Financial Management: Reporting of Army Conventional Ammunition as
Operating Materials and Supplies (Correspondence, 10/24/2000,
GAO/GAO-01-45R).

The Army's current accounting practices and manual procedures for
calculating operating materials and supplies (OM&S) balances caused
accounting errors that understated the Army's fiscal year 1999 OM&S
balance by at least $1.5 billion. In addition, ammunition held at
retail-level installations for training purposes was excluded from the
financial reports.

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

 REPORTNUM:  GAO-01-45R
     TITLE:  Financial Management: Reporting of Army Conventional
	     Ammunition as Operating Materials and Supplies
      DATE:  10/24/2000
   SUBJECT:  Reporting requirements
	     Financial statement audits
	     Accounting standards
	     Ammunition
	     Accounting procedures
	     Internal controls
IDENTIFIER:  Army Commodity Command Standard System
	     DOD Worldwide Ammunition Reporting System

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GAO-01-45R

Army OM& S Financial Reporting

United States General Accounting Office Washington, DC 20548

October 24, 2000 The Honorable Helen T. McCoy Assistant Secretary of the
Army for

Financial Management and Comptroller General John G. Coburn, USA Commanding
General, U. S. Army Materiel Command

Mr. Thomas R. Bloom Director, Defense Finance and Accounting Service

Subject: Financial Management: Reporting of Army Conventional Ammunition as
Operating Materials and Supplies

As part of our audit of the fiscal year 1999 governmentwide financial
statements, we evaluated the Army's accounting practices and processes for
reporting assets as operating materials and supplies (OM& S) on the Army's
General Fund Balance Sheet. 1 Our evaluation identified problems in the
financial reporting process for OM& S assets that caused a material
understatement of the value of these assets reported on the Army's balance
sheet for fiscal year 1999. These problems also resulted in errors in
consistently reporting missile quantities as national defense equipment
(NDE) in the Army's Supplementary Stewardship Report. In general, these
problems can be attributed to the use of undocumented manual procedures for
accumulating these balances at fiscal year- end. Such manual procedures are
in place because DOD and the Army have not yet developed and implemented
automated processes for accumulating these data. The purpose of this letter
is to inform you of these issues and provide recommendations for improving
the financial reporting of OM& S in the short term and ensuring that these
issues are addressed in plans for automating this process in the future.

Background

Virtually all of the $18.9 billion the Army reported as OM& S assets for
fiscal year 1999 consisted of ammunition stored in ammunition depots, on
prepositioned ships, at government and contractor- owned production
facilities, and at various Army installations worldwide. Assets stored in
depots, on prepositioned ships, and at production facilities and managed by
Army commodity managers assigned to the Army Materiel Command are referred
to in Army terminology as “wholesale- level assets.” The Army
manages wholesale- level ammunition assets using its wholesale logistics
system, the Commodity Command Standard System (CCSS). On a monthly and year-
end basis, the Defense Finance and Accounting

1 Operating materials and supplies are reported on the Army General Fund
Balance Sheet as a component of the Inventory and Related Property, Net line
item.

GAO- 01- 45R Army OM& S Financial Reporting Page 2 Service (DFAS), which
maintains the Army's financial accounting system, obtains from

CCSS the value of the Army's wholesale- level ammunition and missile assets
and posts the value to the Army's General Ledger OM& S accounts. 2

In contrast, assets held at Army installations, such as Fort Knox and Fort
Hood, are referred to as “retail- level assets.” Army units at
installations are authorized to hold retail- level ammunition and missile
assets for training and related uses and to maintain combat readiness
capabilities. 3 Army installations store retail- level ammunition assets at
secure storage sites called ammunition supply points, which typically are
located in remote areas of installations and use igloos or bunkers for
storing munitions and other explosives. These ammunition supply points use
the Standard Army Ammunition System– Modified to account for
receiving, storing, and issuing these sensitive items. Ammunition supply
point personnel issue items to requesting units only upon their planned
imminent use. Ammunition supply points periodically report their ammunition
and missile asset balances through their major commands to the Worldwide
Ammunition Reporting System (WARS), the Army's centralized visibility system
for monitoring the location of all ammunition and missile assets located
worldwide, including both wholesale- and retail- level assets.

