1. Department of the Navy Drive to Auditability
Presentation to the 2010 ASMC PDI
Mr. Dennis Taitano – DASN Financial Operations
2 June 2010

2. Agenda Everyone Contributes to Auditability Why is FIAR Important?
DoD Challenges
DoD FIAR Strategy and DON FIP Progress-to-Date
Assertion and Audit Lessons Learned
Summary

3. Everyone Contributes to Auditability – Bottom Line Up Front
Essentially, auditability is:
Well-controlled business processes to satisfy:
Generally Accepted Accounting Principles (GAAP)
Compliance with Federal Financial Management Regulations (FMR, FFMIA, FMFIA, etc.)
Ability to readily produce evidence (e.g. documentation, testing) to support business transactions
Management Assurance (Internal)
3rd Party Assessment (External)
Financial Audit Readiness is presented through 5 Management Assertions:
Completeness: Are all assets and liabilities accounted for?
Rights and Obligations: Do we have ownership and control of assets (i.e. title), and are liabilities our obligation?
Existence: Do all assets and liabilities in our records actually exist?
Valuation: Have we completely and accurately accumulated the appropriate costs of assets and liabilities?
Presentation and Disclosure: Have we presented the transactions appropriately in our financial statements?
Through our efforts to reach this goal, the outcome produced will be timely, accurate, and reliable financial information.

4. Financial Auditability Nuclear Reactor Safety
DoD Business “Control Continuum”
Current
State
“Playground Rules”
No Control
(Anything Goes!)
Financial Auditability
FFMIA Compliant
Complete Control
Nuclear Reactor Safety
GAP
No Assurance
Qualified
Assurance
Reasonable
Absolute Assurance
The DoD Business “Control Continuum” displays the broad spectrum of possible internal control environments. The Continuum begins with a “Playground Rules” environment, in which no control is present. At the opposite end of the spectrum is complete control, akin to the environment of checks and balances present in dealing with nuclear reactor safety (absolutely necessary when lives are at stake).
Obviously the ultimate goal is complete control, but the realist goal is to close the gap between the current state (Qualified Assurance) and Financial Auditability (Reasonable Assurance). Obtaining this goal will provide the apparent benefit of being auditable, but other benefits will be produced as well:
-Controls that are in place and tested (confidence in the control environment, auditable processes)
-More standard processes
-Implementing more capable systems
-Improved operational efficiency (streamlined organization, cost savings)
-Reduced vulnerability to fraud/waste (tighter control)
-Sustained public trust/confidence (stewardship)
“Closing the Gap” Will Mean:
Controls that are in place and tested
More standard processes
Implementing more capable systems
Improved operational efficiency
Reduced vulnerability to fraud/waste
Sustained public trust/confidence

5. Financial Improvement and Audit Readiness (FIAR)
Why is FIAR Important?
Comply with Laws: - Laws require financial statement audits
Verify Correct Allocation of Funds: - Verify that all resources are efficiently allocated to approved mission priorities
Improve Mission Support: - Provide better information for timely, informed decision-making
Increase Public Trust: - Reassure the public that DoD is a good steward

6. DoD Challenges
Many diverse functional organizations must work together
Lack of understanding relating to financial audit requirements
Current business environment makes auditability hard to achieve
DoD systems are not integrated and/or manually intensive
Lack of processes standardization or embedded internal controls
Some systems do not collect or lack visibility of data at transaction level
Lack of coordinated plans
Services pursuing different agendas at different pace
Earlier focus was on information of limited value to management
New Approach Established in August 2009: Focus on Improving Information We Use

7. “It will take longer than we thought to become audit-ready.”

