Presentation on theme: "What’s Next for the DoD Audit"— Presentation transcript:
1What’s Next for the DoD Audit Office of the Under Secretary of Defense (Comptroller)What’s Next for the DoD AuditMr. Mark Easton, Deputy Chief Financial Officer, OUSD(C)Ms. Alaleh Jenkins, Director, OUSD(C)/FIARWashington-ASMC NCR PDIMarch 3, 2015v13
2AgendaThe Requirement: Why Financial Improvement and Audit Readiness (FIAR) Is ImportantFIAR Strategy and Audit Strategy: How We Are Meeting the DeadlineWhere Are We Now?FIAR Guidance and Timeline: Less Than Two Years RemainYour Role: How You Can HelpFinal Thoughts
4It’s the LawThe 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 year Federal Financial Management Improvement PlanThe Government Management Reform Act of 1994: Required annual auditable financial statementsRefined Guidance:Sec 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 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, 2017Continued interest from Congress, GAO, OMB, and the media
5If DoD were a public company, would you invest? StewardshipStewardshipReassures the American public and Congress that the Defense Department is a good steward of its fundsDemonstrates accountabilityHelps to safeguard assets and is a tool for guarding against fraud, waste, and abuseThe 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.”If DoD were a public company, would you invest?
6History of Audit Efforts to Date 2017FY 2017 Statutory DirectionAchieve Full Agency Financial Statement Audit ReadinessThe Big Picture……and Challenge2014FY 2014 Statutory DirectionAchieve Audit Readiness of General Fund Statement of Budgetary Resources (SBR)2009Pre-2009Audit emphasis largely within only the comptroller organizationsPost-2009Audit efforts involve all functional areas enterprise-wideInitial Priorities Established2005FIAR Office Established1994Initial DoD Efforts Began
7FIAR Strategy and Audit Strategy: How We Are Meeting the Deadline
8DoD Consolidated Audit Strategy Overview DoD has developed a strategy to move to full financial statement audit by FY 2018 in accordance with the NDAA for FY 2010The audit strategy builds on audit readiness momentum and demonstrates interim progress toward the FY 2018 target using a phased approachPropose that audits of select reporting entities’ financial statements be acceleratedOther reporting entities will undergo progressively more complex examinationsThe 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 Will Likely Be the Largest Financial Statement Audit Ever Performed
9The DoD Agency-Wide Audit Will Involve Presenting Our Complete PortfolioCategories as Percentage of Total Budgetary Resources0.9 % Not Material for AuditTier 4Tier 33.6% DoD Designated ExaminationsMicroCapsSmallCapsWHS (Pentagon admin)DoDEA (education)MDA (missile defense)DARPA (R&D)DSCA (security cooperation)Many othersSelected Activities in the Fourth Estate are participating in mock auditsTier 221.9% DoD Designated AuditsMidCapsDefense Logistics AgencyDHA (healthcare)USTRANSCOM (transport)USSOCOM (special ops)DISA (IT / communication)Others already under auditTier 173.6% OMB Designated Entity AuditsLargeCapsDepartment 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 FundU.S. Army Corps of Engineers (USACE)– Civil WorksEntities in red are under audit
10Audit Readiness Deal-Breakers 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 documentationValidate corrective action plans have been effectively implemented for critical internal controls processesMuch of the effort related to addressing these deal-breakers requires strong participation from DFAS for success.
12Significant Progress Made 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 ActivityAudit contracts awarded December 2-4, 2014Audits began in January 2015Audits 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-itemsIn FY 2015, the ODOs material to the DoD Consolidated Financial Statements will undergo with SBA mock audits or IPA examinationsOver 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.
13FY 2015 General Funds Planned for Audit Over 90 % Currently Planned for Audit, but Remainder Involves Fourth Estate Organizations4th Estate (TI-97) $132.21B (13.6%)Full Financial StatementsGeneral Fund (GF) Planned Under Audit in FY 2015 – $883.08BMilitary Retirement Fund (TI-97) $54.67B (5.6%)Full Financial StatementsPayments to MRFDoD Component Level AccountsDHA, Contract Resource ManagementMERHCF (healthcare entitlement)Payment to MERHCF (healthcare)DCAADeCA, General FundArmy (TI-21) $266.48B (27.3%)GF (SBA)4th Estate (TI-97) $91.15B (9.4%)Not Under AuditFunds Provided by OSD to MilDepsDHAUSSOCOMForeign Allies Burden SharingDefense 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 FundsU.S. Army Corps of Engineers- Civil Works (TI-96) $30.28B (3.1%)Full FinancialStatementsAir Force (TI-57) $187.77B (19.3%)GF (SBA)Navy (TI-17) $181.86B (18.7%)GF (SBA)Marine Corps (TI-17) $29.81B (3.0%)GF (SBR)FY 2013 Total Budgetary Resources
14FIAR Guidance and Timeline: Less than Two Years Remain
15Expanded Priorities and Guidance 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 assetsAccurately reporting environmental and other liabilitiesPreparing Working Capital Fund financial statements for auditRevised 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 accordinglyLeadership 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 readinessDeputy Secretary Work launched the DEXCOM and addressed leaders of the Fourth EstateMike McCord sworn in as USD(C) and CFOLeadership is confident this expanded focus will keep the Department on the right path to full audit readiness.
