Federal Property Plant and Equipment PPE Accountability and

Federal Property Plant and Equipment (PPE) Accountability and Auditability Issues An Update Deloitte Financial Advisory Services LLP 2010

Accountability and auditability • Asset accountability and financial auditability are closely aligned • Same life cycle • Cost recognition with full acquisition and improvement costs • In-service dates and status • Retention of documentation substantiating property unique identifiers – BUT accountability and financial auditability have some differences • Property records, discrete vs per contract or payment • Physically used and moved • Custodial assignment, location, and condition impacts the record • Two parallel flows • Two divergent objectives – How to integrate the activities to reduce the effort 1 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Why are they on parallel paths? (parallel means they never meet! ) • Silos of responsibilities, systems and procedures Accountability Plan Acquire Use Maintain Re-deploy Dispose/ Donate Management Reporting Disconnects Create Issues Accounting Budget Buy/Pay Depreciate Transactions Report Retire cost Financial Reporting 2 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Why are they on parallel paths? • The common and the connection: data and processes Accountability Acquire connectors Plan Use Maintain Redeploy Dispose/ Donate Record Transfer Retire Asset Coordinated process can yield substantial benefits Accounting Budget Record Addition Depreciate Reconcile Financial Reporting Management Reporting 3 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Systems / Procedures Accountable Property • Property Systems • Example: Do. D 5000. 64 • Descriptive records for all assets • Central system • Maintain asset record through disposal, monitoring custodial assignment, location and condition Programs /Operations • Materials or warehouse • Location and logistic information Financial • Full cost information for all assets procured under programs • By contract, task order, voucher, invoice, NOT asset 4 Programs or Operations • Program purchases • Receipt and deployment Financial • SFFAS 35, 6 and 23 • By contract, task order, voucher, invoice, NOT asset Copyright © 2009 Deloitte Development LLC. All rights reserved.

This isn’t new, so why are there issues? • Differing priorities and focus • Different backgrounds and cultures • Lack of a life cycle approach to property management and accounting • Lack role to coordinate people, policies and systems • Lack of systems that fully integrate capital budgeting, procurement, and fixed asset management and accounting 5 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Life cycle approach The life cycle approach considers: • • 6 The organization’s mission Property types Integrated facets and flows Stakeholder management Property life cycle events Issues specific to property categories within life cycle events Environments in which the property is managed Copyright © 2009 Deloitte Development LLC. All rights reserved.

Typical federal property situations • Audit remediation – Documenting PP&E Assertion Packages for a organization responsible for building and sustaining global information and computing infrastructure • Valuation of contract transfer property – Recording of assets under a service agreement in preparation for a contract transfer • Discrete record creation – Validating real property acquisition costs and creating componentized records for a scientific agency with research facilities • Property management and inventory procedures – Developing property management procedures and performing pilot-site procedure testing for commands in a Military Department for financial improvement • Property accountability processes to reduce loss and fraud – Creating processes for accountability that aligns standardization between headquarters and field sites 7 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Audit remediation scenario Basic circumstances • Government agency needed to prepare assertion packages for PP&E balances as prelude to audit Primary problems • Large scale programs • Had multiple sites throughout the country and around the world • No written procedures for conducting physical inventories • Had 2 WCFs and a general fund, each of which used a different accounting system • No Fixed Asset accounting organization 8 Capital assets not on balance sheet No reconciliation between programs and balance sheet Assets transferred among funds without transfer of program costs Ancillary costs, e. g. , transportation and installation costs, were not being added to calculate full costs of capital assets • Source documentation for asset purchases was widely scattered and not pulled together to support asset valuations • Capital budgeting was not integrated with procurement or accounting – resulting in the expensing of many capital assets • Hundreds of $M spent on capital leases for telecommunications infrastructure was inaccurately expensed Copyright © 2009 Deloitte Development LLC. All rights reserved.

Audit remediation solution • Perform diagnostics on both accountability and auditability to determine extent of problems and likely solutions • Perform inventories and extensive testing of property records/values • Reengineer and document consistent property management business processes • Collect and validate source documents to support asset values • Establish a Fixed Asset accounting group to create skeletal records for capital items, tracking from budgeting through procurement, receipt and installation • Develop journal entries to correct financial statement balances • Prepare Assertion Packages 9 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Property management and inventory procedures scenario Basic circumstances • Commands wanted to establish uniform procedures for personal property • Existing procedures were non-uniform from command to command inconsistently applied • No written procedures for inventories 10 Primary problems • Many missing records for accountable property (not in DPAS) • Roles, responsibilities, and internal controls poorly defined • Receiving function fragmented and not well controlled • Source documents not maintained to support asset valuations Copyright © 2009 Deloitte Development LLC. All rights reserved.

