Office of the Under Secretary of Defense Comptroller Mr Mark Easton Deputy Chief Financial Officer OUSDC Ms Alaleh Jenkins Director OUSDCFIAR WashingtonASMC NCR PDI March 3 2015 v13 ID: 732795
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Slide1
What’s Next for the DoD Audit
Office of the Under Secretary of Defense (Comptroller)
Mr. Mark Easton, Deputy Chief Financial Officer, OUSD(C)
Ms. Alaleh Jenkins, Director, OUSD(C)/FIAR
Washington-ASMC NCR PDI
March 3, 2015
v13Slide2
The Requirement: Why Financial Improvement and Audit Readiness (FIAR) Is
Important
FIAR Strategy and Audit Strategy: How We Are Meeting the Deadline
Where Are We Now?
FIAR Guidance and Timeline: Less Than Two Years Remain
Your Role: How You Can HelpFinal ThoughtsAgenda2Slide3
The Requirement:
Why FIAR is ImportantSlide4
The Chief Financial Officers Act of 1990: Created a CFO position within each cabinet-level agency, required all federal agencies to prepare timely and reliable financial statements for Congress and the Administration to use in managing and evaluating federal programs, and directed OMB to prepare a
5-year Federal Financial Management Improvement Plan
The Government Management Reform Act of 1994: Required annual auditable financial statements
Refined Guidance:
Sec. 1003 NDAA FY 2012: Requires
the plan to include the interim objectives and a schedule of milestones for each Military Department and Defense Agency to support the goal established by the Secretary of Defense that the SBR be validated for audit by not later than September 30, 2014Sec. 1003 NDAA FY 2010: requires the Department to develop and maintain a plan that ensures DoD financial statements are validated as ready for audit by not later than September 30, 2017 Continued interest from Congress, GAO, OMB, and the mediaIt’s the Law4Slide5
If DoD were a public company, would you invest?
Stewardship
Reassures the American public and Congress that the Defense Department is a good steward of its funds
Demonstrates accountability
Helps to safeguard assets and is a tool for guarding against fraud, waste, and abuse
The DoD IG was unable to complete an audit and issued a Disclaimer of Opinion:“ … we could not obtain sufficient appropriate evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the DoD FY 2014 and FY
2013 Basic Financial Statements. Thus, the basic financial statements may have undetected misstatements that are both material and pervasive.
”
Stewardship
5Slide6
The Big Picture…
…and Challenge
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-wide
Initial DoD Efforts Began
FY 2014 Statutor
y
Direction
Achieve Audit Readiness
of General Fund Statement of Budgetary Resources (SBR
)
2017
FY 2017 Statutor
y
Direction
Achieve Full
Agency Financial Statement
Audit Readiness
History of Audit Efforts to Date
6Slide7
FIAR Strategy and Audit Strategy:
How We Are Meeting the DeadlineSlide8
DoD has developed a strategy to move to full financial statement audit by
FY 2018 in accordance with the NDAA for FY 2010
The audit strategy builds on audit readiness momentum and demonstrates interim progress toward the FY 2018 target using a phased approach
Propose that audits of select reporting entities’ financial statements be accelerated
Other reporting entities will undergo progressively more complex examinations
The phased approach will allow for continual growth and expansion of DoD’s audit infrastructure to support the increasing number of auditsStrategy assigns each of DoD’s reporting entities to one of four categories:Tier 1: Large Caps (OMB Designated Entity Audits)Tier 2: Mid Caps (DoD Designated Audits)Tier 3: Small Caps (DoD Designated Examinations)Tier 4: Micro Caps (Remaining Defense Agencies, Organizations, and Funds (Not Material for Audit))
The Resulting DoD Consolidated Financial Statement Audit Starting in FY 2018
Will
Likely Be the Largest Financial Statement Audit Ever Performed
DoD Consolidated Audit Strategy Overview
8Slide9
0.9 % Not Material for Audit
Tier 4
3.6% DoD Designated Examinations
Tier 3
21.9% DoD Designated Audits
Tier 2
73.6% OMB Designated Entity Audits
Tier 1
Categories as Percentage of Total Budgetary Resources
Department of the Army (GF
and
WCF)
Department of the Navy (GF
and
WCF)
(
includes Marine Corps GF and WCF)
Department of the Air
Force
(GF
and
WCF)
Military Retirement Fund (MRF) Trust
Fund
U.S
. Army Corps of Engineers (USACE
)–
Civil
Works
WHS (Pentagon admin)
MDA (
m
issile defense)
DSCA (security cooperation)
DoDEA (education)
DARPA (R&D)
Many
others
Defense Logistics Agency
USTRANSCOM (transport)
DISA (IT / communication)
DHA (healthcare)
USSOCOM (special ops)
Others already under
audit
Selected Activities
in the Fourth Estate are participating in mock audits
Large
Caps
Small
Caps
Mid
Caps
Micro
Caps
The DoD Agency-Wide Audit Will Involve
Presenting Our Complete Portfolio
Entities in red are under audit
9Slide10
Fourth Estate reporting
entities must be able to address a handful of “critical elements” or
deal-breakers
to support the proposed
audit and examination
schedule:Collect a universe of accounting transaction details reconciling the TI-97 accounting systems to the DoD financial statementsConduct reconciliations from source feeder systems where transactions occur and the DoD’s accounting systems and reconcile TI-97 Fund Balance with Treasury account to U.S. TreasuryComplete IT controls discovery and corrective action for material financial systemsIdentify root causes for journal vouchers, eliminate unnecessary journal vouchers, and ensure all remaining journal vouchers are reviewed, approved, and supported by documentation
Validate corrective action plans have been effectively implemented for critical internal controls processes
Much of the effort related to addressing these
deal-breakers requires
strong participation from DFAS for success.