To report the value of retail- level assets, the DFAS Indianapolis Center
derives asset balances from WARS. At fiscal year- end, WARS analysts extract
certain retail balances from WARS and electronically mail the amount to DFAS
Indianapolis, which posts an adjustment to add the value of retail- level
ammunition and missile assets to the Army's general ledger OM& S accounts.
Statement of Federal Financial Accounting Standards (SFFAS) No. 11,
Amendments to Accounting for PP& E: Definitional Changes, requires missiles
to be reported as a separate class of assets, specifically national defense
equipment. Under SFFAS No. 3, Accounting for Inventory and Related Property,
conventional ammunition assets are to be reported in the OM& S accounts. As
a result, DFAS Indianapolis posts an additional fiscal year- end adjustment
to deduct from OM& S the value of missiles classified as national defense
equipment to be reported on the Army's Supplementary Stewardship Report. The
purpose of this adjustment is to avoid double reporting of the same missile
assets as both OM& S and national defense equipment in Supplementary
Stewardship Reports. For fiscal year 1999, the year- end adjustments to add
the value of retail- level assets and deduct the value of national defense
equipment affected the reported balance of the OM& S accounts by about $12
billion.

2 CCSS programming automatically computes a monthly and fiscal year- end
balance for financial reporting to DFAS Indianapolis. This CCSS reporting
program, called Application 431, extracts from logistics records the
quantity of items on hand and due in from other depots and multiplies the
quantity of each item by its standard price. The application also
automatically reports items needing repair at their value net of estimated
repair cost and reports those deemed excess at their estimated salvage
value.

3 Army units are required to have on hand or on requisition certain
ammunition assets for readiness purposes. The requirements are referred to
as “basic load” requirements. As a general rule, a unit's basic
load assets are stored at installation ammunition supply points in the same
manner as is ammunition stored for all other purposes. Units requisition and
are issued ammunition from retail- level storage when needed for their
authorized purpose.

GAO- 01- 45R Army OM& S Financial Reporting Page 3

Objective, Scope, and Methodology

Our objective was to assess the Army's accounting practices and processes
for reporting operating materials and supplies for fiscal year 1999. We
analyzed computerized logistic and financial system data maintained by the
DFAS Indianapolis Center and Saint Louis Operating Location; the Army's
Aviation and Missile Command, Huntsville, Alabama; the Army's Operations
Support Command, Rock Island, Illinois; and the Army Materiel Command's
Logistics Support Activity, Huntsville, Alabama. We held discussions with
officials at these locations and with ammunition management officials
assigned to tactical and storage units at Fort Hood, Texas, and at the
Army's Forces Command, Atlanta, Georgia. We discussed results of our
findings with officials of the Army's Office of the Deputy Chief of Staff
for Logistics and Office of the Assistant Secretary of the Army for
Financial Management and Comptroller, Washington, D. C. We performed our
work at the above locations from August 1999 through May 2000 in accordance
with generally accepted government auditing standards. We requested comments
on a draft of this report from the Secretary of Defense or his designee. On
October 18, 2000, the Assistant Secretary of the Army (Financial Management
and Comptroller) provided us with comments, which are discussed in the
“Agency Comments and Our Evaluation” section and are reprinted
in the enclosure.

Improvements Needed in Year- end Adjustments

In our review of the process that Army and DFAS organizations used to
compile and report values for OM& S, we found problems in how the year- end
adjustments to the financial records were computed that affected the
reported balance for OM& S. Misstatements occurred in the reported asset
balances for wholesale- level OM& S because adjustments to the OM& S
balances were computed using inconsistent methods and criteria. The major
factor contributing to the use of inconsistent methods and criteria for
calculating the year- end adjustments was that Army analysts had no written
procedures on how to make appropriate computations. Other misstatements
occurred in the reported asset balances for retail- level OM& S due to a
disagreement regarding the application of certain provisions in SFFAS No. 3,

Accounting for Inventory and Related Property.

Table 1 shows the dollar values that constituted the reported OM& S balances
for fiscal year 1999.

GAO- 01- 45R Army OM& S Financial Reporting Page 4

Table 1: Compilation of Army OM& S Balances for Fiscal Year 1999

(Dollars in billions) Fiscal year 1999 Wholesale- level values

Conventional ammunition $ 15,1 Missiles 10.2

$ 25.3 Add: retail- level values

Conventional ammunition $ 1. 0 Missiles 1. 8

$2. 8 Total wholesale and retail values

Conventional ammunition $ 16.1 Missiles 12.0

$ 28.1 Less: missiles reported as NDE

Wholesale- level $ (7.4) Retail- level (1.8)

Total $ 9.2 a Reported OM& S balance $ 18.9 a The remaining missile amount
(about $2. 8 billion) represents items that the Army determined did not meet
the criteria for national defense equipment and therefore were reported as
OM& S.