Property management and inventory procedures solution • Develop written procedures for physical inventories • Document “As Is” property management business processes at multiple installations • Develop “To Be” property management business processes • Create Tickler Files for capital assets based on procurement records and tracked through receipt and installation • Write new procedures based on “To Be” property management business processes • Test new procedures at Pilot sites • Conduct orientation and training for roll-out of new procedures 11 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Asset Management Plan 12 Life Cycle Events ACQUIRE UTILIZE AND MANAGE Retirement Disposal Screening and Excessing Storage and Warehousing Environmental Consumption and Utilization Physical Inventory Maintenance, Condition Assessment Risk Management, Insurance, and Lost Damage, and Destruction of Property Safety and Security Location, Tracking, and Transfers Contracts and Grants Administration Control, Accountability, and Ownership Accounting and Valuation Records, Classification, Categorization, and Cost Recognition Receipt, Identification, and Tagging Acquisition and Leasing Organizational Responsibilities Requirements Planning Budgeting and Funding Strategic Planning Asset Management Plan The life cycle elements Financial flow Recording flow Life Cycle Events DISPOSE Use flow Copyright © 2009 Deloitte Development LLC. All rights reserved.

Property diagnostic approach Accountability • Assess procedures /responsibilities – Entire life cycle- program and property – Procedural operations – asset handling – Recording in property system • Test – Data in property system – anomalies – Test asset existence, book to floor and floor to book – Trace source documents and validate values • Assess business processes – Procurement contract flow-downs for PIPC & contractor reporting requirements – Property management processes • Develop baseline accountability diagnostic 13 Auditability • Assess policies & procedures Budgeting and obligating for capital acquisitions Recording full acquisition costs in subsidiary property system Establishing depreciation schedules • Assess asset classifications Test selected asset classifications against US Standard GL classifications • Assess congruence of GL and subsidiary property system Trace monthly acquisitions & dispositions from subsidiary to GL Confirm beginning balance GL + value of monthly activity = ending balance GL • Develop baseline balance diagnostic Copyright © 2009 Deloitte Development LLC. All rights reserved.

Reconciliation — accountability and auditability Accountability • Execute remediation based upon baseline accountability diagnostic – Policy/Procedures – Data completeness & accuracy – Source Documentation & valuations – Business Processes • Develop adjusted accountability baseline Auditability • Execute remediation based upon baseline balance diagnostic Capital budgeting & obligations Full costs Depreciation Asset classifications Monthly postings • Combine accountability and auditability adjustments • Develop adjusted baseline value Single Reconciled Cost associated with Discrete Asset 14 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Challenges to audit readiness Challenges of audit readiness • Many Federal agencies present unique challenges for property, plant, and equipment (“PP&E”) accountability • Limited history and culture of financial statement audit • ERP implementation b lim c ill ph • IG relationship and coordination u is ss e r g • Limited successes to emulate Pro • Requirements – CFO Act of 1990 – SFFAS Standards Regs. Culture PP&E accountability Audit readiness – Bulletin No. 01 -02, Audit Requirements for Federal Financial Statements – OMB Circular A-123 – GAAS/GAGAS/Yellow Book Standards 15 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Sustaining accountability and auditability Approach to successful and sustained audit readiness includes three concurrent perspectives • Audit readiness – Knowledge of regulatory requirements – Understanding of unique agency environment • Accountability – Defining assets ity bil ita Au d ity – Data integrity bil • Systems implementation nta – Ongoing management u co Ac – Creating records – Data migration – Reporting Systems implementation 16 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Establishing an auditable PP&E baseline The Five PP&E Assertion Parameters/Activities Existence • Identify PP&E population • Establish testing procedures • Conduct existence testing • Analyze results • Use existing records • Develop new records Completeness • • • Rights and obligations Valuation Conduct interviews Establish population Develop test plan Conduct completeness testing Reconcile exceptions • Assemble records • Establish testing procedures • Test values • Analyze results • Use/supplement existing values • Revalue using source documentation • Revalue using alternative methods • Research issues • Establish testing procedures • Analyze results Presentation & disclosure • Assemble assertion packages • Assist statement adjustments Resulting in: Clean & Accurate Records Auditable Statements 17 Copyright © 2009 Deloitte Development LLC. All rights reserved.

Key takeaways or questions Process Systems 18 • • Policies • • Metrics • • Copyright © 2009 Deloitte Development LLC. All rights reserved.

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