Audit Readiness Deal-Breakers
10Slide11
Where Are We Now?Slide12
Although the Department did not achieve the September 30, 2014, Statement of Budgetary Resources deadline, significant progress was made.
Military Departments asserted audit readiness on their services’ General Fund Schedules of Budgetary Activity
Audit contracts awarded December 2-4, 2014
Audits
began in
January 2015 Audits will include financial transactions related to appropriation received in FY2015 and will not include financial transactions related to appropriations received in prior fiscal yearsDoD OIG oversees the IPA-conducted SBA auditsOther Defense Organizations (ODOs)
By June 30, 2014, each of the other Defense organizations asserted audit readiness of their applicable assessable units or of specific SBR line-items
In FY 2015, the ODOs material to the DoD Consolidated Financial Statements will undergo with SBA mock audits or IPA examinations
Over
90 percent of the Department’s FY 2015 General
Funds will
be under audit. Funds under audit represent most of the financial
information reported
in the SBR.
Significant Progress Made
12Slide13
Over 90 % Currently Planned for Audit, but Remainder Involves Fourth Estate Organizations
U.S. Army Corps
of Engineers-
Civil Works (TI-96)
$30.28B (3.1%)
Full Financial Statements
Military Retirement Fund (TI-97)
$54.67B (5.6%)
Full Financial
Statements
Marine Corps (TI-17)
$29.81B (3.0%)
GF (SBR)
Air Force (TI-57)
$187.77B (19.3%)
GF (SBA)
Navy (TI-17)
$181.86B (18.7%)
GF (SBA)
Army (TI-21)
$266.48B (27.3%)
GF (SBA)
4th Estate (TI-97)
$132.21B (13.6%)
Full Financial Statements
4th Estate (TI-97)
$91.15B (9.4%)
Not Under Audit
Payments to MRF
DoD
Component Level Accounts
DHA,
Contract Resource Management
MERHCF (healthcare entitlement)
Payment
to
MERHCF (healthcare)
DCAA
DeCA,
General
Fund
Funds Provided by OSD to MilDeps
DHA
USSOCOM
Foreign Allies Burden Sharing
Defense Agencies
(e.g., DLA, MDA, DCMA, DISA)
DoD Field Activities
(e.g., DHRA, DMA, DPMO, DTIC, DTSA, OEA)
Other Defense Organizations
(e.g., DAU, DOT&E, NDU, OIG)
Military Housing Privatization InitiativeOther Trust Funds
General Fund (GF) Planned Under Audit in FY 2015 – $883.08B
FY 2013 Total Budgetary Resources
FY 2015 General Funds Planned for Audit
13Slide14
FIAR Guidance and Timeline:Less than Two Years RemainSlide15
With
less than three years remaining, the Department has expanded its priorities from budgetary data to all financial transactions including:
Valuing and reporting over $1 trillion in assets
Accurately reporting environmental and other liabilities
Preparing Working Capital Fund financial statements for audit
Revised FIAR Guidance soon to be issued and will include:Requirements that apply to General Fund and Working Capital Fund statementsCritical interim requirements, such as opening balancesMilDeps and ODOs will update financial improvement plans accordingly
Leadership and GovernanceFormer Secretary Hagel and recently confirmed Secretary Carter, who previously served as Deputy Secretary, have continued to stress accountability, sound business and management systems, and audit readiness
Deputy Secretary Work launched the DEXCOM and addressed leaders of
the Fourth Estate
Mike McCord sworn in as USD(C) and
CFO
Leadership is confident this expanded focus will keep the Department on the right path to full audit
readiness.
