Background Navy’s Real Property Audit  Assertions DOD has defined audit readiness as having the capabilities in place that  allow an auditor to plan and perform a full financial statement audit that  results in actionable feedback to DOD. In DOD’s May 2016 FIAR Plan  Status Report, the DON initially asserted that it would be audit ready with  regard to real property (including construction-in-progress) for the  existence and completeness assertions by June 2016 and with regard to  the valuation assertion by March 2017. Subsequently, in DOD’s  November 2016 FIAR Plan Status Report, the DON asserted that it would  be audit ready for the existence, completeness, and valuation assertions  by March 2017. In DOD’s May 2017 FIAR Plan Status Report, the DON  reported that it had validated that the existence and completeness  assertions for real property. Ultimately, the DON reported in DOD’s  November 2017 FIAR Plan Status Report that it had achieved audit  readiness for the existence and completeness assertions and was in the  process of determining audit readiness for the valuation assertion. Real Property Valuation  Methods In August 2016, the Federal Accounting Standards Advisory Board issued  Statement of Federal Financial Accounting Standards (SFFAS) No. 50,  which allows reporting entities to apply alternative valuation methods in  establishing opening balances of general property, plant, and equipment  (G-PP&E). Such alternative valuation methods may be applied in  reporting periods beginning after September 30, 2016. SFFAS No. 50  permits each reporting entity to use alternative methods when presenting  financial statements, or one or more line items, (1) for the first time or   (2) after a period during which existing systems could not provide the  information necessary for producing financial statements in accordance  with generally accepted accounting principles (GAAP) without using  alternative methods. SFFAS No. 50 permits reporting entities to apply an  alternative method only once per line item after the period during which  the existing systems could not provide the information for producing  financial statements in accordance with GAAP. As of March 2018, the  Navy has not made an unreserved assertion attesting that its opening  balances of G-PP&E are reported in accordance with SFFAS No. 50.  After opening balances are established using an alternative valuation  method, federal accounting standards require historical cost to be used in  valuing G-PP&E acquired or constructed. Plant Replacement Value  Being Used to Develop  Opening Balances for the  Navy’s Buildings DOD already uses plant replacement value (PRV) for decision making  and management purposes and has reported that it will use PRV to  develop opening balances for the Navy’s buildings. Navy is also currently  using PRV (an allowable alternative valuation method under SFFAS No.  50) for financial statement reporting of its buildings and plans to do so  until the DON makes an unreserved assertion that its financial statements  or its G-PP&E line item or reported assets classes are presented fairly in  accordance with GAAP. PRV represents an estimate of the replacement  cost in current year dollars to design and construct a facility to replace an  existing facility at the same location. As such, the replacement (or  construction) cost factor, generally applied to buildings as a dollar amount  multiplied by square footage, is also indexed to increase or decrease the  amount to account for other variations in costs for different geographic  areas or complexity of the facility. Once the calculation prescribed by the  formula has resulted in PRV, accumulated depreciation is computed  based on the placed in service date. Figure 1 shows an example of the  PRV formula being applied to an enlisted housing facility. The valuation  adjustment factors, as shown below, vary by location and use of the  building. Acquisitions and capital improvements made to existing  buildings during subsequent financial periods are to be recorded at the  actual cost of obtaining the asset or improvement and placing it into  service. Internal Control Activities Internal control activities, as defined in Standards for Internal Control in  the Federal Government, are the policies, procedures, and techniques  that enforce management’s directives to achieve the entity’s objectives  and address related risks. A deficiency in internal control exists when  the design, implementation, or operation of a control does not allow  management or personnel, in the normal course of performing their  assigned functions, to achieve control objectives and address related  risks. Internal Control  Deficiencies Impaired  the Navy’s Ability to  Properly Record and  Report Certain of Its  Buildings We identified internal control deficiencies that impaired the Navy’s ability  to assert that as of September 30, 2016, (1) buildings recorded in  iNFADS and reported as assets in Navy’s financial statements existed  and (2) all of the Navy’s buildings were recorded in iNFADS and correctly  reported as assets in Navy’s financial statements. As shown in figure 2,  the effects of these internal control deficiencies contributed to the Navy  (1) continuing to maintain records in iNFADS for buildings that had been  demolished, sometimes many years ago, and including these buildings as  assets in its financial statements; (2) excluding