Summary
The nation's military installations and nuclear weapons production facilities have accumulated many types of waste and contamination over the years. The federal government estimated its environmental liability to clean up this waste at $249 billion in fiscal year 2004, representing the federal government's third largest reported liability. It represents a significant future outflow of funds at the same time as many other competing demands for federal dollars, but is currently not auditable. GAO was asked to address (1) the nature and extent of the government's environmental liabilities, (2) the extent to which Energy's and Defense's processes and controls were designed to estimate and report environmental liabilities in accordance with federal accounting standards, and (3) the nature and types of uncertainties that are currently not estimable but could affect the cost of cleanup.
The federal government's environmental liability reflects the estimated cost to clean up and dispose of environmental contamination in every state in the nation. The Departments of Energy and Defense report about 99 percent of this liability. Energy's reported liability of $182 billion relates primarily to the cleanup and disposal of nuclear waste, contamination, and by-products that resulted from decades of nuclear weapons production. Defense's reported liability of $64 billion is primarily for the cleanup of hazardous wastes at training ranges, military bases, and former defense sites; disposal of nuclear ships and submarines; and disposal of chemical weapons. While the design of Energy's internal controls have enabled its auditors to determine that Energy's financial statements were presented fairly and in accordance with federal accounting principles, significant weaknesses in Defense's controls have hindered it from producing auditable environmental liability estimates. Specifically, Defense's outdated and incomplete accounting guidance for developing and reporting its environmental liability estimates led to errors in financial reporting; its policies and procedures for determining, reporting, and documenting environmental liability estimates were not consistently followed; and none of the military services had adequate controls in place to help ensure that all identified contaminated sites were included in their environmental liability cost estimates. These weaknesses not only affected the reliability of Defense's environmental liability estimate, but also that of the federal government as a whole. Even if Defense resolved its internal control weaknesses, uncertainties exist for both Energy and Defense--the effect of which cannot currently be estimated--that could increase the government's environmental liabilities beyond the currently recorded amounts. These uncertainties involve the lack of feasible or proven remediation technologies, regulatory impediments and legal challenges, and uncertainties with the agencies' abilities to meet their current cost and schedule targets. It is important to understand the nature and extent of these uncertainties because they have the potential to materially impact the ultimate cost and timing of cleanup activities.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
Jeanette M. Franzel
Government Accountability Office: Financial Management and Assurance
(202) 512-8341
Recommendations for Executive Action
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to develop, document, and implement a program for financial management review, approval, assessment, and monitoring of the estimation and reporting processes for environmental liabilities.
Agency Affected: Department of Defense
Status: In process
Comments: DoD concurred, stating it would update its Financial Improvement and Audit Readiness Plan to include a key milestone for developing a program to monitor the estimation and reporting process. It also stated it would establish a workgroup to improve the financial reporting of environmental liabilities, and to assist the military departments in meeting key milestones. The estimated completion date is June 30, 2008. As of November 20, 2006, DOD stated that the September 2006 Financial Improvement and Audit Readiness Plan contains the key milestones for developing a program to monitor the estimation and reporting process. Actions taken by the working group to assist the Military Departments in meeting the key milestones include finalizing the standardization of key milestones that identify a critical path to assertion and clean audit, developing a key milestone for implementing business system process data model, and addressing completeness for disposal cost by reviewing various scenarios.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and Financial Management Regulations (FMR) guidance and remedy the specific deficiencies we identified by designing a process and controls at the department level to identify new federal accounting standards and to update the FMR for changes and additions in a timely manner.
Agency Affected: Department of Defense
Status: In process
Comments: DoD indicated it would now require its policy proponent offices to monitor the FASAB's proposed and new accounting standards and to publish updated guidance by the effective date of the new standard or publish a policy letter implementing new standards when it is not feasible to update the DOD Financial Management Regulations before the effective date. As of January 30, 2008, DOD still has not fully implemented the standard operating procedure that would ensure that the Financial Management Regulations are updated in a timely manner. The revised milestone date was August 27, 2007.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and FMR guidance and remedy the specific deficiencies we identified by reassessing its process for ensuring that all required financial statement disclosures are made, and disclosing in the notes to the financial statements for the department and for the Army, Navy, and Air Force, as appropriate, all significant uncertainties in accordance with current federal accounting standards, including the effects of the 2005 base realignment and closure round on reported environmental liabilities.
