FAA Financial Management: Further Actions Needed to Achieve Asset
Accountability (Letter Report, 07/30/1999, GAO/AIMD-99-212).
GAO has included the Federal Aviation Administration (FAA) on its 1999
list of government programs at high risk for waste, fraud, abuse, and
mismanagement. Long-standing accounting and financial reporting
weaknesses have undermined FAA's ability to manage its operations and
have limited the reliability of financial information sent to Congress.
These weaknesses include an inability to determine the accuracy of
certain amounts reported in FAA's financial statements for fiscal year
1998, including nearly $12 billion in major assets and $9 billion in
program costs. This report assesses FAA's property, plant, and equipment
and inventory asset accountability problems, which were major reasons
for including FAA financial management on GAO's high-risk list. GAO
discusses (1) the key issues FAA must resolve to achieve accountability
over its property, plant, and equipment inventory and (2) whether FAA is
taking appropriate actions to resolve these issues promptly.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-99-212
TITLE: FAA Financial Management: Further Actions Needed to
Achieve Asset Accountability
DATE: 07/30/1999
SUBJECT: Federal agency accounting systems
Cost control
Information resources management
Accounting procedures
Spare parts
Strategic planning
Inventory control systems
Internal controls
Accountability
IDENTIFIER: FAA Air Traffic Control Modernization Program
FAA Capital Investment Plan
FAA Audit Correction Program
FAA Clean Audit Program Process Improvement Plan
DOT Departmental Accounting and Financial Information
System
FAA National Airspace System Plan
FAA Field Spares Inventory System
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United States General Accounting Office GAO Report
to the Chairman, Committee on the Budget, House of Representatives
July 1999 FAA FINANCIAL MANAGEMENT Further Actions Needed
to Achieve Asset Accountability GAO/AIMD-99-212 United States
General Accounting Office
Accounting and Information Washington, D.C. 20548
Management Division B-282977
Letter July 30, 1999 The Honorable John R. Kasich Chairman,
Committee on the Budget House of Representatives Dear Mr.
Chairman: In January 1999, we designated the Federal Aviation
Administration's (FAA) financial management as a high-risk area
because of serious and long-standing accounting and financial
reporting weaknesses. These weaknesses render FAA vulnerable to
waste, fraud, and abuse; undermine its ability to manage
operations; and limit the reliability of financial information
provided to the Congress. These weaknesses included an inability
to determine the accuracy of certain amounts reported in FAA's
fiscal year 1998 financial statements, including $11.9 billion in
major assets and $9 billion of program costs. This letter responds
to your request that we provide an assessment of FAA's property,
plant and equipment (PP&E) and inventory asset accountability
problems, which were major factors in our designation of FAA
financial management as a high-risk area. Specifically, you asked
us to determine (1) the key issues FAA must resolve in order to
achieve accountability over its PP&E and inventory and (2) whether
FAA is taking appropriate actions to resolve these issues in a
timely manner. Results in Brief FAA's lack of
accountability for PP&E and inventory generally stems from * an
historical lack of attention to basic recordkeeping, * the
continuing use of outdated systems that were not designed for
financial management, and * poor systems of internal controls to
prevent and detect errors in accounting for these assets. In order
to address these issues for PP&E, FAA needs to determine what
assets it has and then reconstruct its records to establish an
historical cost baseline for those assets. Next it needs to
establish adequate systems and controls to account for the assets
on an ongoing basis. Letter Page 1
GAO/AIMD-99-212 FAA Financial Management B-282977 With regard to
inventory, FAA has made improvements in its Logistics Center
(warehouse) inventory accounting, but still needs to strengthen
its procedures and controls. It has made less progress with its
field spares (spare parts) inventory. An accurate baseline of
inventory quantities and costs needs to be established for field
spares, and new procedures and controls implemented in order to
maintain accountability on an on-going basis. FAA has taken
several actions that are likely to lead to or already have
resulted in improved accountability. However, as discussed below,
major issues remain unresolved. During fiscal year 1999, FAA
undertook an extensive effort to identify and record the baseline
cost of unrecorded PP&E assets and to adjust its detailed records.
This effort is still in process. Also, in fiscal year 1999, FAA
began to comprehensively address its systems needs; however, it
does not expect full implementation of these new systems until
2001. Without systems capable of maintaining PP&E accountability
on an ongoing basis, accounting for the acquisition of these
assets will continue to require costly, time-consuming manual
processes. Because these manual processes are inherently prone to
error, strong internal controls are needed to ensure accurate
accounting. While some improvements have been made, FAA has not
implemented such a system of controls. The accuracy of FAA's
reported PP&E assets will remain uncertain until FAA establishes
baseline costs for previously acquired PP&E and establishes
effective systems and controls to properly account for ongoing
PP&E activity. As of September 30, 1997, FAA had completed a
comprehensive physical inventory of its Logistics Center's
operating materials and supplies, and established a baseline of
the inventory quantities. In addition, as of September 30, 1998,
we had assessed the system used to track Logistics Center
inventory quantities on an ongoing basis and determined that it
was generally reliable. A 1998 test of inventory quantities
confirmed the results of this assessment. However, an accurate
baseline of FAA's field spares inventory has not been established
through a comprehensive physical count that has been verified by
independent audit testing. Although procedures to improve
accountability for field spares inventory have been established,
they have not been fully implemented. Until an accurate
comprehensive physical inventory of field spares is taken and
verified and effective inventory Letter Page 2
GAO/AIMD-99-212 FAA Financial Management B-282977 accountability
procedures and controls are implemented, the reliability of FAA's
field spares inventory quantities will be uncertain. Overall,
FAA's lack of management and accountability over physical assets
means that these assets continue to be exposed to waste, fraud,
abuse, and mismanagement. It also means that the Congress has no
assurance that it has accurate financial management information to
help make informed decisions about future funding and oversight of
FAA activities. The lack of accountability is of particular
concern in light of the billions of dollars of taxpayer funds
being spent to acquire assets in connection with the $42 billion
air traffic control (ATC) modernization program. We make several
recommendations regarding FAA's need to * establish accountability
for billions of dollars expended for PP&E in the past and
institute upgraded systems, procedures, and controls to ensure
that accountability is maintained on an ongoing basis and *
complete improvements over its inventory accountability,
particularly those related to field spares. FAA officials
generally concurred with our findings and conclusions. They did
not concur with two of our seven recommendations. As discussed in
the "Agency Comments and Our Evaluation" section of this report,
we believe that our recommendations are valid. Background FAA's
primary mission is to promote safe, orderly, and efficient air
travel throughout the United States. Among other activities, FAA
is responsible for the operation of the nation's air traffic
control system. To fulfill its mission, FAA depends on the
adequacy and reliability of the ATC system, a vast network of
computer hardware, software, and communications equipment and