some of the buildings that  it owns from being recorded in iNFADS and reported as assets in its  financial statements; (3) erroneously reporting nonfunctional buildings as  assets in its financial statements; and (4) excluding certain buildings  from being reported as assets in its financial statements that met or  exceeded DOD’s capitalization threshold. The Navy Did Not Have  Properly Designed  Procedures and Related  Control Activities to  Reasonably Assure Proper  Accounting for Its  Demolished Buildings While the Navy had written procedures for the multistep process for  disposal of real property by demolition, these procedures and related  control activities were not properly designed to reasonably assure that  demolished buildings were recorded as disposed and removed from the  accounting records. Specifically, the procedures and related control  activities did not reasonably assure that RPAOs were provided with a  signed demolition approval document and the related disposal form.  Without these documents, an RPAO may not be aware that a building has  been demolished and therefore may not take the appropriate actions to  record the asset as disposed in iNFADS so that the asset record is  subsequently removed from iNFADS at the end of the fiscal year and the  asset is thereby not included in Navy’s financial statements. When a building is designated for disposal, multiple parties are involved  in the demolition process. This business process can involve the  installation’s Public Works Department; the Regional Commander; the  Facilities Engineering Command realty specialist; the Commander, Navy  Installations Command; the demolition project manager; the demolition  contractor; and the General Services Administration. The multiple  functional offices involved in the disposal by demolition business process  and the lack of communication between the offices can result in buildings  being demolished without the RPAO’s knowledge. The Navy’s procedures  for the disposal of real property by demolition state that the RPAO is to  receive a signed demolition approval document from the installation’s  Public Works Department. After the demolition has been completed, the  project manager is to work with the demolition contractor (if applicable),  the planner, and the RPAO to complete the disposal form. The RPAO,  within 10 days of the completion of the demolition, is to upload supporting  documentation about the disposed asset into iNFADS and create the  iNFADS disposal record. The Navy’s procedures did not include a  control activity, such as a step to verify the RPAO’s receipt of a signed  demolition approval document and disposal form, to reasonably assure  that the RPAOs are notified of all building demolitions. These notifications  are critical so that each RPAO can properly account for a building by  creating an iNFADS disposal record, which ultimately results in records  for demolished buildings being deleted from iNFADS and therefore not  included as assets in the financial statements. During our testing of a nongeneralizable sample of buildings in iNFADS,  we identified buildings that had been demolished prior to September 30,  2016, but were still recorded in iNFADS as of September 30, 2016, and  therefore were reported as assets in Navy’s financial statements as of  September 30, 2016. According to SFFAS No. 6, Accounting for  Property, Plant, and Equipment, assets, including real property, shall be  removed from the asset accounts along with the associated accumulated  depreciation if the asset no longer provides service to the operations of the entity. The inclusion of demolished buildings in iNFADS results in  inaccurate Navy real property records and can lead to an overstatement  of reported balances for real property in Navy’s financial statements. Of  the 40 buildings for which we performed book-to-floor tests for existence,  we found that 4 had been destroyed and no longer physically existed but  were still recorded in iNFADS and reported as assets in Navy’s financial  statements. Because we used a nongeneralizable sample of buildings,  results from the sample cannot be used to make inferences about all of  the Navy’s buildings. The four demolished buildings are described below. A six-car garage building had been demolished several years ago  according to the Navy, but its operational status was shown as active  in iNFADS as of September 30, 2016. Navy officials stated that while  the actual demolition date for this building is not known, based on the  demolition drawing for another building nearby, it appears to the Navy  that the garage was demolished prior to 2001. A marina shop building was demolished as of June 30, 2016, so that a  new building could be constructed at the same location. As of  September 30, 2016, the operational status of this marina shop was  shown as active in iNFADS. The disposal of the marina shop building  was not recorded in iNFADS until May 2017. A storage building was demolished in February 2016 but was still  recorded in iNFADS as of September 30, 2016. The RPAO was not  notified that the building had been demolished until April 2016. After  searching for the relevant paperwork, which could not be located, the  RPAO prepared the disposal form that was dated December 20,  2016. An aviation warehouse, which had previously been demolished, was  still recorded in iNFADS as of September 30, 2016. According