OUSD(AT&L) Acquisition Resources & Analysis (ARA) Property and Equipment Policy Going All In... On E&C Efforts DoD’s Existence & Completeness Initiative for Mission Critical Assets 1

Property & Equipment Policy Who we are: 2 Office of the Under Secretary of Defense, Acquisition, Technology and Logistics (OUSD, AT&L) Acquisition Resources & Analysis (ARA) Property & Equipment Policy Office (P&E P) Mission: To establish policies and support business process development that enables military services and defense agencies to provide more accurate and reliable information to senior leaders to support management decisions at an enterprise level.

E&C “Fun” Fact  According to the FY 2010 DoD-wide financial audit report, what is the total acquisition amount reported for General Property Plant & Equipment ? 3 $1.2 Trillion $596 Billion$1.5 Billion$822 Million

“Going All In” For E&C Efforts Existence Assertion 4 Definition One of the 5 management assertions. This assertion states all assets listed in the Accountable Property System of Record (APSR) physically exist Commonly Referred to: “Book to Floor” Physically Verified

“Going All In” For E&C Efforts Completeness Assertion 5 Definition This assertion states all assets owned by Component are recorded in the Accountable Property System of Record (APSR) Commonly Referred to: “Floor to Book” Recorded in APSR

“Going All In” For E&C Efforts Rights & Obligations Assertion 6 Definition The management assertion stating the Component has lawful claim to the equipment listed in their APSR Commonly Referred to: Ownership DD250 Notional example Receiving Report Notional example

Comptroller Guidance – August 2009 CFO Act 1990 Compliance Requires auditable financial statements Demonstrates to public that DoD is good stewards of tax dollars DoD Priorities Must focus limited resources Must improve financial information & processes Initial Focus – (1) Statement of Budgetary Resources and (2) Existence & Completeness of mission critical assets Mr. Hale Memo Statement of Budgetary Resources (Key highlights) Major financial decisions based upon budgetary related data Initial focus is Appropriations received Designed to demonstrate immediate progress Objective is to demonstrate improved fiscal stewardship (accurate, timely, recording & reporting of budgetary & expenditure transactions) Existence & Completeness Mission critical assets accurately reflected in Accountable property and logistical systems 7

Why the Emphasis on Mission Critical Assets 8 Objective 1 : To ensure mission critical assets are accurately recorded in Components’ property and logistics systems Benefits 1 : Assists Department achieve long standing goal of total asset visibility Improve reliability and accuracy of logistics supply chain and inventory systems Improve ability to timely acquire, maintain and retire assets Improve asset utilization Improve controls over assets by preventing misuse, theft and/or loss 1 May 2011 Financial Improvement and Audit Readiness (FIAR) Plan Status Report p. I-3

OUSD (Acquisition, Technology & Logistics) Fully Supports Comptroller priorities Components tasked with demonstrating asset accountability or remediation plan to address deficiencies Efforts will be reported in semi-annual Financial Improvement and Audit Readiness plan to Congress Property & Equipment Policy Office Partnering with Components to provide independent assessment of E&C efforts and asset accountability Identify control weaknesses impacting completeness and accuracy of asset accountability Dr. Carter Memo ATL Aligns with Priorities – November

What’s In It For You Secretary of Defense Goal: Financial statement audit readiness has been a Department of Defense goal for several years National Defense Authorization Act (NDAA) for FY 2010 mandates “…the financial statements of the Department of Defense are validated as ready for audit by not later than September 30, 2017”(sec. 1003). Chief Management Officer (CMO) and senior executives (including financial and logistics communities) are accountable for meeting audit readiness milestones. Individual and organizational performance plans and evaluations are in place to provide incentive Impact: Failure to meet the September 2017 deadline will invite additional Congressional oversight and increased financial management scrutiny Efforts to obtain Audit Readiness by FY 2017 will impact you and your team! Existence and Completeness of personal property and equipment is critical to audit readiness If not actively planning and executing E&C initiatives, YOU WILL BE 10

 Military Equipment makes up approximately what percentage of total GPP&E for the Department of Defense? E&C “Fun” Fact 11 20% 30%70% 50%