related inventory. Sustained growth in air traffic and aging
equipment has strained the ATC system, limiting the efficiency of
ATC operations. To combat these trends, in 1981 FAA embarked on
its multibillion-dollar, mission-critical Capital Investment Plan
(CIP) aimed at modernizing its aging ATC infrastructure. FAA's
modernization program currently consists of over 200 separate
projects estimated to cost over $42 billion during the 23-year
period through fiscal year 2004. It includes acquisition of new
radar and Page 3 GAO/AIMD-99-212
FAA Financial Management B-282977 automated data processing,
navigation, and communications equipment as well as computer
software, facilities, and support equipment.1 During fiscal years
1982 through 1998, FAA reported that it had obligated
approximately $26 billion on its ATC modernization programs. As
of September 30, 1998, the agency had reported less than $12
billion in gross PP&E in its fiscal year 1998 financial
statements, including $7.4 billion of property and equipment (such
as land, buildings, and air traffic control equipment) and $4.5
billion of work-in-process (which consists of facilities and
equipment acquired but not commissioned). While some of these
costs were appropriately expensed, OIG audits have shown that a
significant amount of costs was improperly excluded from the PP&E
asset total reported by FAA. In addition, $820 million of spare
parts inventory was reported in the financial statements. The
modernization costs that have gone towards the acquisition of
significant amounts of PP&E and spare parts inventory are to be
recorded as assets because of the long-term benefits they are
expected to provide. FAA is accountable for these assets from the
time they are acquired until their ultimate disposition. It is
important to keep adequate records of assets that are acquired for
two primary reasons. First, detailed asset records are necessary
to help provide for their physical accountability. Second, the
cost of these assets is charged to operating expenses over the
time that they provide services- -PP&E through depreciation after
it is placed in service and inventory when it is consumed.2 The
matching of costs to the time periods when services are actually
provided is an important part of measuring the cost of operations
on an ongoing basis. For example, costs incurred this year for a
new radar system that will be in use for 10 years should not be
charged to a current year expense account. That would distort
current year information about the cost of FAA operations.
Rather, the cost should be charged to an asset account and, when
the asset is placed in service, its cost would then be spread over
the future periods that it provides service benefits. Conversely,
costs incurred in the current year that only have a benefit to the
current year should be charged to a current year expense account.
For example, administrative salary costs are charged to operating
expense when incurred. 1See Air Traffic Control: Status of FAA's
Modernization Program (GAO/RCED-99-25, December 3, 1998) for
details about the program and its status. 2Depreciation is the
process used to spread the cost of PP&E over the time that the
asset services are provided. Page 4
GAO/AIMD-99-212 FAA Financial Management B-282977 Proper asset
accountability requires that detailed records of the full cost of
assets acquired be maintained, and that these assets be properly
reported in the agencies' financial management records and
financial reports.3 The full cost of assets includes all direct
and indirect costs required to acquire the asset and to place it
in service. In the case of FAA, the full cost of many projects
includes such direct costs as contractor hardware and software,
installation costs, FAA direct labor costs, as well as FAA
indirect labor and related overhead. Since many FAA expenditures
for modernization project assets are incurred before the assets
are placed in service, these costs should be "captured" in
temporary accounts, called "work-in-process" (WIP) accounts. When
assets are placed in service, a process that FAA calls
"commissioning," the related costs should be removed from the WIP
accounts and placed either in a PP&E account (such as personal
property), or in an inventory account. The flow of costs in such
circumstances is depicted in figure 1. Figure 1: Flow of Project
Costs Assets placed Expense Costs incurred
Costs accumulated in service
accounts PP&E Depreciation Contract costs
detailed records expense For asset Work in
When FAA labor acquisition processa
commissioned FAA overhead
Inventory Other costs
Inventory detailed records consumed Not for
Operating asset acquisition
expense aSome acquired assets that are immediately placed in
service do not need to flow through WIP. 3These requirements
permit assets that have a cost below a defined materiality
threshold to be charged to expense accounts and not be recorded as
an asset. This reduces the costs of recordkeeping. Page 5
GAO/AIMD-99-212 FAA Financial Management B-282977 Objectives,
Scope, and Our objectives were to determine (1) the key issues
FAA must resolve in Methodology order to
achieve accountability over its PP&E and inventory and (2) whether
FAA is taking appropriate actions to resolve these issues in a
timely manner. To fulfill our objectives, we interviewed relevant
FAA staff and reviewed and analyzed FAA reports and records
concerning PP&E and inventory. We attended monthly meetings to
monitor the status of FAA's efforts to correct identified PP&E
financial management deficiencies. We also obtained and reviewed
information from the FAA Office of the Chief Financial Officer
(OCFO) about the current status of corrective actions on PP&E and
inventory. We reviewed OIG program reports on PP&E and inventory,
as well as financial statement audit reports for fiscal years 1992
through 1998. We also reviewed selected OIG workpapers related to
the fiscal year 1998 audit, including the results of various test
counts. In order to help facilitate the fiscal year 1998 FAA
financial statement audit, we conducted, with OIG assistance, an
audit of inventory quantities at the Logistics Center in Oklahoma
City, Oklahoma. To accomplish this, we selected a statistical
sample of items recorded in the inventory database and performed
test counts at the Logistics Center.4 However, we did not
address valuation of inventory. We also visited FAA field sites
in connection with the OIG's audit work for PP&E and inventory to
better understand the OIG's audit procedures and their results. We
conducted our work primarily in Washington, D.C., and at the OIG
office in Baltimore, Maryland, and also obtained information
through field visits to Chicago, Atlanta, New York, Atlantic City,
and Oklahoma City. We performed our work from July 1998 through
June 1999 in accordance with generally accepted government
auditing standards. We requested comments on a draft of this
report from the Secretary of Transportation, or his designee. On
July 6, 1999, FAA officials provided us with oral comments, which
are summarized in the "Agency Comments and Our Evaluation" section
of this report. 4Physical counts and evaluation of count results
of inventory and related assets were performed from August 1998
through January 1999 at FAA's Mike Monroney Aeronautical Center in
Oklahoma City, Oklahoma. Page 6
GAO/AIMD-99-212 FAA Financial Management B-282977 FAA Lacks
Starting with the first audit of FAA's financial statements for
fiscal year Accountability for 1992 and continuing through
the fiscal year 1998 audit, the OIG has reported that FAA has not
been able to provide the basic records necessary Billions of
Dollars to demonstrate accountability for assets totaling
billions of dollars that it Invested in PP&E has acquired.5
During these audits, the OIG found that FAA had improperly charged
billions of dollars of capitalizable costs to expense accounts
instead of to asset accounts. Under the system that FAA had in
place, this meant that there were no detailed records of these
assets, which resulted in incomplete asset accountability. In
many cases, FAA was also unable to provide the OIG supporting
documents necessary to verify the valuation of assets that were
recorded.6 Finally, the OIG reported that FAA continued to
include assets that had been placed in service as work-in-process.