Agency Affected: Department of Defense
Status: In process
Comments: DoD officials stated the DOD Financial Management Regulations (FMR) were updated October 2005 to specifically require the disclosure of uncertainties in the financial statements. In addition, Dod stated it was updating financial statement reporting guidance in the FMR to require the military departments to disclose environmental liability uncertainties regarding significant specific situations. DOD stated it also instructed the military departments to include a step in their financial improvement plans to ensure they have processes in place to identify and disclose uncertainties regarding environmental liabilities for specific situations. DoD's estimated completion date is June 30, 2008. As of January 30, 2008, DOD is still working to implement this recommendation. Quarterly reporting guidance and a memorandum was provided to the Military Departments instructing them to disclose environmental uncertainties in the notes to the financial statements. The estimated completion date is still June 30, 2008.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and FMR guidance and remedy the specific deficiencies we identified by estimating, updating, and reporting the accrued environmental liability for the cost of disposing of the Navy's spent nuclear fuel.
Agency Affected: Department of Defense
Status: In process
Comments: DoD stated it had instructed the Navy to include a step in its financial improvement plan to track the progress of reporting its environmental liabilities for spent nuclear fuel. It estimated completing this step by March 31, 2006. However, we will follow up during the fiscal year 2006 consolidated financial audit to determine whether in fact DoD is reporting this liability.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and FMR guidance and remedy the specific deficiencies we identified by implementing revised FMR guidance for recognizing cleanup costs for the Navy's nuclear ships and submarines over the estimated lives of those assets.
Agency Affected: Department of Defense
Status: In process
Comments: DoD stated that, for Navy ships and submarines placed into service on or after October 1, 1997, the Navy will begin to accrue the environmental liability over the life of the ships and submarines when placed into service rather than recognizing the full cost. DoD also stated it had instructed the Navy to include a step in its financial improvement plan to track the progress of reporting its environmental liabilities for ships and submarines. DoD estimated completing this step by March 31, 2006. However, we will follow up during the fiscal year 2006 consolidated financial audit to determine whether in fact DoD is reporting this liability as indicated.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and FMR guidance and remedy the specific deficiencies we identified by including all appropriate budget elements for reporting financial liabilities for (1) the Navy's nuclear ships and submarines, (2) the Air Force's cleanup and restoration costs, and (3) all costs intended to be paid for with prior-year budgetary authority (e.g., unsigned contracts) by the Army, Navy, and Air Force.
Agency Affected: Department of Defense
Status: In process
Comments: DoD concurred, stating it has instructed the military departments to include a step in their financial improvement plans to comply with this recommendation. It estimated the completion date as June 30, 2008.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and FMR guidance and remedy the specific deficiencies we identified by reconciling the Army's, Navy's, and Air Force's installation-level environmental records to installation-level property records as required and then using the corrected site inventories to determine that all sites with cleanup or corrective action costs and all hazardous waste operations with cleanup or closure costs are included in financial reports of environmental liabilities and all are reported by the appropriate Defense component.
Agency Affected: Department of Defense
Status: In process
Comments: DoD concurred, stating it has instructed the military departments to include a step in their financial improvement plans to comply with this recommendation. It estimated the completion date as June 30, 2008.
Recommendation: To improve internal controls over the development and reporting of environmental liabilities and to prevent recurrence of the types of problems we identified in our report, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller) and the Secretaries of the Army, Navy, and Air Force, as appropriate, to improve compliance with federal accounting standards and FMR guidance and remedy the specific deficiencies we identified by producing and maintaining adequate supporting documentation for Army, Navy, and Air Force environmental liabilities at all levels in accordance with internal control standards in the federal government.
Agency Affected: Department of Defense
Status: In process
Comments: DoD concurred, stating it has instructed the military departments to include a step in their financial improvement plans to comply with this recommendation. It estimated the completion date as June 30, 2008.
Recommendation: To address the deficiency identified with Energy's legal representation letters, the Secretary of Energy should reassess Energy's process for ensuring that all litigation is appropriately documented in its legal representation letters, including its evaluation of the likelihood of an unfavorable outcome, the basis for its conclusion, and whether its legal counsel concurred with that conclusion.
Agency Affected: Department of Energy
Status: Implemented
Comments: Energy officials concurred with the recommendation and indicated they reassessed their process and would change their procedures for the non-monetary legal rep. letter during the fiscal year 2006 financial statement audit. Specifically, Energy officials said that headquarters program offices will now send the field offices' summary evaluations and backup documentation on non-monetary contingencies to the office of the General Counsel (GC). GC will review the program offices' submissions, summaries, and backup documentation and advise the CFO as to whether it concurs. Following the FY 2006 audit, we obtained a copy of the memo from GC to the Assistant IG for corporate audits indicating that it concurred with the program offices' reports with a few exceptions which it spelled out in the memo. We reviewed GC's exceptions and found that all of the exceptions that would require financial statement disclosure were disclosed in DOE's FY 2006 financial statements. This included a case identified by GC which had not been originally reported by the program office. Consequently, we conclude that DOE has appropriately reassessed and improved its procedures, and that the new procedure was effective in improving DOE's financial statement disclosures.