Existence & Completeness “Quick Wins” Goal: To demonstrate progress toward audit readiness by asserting to “existence & completeness” of a substantial dollar value of Military Equipment Focus: Mission critical assets with “high dollar” value and low units Assets subject to tight controls Existence – asset records in APSR represented by physical asset Completeness – all physical assets recorded in APSR Rights & Obligations – Component has supporting documentation establishing their rights to asset 12

Army Rotary Helicopters Tug Boats Navy Ships & Aircraft Satellites & Ballistic Missiles Ordnance USMC (Cap GE) Air Force Aircraft Ballistic Missiles Satellites MDA Sensors (satellites & family of land & sea-based radars) SOCOM Small Boats (cutters, rigid inflatables) Components’ Quick Win E&C Selections 13

14 From FIAR Guidance issued May 15, 2010 Objective: To demonstrate understanding of how the APSR relates to Financial Reporting and demonstrate key categorization of assets and their impact on financial reporting and property accountability

E&C Testing Framework 15 Existence Test Work Purpose Validate assets recorded in APSR exist Test Randomly selected assets from the APSR for each location Completeness Test Work Purpose Validate assets on the ground exist in the APSR Test Select assets to physically observe on site that are not in the Existence population Internal Controls Purpose Validate internal control processes for inventory management and accountability Test Administer questionnaire regarding processes and perform interview Supporting Documentation Purpose Ensure data in APSR is supported with documentation; verify Rights and Obligations Test Review supporting documentation maintained by the Program Office and Accountable Property Officer A framework for Components to review the accountability process for mission-critical assets to determine: accurate records in the related APSR exist, records are complete and internal controls are designed and operating effectively.

Consider These Prior to Asserting to Audit Readiness 16  Relationship to financial statements –Demonstrate an understanding of financial reporting process in order to: Ensure all material sub-processes addressed Address all material risks of misstatement  Transaction or asset populations –Demonstrate ability to reconcile details to general ledger Prove completeness of financial records Ensure management testing covers complete population  IT Controls –Demonstrate effectiveness of system/application controls In order to rely upon system generated reports/data In order to rely upon embedded controls within systems/applications  Controls Testing –Demonstrate ability to rely on effective controls for high volume business areas Avoid significant transaction testing at year-end Capitalize on strong operationally controlled environment  Transaction Testing –Demonstrate ability to support balances/assets with business transactional detail DoD must be able to demonstrate these can be done, or they’re “Audit dealbreakers”

E & C Assertion Package  For E&C initiatives, each Component required to compile & submit Assertion Package  Component Financial Management organization asserts to: –Existence of assets recorded in APSR –Completion of APSR showing all assets –Rights to all assets shown in APSR  Management’s Assertions based on: –Understanding of processes, controls & risks –Access to asset universe as recorded in APSR –Physical asset verification –Review & evaluation of Source documentation –Systems reconciliation to Financial Statements Efforts & Conclusions must be sufficiently documented so that a knowledgeable 3 rd party could review and reach same conclusion 17

Assertion Package Assertion Memo Process & Systems Documentation Test Plans & Results Corrective Action Plans Assertion Package Assertion Package to Comptroller & IG Community who review for adequacy & audit readiness determination Submit 18

Assertion Package Guidance – Where to Go 19 OUSD (Comptroller) Financial Improvement and Audit Readiness html OUSD (AT&L) Property and Equipment Policy Click on FIAR Guidance, May 2010 link Click on links under Existence & Completeness

Path toward Audit Readiness 20 Audit Readiness Assertions made Army (FY11 Q2) – existence and completeness of 8 types of ME Army (FY11 Q2) – existence and completeness of Fire and Rescue General Equipment Air Force (FY11 Q1) – existence and completeness of all ME Navy (FY10 Q4) – existence and completeness of mission critical ME Next Steps Components transitioning to defining new assessable units to include General Equipment (GE) With focus on GE, Government Furnished Property (GFP) must be addressed Numerous audit reports indicate weak accountability controls over GFP P&E P working closely with Components and Comptroller to define next assessable unit P&E P collaborating with Components, Defense Procurement Acquisition Policy (DPAP), Defense Procurement Contract Administration (DCMA) and Defense Contractors on GFP

 As of July 6, 2011, approximately how many Unique Item Identifiers (UIIs) have been loaded into the IUID Registry for Government Furnished Property (GFP)? E&C “Fun” Fact Million 450, Million600,000 BCDA

Government Furnished Property (GFP) Definition: (FAR Definitions) Government-furnished property means property in the possession of, or directly acquired by, the Government and subsequently furnished to the contractor for performance of a contract. Government-furnished property includes, but is not limited to, spares and property furnished for repair, maintenance, overhaul, or modification. Government-furnished property also includes contractor- acquired property (CAP) if the contractor-acquired property is a deliverable under a cost contract when accepted by the Government for continued use under the contract.