From a financial accounting and reporting perspective, these
problems in aggregate would have understated assets on the balance
sheet and overstated expenses, thus distorting FAA's reported
operating results. Early in fiscal year 1999, FAA started an
extensive effort to reconstruct the detailed records necessary to
support prior PP&E costs that should have been reported as assets
on its financial statements. With a significant effort and
commitment of resources, real progress has been made for the first
time. However, FAA lacks the necessary systems, procedures, and
controls to properly account for the full cost of additional
assets as they are acquired on an ongoing basis. FAA began to
comprehensively address its systems needs in early 1999; however,
complete systems improvements are not expected until 2001. Thus,
absent strong controls over manual efforts to maintain these
records on a current basis, these PP&E accountability deficiencies
limit FAA's ability to prepare reliable, auditable financial
statements; expose it to waste, fraud, and abuse; and may prevent
it from being able to accurately determine the cost of its
operations. 5The OIG undertook audits of FAA's financial
statements starting in 1992. As required by the Chief Financial
Officers Act of 1990, the initial financial statements audited by
the OIG were limited to certain trust and revolving funds. In
subsequent years, as the financial activities subject to audit
became more comprehensive, the scope of the OIG's audits
increased. By 1994, the financial statements subject to audit
covered all FAA's activities. 6According to FAA officials, in the
past the Department of Transportation did not have a centralized
policy for retaining asset documentation. In December 1998, FAA
established a policy to retain asset documentation as long as the
asset is in service. Page 7
GAO/AIMD-99-212 FAA Financial Management B-282977 Basic
Accountability The OIG has reported that billions of
dollars of FAA's modernization Records for PP&E Costs program
capital costs have been improperly charged to expense accounts
Have Not Been Maintained instead of being recorded as assets
and that FAA's historical records necessary to support and permit
the verification of PP&E balances have been incomplete and
inaccurate. Some examples of these problems follow: * In its
report on FAA's fiscal year 1998 financial statements, the OIG
stated that FAA's personal property reported at $4.1 billion was
understated by at least $1 billion due to FAA's long-standing
practice of expensing rather than capitalizing material portions
of major equipment systems. For example, voice switching control
systems installed at 23 locations were recorded at a total cost of
$234 million, instead of the actual cost of $1.1 billion. * During
its test of FAA's fiscal year 1998 work-in-process account
reported at $2.1 billion, the OIG stated that it was unable to
trace recorded amounts to invoices or other supporting
documentation on 34 percent of the 185 projects selected for
testing because it was unable to obtain transaction summaries for
those projects. Transaction summaries provide the link between
amounts recorded in FAA's records and underlying supporting
documentation. For example, FAA recorded costs of $1.2 million
for a flight service station during fiscal year 1998, but could
only provide transaction summaries for costs of $123,000, leaving
$1.1 million unsupported. * During its test of FAA's fiscal year
1998 real property reported at $2.5 billion, the OIG tested a
sample of 117 items with a recorded value of $790 million and
determined that the cost for 34 of the sample items, recorded at
$141 million, could not be supported. For example, for a power
system installed in 1992, FAA was able to provide contracts,
purchase orders, payment records, and other support for only $3.6
million of the recorded $20 million cost. * During its fiscal year
1998 test of real property, the OIG concluded that four items
valued at $50 million should be removed from the property records
because they no longer existed. For example, the property records
continued to include a building recorded at $1 million that had
been demolished over 10 years earlier. In addition to these
weaknesses, FAA does not move project costs from its work-in-
process account to appropriate asset accounts in a timely manner.
The OIG identified and reported that costs were not being
transferred from the WIP account to other appropriate accounts in
its report on FAA's fiscal year 1993 financial statements. In its
report on FAA's fiscal year 1998 financial statements, the OIG
reported that FAA had estimated that Page 8
GAO/AIMD-99-212 FAA Financial Management B-282977 approximately
$1.3 billion in completed projects were improperly retained in the
WIP account rather than being transferred to the appropriate real
or personal property accounts. For example, FAA completed
construction of an air navigation facility in 1995 at a cost of
$746,000. As of December 31, 1998, the facility remained in the
WIP account. In addition, since these assets were not moved to
the appropriate accounts, depreciation expense was not calculated.