Expanded Priorities and Guidance
15Slide16
The five TI-97 reporting entities below will move towards stand-alone financial statement audits.
Tier 2: Mid
CapReporting Entities
FY 2015FY 2016FY
2017FY 2018
FY 2019 ForwardDLAExamination – SBA (General Funds)Annual Audits – Full Financial StatementsDefense HealthExamination – SBAAnnual Audits – Full Financial StatementsUSSOCOMExamination – SBAAnnual Audits – Full Financial StatementsDISAUndergoing Internal Validation
Annual Audits – Full Financial Statements
USTRANSCOM
Continuing Audit Readiness Activities
Examination – Full Financial Statements
Annual Audits – Full Financial Statements
The Defense Agencies already under audit are not included in this list.
The
Defense Agencies already undergoing financial statement audit will
continue
to receive annual full financial statement audits.
Timeline to Move to Stand-Alone Audit
16Slide17
The 10 TI-97 reporting entities below will move towards stand-alone audit readiness examinations of their financial statements.
Tier 3: Small Cap
Reporting EntitiesFY 2015
FY 2016FY 2017
FY 2018
FY 2019 ForwardWHSExamination – SBAAnnual Examinations – Full Financial StatementsMDAExamination – SBAAnnual Examinations – Full Financial StatementsDSCAMock AuditAnnual Examinations – Full Financial Statements
DoDEAMock Audit
Annual
Examinations – Full Financial Statements
Other TI-97 Funds Provided to the Army
Mock Audit
Annual
Examinations – Full Financial Statements
DARPA
Examination – SBA
Annual
Examinations – Full Financial Statements
ChemBio
Examination – SBA
Annual
Examinations – Full Financial Statements
DTRA
Examination – SBA
Annual
Examinations – Full Financial Statements
DCMA
Mock Audit
Annual
Examinations – Full Financial Statements
JCS
Mock Audit
Annual
Examinations – Full Financial Statements
Timeline to Move to Stand-Alone Examination
17Slide18
Critical Path Audit Readiness Milestones
Present assertion strategy for critical financial statement line items to FIAR Directorate (2/20/2015):
Critical Line Items: Fund Balance with Treasury; General Property, Plant, and Equipment, including Real Property, General Equipment, and Internal Use Software;
Inventory and Related Property, including Inventory and Operating Materials and Supplies; Environmental and Disposal Liabilities; and Other Line Items Material
FIAR Directorate obtains DoD OIG/GAO approval on assertion strategy/methodology for critical line items (3/31/2015)
Implement corrective action plans to address critical line items (4/30/2015)Undergo FIAR audit readiness validation (5/1/2015 – 5/31/2015)Implement corrective action plans to address deficiencies (6/30/2015)Undergo IPA financial statement audit (10/1/2015 – 11/15/2016)DoD Designated Audits – Tier 2:Critical Path Audit Readiness Milestones18Slide19
Critical Path Audit Readiness Milestones
Present assertion strategy for critical financial statement line items to FIAR Directorate (2/20/2015):
Critical Line Items: Fund Balance with Treasury; General Property, Plant, and Equipment, including Real Property, General Equipment, and Internal Use Software;
Inventory and Related Property, including Inventory and Operating Materials and Supplies; Environmental and Disposal Liabilities; and Other Line Items Material
FIAR Directorate obtains DoD OIG/GAO approval on assertion strategy/methodology for critical line items (3/31/2015)
Implement corrective action plans to address critical line items (9/30/2015)Undergo IPA examination (10/1/2015 – 3/31/2016)Implement corrective action plans to address deficiencies (9/30/2016)Undergo IPA examination (10/1/2016 – 3/31/2017)Implement corrective action plans to address deficiencies (6/30/2017)DoD Designated Examinations – Tier 3:Critical Path Audit Readiness Milestones19Slide20
Five Working Groups for Critical Balance Sheet Line Items:
Real Property
General Equipment
Internal Use SoftwareInventory and Related Property
Environmental and Disposal Liabilities
The OSD Working Groups Were Established to:Address DoD-wide policy and process challenges to audit readinessProvide implementation guidanceReview progress toward achieving audit readiness milestonesExpectations:Address issues quickly to expedite solutions, and elevate issues where neededEstimating beginning balancesDeveloping systems and process agreements to sustain asset and liability valuations
OSD will vet decisions with the DoD OIG and GAO over the next 3 months; decisions targeted for June to allow for implementation
Overview of Working Groups
20Slide21
Your Role:How You Can HelpSlide22
Role
Planning PhaseInternal Control Phase
Test PhaseReport PhaseAuditors
Submit Document Requests
to gain an understanding of
operations and perform data analytics while planning the audit proceduresAssess control risk and determine the nature, timing, and extent of control, compliance, and substantive testingIdentify control weaknesses and, if appropriate, form an opinion and report on internal controls over financial reportingPlan the nature, timing, and extent of procedures to be performed on budgetary transactions and effectiveness of controls
Perform substantive, control and compliance tests
Issue Notices of Findings and Recommendations (NFRs)