to Navy  officials, the demolition package was initiated in 2013, but the  warehouse needed to remain in iNFADS until the site restoration work  was completed. Based on available information, the warehouse was  demolished around May 2014. The site restoration work was  completed in 2016, but the RPAO was never notified. According to  supporting documentation, a search for the relevant paperwork was  completed, after which the building was recorded in iNFADS as  disposed in March 2017. Consistent with our findings, the Navy Office of Financial Operations, in  preparing a white paper on real property accumulated depreciation, also  found that there were buildings recorded as existing in iNFADS that did  not exist. For this white paper, the Navy selected a generalizable  sample of 650 real property assets, including buildings, to test. Noted in  the white paper as of May 31, 2017, only 584 of the 650 sampled real  property assets were able to be tested. Specifically, 51 could not be  validated, and an additional 15 real property assets, or 2.5 percent of the  sample, were found to not exist, but were still recorded in iNFADS as  existing. Based on Navy’s testing, we estimated that 2.5 percent of real  property in the Navy’s iNFADS database as of May 2016 no longer  existed but had not been recorded in iNFADS as disposed. The Navy Lacks  Procedures and Related  Control Activities to  Reasonably Assure Proper  Accounting for Certain  Buildings During some of our site visits, the RPAOs stated that some buildings  acquired or constructed with non-military construction funds (Non- MILCON) and that cost under $750,000 were not recorded in iNFADS.  A Navy official confirmed that there were issues with recording Non- MILCON construction costing $250,000 and above, but under $750,000,  for financial reporting purposes. Specifically, buildings or capital  improvements are sometimes built using other Non-MILCON funding, and  in some cases, an entity other than NAVFAC spends the funds. The  RPAOs therefore may not know of buildings constructed as Non-MILCON  projects if NAVFAC was not involved in the construction project. For  example, at one location, we observed a sentry house that had been  constructed for the Navy using Non-MILCON funding around 2006.  However, the sentry house was not recorded into iNFADS until 2014  when the building was identified as existing through the Navy’s physical  inventory procedures. NAVFAC did not have final procedures and related control activities to  reasonably assure that buildings funded with Non-MILCON funding below  $750,000 were consistently recorded in iNFADS and, if the cost exceeded  the capitalization threshold, were reported as assets in the Navy’s  financial statements. In 2015, the Navy began to develop both the  process and system changes required to track construction-in-progress  costs for the Navy’s Non-MILCON projects with costs greater than  $750,000, so that the cost of the buildings associated with these projects  would be properly recorded in iNFADS. In March 2017, NAVFAC updated  its BMS process document with the steps for Non-MILCON buildings with  costs greater than $750,000 and adopted the new guidance in May 2017. According to NAVFAC officials, the Navy has already determined that an  equivalent detailed process is needed for Navy Non-MILCON buildings  costing less than $750,000 to reasonably assure that the RPAOs are  aware of these projects. The RPAOs are not involved in project  authorization or project funding and otherwise would be unaware of these  Non-MILCON projects. As a result, the RPAOs may not know of Non- MILCON buildings acquired or constructed with operations and  maintenance or other Non-MILCON funding under $750,000 and  accordingly do not have documentation to record the buildings’  acquisitions in iNFADS. A BMS process document that addresses Non- MILCON projects costing under $750,000 is being developed. However,  according to a Navy official, a completion date has not been set for  finalizing this document. Until effective procedures are implemented,  Navy buildings constructed with Non-MILCON funding costing less than  $750,000 may not be timely recorded in iNFADS, which would cause  iNFADS to have incomplete information. If the buildings are not recorded  in iNFADS, the buildings will not be reported as assets in the financial  statements, as required, when the cost of the building meets or exceeds  the Navy’s capitalization threshold of $250,000. The Navy Lacks Written  Procedures and Related  Control Activities to  Reasonably Assure Proper  Financial Reporting for  Buildings Coded as  Nonfunctional NAVFAC did not have written procedures requiring buildings coded as  nonfunctional in iNFADS to be excluded when accumulating data from  iNFADS for financial reporting purposes, nor did it have related control  activities to provide reasonable assurance that such buildings were  excluded. As a result, the Navy incorrectly included the amounts  associated with buildings coded as nonfunctional when accumulating  iNFADS information for financial reporting purposes. Specifically, based  on our aggregation of iNFADS data, the Navy erroneously reported 189  buildings coded as nonfunctional, amounting to $411 million in gross  value, $403 million in accumulated depreciation, and $8 million in net  book value, as assets in the financial statements as of September 30,  2016. For