The OIG estimated that unrecorded depreciation expense related to
these projects amounted to at least $62 million. FAA's lack of
basic accountability over PP&E is the result of numerous factors,
including the lack of financial accounting oriented systems,
inadequate or outdated policies and procedures, inconsistent
implementation of existing policies and procedures, and the low
priority placed on maintaining adequate records. The lack of
accurate PP&E information: * Limits FAA's ability to accurately
determine its costs, an essential requirement if FAA moves to
funding its operations through the use of cost-based user fees.
For example, when PP&E costs are improperly charged to expense
accounts, operating costs for that year and future years are
distorted. * Impedes proper management of these assets and gives
rise to possible operational inefficiencies. For example, the
ability to plan for long-range facilities needs may be impaired. *
May impair the ability of managers to provide appropriate
stewardship over FAA assets. For example, asset theft could go
undetected and funds could be spent unnecessarily to acquire
equipment that is already on hand. * Impairs FAA's ability to
properly maintain these assets, including estimating future
maintenance and deferred maintenance funding needs. FAA Lacks
Systems and While FAA is making a concerted effort to
properly account for prior PP&E Controls to Account for costs,
existing FAA systems and controls are not adequate to account for
PP&E on an Ongoing Basis PP&E in an efficient and effective
manner on an ongoing basis. As a result, FAA faces the prospect
of a continuing need to manually adjust its records for ongoing
costs until its systems and controls are upgraded to account for
PP&E automatically. Among other capabilities, effective and
efficient PP&E systems provide an automated means to capture the
full cost of PP&E when incurred, transfer data among integrated
systems components Page 9 GAO/AIMD-
99-212 FAA Financial Management B-282977 with minimal manual
processes, record complete PP&E information, and calculate
depreciation. FAA's current systems and controls do not meet
these needs in a number of respects. FAA's practices and
identified weaknesses in those practices are depicted in figure 2.
Figure 2: Weaknesses in FAA's PP&E Systems Systems placed Costs
incurred Costs recorded
in service PP&E costs improperly expensed Expenses identified
Expenses Contract costs DAFISa
PP&E Cost FAA labor
Records flows FAA overhead WIP Module
Other costs Weak- * Full costs not captured * WIP
lacks adequate * Manual processes *
Includes PP&E nesses * Some PP&E expensed detail
required to sort out costs improperly * WIP includes
some PP&E expensed expenses
* Significant PP&E cost omitted aDepartment Accounting and
Financial Information System. First, FAA's systems do not capture
the full cost of PP&E. Full costs means all costs, including
internal labor and overhead, necessary to acquire and place
property in service. Such costs are typically identified and
recorded through a cost accounting system. We have reported the
lack of an adequate FAA cost accounting system as a weakness that
prevents FAA from reliably determining full project and other
costs.7 This can result in a 7Air Traffic Control: Improved Cost
Information Needed to Make Billion Dollar Modernization Investment
Decisions (GAO/AIMD-97-20, January 22, 1997). Page 10
GAO/AIMD-99-212 FAA Financial Management B-282977 lack of
reliable project cost information, which is needed to accurately
estimate future project costs and to make sound investment
decisions. In addition, this can result in the misstatement of
PP&E assets and related depreciation expense, as well as the
misstatement of overall expenses. Another issue is that FAA's PP&E
systems do not capture identifiable PP&E costs as they are
incurred. For example, when contractor CIP invoices are paid, the
invoice amounts are recorded in a subsidiary module of FAA's
Department Accounting and Financial Information System (DAFIS)
general ledger accounting system. This subsidiary module
constitutes the details for the WIP account. In some cases,
individual decisions are necessary to determine which costs should
be recorded in the subsidiary module, and to what specific job
order number. Job order numbers are used to differentiate
individual systems projects in the WIP account. This manual
process is imprecise, resulting in some valid CIP costs being
omitted, some invalid CIP costs being included, and costs being
assigned to incorrect job orders. In addition, at the time costs
are initially recorded, they are not identified or identifiable as
PP&E costs. Rather, they are identified as CIP costs related to a
specific CIP project. However, contractor CIP costs may include
PP&E costs, spare parts inventory costs, or costs that are
appropriately classified as expenses. Later, when the specific
project is completed and commissioned, FAA must perform a tedious
manual analysis of documentation related to each of the costs
included in the details of the WIP job orders to determine how
much should be recorded in the PP&E, spare parts inventory, and
expense accounts. A third systems issue is that FAA is unable to
transfer cost and other information to and among systems
components in an efficient manner. For example, when the manual
review and classification of costs charged to WIP job orders is
complete, accounting entries must be manually prepared to remove
the costs from the WIP account and to record them in other
appropriate accounts. In addition, manual entries must be
prepared and input to the property system to add individual PP&E
items to the detailed property records. Each of these manual
entries and processes is time-consuming and, if adequate controls
are not in place, may introduce errors into the detailed records.
Furthermore, FAA property systems are unable to calculate
depreciation for property because the detailed property record
systems do not have this capability. Rather, in order to
calculate depreciation, information about the Page 11
GAO/AIMD-99-212 FAA Financial Management B-282977 cost and
acquisition date of individual property records must be downloaded
into a spreadsheet database to perform the depreciation
calculation. The results of the calculation must then be manually
input to the DAFIS general ledger system in order to record the
amount of depreciation expense for the year. The lack of adequate
integrated systems to account for PP&E costs has resulted in the
need for FAA to undertake a time-consuming reconstruction of its
PP&E accounting records, as discussed below. The chronic lack of
effective systems capabilities results in a continuing need to
perform manual processes to provide sufficient accountability.
