List of Conditions

Name	Long Name	Description
Accounts Payable	Accounts Payable	DOD acknowledged that it does not meet accounting standards for the financial reporting of public accounts payable. "DOD cannot support its accounts payable balances because it lacks standard procedures for recording. reporting, and reconciling the amounts among the financial, accounting, and reporting systems." [DOD IG Report 2010-002, p. 10] Example#1: The Component did not properly identify and value the Military Department accounts payable balances reported in its 742 Report. Specifically, the Component inaccurately reported 73 percent of the $3 billion 742 Report accounts payable balances ($2.1 billion overstated and $0.1 billion understated) and did not include at least $453.9 million of valid accounts payable in the DOD accounts payable balance. Example#2: Accounts payable transactions were not recorded in a timely manner in the Component accounting system General Funds. Specifically, 89 of 199 vendor payment transactions sampled were not recorded in compliance with DOD FMR, which requires establishing the accounts payable on the same day as performance notification is received. The timely establishment of accounts payable transactions would allow for immediate recognition of liabilities.
Accounts Receivable	Accounts Receivable	DOD acknowledged that it is unable to accurately record, report, collect, and reconcile Intragovernmental accounts receivable as well as accounts receivable due from the public. DOD identified accounts receivable as a material weakness based on its FY 2008 assessment of internal control over financial reporting, as required by OMB Circular A-123, Appendix A. [DOD IG Report 2010-002, p. 6] Example#1: The Component performed departmental-level trading partner adjustments valued at $51.8 million that ultimately impacted the mid-year FY 2005 balance sheet. However, the Component provided insufficient documentation to support the adjustments or to trace transaction amounts to source data. As a result, auditors were not able to verify $51.8 million in trading partner adjustments to the accounts receivable balance sheet amount. Inability to document adjustments and transaction amounts significantly impacts the audit readiness of accounts receivable.
Environmental Liabilities	Environmental Liabilities	The Component did not have adequate internal controls over the complication of cost-to-complete environmental liabilities estimates reported for active and Base Realignment and Closure installations. As a result, cost-to-complete estimates used in support of environmental liabilities and disposal liabilities by the Component active and Base Realignment and Closure installations were unreliable.
Financial Management Systems	Financial Management Systems	USD(C)/CFO acknowledged that DOD financial management and feeder systems do not substantially comply with Federal financial management system requirements. DOD financial management and feeder systems were not designed to adequately support various material amounts on the financial statements. These deficiencies in financial management and feeder systems, as well as inadequate DOD business processes, prevent DOD from collecting and reporting financial and performance information that is accurate, reliable, and timely." [DOD IG Report 2010-002, p. 4] Example#1: Audit of a military equipment system identified internal control weaknesses that affected processing and reporting of military equipment financial data. The weaknesses found were related to entity-wide security program planning and management, access controls, application software development and change controls, system software, segregation of duties, and service continuity. The deficient controls created system vulnerabilities that potentially jeopardize the integrity, confidentiality, and availability of data reported by the system. Example#2: The Component did not accurately and efficiently transfer construction-in-process costs between its accounting and property management systems. As a result, the Component could not ensure the accuracy and completeness of the acquisition costs of its real property assets. Also, the Component expended resources to perform duplicate entry of cost data into its systems. The Component needs to be able to transfer construction costs from the construction agent to the installations that will account for the real property assets. In addition, the Component should develop system capabilities in accounting systems to capture all of the relevant construction costs and send acquisition costs to the property management system when placing assets in service.
