ACCOUNTABILITY TO AMERICA DEPARTMENT OF THE NAVY FISCAL YEAR 2017 ANNUAL FINANCIAL REPORT People Processes Capabilities FISCAL YEAR 2017 DEPARTMENT OF THE NAVY ANNUAL FINANCIAL REPORT A Marine conducts preflight inspections during training. (U.S. Navy photo by Cpl. James Guillory/Released) An Airman reattaches fasteners on the tail rotor of an MH-60R Sea Hawk helicopter. (U.S. Navy photo by Mass Communication Specialist 2nd Class Andrew J. Sneeringer/Released) TABLE OF CONTENTS Message from the Secretary of the Navy 3 Management’s Discussion and Analysis 4 Message from the Assistant Secretary of the Navy (Financial Management & Comptroller) 47 Department of the Navy Principal Statements 61 Department of the Navy Required Supplementary Stewardship Information 97 Department of the Navy Required Supplementary Information 105 Department of the Navy Other Information 113 Navy Working Capital Fund Audit Opinions 117 Navy Working Capital Fund Principal Statements 127 Navy Working Capital Fund Required Supplementary Information 153 Navy Working Capital Fund Other Information 155 Appendix 157 A CH-53E Super Stallion helicopter assigned to Marine Heavy Helicopter Squadron 463 carries a Humvee during an external lift training. (U.S. Navy photo by Lance Cpl. Jesus Sepulveda/Released) People Processes Capabilities 2 DEPARTMENT OF THE NAVY FISCAL YEAR 2017 ANNUAL FINANCIAL REPORT MESSAGE FROM THE SECRETARY OF THE NAVY 3 NOVEMBER 2017 RICHARD V. SPENCER As the nation’s forward global force, the Navy and Marine Corps are fully deployed, continuously present afloat and ashore, promoting and protecting the national interests of the United States. We must always be ready to deliver the fight in a moment’s notice. To accomplish this, we must ensure our people are highly trained and well equipped, and we must improve and modernize our capabilities and streamline our processes. The technological and operational advantage we have had over our adversaries is shrinking. It is imperative that we increase the level of urgency in every way we operate as an enterprise. Going forward, we will make significant investments in improving readiness and modernization for both the Navy and Marine Corps. Our priorities center on People, Capabilities, and Processes, and will be achieved by our focus on speed, value, results, and partnerships. Readiness, lethality, and modernization are the requirement driving these priorities. People – Our military and civilian workforce is our greatest resource. • We will enhance the performance of our force by improving policies, programs, and training. • The organization will capitalize on its best talent today, retain that talent over Going forward, the long term, and find ways to continue to recruit the best people for the mission of the future. “we will make • Our military and civilian team will be measured against the highest ethical significant standards for every task and mission. Capabilities – We will be capable of providing maritime dominance and investments power projection required by the Nation. • The organization will focus on training, modernization, and maintenance in in improving order to achieve a high state of readiness and enhanced lethality, now and in the future. readiness and Processes – We must improve our processes in order for our people to modernization meet future challenges. • We will drive efficiency, adopt and implement new ideas, and leverage for both the leading practices from industry and academia to positively impact and support acquisition, manpower, research, and operational processes. Navy and Auditability of the Department of the Navy (DON) is a priority for every member in the Department and leadership is fully engaged and aware of their responsibilities Marine Corps. in moving toward this goal. As presented in the DON’s Fiscal Year 2017 Annual Financial Report, “Accountability to America,” the Department has made great ” strides toward a full financial statement audit. Leadership is focused on attaining a clean audit opinion, which will demonstrate accountability and enhance enterprise credibility. Detailed discussion of identified weaknesses and ongoing remediation efforts are disclosed in the DON Statement of Assurance and within the Management’s Discussion and Analysis section. People. Capabilities. Processes. The inherent excellence and value of all three of these are integral to the Navy of today— and tomorrow. As Secretary of the Navy, I am making excellence in our People, Capabilities, and Processes my priority, and I aim to bring our focus back onto readiness and lethality. Richard V. Spencer Secretary of the Navy Showing a Seaman how to use an alidade compass aboard a guided missile cruiser. (U.S. Navy photo by Mass Communication Specialist 2nd Class Sonja