Due to the number of manual processes and decisions required, such
accountability can be achieved only if strong controls are in
place to prevent and detect errors. Based on the poor condition of
FAA's PP&E records, it is evident that such controls have not
existed in the past. The conditions described above result from
the adaptation of systems, which were acquired for a specific
purpose, to satisfy other purposes for which they were not
designed. For example, the DAFIS general ledger system, which was
created for the Department of Transportation (DOT) in 1976, was
designed to account for FAA financial activities from a budgetary
perspective. As a result, many of the accounting needs of a
financial statement accounting system were not and continue not to
be available in the system that FAA uses. Until FAA acquires
adequate and integrated accounting systems' capabilities, its
ability to account for PP&E as well as other costs on an on-going
basis will be severely limited. The lack of systems integration
and the ability to appropriately accumulate and transfer data
among systems components will continue to require time-consuming
and error-prone manual processes. If these manual processes do
not have the proper controls to prevent and detect errors, FAA
will continue to lack assurance that it has accountability over
PP&E. FAA Has Initiated an On September 30, 1998, the
Secretary of Transportation submitted a plan to Extensive Effort
to the Office of Management and Budget for resolving
major material findings Establish Historical PP&E and
management deficiencies in the FAA financial statement audits. In
Costs December 1998, the FAA Administrator
approved the formation of an Audit Correction Program to resolve
audit concerns identified by the OIG and to put in place improved
systems and processes to prevent these issues from recurring. The
Audit Correction Program included the formation of three Page 12
GAO/AIMD-99-212 FAA Financial Management B-282977 teams to
address WIP, real property, and personal property issues. As
described by FAA, these teams are primarily focused on regaining
accountability over PP&E by establishing baseline costs for
existing assets. FAA expects that the work of the three teams will
conclude in fiscal year 1999, and described the effort as "pivotal
to accomplishing an unqualified audit opinion for FY 1999." FAA's
strategy for implementing the secretary's plan is to perform a
top-down analysis of the $25.7 billion of CIP appropriations for
fiscal years 1982 through 1998 to determine what costs FAA should
record in its asset accounts and in what asset categories as
compared to the approximately $12 billion currently reflected on
the books. As FAA completes segments of its work, an OIG audit
verification of the results is performed. Initially FAA
classified the $25.7 billion of appropriated CIP costs into major
categories by project type as shown in table 1. Table 1: FAA
Classification of Appropriated CIP Costs Dollars in billions
Capital systems projects
$11.4 Terminated projects
2.5 Real property
5.0 Other
6.8 Total
$25.7 Note: Other includes projects that have not been placed in
service ($2.1 billion); expensed projects ($3.7 billion); and
fully depreciated projects ($0.9 billion). The FAA cost
classification process results are also subject to OIG
verification. FAA initially selected 44 systems from the capital
systems projects category with reported costs totaling $10.31
billion as of June 30, 1999, for which detailed supporting
documentation packages will be prepared to establish baseline
costs. Generally, these 44 systems were chosen because they
represent the higher cost systems. This initial selection came
from a population of 123 systems for which $11.4 billion was
appropriated. As of June 30, 1999, FAA had completed detailed
documentation packages for the 44 systems initially identified for
review. The OIG reviewed and analyzed 32 of these packages and,
in the process, identified at least Page 13
GAO/AIMD-99-212 FAA Financial Management B-282977 $4.5 billion of
additional costs, the majority of which should be included in the
PP&E accounts.8 This amount may increase depending upon the
outcome of a number of unresolved questions related to those 32
packages. As the verification of the initial 44 systems is
completed, and as unresolved questions are answered, FAA will
determine, in consultation with the OIG, the nature and extent of
additional work that may be required to identify additional
unrecorded assets. Once FAA has successfully completed its
reviews and the OIG has validated them, FAA will have a reasonable
beginning baseline for its PP&E costs. Starting in June 1999, the
OIG began visiting selected field sites to verify real property,
using a variety of means, including cost per square foot models.
FAA Has Only Just Begun to As previously discussed, FAA's ability
to maintain accountability over its Comprehensively Address
PP&E on an ongoing basis hinges on implementing systems that can
its Systems Issues efficiently and effectively
account for these assets. However, FAA has only recently
developed a plan to address this issue comprehensively. As a part
of the Audit Correction Program described above, on May 20, 1999,
FAA issued its Clean Audit Program Process Improvement Plan. The
plan responded to a request from FAA senior management to begin
working on modifying FAA's practices to ensure that progress
achieved by the Audit Correction Program can be sustained over the
long term. Basically, the plan is divided into three separate sets
of activities termed "tiers" by FAA. Tier 1 includes making minor
systems enhancements during fiscal year 1999 to help achieve
immediate improvements in FAA's recordkeeping. Tier 2 consists of
revisions during fiscal year 2000 in organizational
responsibilities related to work-in-process and the implementation
of additional minor systems enhancements. Both tiers 1 and 2 are
interim actions to strengthen FAA's systems and processes until
existing systems are replaced. However, FAA has not yet
comprehensively reviewed 8According to FAA officials, based on
their analysis, eventual adjustments to the PP&E amount reported
in the FAA financial statements will be significantly less than
the $4.5 billion because some of these costs have already been
recorded as assets. Page 14
GAO/AIMD-99-212 FAA Financial Management B-282977 internal
controls to ensure that all existing systems weaknesses are
identified and corrected.9 Tier 3 includes longer-term systems
changes related to the following two systems initiatives: * DOT is
replacing its DAFIS general ledger system with a commercial based
system, which it has enhanced and refers to as DELPHI. * FAA is
defining its needs for a system that will account for PP&E once it
has been placed in service.10 FAA describes this system as an "in
service" system. FAA describes the planned DOT-wide DELPHI system
as an integrated suite of financial software. FAA has stated that
the implementation of this system will, if properly configured and
utilized, eliminate many of the processing issues presently
constraining the identification, classification, processing, and
accumulation of FAA's PP&E costs. DELPHI has a June 2001 target
date for implementation at FAA. According to FAA, the planned in-
service system provides for all financial accounting requirements
for PP&E that has been placed in service and includes interfaces
to the DELPHI system for tracking the costs of projects under
development. This system has a planned implementation date of
September 30, 2001. An overview of FAA's planned systems functions
is shown in figure 3. 9According to FAA officials, in the last 2
years, significant improvements have been made to the internal
controls over recording of PP&E . For instance, a system for
monitoring the WIP backlog has been instituted to prevent backlogs
from occurring. This is accomplished through matching
commissioning dates from a separate system with the WIP report and
identifying the backlog at 6 months past commissioning. While
these improvements are positive steps, they are not comprehensive
and neither we nor the OIG have verified them. 10 In this regard,
the Institute of Electrical and Electronic Engineers (IEEE) has
developed a nine step process for acquiring software as described
in its IEEE Recommended Practices for Software Acquisition, IEEE
Std 1062, 1998. The nine steps start with planning an
organizational strategy to define organizational objectives and a
software strategy in step 1, through conducting a follow-up
analysis of the process used to acquire the software and lessons
learned in step nine. Page 15
GAO/AIMD-99-212 FAA Financial Management B-282977 Figure 3: FAA
Planned Systems Functions DELPHI Contract costs
Work in In service FAA labor
process PP&E FAA overhead
(WIP) Cost Other costs accounting Cost
* Costs classified, * Costs recorded in
* Detailed flows assigned, and
WIP property records processed In addition
to these recent initiatives, FAA is developing a cost accounting
system. The inadequacy of FAA's cost accounting system has been
identified by GAO,11 the OIG, and others as a weakness that
prevents the agency from having reliable and timely information
about the full cost of projects and program activities. The
objective of a cost accounting system is to accurately assign
basic financial cost data, such as contractor costs and agency
direct labor and overhead costs, to individual project and program
activities. Although FAA originally expected a cost accounting
system to be fully implemented by October 1, 1998, this objective
was not met. It subsequently revised this goal to implementation
of a partially operational system by December 31, 1998, and a
fully operational system by March 31, 1999. FAA now projects full
implementation of its cost accounting system by March 31, 2001.12
11Air Traffic Control: Improved Cost Information Needed to Make
Billion Dollar Modernization Investment Decisions (GAO/AIMD-97-20,
January 22, 1997). 12Statement of Federal Financial Accounting
Standards No. 4, Managerial Cost Accounting Standards (SFFAS No.