Fund Balance with Treasury	Fund Balance with Treasury	DOD continues to have inconsistencies related to in-transit disbursements, unmatched disbursements, negative Unliquidated obligations, unreconciled differences in suspense accounts, and unreconciled differences between U.S. Treasury records and DOD accounting records." [DOD IG Report 2010-002, p. 5] Example#1: The Component did not reconcile the "Statement of Differences-Deposits," within 2 months as a loss or overage of funds. As a result, there was a risk that actual losses of funds would not be identified in a timely manner and agency managers could overspend or overobligate because they did not have current and accurate information on amounts in their Fund Balance with Treasury accounts. Also, unreconciled differences could impact Fund Balance with Treasury amounts reported in the financial statements. Example#2: The Component continues to experience difficulties reconciling all transactions posted to the Fund Balance with Treasury general ledger account. These difficulties persist largely because of deficiencies throughout the accounting, reporting, and reconciling processes. Specifically, the Component had not established adequate procedures to identify and record in-transit disbursement and collection transactions, and could not provide complete information, including disbursement voucher numbers, for transactions included on the Cash Management Report and Detail Pile Report.
General Property, Plant, and Equipment	General Property, Plant, and Equipment	The Component military equipment baseline values were misstated by at least $4.2 billion. In addition, the Component could not support ownership of at least 420 military equipment end-items or the completeness of the military equipment program baseline. As a result, the Component could not rely on the baseline to assert that military equipment was ready for audit. Example#1: We could not validate the ending balance of $8.6 million in assets reported on the FY 2004 Financial Statements despite available documentation to support ownership of the land assets. Our FY 2002 sample results showed that the Component could not provide supporting documentation for $1.78 billion of the $2.35 billion (76 percent) that represented administrative cost. Further, the remaining costs that made up the statistical sample represented land tract costs that included unsupported costs for land tracts and unsupported values for land assets acquired through donations. In addition, the value of land assets could have been misstated because the ending balance included costs associated with land tracts that were disposed of and did not include costs of reservoirs that were misclassified as buildings and structures. As a result, the ending balance for land assets was not ready for substantive audit testing and audit.
Government-Furnished Material and Contractor-Acquired Material	Government-Furnished Material and Contractor-Acquired Material	The Component did not accurately report the amount of its sponsor-owned material at the location. About $130.7 million of the assets were either misclassified or overstated. Also, about $84.1 million in assets not owned by the Component were included in the amounts reported. The Component inventory controls did not ensure that sponsor-owned material was properly reported and updated in a timely manner. In addition, sponsor-owned material was being retained and stored beyond allowable time periods. As a result of these conditions, the Component was not in compliance with provisions of SFFAS No. 3 as it relates to operating materials and supplies. The Component sponsor also lacked total asset visibility over sponsor-owned material at the location.
Intragovernmental Eliminations	Intragovernmental Eliminations	DOD disclosed that it cannot accurately identify most of its Intragovernmental transactions by customer because DOD systems do not track the buyer and seller data needed to match related transactions. In addition, DOD is unable to fully reconcile Intragovernmental transactions with all Federal partners. DOD acknowledged that its inability to reconcile most Intragovernmental transactions results in adjustments that cannot be fully supported. [DOD IG Report 2010-002, p. 12] Example#1: Components are unable to identify intragovernmental transactions by customer, the Components cannot ensure that they are properly eliminating or disclosing all intragovernmental accounts payable in the financial statements, and the Components adjust their non-DOD intragovernmental accounts payable amounts to agree to seller-side balances for financial statement reporting. As a result, reported accounts payable balances do not agree with the transaction detail in supporting accounting systems. Example#2: Aged Accounts Payable are not reviewed to identify and resolve balances that may no longer be valid or warrant investigation Example#3: DOD records and reports accounts payable balances in its financial statements without reconciling to transaction detail in supporting accounting systems. Example#4: Procedures for accounting recognition of unbilled purchases of goods and services are not adequate. Example#5: The actual or constructive receipt or acceptance of goods and services should be the basis for recording accounts payable. Internal controls are not adequate to ensure the Components always follow this policy.