example, one building coded as nonfunctional that we  observed during our site visits was constructed in 1909, with a PRV of  over $5 million in iNFADS. The building has been vacant and unusable  since September 11, 2002, but was included as an asset in the financial  statements for fiscal year 2016. According to federal accounting standards, fully impaired assets, such as  nonfunctional buildings, should not be included in an entity’s financial  statements and related notes. Specifically, SFFAS No. 6, Accounting for  Property, Plant, and Equipment, states that G-PP&E, which includes real  property, shall be removed from the accounts along with the associated  accumulated depreciation if the asset no longer provides service to the  operations of the entity. Moreover, SFFAS No. 44, Accounting for  Impairment of General Property, Plant, and Equipment Remaining in Use,  reiterates the requirement of SFFAS No. 6 by stating that fully impaired  assets should be removed from the G-PP&E accounts along with the  associated accumulated depreciation if, prior to disposal, the asset no  longer provides service in the operations of the entity. Navy officials confirmed that they do not have written procedures or  related control activities requiring buildings coded as nonfunctional in  iNFADS to be excluded when accumulating iNFADS data for financial  statement reporting purposes. As a result, for fiscal year 2016, the Navy  erroneously included buildings coded as nonfunctional as assets on its  financial statements. Navy officials agreed that nonfunctional buildings  meet the impairment definition of SFFAS No. 6 and No. 44, as these  buildings no longer provide service to Navy operations, and therefore  should be removed from the G-PP&E accounts. For fiscal year 2017,  Navy officials stated that nonfunctional buildings were reclassified from  the asset class that includes buildings to the “Other” asset class.  However, both asset classes were reported as G-PP&E on the balance  sheet, and as a result, the nonfunctional buildings were again reported as  assets in the G-PP&E line item in the Navy’s financial statements. The Navy Lacks Written  Procedures and Related  Control Activities to  Reasonably Assure Proper  Financial Reporting for  Buildings That Meet or  Exceed DOD’s  Capitalization Threshold NAVFAC officials confirmed that they did not have written procedures and  related control activities to reasonably assure that buildings recorded in  iNFADS that met or exceeded DOD’s established capitalization threshold  are properly included as assets in Navy’s financial statements. For  financial reporting, the Navy’s policy is to capitalize buildings based on  the established capitalization threshold in effect when each building was  placed in service. According to Navy officials, buildings placed in service from October 1,  2007, through September 30, 2013, should have been included as assets  in the financial statements if the buildings were valued at or above  $20,000, the capitalization threshold that was in place during that period.  However, for buildings placed in service during this period, the Navy  continued to use the previous capitalization threshold of $100,000 rather  than the $20,000 threshold. An Office of the Secretary of Defense  memorandum dated September 20, 2013, directed the services to  increase the capitalization threshold to $250,000 for assets acquired and  placed in service on or after October 1, 2013, and the Navy implemented  this change. Further, the Navy incorrectly reported in the notes to its fiscal  year 2016 and 2017 financial statements that the $20,000 capitalization  threshold was used for real property. Navy officials stated that when DOD’s capitalization threshold was  changed to $20,000, the Navy did not adopt the reduced threshold  pending an evaluation of changes needed to iNFADS and the  development of procedures to implement the lower threshold. Because  the Navy did not adopt DOD’s $20,000 capitalization threshold and  instead continued to use the $100,000 threshold, buildings placed in  service in fiscal years 2008 through 2013 with a value at or above  $20,000 but less than $100,000 were not reported as assets in the Navy’s  financial statements as of September 30, 2016, and in prior years. Navy officials could not quantify the effect on its financial statements that  occurred based on the Navy’s use of the $100,000 capitalization  threshold instead of the $20,000 threshold for fiscal years 2008 through  2013. Additionally, the Navy by not adopting DOD’s $20,000 capitalization  threshold resulted in inconsistent reporting in DOD’s consolidated  financial statements. Challenges the Navy  Faces in Complying  with Federal  Accounting Standards  for Valuing Its  Buildings The Navy faces several challenges in valuing its buildings in accordance  with federal accounting standards, including (1) finalizing documentation  of actual cost information for buildings that are acquired and placed in  service after the Navy’s opening balances have been established based  on alternative valuation methods permitted by SFFAS No. 50;   (2) capturing and recording costs of improvements that should be  reported; (3) consistently completing asset evaluations for each building  every 5 years as required by DOD Instruction 4165.14 to help ensure that  each building’s information in iNFADS is correct; and (4) determining  placed