4), effective in fiscal year 1998, requires agencies to accumulate
and report the full costs of their activities. FAA officials told
us that the cost accounting system they are implementing goes well
beyond the requirements of SFFAS No. 4 and that they believe they
will be in compliance with SFFAS No. 4 for fiscal year 1999. Page
16 GAO/AIMD-99-212
FAA Financial Management B-282977 Inventory FAA
maintains its inventory at its Logistics Center, the central
warehouse Accountability Has for operating materials and
supplies, and at approximately 34,000 field spares locations.13
Inventory accountability has improved at the Logistics Improved,
but Field Center, and, as of September 30, 1998, inventory
quantities were reasonably Spares Accuracy stated in the
accounting records.14 Also, Logistics Center inventory system
Remains Uncertain controls provide a reasonable basis for
the ongoing tracking and controlling of inventory.15 Although we
found some weaknesses in data entry, receipts and issuances, and
other processing-type procedures at the Logistics Center, these
weaknesses did not significantly impact overall accountability.
The accuracy of FAA's accounting for field spares quantities,
however, remains uncertain because an accurate baseline has not
been established. Field spares are mission-critical parts that
support the National Airspace System (NAS)16 and are maintained at
locations near the facilities they support. Although FAA is
acting to improve field spares inventory accountability, until
these action plans are fully implemented, FAA has no assurance
that it is accurately accounting for field spares. Logistics
Center Beginning with the OIG's audit of FAA's financial
statements for fiscal year Accountability Has 1992, the OIG
could not validate the Logistics Center inventory quantity
Improved balances because of the lack of accurate
records and documentation. This problem continued through fiscal
year 1996 because of limited Logistics Center inventory counts by
FAA. In fiscal year 1996, the OIG could not verify the FAA
inventory balance because of numerous errors and omissions in the
inventory records. In fiscal year 1997, FAA conducted, and the
OIG tested, a comprehensive wall-to-wall count of Logistics Center
inventory and made necessary adjustments to correct its inventory
records. 13Some of the 34,000 locations may be in the same
geographic location and even in the same building. 14The OIG
tested inventory values as of March 31, 1998, and needed
adjustments were made as identified. Neither the OIG nor we
validated the reported inventory values as of September 30, 1998.
15 The Logistics Center inventory system is designed to operate as
a perpetual inventory system and updates inventory quantities at
various points in time. Among other capabilities, it tracks
receipts, issuances, adjustments, and locations of inventory. 16
The National Airspace System is the FAA system that provides for
the safe, orderly, and expeditious flow of air traffic in the
United States. NAS's principal component is the nation's air
traffic control system. Page 17
GAO/AIMD-99-212 FAA Financial Management B-282977 In fiscal year
1998, GAO, with OIG assistance, performed test counts of inventory
quantities at the Logistics Center. Based on the results of our
tests, we concluded that the Logistics Center inventory quantities
were materially correct as of September 30, 1998, and the system
for tracking quantities was generally reliable. However, we
identified minor differences in quantities caused by factors such
as data entry errors, untimely processing of recording receipts
and issuances, commingling of similar items, and prior erroneous
inventory adjustments. Cumulatively, these differences, when
statistically projected, did not result in material variances in
recorded inventory quantity balances. While these differences
were not material to inventory balances at the time of our review,
the weaknesses that caused these differences could lead to
significant problems in inventory balances in the future if not
addressed by FAA management. Accurate Baseline for Field Until
fiscal year 1997, FAA recorded the cost of field spares as
expenses in Spares Has Not Been its financial
statements regardless of whether they had been used or Established
remained available in inventory for use in future years. In
fiscal year 1997, FAA first reported field spares inventory as an
asset. However, the amount was estimated because a comprehensive
physical inventory count had not been performed, even though FAA's
policy, contained in order 4250.9B, "Field Material Management and
Control," dated January 24, 1992, mandates a 100-percent annual
count of field spares. According to FAA, it completed a full
field spares physical inventory in fiscal year 1998; however, as
discussed below, our review of the results of the OIG tests shows
that the accuracy of field spares records remains in question. As
of September 30, 1998, the reported value of field spares
inventory was $338 million. Figure 4 shows the reported amount of
field spares in each FAA region and center. Page 18
GAO/AIMD-99-212 FAA Financial Management B-282977 Figure 4:
Reported Value of Field Spares in FAA Regions and Centers
Northwest Mountain Region
Eastern $34 million Great Lakes
Region New England Region
$44 million Region $46 million
$19 million William J. Hughes Technical Center Western
$7 million Central Pacific
Region Region
$23 million $38 million FAA Aeronautical Center $9 million
Southern Region $62 million Southwest Region $49 million Alaska
Region $7 million * 9 regions and 2 centers * Over 800 sites *
Over 34,000 storage locations * 185,000 units totalling $338
million Source: FAA FAA tracks field spares through an automated
Field Spares Inventory system (FSI). This system is maintained by
about 1,000 FAA personnel who are individually responsible for
managing field spares at each of 34,000 different locations, but
whose primary responsibility is to keep the NAS systems
operational. Based on our analysis of the OIG's workpapers related
to its testing of FAA's fiscal year 1998 field spares inventory
count, we were unable to satisfy ourselves about the accuracy of
the field spares inventory Page 19
GAO/AIMD-99-212 FAA Financial Management B-282977 quantities. In
its review of the fiscal year 1998 field spares physical
inventory, the OIG tested data for 14 sites with a recorded value
of $14 million. The sites were judgmentally selected based in
part on locations where the OIG expected there might be problems.