Inventory	Inventory	The Component did not adequately review inventory accounting adjustments or correct the erroneous, missing, or duplicate supply transactions causing discrepancies in inventory balances recorded in the supply systems. Not reviewing and correcting adjustments results in inaccurate inventory records; distorted reports that inventory managers use to make decisions to buy, repair, and excess material; and unreliable and inaccurate financial reports used to measure the performance. Example#1: The inventory reconciliation process at the Component did not adequately fulfill DOD financial and operational requirements. Specifically, the automated portion of the process did not accurately select reconciliation items for causative research in accordance with DOD criteria, calculate accurate adjustments, post adjustments reversals to the proper general ledger accounts, and maintain sufficient audit trails. Further, personnel responsible for manual causative research did not perform all required research, consistently perform adequate causative research and post proper adjustments, complete causative research in a timely manner, and request special physical inventories when necessary. The control weaknesses impact the overall integrity of the inventory records that DOD managers rely on for operational mission decisions and financial reporting purposes.
Material Weakness	Material Weakness	A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.
Operating Materials and Supplies	Operating Materials and Supplies	The Component did not accurately report the sponsor-owned material it included in the FY 2006 Financial Statements. The Component misclassified the material and overstated its reported value at the four locations we visited. More than $2.5 million of sponsor-owned material was improperly classified and reported as operating materials and supplies, including $1.9 billion of special tooling and test equipment, $481.6 million of aviation support equipment held for Foreign Military Sales, and $113.7 million of general support equipment. The C/C/A needed to ensure that its financial reporting of sponsor-owned material complied with SFFAS Nos. 3 and 6. Also, it needed to perform a complete reconciliation of its sponsor-owned material inventory amounts recorded in the asset management system with the actual amounts of on-hand inventory.
Other Accounting Entries	Other Accounting Entries	DOD acknowledged that it continues to enter material amounts of unsupported accounting entries." [DOD IG Report 2010-002, p. 13] Example#1: We audited a sample of 160 journal vouchers. We identified 37 journal vouchers with a net value of $4.1 billion as unsupported. We also identified 110 of these journal vouchers with operational control deficiencies. As a result, we estimate that the Component processed 220 unsupported journal vouchers and 682 journal vouchers with operational control deficiencies Example#2: Component officials did not properly review and approve 102 adjustments for $1.1 trillion made to financial statement data before closing the accounting records. As a result, the Component could process erroneous journal vouchers that can only be corrected at the request of USD(C)/CFO and would require the Assistant Secretary of the Component (Financial Management and Comptroller) to reconfirm the statements.
Reconciliation of Net Cost of Operations to Budget	Reconciliation of Net Cost of Operations to Budget	SFFAS No. 7, "Accounting for Revenue and Other Financing Sources," requires a reconciliation of proprietary and budgetary information to assist users in understanding the relationship between the net cost of operations and the budgetary resources obligated by the entity during the period." (DODIG Report 2010-002, p.14). Example #1: In 24 of the reports, we discussed deficiencies in DOD's reconciliation of net cost of operations to budget. DOD acknowledged that it is unable to reconcile budgetary obligations to net costs without making unsupported adjustments. Specifically, budgetary data does not agree with proprietary expenses and capitalized assets. DOD made unsupported adjustments of $7 billion (absolute value) to reconcile obligations to the Statement of Net Cost. While none of the standard audit reports discussed this area directly, 24 of the 40 disclaimers cited the issue as one of the internal control weaknesses that led to the disclaimer.
Statement of Net Costs	Statement of Net Costs	DOD acknowledged the following deficiencies related to the Statement of Net Cost: (1) the amounts presented for the GFs may not report actual accrued costs, (2) although WCFs are generally recorded on an accrual basis, as required by accounting principles generally accepted in the United States, the systems do not always capture actual costs in a timely manner, (3) the Statement of Net Cost is not presented by program, in alignment with major goals and outputs described in DOD strategic and performance plans as required by the Government Performance and Results Act, and (4) revenues and expenses are reported by appropriation category because financial processes and systems do not collect costs according to performance measures." {DOD IG Report 2010-002, pp. 10-11]