written comments, which are discussed in the "Agency
Comments and Our Evaluation" section and reprinted in appendix II. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following is GAO's comment on the Department of Defense letter
dated June 14, 1996. 

GAO COMMENT

1.  A representative of DFAS, Cleveland, contacted us regarding this
figure and, on May 16, 1996, we provided additional information as to
its source.  DFAS, Cleveland, did not indicate that further
clarification was necessary. 


LOCATIONS WHERE AUDIT WORK WAS
CONDUCTED
========================================================= Appendix III

DEPARTMENT OF THE NAVY ACTIVITIES

AEGIS Training Center, Dahlgren, Virginia

Facilities Support Office, Port Hueneme, California

Fleet Combat Training Center-Atlantic, Dam Neck, Virginia Beach,
Virginia

Naval Air Maintenance Training Group, Millington, Tennessee

Naval Air Station, Norfolk, Virginia

Naval Air Station, Millington, Tennessee

Naval Air Station-Oceana, Virginia Beach, Virginia

Naval Air Technical Training Center, Millington, Tennessee

Naval Amphibious Base-Little Creek, Norfolk, Virginia

Naval Base, Norfolk, Virginia

Naval Computer and Telecommunications Area Master Station-Atlantic,
Norfolk, Virginia

Naval Computer and Telecommunications Area Master Station-Atlantic
Detachment, Key West, Florida

Navy Experimental Diving Unit, Panama City, Florida

Naval Facilities Engineering Command, Alexandria, Virginia

Naval Facilities Engineering Command-Southwest Engineering Field
Division, San Diego, California

Naval Industrial Resources Support Activity, Philadelphia,
Pennsylvania

Naval Space Command, Dahlgren, Virginia

Naval Submarine Base-Bangor, Silverdale, Washington

Tactical Training Group-Atlantic, Dam Neck, Virginia Beach, Virginia

Trident Refit Facility-Bangor, Silverdale, Washington

United States Naval Academy, Annapolis, Maryland

DEFENSE FINANCE AND ACCOUNTING
SERVICE ACTIVITIES

Defense Finance and Accounting Service-Cleveland Center, Cleveland,
Ohio

Defense Accounting Office, Norfolk, Virginia

Defense Accounting Office, Port Hueneme, California

Defense Accounting Office, San Diego, California

Defense Accounting Office, Arlington, Virginia

Defense Accounting Office, Pensacola, Florida


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Alan A.  Steiner
Patricia A.  Summers

ATLANTA REGIONAL OFFICE

Linda P.  Garrison

NORFOLK REGIONAL OFFICE

Ruth M.  Winchester

SEATTLE REGIONAL OFFICE

Pat L.  Seaton
Catherine W.  Arnold
Julianne Hartman Cutts
Karlin I.  Richardson
Patricia J.  Rennie

*** End of document. ***