Government Furnished Property (GFP) Requirements for Providing Government Property (FAR ) Contractors are ordinarily required to furnish all property necessary to perform government contracts Basis for decision to provide government property must be documented* and clearly demonstrate that: In the government’s best interest Overall benefit significantly outweighs increased cost of administration Providing the property does not substantially increase government’s assumption of risk Government requirements cannot otherwise be met * = Documented equals Cost Benefit Analysis (see DFARS 245 PGI for more details)

Government Furnished Property Key Points: Cost/Benefit Analysis must support decision to furnish government property to contractor Government still owns property Government still accountable for property. Must be in an Accountable Property System of Record (APSR) GFP must be listed as part of the contract Property must be used in manner specified in contract and for the contract in question only Contractor must maintain adequate stewardship over property until formally relieved of responsibility

GFP Material Weakness Declared - FY2011  Material Weakness: –OSD declaring Department -wide Material Weakness in its annual Internal Control Statement of Assurance related to government furnished equipment (GFE): Department lacks controls over government property provided on contract Numerous audit reports highlight the lack of accountability for contract property  Problem: –Components do not have accountability over furnished equipment –Accountable Property Systems of Record (APSR) does not reflect government equipment on contract –Requests from government to contractors to create/validate legacy Government furnished equipment (GFE) items is uncoordinated and burdensome

Lessons Learned – So Far  FAR & DFARS do a good job of detailing process & requirements  Cost/Benefit Analysis must justify giving contractor equipment  Specific assets given to contractor must be individually listed & uniquely identified in contract  Contractor must have a controlled environment to fulfill stewardship responsibilities  Roles & Responsibilities are not clearly understood –Many “players” involved –Lots of “hand-offs” –Unclear responsibilities  Process gaps at the component level causing APSR not to reflect GFP  Accountable Property Officer (APO) is not part of communication chain for updates to GFP resulting in APSRs not being maintained.  IUID Registry not being properly populated

Corrective Action Plan – FY 2011  FY2011 Q3 –OUSD(AT&L) provides auditable methodology for establishing legacy contract property accountable property records for execution by the Department –Purpose Provide guidance on developing and validating a baseline for legacy serially- managed assets, i.e., GFE Provide reasonable assurance of GFE records recorded in the APSR Bring active contracts into compliance with Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) guidance Improve accountability over GFE Assure Audit Readiness 27 Amended contracts to serve as supporting documentation for management’s rights and obligations assertion

GFP Baseline Validation Methodology  Highlights: –Create Integrated Project Team to execute methodology (DCMA, DPAP, P&EPO, Contractors) –Use the IUID Registry to interface with contractors –Leverage DCMA’s Property Management System Analysis (PMSA) to validate data: “Adequate” rating & “Low” risk = accept contractor data without any subsequent validation “Inadequate” rating & “High” risk = perform wall to wall inventory to validate data “Inadequate” rating & “Moderate” risk = evaluate Corrective Action Plan and use sampling techniques to validate data –Emphasize components to focus on improving current business processes to improve accountability for GFE going forward –Modify contracts to list GFE in possession of contractors to bring contracts into FAR, DFARS compliance –Amended contracts to serve as supporting documentation for government’s rights/obligations to equipment –Complies with Senior Leadership guidance

GFP Material Weakness and Corrective Action Plan  Other Associated Efforts –Air Force has declared GFE as a “material weakness” and initiated a Corrective Action Plan –Missile Defense Agency (MDA) will declare GFE as a “material weakness” in their FY2011 Statement of Assurance –DFARS cases underway to improve contractor reporting of GFE through the IUID Registry (GFP Module)

GFP Planned Corrective Actions–FY2012 & Beyond 30

E&C “Fun” Fact  The National Defense Authorization Act for Fiscal Year 2010 mandates DoD be audit ready by what date… 31 September 2017September 2014 September 2020 September 2016 BCDA

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