16Timeline to Move to Stand-Alone Audit The five TI-97 reporting entities below will move towards stand-alone financial statement audits.Tier 2: Mid CapReporting EntitiesFY 2015FY 2016FY 2017FY 2018FY 2019 ForwardDLAExamination – SBA (General Funds)Annual Audits – Full Financial StatementsDefense HealthExamination – SBAUSSOCOMDISAUndergoing Internal ValidationUSTRANSCOMContinuing Audit Readiness ActivitiesExamination – Full Financial StatementsThe 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.
17Timeline to Move to Stand-Alone Examination The 10 TI-97 reporting entities below will move towards stand-alone audit readiness examinations of their financial statements.Tier 3: Small CapReporting EntitiesFY 2015FY 2016FY 2017FY 2018FY 2019 ForwardWHSExamination – SBAAnnual Examinations – Full Financial StatementsMDADSCAMock AuditDoDEAOther TI-97 Funds Provided to the ArmyDARPAChemBioDTRADCMAJCS
18DoD Designated Audits – Tier 2: Critical Path Audit Readiness MilestonesCritical Path Audit Readiness MilestonesPresent 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 MaterialFIAR 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)
19DoD Designated Examinations – Tier 3: Critical Path Audit Readiness MilestonesCritical Path Audit Readiness MilestonesPresent 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 MaterialFIAR 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)
20Overview of Working Groups Five Working Groups for Critical Balance Sheet Line Items:Real PropertyGeneral EquipmentInternal Use SoftwareInventory and Related PropertyEnvironmental and Disposal LiabilitiesThe 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 valuationsOSD will vet decisions with the DoD OIG and GAO over the next 3 months; decisions targeted for June to allow for implementation
22Roles and Responsibilities Planning PhaseInternal Control PhaseTest PhaseReport PhaseAuditorsSubmit 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 controlsPerform substantive, control and compliance testsIssue Notices of Findings and Recommendations (NFRs) to outline problem areas within accounting, internal controls, IT systems, and business processesFM HQ OrganizationsProvide strategic guidance and technical expertise to consolidate and coordinate the audit response and communication across the organizationProvide coordination and communication to facilitate a close working relationship between auditors, Commands, and functional ownersDirect, 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 stakeholdersFinancial and Functional OwnersRespond to Document requests – a function that will continue throughout the audit cycleFacilitate 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
23Critical Success Factors Tone from the TopStress importanceEmphasize deadlinesStrong Audit InfrastructureWell organized audit support teamContinual and effective communicationAccess to Supporting DocumentationCorrect, clear, and timelyAuditor must be able to follow (plain English)
24Setting Expectations Be Prepared Own Your Information Communicate Auditor will interview personnel and observe operationsAuditor will test account balances and trace to sourceAll organizations, locations, processes, and systems may be subject to auditAssign point personnel for supporting documentationExpect large sample sizes for testingOwn Your InformationProvide correct audit evidence in a timely mannerBe able to respond to an auditor’s questionsCommunicateContinually communicate with audit liaisons and your organizationsDon’t assume auditors know your business…clear communication is keyEmbrace feedback
26Final ThoughtsThis is a massive enterprise change management effortThe scale of DoD’s consolidated financial statement audit is unprecedentedDoD is much more like a country than a corporationThere is significant value in moving into an audit regimenUntil audit opinions become routine, sustained emphasis will be needed from:DoD senior leadershipCongressOversight 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
27Stay Connected Visit the FIAR website Read the FIAR Plan Status Report Read the FIAR Plan Status ReportSubscribe to DCFO mailings by ingThe Department is Fully Committed to Improving the Quality of Our Financial Information and Achieving Audit Readiness
29Example Issues and Solutions in Development Solutions in Development Real PropertyExample Issues and Solutions in DevelopmentExample IssuesSolutions in DevelopmentPolicy 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 AssetsFollowing 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.
30Example Issues and Solutions in Development Solutions in Development General EquipmentExample Issues and Solutions in DevelopmentExample IssuesSolutions in DevelopmentImplementation 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.
31Environmental and Disposal Liabilities Example Issues and Solutions in DevelopmentExample IssuesSolutions in DevelopmentPolicy Issue – Required Support for Cost ModelsCost 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 APSRsFence-to-fence surveyHistorical studyReconciling to other authoritative listings (e.g. EPA listings)
32Example Issues and Solutions in Development Solutions in Development Internal Use SoftwareExample Issues and Solutions in DevelopmentExample IssuesSolutions in DevelopmentPolicy Issue – Terminology and Conceptual Gap Between FM and CIOComponent 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 UniverseIUS 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.
33Inventory and Related Property Example Issues and Solutions in DevelopmentExample IssuesSolutions in DevelopmentPolicy 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.𝑀𝐴𝐶= 𝑆𝑡𝑎𝑟𝑡𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒+𝐻𝑖𝑠𝑡. 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑁𝑒𝑤 𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛𝑠 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦Implementation Issue – Defining the “End User” for OM&SComponents 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)