Are you helping to put out the FIAR?
How Contracting Officers Contribute to Achieving the FIAR Objectives for Property in the Possession of Contractors
By Andrew Obermeyer
By now every Department of Defense (DoD) contracting professional has probably at least heard about Financial Improvement and Audit Readiness (FIAR), the effort under which the department plans to obtain an eventual unmodified audit opinion for its financial records. Some contracting professionals may still believe FIAR is just something for the financial folks to worry about. The true professional understands that each part of the acquisition community has a role to play in addressing the FIAR challenges and better outcomes are obtained when all parties are fully engaged. When it comes to addressing the FIAR challenges with government property in the possession of contractors, or PiPOC (oh, yes, another new acronym!), property administrators and contracting officers must team together to achieve the department’s goals. Both contracting officers and property administrators must help to “put out the FIAR” through collaborative efforts to obtain a clean audit opinion.
In June 2021, DoD issued the U.S. DoD FIAR Report covering the results of the Fiscal Year (FY) 2020 audit efforts. The report states that nine reporting entities representing 35 percent of the $3.1 trillion in total assets owned by the DoD had achieved a clean audit report. Progress continues addressing the deficiencies in the other two-thirds of the department’s entities. The DoD Inspector General has also identified 26 department-wide material weaknesses, which include government property in the possession of contractors. A material weakness is a deficiency that presents a reasonable possibility that a material misstatement of the entity’s financial statement will not be prevented or detected and corrected. The material weakness for PiPOC was first identified in 2011 and is currently targeted for correction in FY26, five years later than originally projected for correction in FY21. Interestingly, the comptroller reports indicate the value of all government property at $1.1 trillion, or a bit more than a third of the total assets. How much of that $1.1 trillion is PiPOC is unknown, as no single data system tracks that number. However, the Defense Contract Management Agency (DCMA) collects information from contractors assigned to DCMA for contract administration, which indicates that these contractors hold approximately $115 billion in government PiPOC, or about 11 percent of the total value of DoD property. Equally interesting, while the DoD received 3,482 Notifications of Findings and Recommendations (NFRs) from its auditors in FY20, only 15 of those had findings involving PiPOC. That small number of NFRs should not be viewed as an indication that the problem with government PiPOC is small. It more likely reflects that bigger issues with the reporting entities’ accountable property systems of records are masking uniquely identifiable issues with PiPOC.
Much effort is underway to address the PiPOC material weakness. The DoD FIAR Report includes in its appendices the inspector general’s list of material weaknesses and reports on progress being made for each. FY20 results for PiPOC included efforts aimed at improving the existence and completeness of reporting entity accountable property systems of record (APSRs), in which any PiPOC should be recorded. These efforts necessarily include reconciling the APSRs with any available PiPOC records, some of which may need to be obtained by actually conducting inventories. Not mentioned in the report are the considerable efforts being undertaken to improve the information technology systems that track the initiation of PiPOC and its movement through its life cycle, up to and including disposition prior to contract closeout. In FY20, the department completed the development and fielding of the property loss reporting capability within the GFP Module in the Procurement Integrated Enterprise Environment (PIEE). The advantage of the new property loss capability is that completed case records are now automatically filed with the authorizing contract in Economic Development Administration (EDA), allowing accountable property officers the ability to pull these case reports to update their APSRs in near real time. FY21 efforts include the capability for disposition, which will eventually replace the use of the DCMA Plant Clearance Automated Reutilization and Screening System, or PCARSS, again allowing the completed case files to flow to EDA and will eventually update the property disposition report itself. Updates and improvements to the various policies and procedures are also underway.
So how can a contracting officer help to “put out the FIAR’?