to outline problem areas within accounting, internal controls, IT systems, and business processes
FM HQ Organizations
Provide
strategic guidance and technical expertise
to consolidate and coordinate
the audit response
and communication across the organization
Provide
coordination
and
communication
t
o facilitate a close working relationship between auditors,
Commands, and functional owners
Direct, oversee, and provide
quality control and quality assurance
for all audit response activity before delivery to the Independent Public Accountant (IPA)
Communicate outcomes
of the audit
and
coordinate NFR remediation and
Corrective Action Plans (CAPs)
implementation
with assigned stakeholders
Financial and Functional
Owners
Respond to Document requests
– a function that will continue throughout the audit cycle
Facilitate the review of internal controls and processes
to include MICP and system access & segregation
of duties, etc.Respond to sample data requests from the auditor in a timely manner and provide insight into the quality of line item supporting documentationAssigned stakeholders develop CAPs
Roles and Responsibilities
22Slide23
Tone from the Top
Stress importance
Emphasize deadlines
Strong Audit Infrastructure
Well organized audit support team
Continual and effective communicationAccess to Supporting DocumentationCorrect, clear, and timelyAuditor must be able to follow (plain English)
Critical Success Factors
23Slide24
Be Prepared
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 testingOwn Your InformationProvide correct audit evidence in a timely mannerBe able to respond to an auditor’s questionsCommunicate
Continually communicate with audit liaisons and your organizationsDon’t assume auditors know your business…clear communication is key
Embrace feedback
Setting Expectations
24Slide25
Final ThoughtsSlide26
This is a massive enterprise change management effort
The scale of DoD’s consolidated financial statement audit is unprecedented
DoD is much more like a country than a corporation
There is significant value in moving into an audit regimenUntil audit opinions become routine, sustained emphasis will be needed from:
DoD senior leadership
CongressOversight organizationsBudget stability is critical to our successThis will be a multi-year effortFederal Government experience indicates this is a 3-5 year process once audits beginWe plan to do better, but need to manage expectationsThe Department is Fully Committed to Improving the Quality of Our Financial Information and Achieving Audit Readiness
Final Thoughts
26Slide27
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 DCFO mailings by emailingAuditReadiness@osd.milThe Department is Fully Committed to Improving the Quality of Our Financial Information and Achieving Audit ReadinessStay Connected
27Slide28
BackupSlide29
Example
Issues
Solutions in Development
Policy Issue
– Unclear Financial Reporting ResponsibilitiesThe Department has struggled for years to develop a GAAP-compliant real property reporting policy that is also doable in a practical sense. Preponderance of use, operational control, and Title X have all been considered at various times.The group looked at options from GAAP compliance, audit risk, and operational perspectives.The pending solution focuses on the funding Component and Components that have exclusive use of a space.
Implementation Issue – Valuation of Existing RP Assets
Following significant Wave 3 (existence and completeness) work, a significant amount of the Department’s real property still lacks documentation to support historical costs.
Leveraging SFFAS 35 (Estimating the Cost of PP&E), a methodology was developed by the group to use a deflated plant replacement value for existing real property. The methodology uses information already included in property systems, and can be quickly and consistently deployed across the Department. The result will be an auditable value for approximately 65% of the Department’s real property assets.
Real Property
Example Issues and Solutions in Development
29Slide30
Example Issues
Solutions in Development
Implementation Issue – Valuation of Existing Assets (Baseline)
The
Department lacks an auditable valuation methodology that can consistently be deployed across all Components.
Using SFFAS 35, the group is developing an estimating methodology that includes the use of budget and contract documentation. The methodology will focus on identifying and allocating capitalized costs to end items using contract and budget data.
Policy Issue – Contracts Do Not Differentiate Capital vs. ExpenseMajor Defense Acquisition Programs include a significant percentage of DoD equipment value. Current program structures don’t isolate capital costs or associate them to specific end items.
Major Defense Acquisition Programs will likely require some estimates to value equipment but should be minimized to the extent possible. This includes differentiating between capital and expense costs and liquidating construction in progress accounts as end items are delivered. New CLIN structures are being embedded in future acquisition contracts to map capital costs to end items.
