Alaleh Jenkins

Office of the Under

Secretary of Defense

(Comptroller)

Financial Audit Readiness:

The Big Picture – What’s It

Mean to You and Your

OrganizationAmerican Society of Military Comptrollers (ASMC) – PDI

May 28, 2015

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• Audit Readiness Mission

— Call to Action

— Statutory Direction

• Audit Readiness Approach

— The Big Picture…and Challenge

— Steamlined FIAR Approach

• FIAR Guidance

— DoD’s Guide to Audit Readiness

— FIAR Methodology

— Significant Changes – April 2015

• Critical Path

— Critical Path Task Overview

— DoD-Wide Initiatives:— Property Working Groups

— Fund Balance with Treasury

— TI-97 Workstreams

• Roles and Responsibilities

— Governance Structure

— Supporting Audit Readiness

• Supporting the Audit

— What a Successful Audit Requires

— Critical Success Factors

Agenda

Audit Readiness Mission

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“Although there is more work to be done, we will continue to move the Department from audit readiness to audit. We will not let up until every Defense organization has achieved the Secretary’s goal and the congressional mandate for validated full financial statement audit readiness by September 30, 2017, and, ultimately, has achieved a positive audit opinion.”

--Michael McCord

Under Secretary of Defense (Comptroller)/Chief Financial Officer

Call to Action

Audit Readiness Mission

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The Chief Financial Officers (CFO) Act of 1990 requires federal agencies to

prepare annual financial statements, and the Government Management Reform

Act (GMRA) of 1994 requires the financial statements to be audited. In addition

to the CFO Act and GMRA, Congress legislated the following:

• Sec. 1003 of the National Defense Authorization Act (NDAA) for 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, 2014

• Sec. 1003 of the NDAA for 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

Statutory Direction

Audit Readiness Approach

The Big Picture…and Challenge

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Audit Readiness Approach

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• Focuses on information DoD uses to manage:

— Budgetary data

— Asset counts/locations (existence and completeness)

• Improves information

— Internal controls and source documentation

— Verify success or identify problems through audits

• Seeks cost-effective approach for lower priority information

— Primarily historical valuations of assets

Streamlined FIAR Approach

This approach has created unified support for initiatives and

brought the DoD enterprise together on an audit readiness path

FIAR Guidance

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• Defines the Department’s goals,

strategy and methodology for

becoming audit ready

• Details the roles and responsibilities of

reporting entities and service providers

• Captures previously-communicated

guidance into one comprehensive

document

• Establishes priorities, per the USD(C),

to achieve the FIAR objectives. These

priorities are:

– Budgetary information

– Mission critical asset information

DoD’s Guide to Audit Readiness

Provides instructions for implementing a mandated, consistent,

Department-wide plan toward achieving the Department’s FIAR

objectives.

FIAR Guidance

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• Balances the need to achieve short-term accomplishment (Wave 1) against the

long-term goals of achieving an unqualified opinion on the Department’s financial

statements (Wave 4)

• Includes four prioritized waves to achieve and sustain audit readiness

• Includes clearly defined and sequenced Phases and Key Tasks

FIAR Methodology

Provides a critical path and clearly defined activities for the Department

FIAR Guidance

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• Expanded Core Document

— Emphasizes beginning balances, balance sheet line items, and valuation

— Discusses development of a robust Audit Infrastructure to support auditor

requests

• Focus on Wave 4 – Full Financial Statements Audit

— Defines SBR Beginning Balances, Material Balance Sheet Line Items, and

Financial Reporting as assessable units

— Establishes “critical path” milestone dates for specific assertion tasks in

new Appendix F and Appendix G

• Other Changes

— Emphasizes urgency of effort as Congressionally-mandated deadline

approaches and accelerates TI-97 audit readiness

— Aligns FIAR Guidance with DoD-wide audit strategy

Significant Changes – April 2015

Critical Path

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• Fund Balance with Treasury

— Perform complete reconciliations for outlays, Fund Balance with Treasury, and

unobligated balances for all material active/expired appropriations

• Universe of Accounting Transactions

— Produce a universe of transactions reconciled to the financial statements

• Feeder System Reconciliations

— Perform complete reconciliations (including all controls in place to support,

age, and resolve differences) with all material financial systems

• Property Existence, Completeness, and Valuation

— Identify all historical property, establish historical property values, and develop

sustainable processes to identify and value property

• Environmental Liabilities Completeness and Valuation

— Identify and value all environmental liabilities

• Journal Vouchers

— Perform root cause analysis of Journal Vouchers, implement corrective

actions to address root causes, and implement processes and controls to

review, approve, and support remaining Journal Vouchers

Critical Path Task Overview

Critical Path

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• There are multiple challenges to accomplishing the critical path tasks.

