Department of Defense Financial Improvement and Audit ... · Department of Defense Financial...

Department of Defense

Financial Improvement and

Audit Readiness

National PDI

Workshop #66

June 3, 2016

End Game Strategy for Audit 2017 and 2018

Making the Final Assault on the Audit Summit

Alaleh Jenkins, Assistant Deputy Chief Financial Officer

DoD Financial Operations Executives

2

• The Department’s Financial Audit Requirement & Approach– History of Audit Efforts to Date

– Clear Strategy and Priorities

– Overview of Audit Readiness Strategy

– Ranking of Audit Readiness Progress

• Current Status – FY 2015 Schedule of Budgetary Activity (SBA) Audit Results

– Remaining Challenges

• Path to the Initial FY 2018 Full Financial Statement Audit– FY 2016 General Funds Projected to Be Under Audit

– Strategy for 2016-2017: Move the Big Rocks

– Audit Readiness Validation Timeline for Critical Capability Areas

– What Lies Ahead

– Oversight of the Fourth Estate Driving Progress and Consistency

– DoD-Wide Initiatives

•Your Role: How You Can Be Prepared– Key Supporting Documentation and Controls

– Setting Expectations

– Critical Success Factors

• Final Thoughts

Agenda

The Department’s Financial Audit

Requirement & Approach

3

4

The Big Picture…

…and Challenge

History of Audit Efforts to Date

The Department’s Financial Audit Requirement and Approach

FIAR Office

Established

2005

1994

Initial Priorities

Established

2009

2014

Pre-2009

Audit emphasis

largely within only the

comptroller organizations

Post-2009

Audit efforts involve

all functional areas

enterprise-wideInitial DoD

Efforts Begin

FY 2014 Statutory Direction

Achieve Audit Readiness

of General Fund Statement of

Budgetary Resources (SBR)

2017 FY 2017 Statutory Direction

Achieve Full

Agency Financial Statement

Audit Readiness

5

Clear Strategy and Priorities

DoD’s FIAR Strategy balances the need to achieve short-term accomplishments

(Waves 1 and 2) against the long-term goal of achieving an unqualified opinion

on the Department’s full financial statements (Wave 4)

• Includes four prioritized waves to achieve and sustain audit readiness

• Initial waves’ focus on information management actually uses and generates

enterprise-wide support

• Incrementally builds audit infrastructure for increased scope

2012 2014 2016 2017


• Seven Defense Agencies continued to sustain full financial audits in FY 2015

• Military Services and seven additional Defense Agencies were under SBA

audits / examinations in FY 2015

• Beginning in FY 2016 – Sustain and expand audit coverage:

DLA and DISA to go through Full Financial Statement Audits

• Developing corrective action plans for SBA audit findings and tracking

progress

• Implementing a risk-based approach for remaining financial statements;

measuring progress in high-risk areas for each component

Overview of Audit Readiness Strategy

6


Detailed information is contained in the November 2015 FIAR Plan Status Report at

http://comptroller.defense.gov/Portals/45/documents/fiar/FIAR_Plan_November_2015.pdf

Report on Auditable Financial Statements

• Section 1003 of the NDAA for FY 2016 required a report

“ranking all military departments and Defense Agencies in

order of how advanced they are in achieving auditable

financial statements as required by law”

• This report was submitted to Congress on February 23, 2016

• Ranking will continue

– The Office of the Under Secretary of Defense (Comptroller) (OUSD(C))

will continue to obtain performance reports from the MilDeps and

Defense Agencies

– Rankings will be compiled quarterly through the duration of preparing for

full financial statement audit

Ranking of Audit Readiness Progress

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Current Status

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Key Themes of the FY 2015 Audits Results – Critical Issues Exist:

• Incomplete universe of transactions, and General Ledger/Feeder system

reconciliations

• Insufficient information technology controls, for both the reporting entity and Service

Providers

• DoD-wide issues (e.g. Funds Balance with Treasury differences, Journal Vouchers for

Eliminations and Accruals)

• Lack of control operating effectiveness and centralized document repository

Key Takeaways

• A positive opinion was not expected

• The experience implemented a financial management discipline as the “new norm”,

not just preparation for audit

• Prioritizing and tracking CAPs is imperative, as is validating the CAP addresses the

root cause of the NFRs.

FY 2015 SBA Audit Results

9

Current Status

As with many first year audits, the audit opinion will not be positive. It is expected that it will

be several years before DoD achieves a positive audit opinion on SBA but SBR opinions

should follow directly.

