1. Bureau of Medicine and Surgery 2012 Navy Medicine Audit Readiness Training Symposium Federal and Non-Federal Receivables: Path to Audit Readiness June 5 th – 6 th, 2012

2. FOR OFFICIAL USE ONLY Audit Readiness Context  DoD is required to assert audit readiness for the Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As part of Navy Medicine’s audit readiness effort, the Federal and Non-Federal Receivables business processes has been identified as an assessable unit for which assertion must take place. Purpose  To discuss the Key Control Objectives (KCOs), Key Supporting Documents (KSDs), identified gaps and potential corrective actions for Federal and Non- Federal Receivables. Outcome  An understanding of the status of the Federal and Non-Federal Receivables assessable units, including major deficiencies and what can be done now at the field level to facilitate a successful financial statement audit.  Some assessable units may not require field action at this time. 2

3. Receivables Scope & Definitiion FOR OFFICIAL USE ONLY 3 DefinitionFederal Receivables: Includes medical treatment receivables due from federal entities such as U.S. Coast Guard (USCG), National Oceanic and Atmospheric Administration (NOAA), the U.S. Public Health Service (PHS) and the Veteran’s Administration (VA) Non-Federal Receivables: Includes medical treatment receivables due from non-federal entities (e.g. Health Insurance Companies, Third Party Collections, Medical Affirmative Claims Medical Service Accounts, paid patients) Assessable Unit Lead/TeamMel Becker Bill Condon Assessable Unit SupportKevin Norman – knorman@deloitte.comknorman@deloitte.com Kim Mackey – kimackey@deloitte.comkimackey@deloitte.com Q1 FY12 CollectionsFederal Receivables: $10.5 Million Non-Federal Receivables: $9.7 Million

4. Audit Readiness Timeline FOR OFFICIAL USE ONLY 4 FY12FY13FY14 Assessable Units – Wave 2 Max Assertion Date Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Travel 4 SEP 2012 Consumables 3 DEC 2012 Reimbursable Work Orders – Grantor 3 DEC 2012 Reimbursable Work Orders – Performer (Non-UBO) 1 APR 2013 Military Payroll (including RPN) 1 APR 2013 Contract Administration 1 JUL 2013 Non-Federal Receivables (UBO/Medical Treatment) 1 JUL 2013 Federal Receivables (UBO/Medical Treatment) 3 SEP 2013 Civilian Payroll 2 DEC 2013 Financial Reporting 2 DEC 2013 Funds Management (FBWT) 2 DEC 2013 Assessable Unit Assertion Interim Progress Milestones (90 Days, 50 %, 75 %) Control Testing Time Period

5. Audit Readiness Process FOR OFFICIAL USE ONLY 5 TasksWork ProductsCompleted Document Assessable Units 1 Determine which key business processes are Assessable Units Process Narrative Process Flowchart Mar. 1st 2 Document Assessable Units through interviews and observation Assess Internal Controls 3 Determine control objectives for each Assessable Unit Control AssessmentMar. 1st 4 Highlight internal controls in process documentation 5 Assess whether controls are effective in meeting control objectives Assess Supporting Documentation 6 Determine what supporting documents exist for each transaction type Key Supporting Document Matrix Apr. 16th 7 Assess whether there are any unsupported transactions Identify and Prioritize Deficiencies 8 Create list of deficiencies for any objectives that are not met or transactions that are not supported Deficiencies ListingApr. 30th 9 Prioritize deficiency list based on audit criteria

6. Key Control Objectives (KCOs) KCO #KCO Description Establish Agreement 1Anticipated and accepted orders do not exceed authority 2aAll unfilled customer orders are recorded in the correct period 2b Unfilled customer orders in the correct amount and line of accounting 2c Unfilled customer orders represent a valid need that is authorized and approved Billing 3Obligations do not exceed unfilled customer orders 4aAll revenues/receivables are recorded in the proper period FOR OFFICIAL USE ONLY 6 KCOs – Represent outcomes needed to achieve proper financial reporting and are a basis by which the effectiveness of control activities can be evaluated.

7. Key Control Objectives (KCOs) KCO #KCO Description 4b All revenues/receivables represent valid transactions that are authorized and approved 4c All revenues/receivables are recorded in the correct amount and line of accounting Collections 5All collections are recorded in the proper period 6a All Collections are recorded in the correct amount and line of accounting 6b All collections represent valid transactions that are authorized and approved FOR OFFICIAL USE ONLY7

8. Key Control Objectives (KCOs) KCO #KCO Description Outstanding Receivables 7aAll uncollectible receivables are recorded in the proper period 7b All uncollectible receivables are recorded in correct amount & line of accounting 7c All uncollectible receivables represent a valid need that is authorized and approved FOR OFFICIAL USE ONLY8

9. Key Supporting Documentation – Federal Receivable Execution Code Description of TransactionKey Supporting Documentation TBDTo record the unfilled customer order TBD 121, 201To record service rendered and work estimate and cost transfer SF 1080 NC 2275 610, 202To record the collection and reduce the receivables SF 1080 FOR OFFICIAL USE ONLY 9 KSDs – Documentation retained to support individual financial transactions and accounting events.