General Equipment
Example Issues and Solutions in Development
30Slide31
Example Issues
Solutions in Development
Policy Issue
– Required Support for Cost Models
Cost models are used to estimate cost to complete. However, a recent audit of DLA E/L CTC highlighted the need for additional clarification to determine how models should be supported during an audit.
The Group is reviewing RACER and NORM to determine appropriate procedures for validating and documenting model data sources, inputs, table updates, and supporting documentation, as well as responsibilities for supporting the audit.Implementation Issues –
E&DL Completeness ChallengeEnvironmental liabilities can be associated with DoD assets but can also exist outside fence lines or even in locations where the Department has not operated in 100 years.
The group has developed a point of view on establishing a complete universe of E&DL that included several approaches. Establishing a complete universe may require more than one approach.
Reconciling to APSRs
Fence-to-fence survey
Historical study
Reconciling to other authoritative listings (e.g. EPA listings)
Environmental and Disposal Liabilities
Example Issues and Solutions in Development
31Slide32
Example Issues
Solutions in Development
Policy Issue
–
Terminology and Conceptual Gap Between FM and CIO
Component FM and CIO organizations interpret SFFAS 10 and FMR IUS definitions in a variety of ways. Further guidance is needed for consistent application of the standards and financial reporting.The working group is collecting areas of misunderstanding or areas that lack clarity. For example, the SFFAS 10 IUS definition includes the term “operating system programs,” which CIO and FM personnel understand differently. This causes a significant disconnect in what IUS is reported and how. The group is also working with FASAB to help improve future guidance.
Implementation Issue – Lack of a Complete IUS Universe
IUS is dramatically underreported in many Components (e.g. Navy reports $5M in IUS on its GF balance sheet). To establish a baseline, a methodology is needed to identify the complete universe of IUS.
A methodology is being developed to identify a complete universe of software by reviewing multiple software record repositories, such as electronic discovery reports, APSRs, contracts, and budget documents. Following the accumulation of a potential IUS universe, functional and FM personnel, reduce the list to potentially capital IUS. Lessons learned from Components that have completed this milestone will be briefed at the WG meetings.
Internal Use Software
Example Issues and Solutions in Development
32Slide33
Example Issues
Solutions in Development
Policy Issue
– Valuing existing
OM&SMuch of the Department’s OM&S predates the requirement for historical cost supporting documentation. As a result, an initial moving average cost cannot be supported without significant manual effort to estimate values.The group is working with the Federal Accounting Standards Advisory Board (FASAB) to consider other potential options. One option under consideration is the establishment of a baseline at latest acquisition cost (LAC) and using moving average cost (MAC) on a go-forward basis.
Implementation Issue
– Defining the “End User” for OM&S
Components
struggle to determine whether the purchases or consumption method is appropriate for OM&S. A significant contributor to this indecision is that there is no established criteria to define the “end user” of OM&S.
The group is developing more specific criteria to help Components evaluate whether OM&S stored in locations such as on ships or field units can be expensed because they are in the hands of the end user or must be capitalized.
Purchases Method
“The purchases method provides that operating materials and supplies be expensed when purchased.”
(i.e., no dollar amount reported on the Balance Sheet)
Consumption Method
“The cost of goods shall be removed from operating materials and supplies (i.e., the asset account) and reported as an operating expense in the
period they are issued to an end user
for consumption in normal operations.”
(i.e., dollar amount of items held for issue is reported on Balance Sheet)
Example Issues
Solutions
in Development
Policy Issue
– Valuing existing
OM&S
Much of the Department’s OM&S predates the requirement for historical cost supporting documentation. As a result, an initial moving average cost cannot be supported without significant manual effort to estimate values.
Implementation Issue
– Defining the “End User” for OM&S
Components
struggle to determine whether the purchases or consumption method is appropriate for OM&S. A significant contributor to this indecision is that there is no established criteria to define the “end user” of OM&S.
The group is developing more specific criteria to help Components evaluate whether OM&S stored in locations such as on ships or field units can be expensed because they are in the hands of the end user or must be capitalized.
Purchases Method
“The purchases method provides that operating materials and supplies be expensed when purchased.”
(i.e., no dollar amount reported on the Balance Sheet)
Consumption Method
“The cost of goods shall be removed from operating materials and supplies (i.e., the asset account) and reported as an operating expense in the
period they are issued to an end user
for consumption in normal operations.”
(i.e., dollar amount of items held for issue is reported on Balance Sheet)
Inventory and Related Property
Example Issues and Solutions in Development
33