8. OSD/Services Developing Detailed Financial Improvement Plans
New Approach
Focus on information DoD uses to manage
Budgetary data
Asset counts/location (existence and completeness)
Main emphasis: improve information
Use audits to verify success or identify problems
Focus on internal controls and source documentation
Lower priority for information not useful to managers
OSD/Services Developing Detailed Financial Improvement Plans

9. DON Financial Improvement Program Overview
DON FIP is a department-wide effort designed to achieve the goal of DON reaching an audit ready state
The program continues to drive toward more effective business processes, with the focus centered on effective internal control implementation
DON FIP outcomes include:
More accurate, timely, and reliable information for decision making
More confidence of DON’s effective stewardship of taxpayer dollars

10. DON FIP Accomplishments and Updates
Accomplishments to Date:
Accomplishments
Environmental Liabilities –Weapons Systems (Ships, Submarines), DERP, OEL, BRAC
Cash and Other Monetary Assets
Contingent Legal Liabilities, Debt
In Process Items:
In Process
Civilian Pay Assertion – currently under review by OSD(C) and DoDIG
Appropriations Received (Funds Receipt and Distribution) – pre-audit review by DoDIG
USMC Statement of Budgetary Resources – currently under audit
Key Upcoming Milestones/Dates:
Event
Date
Transportation of People (TDY Travel) Assertion
9/30/2010
E&C Quick Wins (Ships and Submarines, Aircraft, Satellites, ICBMs) Assertion
USMC SBR Audit Opinion
11/15/2010
Remediate control weaknesses for CivPay and Appropriations Received (FRD)
12/31/2010

11. FIAR FY 11-16 Milestones - Audit Ready Assertion Dates
Obligation Status - DON
Supply Orders (MILSTRIPs) Q3 FY11
Contracts Q4 FY11
Military Pay Q4 FY12
Funds Balance with Treasury (Outlays) - DON Q4 FY12
Statement of Budgetary Resources
DON (USMC already under audit) Q1 FY13
Army Q1 FY15
Air Force Q4 FY16
Mission Critical Asset Existence and Completeness
DON Q2 FY15
Army Q3 FY15
We Will Seek Independent Validation for Some of These

12. DON FIP Strategy - Management Challenges
How We Are Responding
Implementing a Robust Internal Control Environment Across a Large, Geographically Dispersed Organization
Focusing on mitigating risk and meeting control objectives
Defining key controls across business processes
Integrating Audit Readiness with Change Management efforts
Intra/Inter DoD Agency Coordination
Continuing to foster cooperative relationships with business partners (e.g. DFAS, DLA, DCMA)
Reaching outside of the FM community (e.g. Acquisition, Logistics)
Working to adopt BTA standards and promote common business processes and interoperability of data
Building and Sustaining an Audit Readiness Infrastructure
Looking to standardize processes and internal controls to reduce complexity, risk, cost of maintenance, and deploy new enterprise systems (e.g. Navy ERP, FPPS)
Promoting awareness and understanding of the importance and use internal controls across the enterprise, while establishing accountability
Developing an organized systemic means to periodically evaluate operating effectiveness (OMB A-123 Appendix A - ICOFR)

13. Lessons Learned: Assertion to Audit
Key Lessons Learned thus far can be grouped into four areas:
Financial Environment
“Know Your Environment”
Understand the flow of events and transactions from recognition through recording to reporting
Reconciliation of: FBWT, UTB to ATB, DO-Unpaid to A/P, etc.
Readily available source docs
Standard internal controls,
systems, and processes improves
audit performance
Data Management
Sample retrieval, submission, and tracking, as well as follow-up question management
“Transmitting Timely and Accurate Information”
DoD/DON information security requirements
Pathway to Success
Data requirements are large and complex – requires constant focus
Auditor-Auditee Communication
Human Resource Management
“People Make the Difference”
“Simple in Concept… Monumental in Execution”
Quality people are needed in the auditee organization as well as in the external service providers
Constant education of both auditor and auditee
Must have the “Will to Win” – Audit is unrelenting
Know how to communicate with the auditor
Assure clear understanding by all parties of business activities
We know our business better than anyone, so be confident

14. What is the Significance of These Dates?
1990
1996
2000
2007
2017

15. Summary DoD’s financial management community is performing well
DoD’s financial management health and capabilities are a reflection of the business environment and key supporting elements (i.e., people, processes, systems)
Enterprise-wide changes in our business will be required to meet stakeholder expectations
Better integrated/more capable systems
Standardized business processes which are periodically tested and measured against efficiency, effectiveness and compliance criteria
The Comptroller serves as a catalyst in strengthening the key elements of our business…both inside and outside of the FM “stovepipe.”
We need to recapitalize our business infrastructure
Continue to build and strengthen the audit support infrastructure today, to support the audit tomorrow.