• Resources are necessary to support and

sustain audits, and remediate audit

findings

• Legacy environment is stove-piped,

complex, non-standard, and decentralized,

making audits difficult and highly inefficient

• Migrating to a new control environment will

take time, but it will enhance auditability

successes and efficiencies

Remaining Challenges

10

Current Status

Examples of Specific Challenges

• Universe of transactions (21 general ledger systems, 600 feeder systems)

• Defense-wide shared appropriation (TI-97), to include use of sub-allotments:

o Lack of visibility of transactions at the Component level hinders proper reconciliation of cash

Funds Balance with Treasury auditable

o Poses challenge for a complete universe of transactions

• Valuation of Property (and establishing policies that are cost-effective)

This Journey Will Take Time and Resources

Path to the Initial FY 2018

Full Financial Statement Audit

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FY 2016 General Funds Projected to Be Under Audit

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Path to the Initial FY 2018 Full Financial Statement Audit

U.S. Army Corps

of Engineers-

Civil Works (TI-96)

$0.40B (0.1%)

** USACE is

undergoing a full

financial statement

audit (including SBR).

However, this wedge

only displays SBA

budgetary resources. **

Risk-Based Approach, measuring progress and performing control testing, focused on

seven Critical Capability Areas:

• Universe of Transactions – reconcile feeder systems to general ledgers and retain underlying detailed

transactions

• Fund Balance with Treasury (FBwT) – reconcile FBwT and retain supporting documentation

• Journal Vouchers (JVs) – validate that JVs are supported and justified

Strategy for 2016-2017: Move the Big Rocks

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Over the next two years, the Department will continue to expand the scope of audits,

while sustaining a stronger, more disciplined environment, until full audit readiness is achieved.

OUSD(C) and DCMO are increasing pressure and visibility using FIAR Governance.

• Open Obligations – confirm that the balances

are valid and supported

• Existence, Completeness and Rights &

Obligations of Assets – validate that assets

exist, records are complete, and verify ownership

• Valuation of Assets – record assets at the

correct amount

• Environmental and Disposal Liabilities –

implement a process for identifying, estimating

and recording the cleanup costs of hazardous

waste

Audit Readiness Validation Timeline for Critical Capability Areas

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Universe of Transactions*

Fund Balance with Treasury*

Journal Vouchers*

Open Obligations

Existence, Completeness, and

Rights - General Property, Plant,

and Equipment and Inventory and

Related Property*

Valuation - General Property,

Plant, and Equipment and

Inventory and Related Property*

Environmental Liabilities

* Linked to High Risk Areas

• Open

Obligations

• PP&E Valuation

Legend

Government Acquisition Cycle Begins for FY

2018 Full Financial Statement Audit

Activities Completed over Period

Feedback/Validation Received During SBA

Audit/Examination (where applicable )

Activities Completed by Date

Congressionally Mandated Audit Readiness

Date

Administration Change - Turn-Over Package

Examines:

• Budget Priorities, Property Priorities, and

Audit Infrastructure

• All JVs

IPA

/Co

nsu

ltan

t Fe

edb

ack/

Val

idat

ion

Co

mp

lete

• FY 15 SBA JVs

FY 2018 Full

Financial Statement Audit

FY 2016 SBA Audit

• SBA UT

• FY 16

SBA

FBWT

• FY 16

SBA JVs

• FY 15

SBA

FBWT

Audit Period

• FBWT

B/S

• SBR &

B/S UT

Reporting

Audit Period

• Environmental

Liabilities

• PP&E Existence

& Completeness

FY 2018FY 2017FY 2016FY 2015

2018

Q4

2015 2016 2017

Q1 Q4Q3Q2Q1Q4

FY 2015 SBA Audit

Q3Q2Q1Q4Q3

Audit

PeriodReporting

Q2

2

1

1 2

What Lies Ahead

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• Fixing known problems – audit findings – should be top priority. Sustaining fixes are

equally important

• Reduce or strengthen traceability and support for sub-allotments (letting another entity have control of

one’s checkbook)

• Build listings of transactions that make up our financial statements (Universe of Transactions)

• to include sensitive activities

• Balance our “check-book”

• Embrace and encourage new way of doing business (change management)

• Continue to integrate and simplify processes & systems

• Over 400 separate and mostly legacy systems relevant to audit – make tracing dollars

• from one system to another system nearly impossible

• Implement standard language within systems

• Finish counting assets and ensure processes are in place to value assets

• Implement changes necessary to value assets based on OSD policies

• Implement methodology for bringing contractor acquired assets to books

• Ensure close collaboration with service providers (e.g., Military Departments,

• DFAS, and DLA)• Know and document what the service provider does on your behalf

• Monitor service providers’ performance

Oversight of the Fourth Estate Drives Progress and Consistency

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• Detailed implementation plans for the Fourth Estate have been developed

