DoD Audit Readiness Progress Washington-ASMC NCR PDI March 10, 2016 Mark Easton, Deputy Chief Financial Officer Alaleh Jenkins, Assistant Deputy Chief Financial Officer v8
Agenda The Department s Financial Audit Requirement & Approach History of Audit Efforts to Date Clear Strategy and Priorities Where Are We Now? Increased Congressional Visibility National Defense Authorization Act (NDAA) Audit Readiness Progress Rankings Current Status Fiscal Year (FY) 2015 General Funds (GF) Under Audit FY 2015 Schedule of Budgetary Activity (SBA) Audit Results Remaining Challenges Path to the Initial FY 2018 Full Financial Statement Audit FY 2016 GF Projected to Be Under Audit Strategy for 2016-2017: Move the Big Rocks Audit Readiness Validation Timeline for Critical Capability Areas Oversight of the Fourth Estate Driving Progress and Consistency DoD-Wide Initiatives Your Role: How You Can Be Prepared Final Thoughts 2
The Department s Financial Audit Requirement & Approach 3
The Department s Financial Audit Requirement and Approach History of Audit Efforts to Date 2009 1994 Initial DoD Efforts Begin Initial Priorities Established 2005 FIAR Office Established Pre-2009 Audit emphasis largely within only the comptroller organizations Post-2009 Audit efforts involve all functional areas enterprise-wide 4
The Department s Financial Audit Requirement and Approach History of Audit Efforts to Date 2014 FY 2014 Statutory Direction Achieve Audit Readiness of General Fund Statement of Budgetary Resources (SBR) 1994 Initial DoD Efforts Begin 2009 Initial Priorities Established 2005 FIAR Office Established Pre-2009 Audit emphasis largely within only the comptroller organizations Post-2009 Audit efforts involve all functional areas enterprise-wide 5
The Department s Financial Audit Requirement and Approach History of Audit Efforts to Date The Climb from SBA to Full Financial Statement Audit Will Be Steep 2014 2017 FY 2017 Statutory Direction Achieve Full Agency Financial Statement Audit Readiness FY 2014 Statutory Direction Achieve Audit Readiness of General Fund Statement of Budgetary Resources (SBR) 1994 Initial DoD Efforts Begin 2009 Initial Priorities Established 2005 FIAR Office Established Pre-2009 Audit emphasis largely within only the comptroller organizations Post-2009 Audit efforts involve all functional areas enterprise-wide 6
The Department s Financial Audit Requirement and Approach 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 7
The Department s Financial Audit Requirement and Approach Where Are We Now? 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 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 8
The Department s Financial Audit Requirement and Approach Increased Congressional Visibility Key National Defense Authorization Act (NDAA) Provisions NDAA for FY 2010 NDAA for FY 2014 NDAA for FY 2015 NDAA for FY 2016 Requires DoD financial statements to be validated as ready for audit by the end of FY 2017 Establishes the timeline for a full audit of the FY 2018 full financial statement Senate Armed Service Committee report requires DoD to submit an annual report to Congress on the aggregate funding included in the Schedule of Budgetary Activity Requires a report to Congress ranking the Military Departments and other defense organizations on their progress toward achieving auditable Statements of Budgetary Resources 9
Tier 3 Tier 2 Tier 1 The Department s Financial Audit Requirement and Approach NDAA Audit Readiness Progress Rankings Tier & Rank Statement of Budgetary Resources (SBR) Auditability Ranking Existence & Completeness (E&C) Auditability Ranking Full Financial Statement Auditability Ranking 1 Marine Corps GF Army GF Marine Corps GF 2 Air Force GF Navy GF Army WCF 3 Army GF Air Force GF Air Force GF 4 Army WCF Marine Corps GF Army GF 5 Navy GF Army WCF Navy GF 6 Air Force WCF Department of the Navy WCF (incl USMC WCF) Air Force WCF 7 Department of the Navy WCF (incl USMC WCF) Air Force WCF Department of the Navy WCF (incl USMC WCF) 1 Defense Information Systems Agency WCF Defense Logistics Agency Strategic Materials Defense Information Systems Agency WCF 2 Defense Information Systems Agency GF Defense Logistics Agency WCF Defense Information Systems Agency GF 3 Defense Logistics Agency Strategic Materials Defense Logistics Agency GF Defense Logistics Agency Strategic Materials 4 Defense Logistics Agency WCF Defense Information Systems Agency WCF Defense Logistics Agency WCF 5 Defense Logistics Agency GF Defense Information Systems Agency GF Defense Logistics Agency GF 6 Defense Health Program (incl DHA and SMAs) Defense Health Program (incl DHA and SMAs) Defense Health Program (incl DHA and SMAs) 7 U.S. Transportation Command U.S. Special Operations Command U.S. Special Operations Command 8 U.S. Special Operations Command U.S. Transportation Command U.S. Transportation Command 1 Missile Defense Agency Chemical Biological Defense Program Defense Advanced Research Projects Agency 2 Defense Advanced Research Projects Agency Defense Security Cooperation Agency Chemical Biological Defense Program 3 Chemical Biological Defense Program Defense Advanced Research Projects Agency Missile Defense Agency 4 Defense Threat Reduction Agency Defense Contract Management Agency Defense Contract Management Agency 5 DoD Education Activity Missile Defense Agency Defense Threat Reduction Agency 6 Defense Contract Management Agency Defense Threat Reduction Agency Defense Security Cooperation Agency 7 Office of the Chairman of the Joint Chiefs of Staff Office of the Chairman of the Joint Chiefs of Staff Office of the Chairman of the Joint Chiefs of Staff 8 Defense Security Cooperation Agency Washington Headquarters Services DoD Education Activity 9 Washington Headquarters Services DoD Education Activity Washington Headquarters Services