Notwithstanding all this progress, much remains for the contracting officers to do to enhance the timeliness and completeness of PiPOC records. The first and foundational duty is to ensure that all government furnished property (GFP) is properly recorded in the GFP attachment which should be built in the GFP module in PIEE. Creating these initial records in the GFP module allows for all subsequent transactions to be built from the initial record, saving significant hours re-entering data that can now be pulled from the GFP attachment. Reusing the attachment data should also significantly reduce data entry errors in subsequent transactions as well, again improving the accuracy of the records. The second, and really parallel, foundational task for contracting officers is to ensure that the contract in question includes all the appropriate FAR and DFARS clauses dealing with GFP. Failure to include the appropriate clauses leaves both the government and the contractor at risk that government property will not be properly managed and recorded through its life cycle and can lead to real problems with liability and stewardship. DoD has tracked the success rate on including the proper property clauses for a number of years, and the trends still argue for more attention to this area.
Relationships need to be built between the reporting entity personnel authorizing the use of government property and the contracting officers to ensure that the APSRs are updated at the same time the property is shipped from government stores or purchased in accordance with awarded contracts. As a leader within the acquisition teams, contracting officers may need to help ensure that the information flow about individual pieces of GFP and GFP transactions get to the right players within the reporting entities. Does the logistician know what commitments are being made in the GFP attachment for government property for which they may be responsible? Is the accountable property officer updating the APSRs when property is shipped to the contractor, and are they updating APSRs to reflect loss cases or transfers? Often the contracting officer may be the only common link in all these data transactions. How many contracting officers can name the APO(s) responsible for items on the contract’s GFP attachment? Putting out the FIAR—resolving the material weakness—will require new relationships and exchanges of information between the already burdened contracting officers and the various logisticians and property personnel working in the reporting entities and supporting organizations.
Contracting officers may have to act on recommendations to hold contractors liable for property losses. Delays with processing these actions can lead to adverse audit findings, because until these actions are completed, the financial records will still record the full acquisition value of an item that is no longer available for its intended purpose and may not have been for longer than the accounting period in question. Contracting officers may also be called upon to assist with disposition of property no longer required by contractors when contractors report property as excess to their contractual requirements. In larger production contracts, it is not unusual for GFP to be transferred from one contract to another, an act which requires modifications to both the losing and gaining contracts to update their respective GFP attachments and properly authorize the movements. At public forums addressing government property administration, a frequent complaint is the long wait times for contracting offices to act upon requests to transfer GFP. While these delays may not have an immediate effect on the reporting entity financial statements, they can delay the completion of property closeout, which will in turn delay contract closeout activities. Contracting offices can assist in the management of PiPOC by developing capabilities to track request for property transfers from receipt through completion, and by taking a leadership role with ensuring all the necessary players are involved and informed—the reporting entity logisticians and accountable property officers in particular. The GFP Module has capabilities that can be used in these processes as well, such as the Contractor Acquired Property Pre-Screening capability. Does your contracting office have a process for acknowledging receipt of GFP transfer requests, and a process to track them until the modifications are actually done?
Efforts DCMA is making to help “put out the FIAR”
No single entity within DoD will be able to remedy the material weakness for PiPOC by itself. It will require the combined efforts of many separate DoD organizations to adequately address the policy and procedural issues inhibiting the attainment of a clean audit opinion. The DCMA does not maintain any property records for PiPOC on the contracts it administers, nor does it conduct inventories of PiPOC. The DCMA’s role in property administration is primarily focused on ensuring that contractors preserve and account for GFP in accordance with contract requirements, primarily those outcomes detailed in the FAR and DFARS clauses. DCMA does have some unique responsibilities for GFP on contracts assigned to it for administration that center on decisions involving the adjudication of property loss cases and property disposition, known as the plant clearance process. In these two areas, decisions made by government property administrators on loss liabilities and the best use of excess property do have a direct effect on the department’s financial statements. In the first area, the resolution of a property loss report requires an update to the reporting entities’ APSR to reflect that the item is no longer in the inventory. As a consequence, the financial value of that asset, which is usually zero for an item that has been lost, must be updated accordingly. The APSR is held by the reporting entity (think army, navy, air force, etc.), so the record of the service provided by DCMA—adjudicating the loss report—must flow back to the reporting entity. The same is true of the service DCMA provides in clearing property no longer needed to perform the contract and any government property remaining in the contractors’ possession when the contract is complete, particularly when excess property is donated to other than the owning organization, or when the property in question is scrapped or abandoned. APSRs must be updated to reflect that the items are no longer a DoD asset, which in turn removes the items “book value” from the DoD financial reporting systems. Recognizing the importance of these services to resolving the material weakness for PiPOC, DCMA is pursuing an audit of its functions as the principal service provider for the administration of GFP.