Wholesale- Level NDE Missile Adjustments Calculated Incorrectly The fiscal
year 1999 OM& S reported balance was understated by at least $1.5 billion
because the $7.4 billion adjustment to remove the value for national defense
equipment missile assets from the OM& S account was not calculated
correctly. This can be attributed to the lack of specific written procedures
for calculating the accounting adjustments to the OM& S balances.

First, the automated year- end financial balance for OM& S provided by CCSS
to DFAS Indianapolis included a $1.4 billion amount, essentially a reserve,
for the estimated cost to repair missile assets in unserviceable condition,
which reduced the balance in OM& S. This year- end balance also included a
$91 million amount to reflect the value of missile items deemed to be
economically unrepairable at their estimated salvage value. However, when
the adjustment was made to deduct missiles from OM& S, the related amounts
for repairs and salvage values were not also removed. As a result, the
balance of OM& S was understated by the amounts of these missile- related
reductions.

Second, timing errors affected the accuracy of the reported value for OM& S
because the adjustment calculation to remove national defense equipment
missiles included transactions that were recorded in CCSS after the end of
the fiscal year. In attempting to provide the best information available,
the Office of the Deputy Chief of Staff for Logistics requested that
commodity managers at the Army Aviation and Missile Command provide
information on missile balances to remove these balances from OM& S. The
commodity managers reported

GAO- 01- 45R Army OM& S Financial Reporting Page 5 balances as of the date
of the request instead of the fiscal year- end. As a result, the

adjustment was inaccurate. For example, the adjustment improperly included
275 Stinger missiles valued at $38,300 per unit that were received after
September 30. These missiles were not in the reported September 30 balance.
As a result, their inclusion in the adjustment inappropriately reduced the
balance of OM& S.

Finally, the national defense equipment adjustment included a value for
missiles in transit that was much greater than the comparable in- transit
values reported to DFAS by CCSS at the end of the fiscal year. Specifically,
the adjustment data included values for all in- transit assets, while CCSS's
automated financial reporting process only reported those due in from
wholesale- level storage activities. For example, in- transit items excluded
from CCSS included 28 TOW missiles valued at $19,145 each and 38 advanced-
version Stinger missiles valued at $48,393 each. Because such items were
included in the national defense equipment adjustment and not in the
September 30 reported balance, the Army's OM& S was understated by the
amounts of these in- transit missile- related reductions.

Understatement of Retail- Level Inventory The Army's long- standing
accounting policy for reporting OM& S has been to report a portion of the
retail ammunition using the consumption method, whereby the cost of goods is
removed from the OM& S account in the accounting period they are issued to
an end user for consumption in normal operations, and report another portion
using the purchase method, whereby the items are expensed when purchased.
Because of recognized accounting system inadequacies, the Army and DFAS-
Indianapolis currently use manual work- around procedures to post a year-
end adjustment to the OM& S accounts to “recapitalize” the value
of ammunition and missile assets held for combat readiness purposes at the
end of the fiscal year, thus reporting these assets until they are consumed.
The assets held at the end of the year for future training and other
purposes are not “recapitalized” and are therefore treated as
expensed when purchased. Use of these inconsistent methods to report the
values of items held in storage at fiscal year- end understates the value of
ammunition held in storage. For example, the 1999 fiscal year- end OM& S
balance did not include approximately $1 billion in ammunition stocks held
in retail- level storage pending use in training exercises.

SFFAS No. 3, Accounting for Inventory and Related Property, specifies that
the cost of goods shall be removed from the OM& S account in the accounting
period they are issued to an end user for consumption in normal operations,
under the consumption method of accounting. However, SFFAS No. 3 provides
that OM& S may be expensed when purchased (using the purchase method of
accounting) if (1) OM& S balances are not significant amounts, (2) the items
are in the hands of the end user for use in normal operations, or (3) it is
not cost- beneficial to apply the consumption method of accounting.

The Army stated in the notes to its financial statements that current
financial and logistics systems cannot fully support the consumption method
of accounting- that is, expensing OM& S when items are actually provided to
end users. However, the notes stated that the Army is moving to the
consumption method of accounting for OM& S for future years. For fiscal year
1999, the notes stated that significant portions of the Army's OM& S were
reported under the purchase method because either the systems could not
support the consumption method of accounting or there is disagreement with
the auditing community on what constitutes an item being in the hands of an
end user. With regard to items held for

GAO- 01- 45R Army OM& S Financial Reporting Page 6 training, there appears
to be little disagreement that these ammunition items were held in

warehouses at the end of the fiscal year. Items held in warehouses for
further distribution are, by definition, not in the possession of the end
users. 4 Furthermore, the lack of adequate systems does not appear to be an
impediment to reporting training ammunition because the manual work- around
procedures the Army uses to capitalize assets held for combat readiness
purposes could also be applied to training ammunition.