in service dates for previously unrecorded buildings that are  subsequently discovered/identified through physical inventories/asset  evaluations. Navy officials are aware of these challenges and have  various efforts under way to address them. Effective implementation of  these efforts is crucial to help address these challenges. Finalizing the DD-1354 for  Buildings Being Valued at  Cost As we have previously reported, each completed military construction  project includes the DD-1354, Transfer and Acceptance of DOD Real  Property, to formally transfer ownership from the constructing entity to the  acquiring entity. The final version of the DD-1354 documents the final  total cost of the project in iNFADS, the source of real property information  for financial reporting. Navy officials acknowledge that significant delays  may occur in getting to the final version of the DD-1354, which occurs  after all costs are determined. If there are issues such as cost overruns or  contract disputes, the delays in completing the final version of the form  can be substantial. The Navy considers these substantial delays in  getting to the final version of the DD-1354 to be an obstacle to timely  documenting the final costs of buildings that are acquired and placed in  service after the Navy’s opening balances have been established, based  on alternative valuation methods permitted by SFFAS No. 50. During our  site visits when we tested 79 buildings, we identified 13 buildings, either  constructed or with capital improvements made from 2012 through 2016,  for which a final DD-1354 had not yet been completed. According to several RPAOs we interviewed, getting to the final version of  the DD-1354 is a complicated process, requiring coordination among  multiple responsible parties and units, and determines all costs  associated with the construction. For example, a complex project that  involves the construction and demolition of multiple buildings makes the  allocation of the construction costs among the buildings of the project  considerably challenging. Recording Capital  Improvements According to SFFAS No. 6, costs associated with capital improvements— those that extend the useful life of a building or improve its capacity—are  to be recorded in the accountable real property system if the actual cost  exceeds the capitalization threshold. Navy officials reported that one  obstacle to capitalizing the costs of improvements is determining the  actual costs associated with the projects for capital improvements that are  made after the opening balances are established using alternative  valuation methods. The Navy has developed and is testing its  methodology to properly account for capital improvements to buildings.  This methodology uses an automated link from the Facilities Information  System (which has the construction-in-progress account) to iNFADS. The  success of this methodology will be critical for capturing capital  improvements for buildings. The inability to account for the total costs associated with capital  improvements to buildings after the opening balances have been  established using alternative valuation methods would result in the  undervaluing of the total actual cost and annual depreciation expense  associated with the buildings. Once PRV is used to establish the opening  balance for buildings, the Navy must accurately record capital  improvements in iNFADS in order to appropriately value the buildings and  record the correct depreciation expense. Performing Timely Asset  Evaluations We observed that the Navy has taken steps to improve the quality of its  asset evaluations by completing and maintaining supporting  documentation. However, we found that the Navy has not consistently  completed asset evaluations for each building every 5 years as required  by DOD policy. An asset evaluation is a key Navy control to help ensure  that the information recorded in iNFADS is accurate. While the Navy  issued a revised BMS process document formalizing asset evaluations  procedures, these evaluations have not been performed every 5 years as  required. Specifically, in a June 30, 2017, Navy analysis, the Navy  determined that while an asset evaluation is required to be performed  every 5 years, the asset evaluations had not been done for more than 5  years for 17.4 percent of real property, including buildings. When asset  evaluations are not done every 5 years for each building, there is an  increased risk that information in iNFADS may not be accurate. In  addition, as a part of asset evaluations, Navy personnel verify key  information, including the square footage of buildings that is used for the  PRV calculation. The Navy has efforts under way to perform asset  evaluations for those buildings for which these evaluations had not been  completed in a 5-year period, including using contractors to help complete  the asset evaluations. Determining Placed in  Service Dates for  Buildings Found by  Inventory As stated in DOD’s Financial Management Regulation, real property  assets and capital improvements to these assets are to be capitalized as  of the date each asset was placed in service. Navy officials occasionally  identify existing buildings that have not been recorded in iNFADS and are  referred to as buildings found by inventory. These buildings are often  identified through NAVFAC’s asset evaluations and periodic virtual  inventories. For