Within the department’s overall FIAR effort, many service providers are separately audited in what is called a Statement on Standards for Attestation Engagements No 18, or an SSAE18 examination. Independent public accountants conduct the audit and issue an opinion called a System and Organizational Control report, or a SOC 1. In FY20, 25 service providers within DoD underwent an SSAE18 examination, and 12 of those received an unmodified opinion—the best outcome. DCMA has obtained a SOC 1 for the service it provides in contract pay, which has been under audit for a number of years now. Reporting Entity auditors can rely on these SOC 1 reports as evidence that controls are operating effectively, and then reduce the number of redundant audits that they would otherwise conduct, saving the department time and money. Contractors holding GFP should also see a reduction in the number of audit engagements required by the DoD. DCMA’s effort to obtain a positive SOC 1 Government Contract Property Service Provider audit report will be a significant step toward addressing the material weakness for PiPOC, but it won’t “put the FIAR out” by itself. The reporting entities must establish their own business processes and controls that address the service providers’ outcomes, and these are called Complementary User Entity Controls, or CUECs. For example, a property loss liability determination executed by a contracting officer leads to completed property loss case filed in EDA. The CUEC would require that the reporting entity update their APSR to move the lost item.
DCMA is scheduled to begin the SSAE18 examination of its Government Contract Property Service Provider functions in FY22. Positive outcomes would then impact the reporting entities FY23 audit efforts, and over time will positively address the material weakness. Over time, successive positive audit outcomes, combined with the ongoing efforts to improve the linkage of information systems and improve policies and procedures, should lead to a reassessment of the risks associated with PiPOC. Positive audit outcomes could support a conclusion that the controls are effective and that oversight could then be reduced, allowing the department to shift resources to areas of greater risks. But, like many things in life, it’s a journey. The secretary of defense named government property in the possession of contractors as one of four audit priorities in FY19. In FY20, the secretary again named the four FY19 priorities and added an additional four items. PiPOC remained on the secretary’s list of audit priorities for in FY21. Throughout the life cycle of PiPOC, contracting professionals have many “touchpoints” with the property administration community. Correctly executed and timely transactions, be they property loss determinations, transfers of government property between contracts, or updating GFP attachments, all eventually impact the department’s financial statements. Each timely and correctly executed transaction helps to “put the FIAR out” and affirms our collective commitment to be good stewards of the taxpayers’ resources. To quote the secretary’s FY21 audit priorities memorandum, “Progression toward a clean audit opinion will further advance our stewardship of the funding entrusted to us and show that we are efficiently and effectively managing our assets—we owe nothing less to our service members and to the American people.” CM
- Senior Audit Readiness Advisor, Defense Contract Management Agency
- Graduate of Georgia State University; Master’s Degree from the University of Dayton; Masters of National Security Strategies degree from the Industrial College of the Armed Forces at the National Defense University.
- Contracting professional for more than three decades, first as an Air Force Officer and now as a civil servant.
- National Contract Management Association Fellow and past Director.
- Certified Professional Contract Management certificate
- Received the National Achievement Award (2006) and the Charles A. Dana Distinguished Service Award (2012), as well as the Secretary of Defense Medal for Exceptional Civilian Service
United States Department of Defense Financial Improvement and Audit Remediation Report, issued by the Office of the Undersecretary of Defense (Comptroller), June 2021
Secretary of Defense Memorandum, “Fiscal Year 2021 Financial Statement Audits and Priorities,” dated May 14, 2021