In addition, the fiscal year 1999 adjustments to add certain retail- level
assets to the OM& S account and deduct retail- level national defense
equipment missile assets were computed using different criteria. The
computation of the adjustment to add a value for retail- level assets
included only those on- hand assets required to maintain readiness
requirements while the computations to deduct from the OM& S account the
value of retail- level national defense equipment included assets held for
all requirements, including those held for training and other operational
purposes. Not consistently including assets held at year- end for all
authorized purposes when computing the two adjustments resulted in an
understatement of the reported OM& S balance by about $128 million for
fiscal year 1999. This amount is a part of the approximately $1 billion of
unreported training assets held in retail- level storage at the end of
fiscal year 1999.

Conclusions

The Army's current accounting practices and manual procedures for computing
OM& S balances caused compilation errors resulting in at least a $1.5
billion understatement of the Army's fiscal year 1999 OM& S balance.
Further, OM& S was understated by approximately $1 billion of ammunition
held at retail- level installations for training purposes that was excluded
from the financial reports. In the short term, written policies and
procedures for identifying the population of assets that is to be reported
and for compiling year- end balances for OM& S would help ensure that these
assets are properly reported. These issues will also be important to
consider in the development of long- term systems solutions for accounting
for OM& S to help ensure that the problems encountered in the manual process
are not perpetuated in future automated procedures.

Recommendations for Executive Action

To improve the current manual processes for the financial reporting of OM&
S, we recommend that the Army's Assistant Secretary for Financial Management
and Comptroller, in coordination with the Commanding General of the U. S.
Army Material Command and the Director of the Defense Finance and Accounting
Service, develop and implement formal written policies and procedures to
properly calculate and record year- end adjustments to the OM& S account.
Such policies and procedures should address properly and consistently
calculating the adjustment to remove national defense equipment missiles,
including reducing the value for reparable and salvage items, eliminating
timing errors, and including in- transit assets.

4 According to SFFAS No. 3, “[ a] n end user is any component of a
reporting entity that obtains goods for direct use in the component's normal
operations. Any component of a reporting entity, including contractors, that
maintains or stocks operating materials and supplies for future issuance
shall not be considered an end user.”

GAO- 01- 45R Army OM& S Financial Reporting Page 7 In addition, we recommend
that your offices collaboratively address two additional matters.

First, we recommend that as the Army moves toward implementing the
consumption method of accounting for OM& S, you apply the manual work-
around procedures used to capitalize assets held for combat readiness
purposes to items held for training as well. Second, we recommend that you
consider the issues discussed in this letter in the development and
implementation of the long- term system solutions for proper accounting of
the Army's OM& S.

Agency Comments and Our Evaluation

In written comments on a draft of this letter (see enclosure), DOD concurred
with our recommendations. Specifically, the response stated that the Army's
Assistant Secretary for Financial Management and Comptroller will work with
the staffs of the Director of the Defense Finance and Accounting Service,
Deputy Chief of Staff for Logistics, and Army Materiel Command to develop
procedures to properly calculate and record year- end adjustments to the OM&
S account beginning with the fiscal year 2000 financial statements. DOD also
agreed to address (1) the application of procedures to capitalize assets
held for training until these items are placed in the possession of end
users and (2) ensuring that the procedures for reporting these assets are
considered in the development and implementation of long- term system
solutions.

---- Within 30 days of the date of this letter, we would appreciate
receiving a written statement on actions taken to address the
recommendations included in this letter.

We are sending copies of this letter to Nelson Toye, Deputy Chief Financial
Officer, Office of the Under Secretary of Defense (Comptroller); Major
General Charles C. Cannon, USA, Acting Deputy Chief of Staff for Logistics;
and interested congressional committees. Copies will be made available to
others upon request.

Please contact me at (202) 512- 9095 or Gayle Fischer, Assistant Director,
at (202) 512- 9577, if you or your staffs have any questions concerning this
letter. James D. Berry and Ronald M. Haun were major contributors to this
assignment.

Lisa G. Jacobson Director, Defense Audits

Enclosure

Enclosure

GAO- 01- 45R Army OM& S Financial Reporting Page 8

Comments From the Department of the Army

Enclosure

GAO- 01- 45R Army OM& S Financial Reporting Page 9

Enclosure

GAO- 01- 45R Army OM& S Financial Reporting Page 10 (919530)
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