• FIAR, in coordination with DFAS and the Reporting Entities, has established

initiatives, such as working groups and policy updates, to remediate these

challenges.

DoD-Wide Initiatives

Critical Path Tasks Challenges Initiatives

Fund Balance with

Treasury

• Difficult to identify and address

all the differences when

reconciling FBWT

• TI-97 Workstream

• Updated DoD policy

Universe of Accounting

Transactions

• Difficult to collect reconciled

data from over 20 accounting

systems and reconcile to

dozens of feeder systems

• TI-97 Workstream

Feeder Systems

Reconciliations

• TI-97 Workstream

Property Existence,

Completeness, and

Valuation

• Lack of established process to

value existing and future

property

• Property Working Groups

Environmental Liabilities

Completeness and

Valuation

• Lack of established process to

identify and value

environmental liabilities

• Environmental Liabilities

Working Group

Journal Vouchers • Lack of support for journal

vouchers made to accounting

records

• TI-97 Workstream

Critical Path

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• Overview

— Aligned with FIAR mission critical asset and liability categories

— Address DoD-wide policy and process challenges to audit readiness and

provide implementation guidance

— Each group meets bi-weekly (weekly for internal use software)

— Include financial and functional representatives from OSD and material

Components

DoD-Wide Initiatives: Property Working Groups

Working Group Representative Focus Issues

Equipment • Baseline valuation strategy

• CIP baseline

• Valuation sustainment

• Indirect cost allocation position

Real Property • Baseline valuation estimates

• Capital improvements

• CIP process

• Disposal process

Internal Use Software • Common IUS definition

• Completeness methodology

• Valuation of development methods

• Capitalization of licenses

Inventory and Related

Property

• Clarifying purchases vs.

consumption method guidance

• Minor equipment vs. OM&S

• Initial spares accounting

Environmental and

Disposal Liabilities

• Completeness methodology

• Site level tracking

• Roll forward methodology

• Clarify “probable and reasonable”

Critical Path

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• Highlighted Accomplishments to Date

• Path Forward

— Continue working new issues and vetting with IG, GAO, and FASAB

— Codify completed issues in policy memos with implementation guidance

— Update the FMR where appropriate

Working Group Highlighted Accomplishments

Equipment • Developed a Department-wide strategy to establish an auditable equipment baseline

• Developed a methodology to sustain the valuation of equipment acquired through major

programs

• Briefed to GAO and DoDIG

Real Property • Developed a GAAP compliant and implementable real property reporting policy and briefed the

GAO and DoDIG

• Established a GAAP compliant baseline valuation methodology and briefed to FASAB

Internal Use

Software

• Established a Department-wide definition of IUS that clarifies the accounting standards

• Developed an IUS data call survey to establish an initial population of IUS

Inventory and

Related Property

• Developed framework for Components to evaluate the capitalization or expense of OM&S

• Worked with FASAB on developing new OM&S valuation accounting guidance

Environmental

and Disposal

Liabilities

• Established a completeness methodology for liabilities not associated with DoD assets

• Established a program management cost allocation position for Defense Environmental

Restoration Program

• Developed documentation and reconciliation requirements for site level tracking

DoD-Wide Initiatives: Property Working Groups

Audit Readiness Critical Path – DoD-Wide Initiatives

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• Overview

• Financial and functional representatives developing solution to reconcile FBWT

and address DoD policy challenges

• Highlighted Accomplishments to Date

• Updated DoD policy to provide additional guidance on FBWT reconciliations,

such as:

— Who is responsible for performing reconciliations and clearing differences

— What detail should be included in the reconciliations

— How often the reconciliations should be performed

• Defined the categories of FBWT differences that can occur when reconciling

the Department’s records to Treasury’s records

• Developed approach to address FBWT beginning balances

Critical Path

DoD-Wide Initiatives: Fund Balance with Treasury

Critical Path

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• Overview

• Financial and functional representatives from OSD, DFAS, and reporting

entities meet regularly to develop solutions to remediate challenges to critical

path tasks

• Highlighted Accomplishments to Date

• Identified security risks related to a universe of accounting transactions and

have developed mitigation plan

• Ascertained necessary data elements and designed solution to reconcile 20+

accounting systems to corresponding feeder systems

• Dedicated resources to identify root causes of unsupported journal vouchers,

and focus on reducing the number of journal vouchers rather than working to

support them

DoD-Wide Initiatives: TI-97 Workstreams

Roles and Responsibilities

Governance Structure

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• Establishes a governance structure

that engages key stakeholders and

commits adequate resources

• Provides the vision, goals, and

priorities of the FIAR strategy (tone

at the top)

• Engages the DoD’s most senior

leaders from the financial

management community along with

the Deputy Chief Management Officers

(DCMOs) and senior representatives

from all functional communities

• Provides the Department with a

visible leadership commitment to the

audit readiness process and

establishes accountability

Roles and Responsibilities

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What Commanders/Directors Need to Do:

• Reporting entities are the base of the governance structure pyramid on the

previous slide. Reporting entity commanders and directors need to:

• Ensure management controls are in place and operating, by:

— Confirming that personnel understand the controls must be documented

consistently (e.g., review/approval)

— Verifying that the controls are implemented and operating by conducting

tests

• Monitor levels of business discipline and accountability by asking

questions, such as:

— Are your contracts recorded accurately and timely?

— Are you financial obligations still valid?

— Are material receipts recorded accurately and timely?

— Are your financial decisions based on information in official systems?

• Actively support Enterprise Resource Planning systems

Supporting Audit Readiness

Roles and Responsibilities

Supporting Audit Readiness

This is simple in concept but difficult in execution.

Success requires discipline, persistence, and consistency.18

Business Process Operations

•Record information in relevant

systems (e.g., budgetary,

financial)

•Create contracts that facilitate

stakeholder needs

•Record payables and accruals

based on reasonable estimates

• Input time and attendance (e.g.,

overtime, leave)

•Update property records when

transferring items one location to

another location

•Record personnel status changes

Controls

•Verify information is consistent in

relevant systems

•Confirm that contract requires the

appropriate number of CLINs to

facilitate operational requirement

and financial reporting

•Verify reasonableness of accrual

estimates

•Verify that payroll hours are

authorized (e.g., overtime, leave)

•Confirm accuracy of property

records

•Verify the validity of personnel

status changes

Supporting the Audit

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• Doing the day-to-day job right is the starting point

• The ability to produce a reliable “universe” transactions

• Verify that each transaction is recorded and supported

— Invoice

— Proof of receipt of goods/services

— Contract

• Strong, consistent financial systems and management controls reassures auditors

and allow limited sample sizes

• Aggressively remediate deficiencies identified during audits and examinations

What a Successful Audit Requires

• Tone from the Top:

— Exhibit the importance of senior leadership commitment – Tone from the Top drives

action

— Encourage audit readiness as an “All Hands” effort

Process owners need to be engaged early in the process

Maintain continuous and effective communication across the enterprise

• Strong Audit Infrastructure:

— Communicate the importance of infrastructure and dedicated resources necessary

to support the audit

— Establish clear roles and responsibilities with Service Providers (i.e., DFAS)

— Acquire and sustain sufficient resources

• Access to Supporting Documentation:

— Ensure easy access to supporting documentation including where it is maintained

and who is responsible

— Monitor compliance with policies and procedures and retention of supporting

documentation

— Maintain and present Universe of Transactions in a timely manner

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Critical Success Factors

Supporting the Audit

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• Visit the FIAR website – http://comptroller.defense.gov/FIAR.aspx

• Read the FIAR Plan Status Report– http://comptroller.defense.gov/FIAR/plan.aspx

• Connect with the FIAR Group on milBook– Join the discussion and become a member of the FIAR Group on milBook at

https://www.milsuite.mil/book/groups/fiar

• Subscribe to the DCFO’s ‘Defense Audit Readiness News’ – Join the distribution list by emailing AuditReadiness@osd.mil

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