The OIG found numerous errors in inventory recordkeeping and a
lack of physical controls over inventory on hand for 9 of the 14
sites. Some examples follow: * At one site, FAA had not recorded
$106,000 of communication equipment spares for newly commissioned
systems. * At another site, 11 items valued at over $39,000 that
support new systems were not included in the records, while 21
items valued at about $67,000 could not be located. * At a third
site, numerous errors resulting from inaccurate or incomplete
record keeping totaled $380,000. These included items related to
newly commissioned systems, decommissioned systems, and other
items that had not been recorded. OIG workpapers stated that the
field spares quantity errors identified by the OIG staff were
subsequently corrected in the FSI. However, these errors were
identified in a test of only 14 of 834 sites. In addition, while
the OIG report referred to internal FAA analyses that suggested
accountability issues for a number of other sites, quantifiable
information does not exist to determine the extent or severity of
the problems for the other 820 sites. According to an FAA
commissioned fiscal year 1998 study of NAS Field Spares
Inventory,17 several factors could have affected the accuracy of
field spares records. First, prior to 1998, the field spares
program lacked procedures for * updating the field spares
inventory system for adding field spares to the inventory records
when systems are commissioned, * deleting field spares from
inventory records when systems are decommissioned, and * taking
field spares physical inventories. 17"Federal Aviation
Administration FY 98 Study of NAS Field Spares Inventory, Report
of the Field Spares Environment" prepared by DOT Research &
Special Programs Administration, Volpe National Transportation
Systems Center and Coopers & Lybrand L.L.P., dated June 5, 1998.
Page 20 GAO/AIMD-99-212
FAA Financial Management B-282977 The FAA study provided
procedures to perform the above functions. However, according to
OIG workpapers, when these procedures were issued in 1998, they
were not provided to all FAA staff responsible for accounting for
inventory transactions and physical inventories. As a result,
field spares records were not maintained consistently. Second, the
FAA study stated that FAA order 4250.9B stipulates that the System
Management Office (SMO) managers have property accountability for
field spares in a geographical area within a specific FAA region.
The order also provides that this responsibility can be delegated.
However, different interpretations of this responsibility by field
personnel have caused them to be uncertain as to who has ultimate
responsibility for field spares, including ensuring that inventory
counts are complete, accurate, and timely. Third, the FAA study
states that although limited training was provided, additional
training is needed on how to take physical inventory and how to
use the FSI module, which contains field spares quantity and
location information. OIG workpapers stated that testing of the
fiscal year 1998 physical inventory process showed that lack of
training continued to be a problem contributing to field spares
record errors. The errors and lack of procedures noted above imply
serious weaknesses in physical controls and accountability over
inventory and field spares. These conditions increase the risk
that theft18or loss could go undetected. Also, inaccurate field
spares information could result in unexpected shortages of
critical parts, or unnecessary ordering of parts already on hand,
thus requiring the use of additional funds to purchase unneeded
spares. The latter situation may lead to excess or obsolete
stock requiring storage, control, and other activities that
consume operating resources. Procedures Established to FAA
senior management has indicated that it recognizes the urgency of
Improve Inventory correcting inventory accountability
deficiencies. To address these Accountability, but Full
deficiencies, FAA has established procedures in its Inventory
Integrity Implementation Needed Guide and is in the
process of implementing the procedures at the Logistics Center.
These procedures include performing periodic inventory counts to
18 According to FAA, in early 1998, a theft of aircraft parts was
detected at the Logistics Center and is currently under
investigation. The value and extent of the missing inventory
parts have not been conclusively determined. Page 21
GAO/AIMD-99-212 FAA Financial Management B-282977 substantiate
inventory balances on an ongoing basis. The Guide should also
provide useful guidance to FAA staff in correcting the control
weaknesses identified at the Logistics Center and improving
accountability over operating materials and supplies. In
addition, FAA personnel are developing a bar coding system to
improve tracking of inventory from the time it arrives at the
Logistics Center warehouse until it is issued. When implemented,
this system should help improve controls over the inventory in the
warehouse. For field spares, FAA has recently distributed new
procedures for managing them. Among other topics, these
procedures include guidance on * adding field spares to the
automated inventory system when NAS systems are commissioned, *
deleting field spares from the automated inventory system when NAS
systems are decommissioned, and * taking and recording physical
inventory. When fully implemented, these procedures should help
improve the accountability and control over field spares by
requiring verification of both physical counts and also data
entered into the FSI. These procedures should also help to
effectively utilize FAA's perpetual inventory system, thus
providing up-to-date and accurate information on field spare
quantities and locations. In addition, FAA advised us that it is
conducting a 100-percent count of field spares inventory for
fiscal year 1999. FAA is also separately developing a bar coding
system for field spares that is expected to provide more accurate
and reliable identification of and physical control over these
items. Under the system, the manufacturer and FAA would install
bar codes on field spares. According to FAA officials, this
system is expected to be implemented as funds are budgeted,
possibly by installing bar coding on a NAS system-by-system basis.