10. Key Supporting Documentation – Non-Federal Receivable Execution Code Description of TransactionKey Supporting Documentation TBDTo record the unfilled customer order TBD 121, 201 EST To record service rendered and work estimate and cost transfer Invoice 610, 202 REF To record the collection and reduce the receivables SF 215 DD 1131 TBDTo record the net realizable value (NRV) Monthly NMACT Package FOR OFFICIAL USE ONLY 10

11. Deficiency Types Material Weakness: A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected timely. Significant Deficiency: A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Control Deficiency: A deficiency that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely manner. FOR OFFICIAL USE ONLY 11

12. Considerations For Deficiency Type  Quantitative Materiality - Dollar impact or potential impact to the financial statements  Qualitative Materiality - Non-quantitative factors such as complexity of transactions, legal or regulatory concern or system deficiencies  Pervasiveness - Number of activities or transactions affected by the deficiency  Audit Dealbreaker - Issues that prevent an audit from occurring  Existing Guidance - Determining whether current policy or SOP is in place that meet financial reporting requirement FOR OFFICIAL USE ONLY 12

13. Federal and Non-Federal Receivable Material Weaknesses  Material Weakness 1: Unfilled customer orders are not recorded in the accounting system  Material Weakness 2: Medical billings/Receivables are not recorded in the accounting system until collections are received FOR OFFICIAL USE ONLY 13

14. FOR OFFICIAL USE ONLY Unfilled customer orders are not recorded Issue Detail  No unfilled customer orders are recorded in STARS-FL.  Unfilled customer orders should be recorded to present authority derived from providing services for which costs will be incurred.  By not recording unfilled customer orders, we are causing a required cost transfer once collections are made for services provided.  This is a departure from GAAP, and an audit deal breaker. Impact on Audit Readiness  If the unfilled customer order is not recorded, the authority to provide services to other federal agencies is not being adequately reported on the financial statements until after those services are provided, which will result in a materially misstated “Change in Unfilled Customer Order" line item on the SBR. 14

15. FOR OFFICIAL USE ONLY Unfilled customer orders are not recorded Path Forward  A Corrective Action Plan will be Developed for implementation by the Activities. Potential solutions would vary between Federal and Non-Federal business processes:  For Federal Receivables, implementation of the Inter-Agency Agreement currently being put into place with the United States Coast Guard could materially change the accounting for this process and may remediate this Material Weakness if implemented correctly as written. The corrective action would focus on how to implement and execute similar IAA for other agencies services at Navy Medicine MTFs.  For Non-Federal Receivables, Navy Medicine is a unique service provider, and industry experts will need to be consulted to determine how to derive an expected authority from insurance companies based on eligible personnel being serviced who have Other Health Insurance (OHI). 15

16. FOR OFFICIAL USE ONLY Receivables are not recorded until collections are received Issue Detail  Receivables are not entered into STARS-FL until they have been collected. Current Navy Medicine guidance dictates that the MTFs should not establish reimbursable authorization until collection and therefore cannot recognize the receivable at the time services are rendered.  DOD Comptroller issued Defense Health Program (DHP) Accounts Receivables Policy dated May 2, 2008 stating all DHP-funded activities will recognize and record a receivable when it establishes a claim based on goods or services provided.  This is a departure from GAAP, and an audit deal breaker. Impact on Audit Readiness  Recording accounts receivable upon receipt of collections causes the account receivables balances to not be recorded in the proper accounting period, if at all. This material weakness significantly impacts the SBR because the account receivable and revenues balances are not fairly represented. 16

17. FOR OFFICIAL USE ONLY Receivables are not recorded until collections are received Path Forward  The Federal & Non-Federal Assessable Unit Team will document a formal Corrective Action Plan to address this issue. Potential solutions may vary between Federal and Non-Federal business processes, but would include two key phases:  Phase One: Development of a GAAP compliant, achievable, sustainable ‘to-be’ business process that incorporates current internal controls and key supporting documents where possible.  Phase Two: Development of a plan for implementation of the ‘to-be’ process across the organization, including:  Timeline for implementation  Actions necessary to implement new process  Roles and responsibilities for affective personnel  Reporting requirements to document process with Audit Readiness PMO. 17

18. Other Receivables Deficiencies  Control Deficiency 1: Inconsistent or inaccurate execution of patient registration for completion of Third Party Collection Program/Medical Service Accounts/Other Health Insurance (OHI) – DD 2569 forms FOR OFFICIAL USE ONLY 18

19. FOR OFFICIAL USE ONLY Inconsistent Use or Inaccurate Completion of DD 2569 Forms Issue Detail  The Assessment Team identified several Activities that are not obtaining an accurate and current DD 2569 for all patients that receive treatment.  Currently, procedures/methods/controls used by clinic personnel are subject to error and great variation in the DEERS check. An incorrect patient registration and/or failure to obtain/enter OHI data potentially results in non-recognition of a receivable. Impact on Audit Readiness  Missing or incomplete DD 2569s affects the Activity’s ability to properly bill and collect from the responsible party, resulting in unrecorded accounts receivable. Path Forward / Potential Activity Action  Improve the collection and completion of DD 2569 forms 19

20. FOR OFFICIAL USE ONLY Questions? 20