Wickard/Released) OVERVIEW The Department of Defense (DoD) includes three military departments (Department of the Army, Department of the Navy, and Department of the Air Force); however, there are four separate service branches (Army, Navy, Marine Corps, and Air Force) Since 1834, the Navy and Marine Corps have been housed together under the Department of the Navy (DON) The Department of the Navy was established on April 30, 1798 The DON has three principal components: the Navy Department, consisting of executive offices mostly in Washington, DC; the operating forces, including the Marine Corps, the reserve components, and, in time of war, the U S Coast Guard (in peace, a component of the Department of Homeland Security); and the shore establishment The Department of the Navy consists of two uniformed services: the United States Navy and the United States Marine Corps The United States Navy was founded on October 13, 1775 The Navy’s core responsibilities are to deter aggression and, if deterrence fails, win the nation’s wars The Navy employs the global reach and persistent presence of forward-stationed and rotational forces to secure the nation from direct attack, assure Joint operational access, and retain global freedom of action Along with global partners, the Navy protects the maritime freedom that is the basis for global prosperity and fosters and sustains cooperative relationships with an expanding set of allies and international partners to enhance global security The United States Marine Corps (USMC) was founded by an act of the Continental Congress on November 10, 1775 As the nation’s Expeditionary Force in Readiness, the Marine Corps provides power projected from the sea, utilizing the mobility of the Navy to rapidly deliver combined-arms task forces in coastal regions or emergent global crises. The Marine Corps has evolved into a balanced air-ground task force with significant logistical capabilities to forward deploy, shape, train, deter, and respond to all manner of crises and contingencies The Department of the Navy Annual Financial Report (AFR) includes two separate sets of financial statements, the DON General Fund (GF) and the Navy Working Capital Fund (NWCF) The DON GF accounts for appropriations and funds as general, working capital (revolving), trust, special, and deposit funds The DON uses these funds (excluding deposit funds) to execute its mission The National Defense Sealift Fund is the only revolving fund within DON GF and receives an annual appropriation The DON GF is comprised of those federal account symbols 4 DEPARTMENT OF THE NAVY FISCAL YEAR 2017 ANNUAL FINANCIAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS 5 beginning with agency number 17 within the United States Treasury’s Federal Account Symbols and Titles (FAST) Book The NWCF is a revolving fund and is reimbursed for the goods, services, and infrastructure provided to the DON and other DoD customers, based on a relationship between operating units and NWCF support organizations. NWCF activities strive to break even over the budget cycle. NWCF has five programs: Depot Maintenance, Supply Management, Research and Development, Base Support, and Transportation The NWCF is comprised of federal account symbol 97 4930 002, “Defense Working Capital Fund, Navy ” The GF and NWCF financial statements report consolidated or combined financial information for both the Navy and Marine Corps. A listing of DON General Fund and Navy Working Capital Fund federal account symbols is included within each applicable Other Information section The DON continues to move forward and make significant progress toward a full financial statement audit and overall financial improvement. The FY 2015 and FY 2016 Schedules of Budgetary Activity (SBA) audits yielded numerous Notices of Findings and Recommendation, with a Flag Officer or Senior Executive assigned to direct the remediation of each finding. In raising the level of responsibility for correcting deficiencies, the Navy is widening the circle of accountability for making improvements in its culture The DON is meeting hurdles head-on with full awareness that financial audit readiness will not be a one-time achievement – rather, it will be marked by a progressively changing business environment in which improvements will be incorporated into permanent work processes The result will be a strengthened stewardship for public funds, institutionalized by performing effective internal controls over business processes and systems and by making business policies and procedures more precise and compliant with accounting standards The DON is committed to promoting a business culture in which all participants understand their respective roles in achieving and sustaining financial auditability,