This would be done by providing bar coding for one specific system
and its related field spares at all FAA locations. Once fully
developed and implemented, the use of this bar coding system
should help provide more accurate identification and control over
inventory. Conclusions While FAA has taken steps that are
likely to lead to or already have resulted in improved
accountability for PP&E and inventory, much still remains to be
done. Until such time as full accountability is achieved, these
assets will Page 22 GAO/AIMD-99-212
FAA Financial Management B-282977 continue to be exposed to waste,
fraud, abuse, and mismanagement. In addition, the Congress will
have no assurance of receiving accurate financial management
information to help make informed decisions about future funding
and oversight of FAA activities. The continued lack of
accountability is of particular concern in light of the billions
of dollars of taxpayer funds being spent to acquire assets in
connection with the $42 billion Air Traffic Control modernization
program. Recommendations We recommend that the Secretary of
Transportation direct the FAA Administrator to take the following
actions: * Ensure timely completion of current efforts to
identify, record, and provide support for all PP&E owned by FAA in
order to establish a baseline of PP&E costs. * Perform a
comprehensive internal control assessment of current PP&E
accounting practices and identify and implement new PP&E controls
where necessary to ensure ongoing accountability. * Prioritize the
acquisition of systems that are capable of accurately accounting
for PP&E efficiently and effectively on an ongoing basis. * Ensure
timely implementation of planned procedures to improve inventory
accountability, including * performing periodic cycle counts at
the Logistics Center to substantiate inventory quantities on an
ongoing basis; * conducting a comprehensive field spares inventory
by September 30, 1999, resolving count differences, and making
appropriate adjustments to establish a field spares inventory
baseline; and * implementing the planned bar coding system for the
Logistics Center and for field spares to capture inventory
information from the time of receipt and through subsequent
movements and ultimate disposition. * Perform an internal control
assessment of field spares accountability practices and implement
new field spares controls where necessary to ensure ongoing
accountability. * Implement a program of periodic field spares
cycle counts to substantiate inventory quantities on an ongoing
basis. * Revise FAA order 4250.9B, "Field Material Management and
Control," to clearly indicate the official who has ultimate
responsibility for the accountability of field spares and the
procedures required to carry out this responsibility. Page 23
GAO/AIMD-99-212 FAA Financial Management B-282977 Agency Comments
and FAA officials consisting of the Acting Director of the Office
of Financial Our Evaluation Management, and the
Program Director of the Resource Management Program and their
staffs, provided oral comments on a draft of this report. The
officials generally concurred with our findings and conclusions.
They did not concur with two of our seven recommendations. As
discussed below, we believe that our recommendations are still
valid. In regard to our recommendation that FAA perform a
comprehensive internal control review of current PP&E accounting
practices, FAA officials stated that a study of PP&E controls has
already been performed and a report has been issued by an
independent Certified Public Accounting firm and the DOT VOLPE
National Transportation System Center. The scope of the study was
limited, focusing on fixed asset capitalization processes, which
represents only one of the activities related to PP&E
accountability. A comprehensive internal control assessment would
include other significant activities such as determining what
controls are needed to ensure that all owned property is recorded,
all recorded property actually exists, all property is properly
valued, and all recorded property balances are substantiated.
Therefore, we continue to recommend that FAA perform a
comprehensive PP&E internal control assessment. In regard to our
recommendation that FAA revise its order 4250.9B, "Field Material
Management and Control," to clearly indicate who has ultimate
responsibility and is accountable for field spares, FAA officials
stated that such a change had been issued. Subsequently, FAA
personnel provided us a draft change order, which has not yet been
issued, and which continues to give primary responsibility for the
accountability for field spares to Systems Management Office
managers, while also allowing the responsibility to be delegated.
Therefore, we continue to affirm our recommendation that FAA order
4250.9B be revised to clearly state which official has ultimate
responsibility for field spares accountability. While FAA
officials did not disagree with our recommendation that FAA
implement procedures to conduct a comprehensive field spares
inventory count during fiscal year 1999 and establish a field
spares inventory baseline by September 30, 1999, they stated that
they had previously established a field spares inventory baseline.
They added that the baseline was established in fiscal year 1998
through a 100-percent wall-to-wall inventory. As discussed in our
report, the OIG performed limited tests of the fiscal year 1998
field spares inventory and found numerous errors in FAA's
inventory records, thus indicating that an accurate baseline for
field spares Page 24 GAO/AIMD-99-
212 FAA Financial Management B-282977 has not been established.
FAA officials further stated that they plan to perform a complete
field spares inventory by September 30, 1999. In addition, FAA
provided us a number of suggested technical changes to our report.
We have reviewed these proposed changes and incorporated them
where appropriate. We are sending copies of this letter to
Representative John M. Spratt, the Ranking Minority Member of your
committee; the Honorable Rodney E. Slater, Secretary of
Transportation; the Honorable Carl B. Schellenberg, Chief
Financial Officer of the Federal Aviation Administration; the
Honorable Jane F. Garvey, Administrator of the Federal Aviation
Administration; the Honorable Jacob Lew, Director of the Office of
Management and Budget; the Honorable Kenneth M. Mead, Department
of Transportation Inspector General; and other interested parties.
Copies will also be made available to others on request. If you
have any questions concerning this letter, please call me at (202)
512-9508 or John C. Fretwell at (202) 512-9382. Key contributors
to this letter are included in appendix I. Sincerely yours, Linda
M. Calbom Director, Resources, Community, and Economic
Development, Accounting and Financial Management Issues Page 25
GAO/AIMD-99-212 FAA Financial Management Appendix I GAO Staff
Acknowledgements
Appendix I Acknowledgments Leo Blas, Donald Campbell, Rick
Kusman, Mary Merrill, Meg Mills, Charles Norfleet, and Frank
Synowiec, Jr., made key contributions to this report. (913848)
Letter Page 26 GAO/AIMD-99-212
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