– Include critical path items and progress checks

– Address Fourth Estate-specific issues

o Universe of Transactions solution

o Proposing “Sub Accounts” at Treasury to reconcile cash

o DFAS & DCFO have established “tiger teams” (JVs, FBwT, PP&E)

o Standard process documentation (flowcharts, narrative, control matrices) have

been developed to drive consistency in processes

• Progress and status are being monitored by DCFO and ADCMO

– Will leverage FIAR Governance & the Defense Business Council to raise and address

DoD-wide issues

– Will continue to monitor results from SBA and Service Provider audits and exams

• ODCFO / FIAR will perform ongoing monthly testing

of SBA areas to sustain the audit momentum and

validate that CAPs are implemented

• ODCFO / FIAR continues engaging FASAB to

ensure policy changes / clarifications are

codified in Federal Accounting Standards

DoD-Wide Initiatives

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Examples of Where We Are Addressing Enterprise-Wide Dependencies

1 Feeder System Reconciliations - Completeness can’t be proven without reconciliations to all material

feeder systems

2 Material Unsupported Journal Vouchers (Eliminations) - JVs are automatic high risk area for auditors

subject to extensive testing.

3 Fund Balance with Treasury Reconciliation - Completeness of Disbursements & Collections

4 Service Provider Coordination - Service provider processes and systems that affect customer audit

readiness

5 Government Furnished Equipment (GFE)/Contractor Acquired Property (CAP) – capitalization and

recording of these assets

6 Go Forward Valuation of Property, Inventory & Related Property - proposing to FASAB cost-effective

methods for valuation of property

7 DoD Policy Updates/FASAB Updates - Policy updates are needed to define our requirements for

supporting our beginning balances—necessary to move into a full financial statement audit

8 Suspense Account - Completeness of Disbursements & Collections

9 Estimation Models (Environmental Liabilities & Replacement Values) - Supports Valuation Baseline

Methodology & Support for Estimates

Your Role:

How You Can Be Prepared

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Are You Prepared for the Game?

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Your Role: How You Can Be Prepared

Who Are the Players? FM Leaders, Functional Process Owners, Service Providers,

System Owners, Policy Setters

{We need to share the ball [i.e.: responsibilities and information]}

Who is Watching in the Crowd? Legislators, Regulators, Taxpayers

(who is holding us accountable?)

Who Are the Coaches? CFO, DCFO, ADCFO

(providing and enforcing clear guidance, consistent strategy, and

ongoing support)

Legislators

Service

Provider

Policy

Setter

System

Owner

Process

Owner

FM

Leader

Who Are the Referees?

DoDIG/GAO/IPA

(ongoing audits are a reality,

set the discipline now)

Goal? 2018 Audit!!!!

Example: Key Supporting Documentation and Controls

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Maintain your travel request and authorization

Maintain receipts (all lodging and for expenses $75 or more)

Maintain signed voucher for travel claims submitted in DTS (if entered by someone other than yourself)

Maintain any other document required to support claimed reimbursement

Maintain copies of your Government Travel Card training certificates.

P

P

Travel Documentation

YOU ARE RESPONSIBLE for YOUR Processes, Key Supporting Documentation and Controls.

EVERYONE CONTRIBUTES TO THE ACCURACY AND RELIABILITY OF OUR FINANCIAL DATA!

Setting Expectations

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• Auditor will interview

personnel and observe

operations

• Auditor will test account

balances and trace to

source

• All organizations,

locations, processes, and

systems may be subject

to audit

• Assign point personnel for

supporting documentation

• Expect large sample sizes

for testing

• Provide correct audit

evidence in a timely

manner

• Be able to respond to

auditor’s questions

related to your processes,

key supporting

documentation and

controls

• Own your information, not

others. Do not provide

information on processes

you are not familiar with

or have no responsibility

over.

• Continually communicate

with audit liaisons and

your organizations

• Don’t assume auditors

know your business –

clear communication is

key

• Embrace feedback

Be

PreparedOwn Your

InformationCommunicate

Critical Success Factors

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Tone From

the Top

Access to

Supporting

Documentation

Strong Audit

Infrastructure

• Well organized

Audit Support

Team

• Continual and

effective

communication

• Leadership’s

buy-in

• Stress

importance

• Emphasize

deadlines

• Correct, clear,

properly

documented,

and timely

• Auditor must be

able to follow

(Plain English)

Stay Connected

Visit the FIAR websitehttp://comptroller.defense.gov/FIAR.aspx

Read the FIAR Plan Status Report

http://comptroller.defense.gov/FIAR/plan.aspx

Subscribe to the DCFO’s

‘Defense Audit Readiness News’Join the distribution list by emailing

[email protected]

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Final Thoughts

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