these buildings, the placed in service dates may not be  known. While DOD and the Navy have subsequently developed  procedures for determining the placed in service dates for buildings found  by inventory, for some Navy buildings, the placed in service date  recorded in iNFADS was the date the building was found, rather than the  actual placed in service date. According to previous guidance, if a placed in service date could not be  identified through the due diligence process, then the building was  recorded as placed in service as of the date it was found. The Navy’s  BMS process document for real property found by inventory, dated  October 25, 2016, stated each building found by inventory is to be  recorded with an estimated placed in service date determined using the  criteria provided in DOD’s February 2015 guidance. We were told that  until December 2016, any building found by inventory was recorded with  a placed in service date of the day the building was found. The Navy’s use of the date the building was found by inventory as the  placed in service date can substantially affect the information in iNFADS.  For example, one of the buildings in our nongeneralizable sample was an  old, abandoned maintenance shed. However, based on the iNFADS  property record, the building appeared to be a relatively new building  based on the recorded placed in service date of August 16, 2016, the  date it was found by inventory (see fig. 3). As a result, the building is  recorded in iNFADS on August 16, 2016, the placed in service date and  therefore the accumulated depreciation would be less than a building with  an older placed in service date. The complete, timely, and accurate  recording of the placed in service date information enables ensures  reliable and accurate reporting of real property information in DOD’s  financial statements. Navy officials are aware of the challenges discussed above and have  various efforts under way to address them. Effective implementation of  these efforts is crucial to help address these challenges. Conclusions The Navy’s inability to accurately account for real property assets,  specifically its buildings, continues to be a material weakness reported by  independent auditors. Inadequate procedures and internal control  deficiencies prevent the Navy from accurately recording and reporting its  buildings and knowing how many buildings it actually owns. Some  buildings recorded in the Navy’s accountable real property system,  iNFADS, do not exist. Similarly, the Navy does not have adequate  procedures and related controls to reasonably assure that all Non- MILCON buildings and capital improvements costing less than $750,000  are recorded in iNFADS. Additionally, the Navy erroneously reported  nonfunctional buildings as assets in its financial statements and excluded  certain buildings that met or exceeded DOD’s capitalization threshold as  assets in its financial statements. As a result of these deficiencies, the  Navy does not have adequate information to support reliable reporting of  real property in its annual financial statements, and DOD, Congress, and  others do not have reliable, useful, and timely information for decision  making. Recommendations for  Executive Action We are making the following four recommendations to the Navy. The Commander of NAVFAC should develop and implement  procedures and related control activities for real property disposed of  by demolition to provide reasonable assurance that the RPAOs timely  receive a signed demolition approval document and disposal form, so  that demolished buildings are recorded as disposals in iNFADS and  removed at the end of the fiscal year. (Recommendation 1) The Commander of NAVFAC should finalize and implement written  procedures and related control activities to reasonably assure that all  buildings costing less than $750,000 and funded with Non-MILCON  funding are recorded in the Navy’s iNFADS and therefore included as  assets in the financial statements if they meet or exceed the Navy’s  capitalization threshold. (Recommendation 2) The Commander of NAVFAC should develop and implement written  procedures and related control activities to reasonably assure that  buildings coded as nonfunctional in iNFADS are excluded for financial  statement reporting purposes. (Recommendation 3) The Commander of NAVFAC should develop and implement written  procedures and related control activities related to DOD’s  capitalization thresholds and outline the specific information to be  accumulated from iNFADS to reasonably assure that real property  assets are properly reported for financial statement reporting  purposes. (Recommendation 4) Agency Comments We provided a draft of this report to the Navy for comment. In its  comments, reproduced in appendix II, the Navy concurred with our four  recommendations. We are sending copies of this report to the Secretary of Defense, the  Under Secretary of Defense (Comptroller)/Chief Financial Officer, the  Deputy Chief Financial Officer, the Office of the Assistant Secretary of  Defense (Energy, Installations, and Environment), the Assistant Secretary  of the Navy (Energy, Installations and Environment), the Assistant  Secretary of the Navy (Financial Management & Comptroller), the  Director of the Office of Management and Budget, and appropriate  congressional committees. In addition, the report is available at no charge  