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

Federal Property Plant and Equipment (PPE) Accountability and Auditability IssuesAn Update

Deloitte Financial Advisory Services LLP 2010

Copyright © 2009 Deloitte Development LLC. All rights reserved.2

• 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

– How to integrate the activities to reduce the effort

Accountability and auditability

• Two parallel flows •Two divergent objectives• Two parallel flows •Two divergent objectives


• Silos of responsibilities, systems and procedures

Why are they on parallel paths? (parallel means they never meet! )

Accountability

Plan Acquire Use Maintain Re-deployDispose/ Donate

Budget Buy/PayDepreciate

Report Retire costTransactions

Financial Reporting

Management Reporting

DisconnectsCreate Issues

Accounting


• The common and the connection: data and processes

Why are they on parallel paths?

Plan Acquire Use Maintain RedeployDispose/ Donate

BudgetRecord

Addition

Depreciate Record Transfer

Retire AssetReconcile

Financial Reporting

Management Reporting

Coordinated process can

yield substantial benefits

co

nn

ec

tors

Accountability

Accounting


Accountable Property

• Property Systems

• 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

Systems / Procedures

Accountable Property

• Example: DoD 5000.64

Programs or Operations

• Program purchases

• Receipt and deployment

Financial

• SFFAS 35, 6 and 23

• By contract, task order, voucher, invoice, NOT asset


• 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

This isn’t new, so why are there issues?


The life cycle approach considers:

• 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

Life cycle approach


• 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

Typical federal property situations


Basic circumstances

• Government agency needed to prepare assertion packages for PP&E balances as prelude to audit

• 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

Audit remediation scenario

Primary problems• Large scale programs

@̶ 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


• 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

Audit remediation solution


Basic circumstances

• Commands wanted to establish uniform procedures for personal property

• Existing procedures were non-uniform from command to command and inconsistently applied

• No written procedures for inventories

Property management and inventory procedures scenario

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


• 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

Property management and inventory procedures solution


The life cycle elements

ACQUIRE UTILIZE AND MANAGE DISPOSE

Life Cycle Events

Ass

et

Man

agem

ent P

lan

Str

ateg

ic P

lann

ing

Bud

getin

g an

d F

undi

ng

Req

uire

men

ts

Pla

nnin

g

Org

aniz

atio

nal

Res

pons

ibili

ties

Acq

uisi

tion

and

Leas

ing

Rec

eipt

, Id

entif

icat

ion,

and

T

aggi

ng

Rec

ords

, C

lass

ifica

tion,

C

ateg

oriz

atio

n,

and

Cos

t R

ecog

nitio

n

Acc

ount

ing

and

Val

uatio

n

Con

trol

, A

ccou

ntab

ility

, an

d O

wne

rshi

p

Con

trac

ts a

nd

Gra

nts

Adm

inis

trat

ion

Loca

tion,

T

rack

ing,

and

T

rans

fers

Saf

ety

and

Sec

urity

Ris

k M

anag

emen

t, In

sura

nce,

and

Lo

st D

amag

e, a

nd

Des

truc

tion

of

Pro

pert

y

Mai

nten

ance

, C

ondi

tion

Ass

essm

ent

Phy

sica

l Inv

ento

ry

Con

sum

ptio

n an

d U

tiliz

atio

n

Env

ironm

enta

l

Sto

rage

and

W

areh

ousi

ng

Scr

eeni

ng a

nd

Exc

essi

ng

Dis

posa

l

Ret

irem

ent

Financial flow

Ass

et

Man

agem

ent

Pla

n

Recording flow

Use flow

Life Cycle Events

Ass

et

Man

agem

ent

Pla

n

Ass

et

Man

agem

ent

Pla

n


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

Property diagnostic approach

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


Accountability

• Execute remediation based upon baseline accountability diagnostic– Policy/Procedures

– Data completeness & accuracy

– Source Documentation & valuations

– Business Processes

• Develop adjusted accountability baseline

Reconciliation — accountability and auditability

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


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

• IG relationship and coordination

• Limited successes to emulate

• Requirements– CFO Act of 1990

– SFFAS Standards

– Bulletin No. 01-02, Audit Requirements for FederalFinancial Statements

– OMB Circular A-123

– GAAS/GAGAS/Yellow Book Standards

Challenges to audit readiness

Regs.Audit

readinessPP&E

accountabilityCulture

Progress is uphill clim

b


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

– Creating records

– Ongoing management

• Systems implementation– Data integrity

– Data migration

– Reporting

Sustaining accountability and auditability

Aud

itabi

lity

Accountability

Systems implementation


Establishing an auditable PP&E baseline

Existence Completeness ValuationRights and obligations

Presentation & disclosure

The Five PP&E Assertion Parameters/Activities

• Identify PP&E population

• Establish testing procedures

• Conduct existence testing

• Analyze results• Use existing records• Develop new records

• 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

• Assemble assertion packages

• Assist statement adjustments

Resulting in:

Clean & Accurate Records

Auditable Statements


Key takeaways or questions

Process

Systems

Policies

Metrics

• •

• •

• •

• •

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Documents

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