Current Status 11
Current Status FY 2015 General Funds Under Audit ODOs (TI-97) $137.57B (14.4%) Full Financial Statements ODOs (TI-97) $64.83B (6.7%) Undergoing Examination ODOs (TI-97) $31.40B (3.3%) Performing Audit Readiness Activities Air Force (TI-57) $188.51B (19.7%) GF (SBA) Marine Corps (TI-17) $28.17B (2.9%) GF (SBA) $957.12 Billion Total Under Audit Military Retirement Fund (TI-97) $55.45B (5.8%) Full Financial Statements Army (TI-21) $240.80B (25.2%) GF (SBA) U.S. Army Corps of Engineers- Civil Works (TI-96) $28.73B (3.0%) Full Financial Statements Navy (TI-17) $181.66B (19.0%) GF (SBA) 12
Current Status FY 2015 SBA Audit Results 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., Fund 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 corrective action plans (CAPs) is imperative, as is validating that the CAP addresses the root cause of the notice of finding and recommendation 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 SBA audit opinion, but SBR opinions should follow directly. 13
Current Status Remaining Challenges This Journey Will Take Time and Resources 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 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) 14
Path to the Initial FY 2018 Full Financial Statement Audit 15
Path to the Initial FY 2018 Full Financial Statement Audit FY 2016 General Funds Projected to Be Under Audit $673.35 Billion Projected Under Audit 16
Path to the Initial FY 2018 Full Financial Statement Audit Strategy for 2016-2017: Move the Big Rocks 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 Open Obligations Confirm that the balances are valid and supported Existence, Completeness and Rights & Obligations of Assets Validate that assets exist and records are complete; 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 Information Technology (IT) Implement and validate IT controls (e.g., security, access control) 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. 17
Path to the Initial FY 2018 Full Financial Statement Audit Audit Readiness Validation Timeline for Critical Capability Areas 2015 2016 2017 FY 2015 FY 2016 FY 2017 2018 FY 2018 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY 2015 SBA Audit Audit Period Reporting FY 2016 SBA Audit Audit Period Reporting FY 2018 Full Financial Statement Audit 1 2 Audit Period IPA/Consultant Feedback/Validation Complete 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 SBA UT FY 15 SBA FBWT FY 15 SBA JVs FY 16 SBA FBWT PP&E Existence & Completeness FY 16 SBA JVs SBR & B/S UT Environmental Liabilities Open Obligations PP&E Valuation FBWT B/S All JVs Administration Change - Turn-Over Package Examines: Budget Priorities, Property Priorities, and Audit Infrastructure Activities Completed by Date Legend Feedback/Validation Received During SBA Audit/Examination (where applicable ) 1 2 Government Acquisition Cycle Begins for FY 2018 Full Financial Statement Audit Congressionally Mandated Audit Readiness Date Activities Completed over Period * Linked to High Risk Areas 18
Path to the Initial FY 2018 Full Financial Statement Audit Oversight of Fourth Estate Drives Progress and Consistency 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 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 19
Path to the Initial FY 2018 Full Financial Statement Audit Audit Issues with DoD-Wide Impact Examples of Where We Are Addressing Enterprise-Wide Dependencies 1 2 3 4 5 6 7 8 9 Feeder System Reconciliations Completeness can t be proven without reconciliations to all material feeder systems Material Unsupported Journal Vouchers (Eliminations) JVs are automatic high risk area for auditors subject to extensive testing. Fund Balance with Treasury Reconciliation Completeness of Disbursements & Collections Service Provider Coordination Service provider processes and systems that affect customer audit readiness Government Furnished Equipment (GFE) / Contractor Acquired Property (CAP) capitalization and recording of these assets Go Forward Valuation of Property, Inventory & Related Property proposing to FASAB cost-effective methods for valuation of property 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 Suspense Account Completeness of Disbursements & Collections Estimation Models (Environmental Liabilities & Replacement Values) Supports Valuation Baseline Methodology & Support for Estimates 20
Your Role: How You Can Be Prepared 21
Your Role: How You Can Be Prepared Are You Prepared for the Game? 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) Who Are the Referees? DoD IG, GAO, IPA (Ongoing audits are a reality, set the discipline now) Goal? 2018 Audit!!!! Service Provider System Owner Process Owner Policy Setter FM Leader Legislators 22
Your Role: How You Can Be Prepared Key Supporting Documentation and Controls Example: P P Travel Documentation 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 YOU ARE RESPONSIBLE for YOUR Processes, Key Supporting Documentation and Controls. EVERYONE CONTRIBUTES TO THE ACCURACY AND RELIABILITY OF OUR FINANCIAL DATA! 23
Your Role: How You Can Be Prepared Setting Expectations Be Prepared Own Your Information Communicate 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 24
Your Role: How You Can Be Prepared Critical Success Factors Tone From the Top Strong Audit Infrastructure Access to Supporting Documentation 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) 25
Final Thoughts Keys to Success Leadership Ownership IT Controls Sustainment 26
Stay Connected Visit the FIAR website http://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 AuditReadiness@osd.mil 27