on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact  me at (404) 679-1873 or cordreyw@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III. Appendix I: Objectives, Scope, and  Methodology This engagement was initiated in connection with the statutory  requirement for GAO to audit the U.S. government’s consolidated  financial statements. The focus of this engagement was the United  States Navy’s (Navy) real property, specifically buildings, because the  Department of the Navy was the first military department to initially assert  real property audit readiness for existence and completeness. Our  objectives were to (1) determine the extent to which the Navy had internal  control deficiencies, if any, that may impair its ability to assert that its  buildings, as reported in its financial statements, exist and that the  information about the buildings is complete and adequately supported by  property records and (2) identify the challenges, if any, that the Navy  faces in valuing its buildings in accordance with federal accounting  standards. To address our first objective, we interviewed Department of Defense  (DOD) and Navy officials and reviewed relevant documentation, including  the Naval Facilities Engineering Command’s (NAVFAC) Business  Management System (BMS) process documents, which are similar to  desktop procedures, to identify control activities over buildings. We  reviewed the results from prior real property audit readiness testing  conducted by a contractor that the Navy engaged to help it achieve audit  readiness for its real property. We performed data analyses of buildings  in the Navy’s accountable real property system, the internet Navy Facility  Assets Data Store (iNFADS) as of September 30, 2016. To assess the  reliability of data we used, we reviewed relevant Navy documentation,  interviewed knowledgeable officials, reviewed policies and procedures  regarding collecting and maintaining the data, performed data analyses to  look for logical inconsistencies, and traced a nongeneralizable sample of  buildings to supporting documents. We concluded that the data elements  we used from iNFADS were sufficiently reliable for the purposes of  selecting a nongeneralizable sample of buildings to test. We selected the Norfolk and San Diego geographic areas for site visits  because of the numerous bases in each area and the proximity of 5  installations to one another in each of the areas. We analyzed data from  the iNFADS database as of September 30, 2016, to select buildings that  fit our selection criteria for our nongeneralizable sample of buildings for  book-to-floor testing from these two geographic areas. These selection  criteria included age of the buildings (both older and newer buildings);  square footage of the buildings, including small buildings (such as  sentry houses) and large buildings (such as training facilities and  barracks);  cost per square foot of the buildings, including lower cost (such as  warehouses) and higher cost (sentry houses with sophisticated  electronics); use of the buildings, to include a variety of uses (such as electrical  substations, training facilities, and offices); and operational status code of the buildings, including active and  nonfunctional. We conducted site visits in Norfolk and San Diego to interview real  property accountable officers (RPAO), observe buildings, and review the  available supporting documents for the sample buildings. We tested 40  buildings book to floor by visiting these buildings at 10 Navy installations  across two geographic areas. During our site visits, we also selected a  nongeneralizable sample of a total of 39 buildings on Navy installations to  be tested floor to book—19 from 5 Norfolk and 20 from 5 San Diego  areas. We met with the RPAOs at each of the10 installations and tested  by observation whether the 40 buildings selected for book-to-floor testing  existed. In addition to testing for existence, we compared the descriptions  of the buildings in iNFADS with the buildings that we observed. For  example, if the placed in service date in iNFADS was recent, we would  observe whether it was a newer building. We selected a nongeneralizable  sample of buildings for floor-to-book testing based on proximity to the  buildings we had selected for book-to-floor testing. For the 39 buildings  that we tested floor to book, we reviewed available supporting  documents. We also reviewed a Navy Office of Financial Operations white paper on  the risk and potential amount of material misstatement of accumulated  depreciation on the Navy’s general fund consolidated balance sheet.  This white paper presented the results of a statistical sample for which 15  selected real property assets were excluded from testing because the  assets no longer existed. Two social science specialists with expertise in  research design and statistics reviewed the methodology and sampling  used in this study and found them to be sufficient for the purposes of  estimating the proportion of Navy real property assets reported as  existing in iNFADS that did not exist as of May 31, 2017. We used the  sampling information in the study to create a confidence interval around  the estimate of the proportion of buildings at the 95 percent confidence  level. To address our second objective, we reviewed federal accounting  standards, including Statement of Federal Financial Accounting Standard  (SFFAS) No. 50, and the Navy’s documents for recording assets into  iNFADS. We also interviewed agency officials responsible for financial reporting and real property management, including the RPAOs at the  installations we visited, to identify the challenges the Navy faces in  recording buildings at actual cost once the opening balances have been  established according to SFFAS No. 50. While our audit objectives focused on certain control activities related to  (1) the existence and completeness of the Navy’s buildings as reported in  its financial statements and the completeness and adequacy of  supporting property records for those buildings and (2) the valuation of  the Navy’s buildings in accordance with federal accounting standards, we  did not evaluate all control activities and other components of internal  control. If we had done so, additional deficiencies may or may not have  been identified that could impair the effectiveness of the control activities  evaluated as part of this audit. We conducted this performance audit from September 2016 to May 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Appendix II: Comments from the Department  of the Navy Appendix III: GAO Contact and Staff  Acknowledgments GAO Contact Staff  Acknowledgments In addition to the contact named above, the following individuals made  key contributions to this report: Paul Kinney (Assistant Director), Marcia  Carlsen, Dennis Clarke, Francine DelVecchio, Maxine Hattery, Jason  Kelly, Jared Minsk, Lisa Motley, Robert Sharpe, Sandra Silzer, and  Shana Wallace.
This engagement was initiated in connection with the statutory requirement for GAO to audit the U.S. government's consolidated financial statements. The 2018 National Defense Authorization Act requires that the Secretary of Defense ensure that a full audit is performed on the financial statements of DOD for each fiscal year and that the results be submitted to Congress no later than March 31 of the following fiscal year. The Navy was the first military department to assert real property audit readiness related to DOD's Financial Improvement and Audit Readiness effort. For this report, GAO's objectives were to (1) determine the extent to which the Navy had internal control deficiencies, if any, that may impair its ability to assert that its buildings, as reported in its financial statements, exist and that the information about these buildings is complete and adequately supported by property records and (2) identify the challenges, if any, that Navy faces in valuing its buildings in accordance with federal accounting standards. GAO reviewed the Navy's policies and procedures for control activities over its buildings, performed data analyses, and tested a nongeneralizable sample of buildings. GAO also discussed with Navy officials the challenges in complying with federal accounting standards for valuing its buildings. Although the United States Navy (Navy) has taken actions to become audit ready for its real property, GAO identified internal control deficiencies that impaired the Navy's ability to assert that (1) buildings recorded in the internet Navy Facility Assets Data Store (iNFADS), the Navy's real property system, and reported as assets in its financial statements existed and (2) all of the Navy's buildings were recorded in iNFADS and correctly reported as assets in the Navy's financial statements. As shown in the figure below, the effects of these internal control deficiencies contributed to the Navy (1) continuing to maintain records in iNFADS for buildings that had been demolished, sometimes many years ago, and include these buildings as assets in its financial statements; (2) excluding some of the buildings it owns from being recorded in iNFADS and reported as assets in its financial statements; (3) erroneously reporting nonfunctional buildings as assets in its financial statements; and (4) excluding certain buildings from being reported as assets in its financial statements that met or exceeded the Department of Defense's (DOD) capitalization threshold. The Navy has various efforts under way to address challenges in valuing its buildings for financial reporting in accordance with federal accounting standards. Navy officials have acknowledged that significant delays can sometimes occur in the Navy being able to complete supporting documentation of the final costs to properly report buildings in its financial statements. Additionally, implementation of the Navy's new methodology to properly account for capital improvements will be critical for capturing accurate costs for buildings. Furthermore, the Navy has not consistently completed a physical inventory (asset evaluation) for each building every 5 years as required by DOD policy. These asset evaluations are an important control to help ensure that the information recorded for buildings in iNFADS is accurate. Finally, the Navy also faces a challenge in determining the placed in service dates for those buildings found through inventory procedures. The Navy's use of the date the building was found rather than the estimated date the building was placed in service can substantially affect the accuracy of the information in the Navy's systems and financial statements. Navy officials are aware of these challenges and have various efforts under way to address them. Effective implementation of these efforts is crucial to help address these challenges.