1

Will it Blend?Coordinating Internal Controls & Process

Remediation to Achieve Sustainable Financial Audit Success

John Bower, CPACDR Colin Campbell, USCG

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LUCASFILM

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Why We’re Here

• Federal Financial Management Improvement Act (1982)

improving info for decisions & accountability

• CFO Act of 1990CFO in all executive agencies

• DHS Financial Accountability Act (2004)CFO agency; Internal Controls Over Financial Reporting

• DHS Audit Requirement Target Act (2012)clean financial statement audit by 2013

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Agenda

• Audit Remediation & Internal Controls

• The Internal Controls Cycle

• Tools

• Best Practices

• Roadmap to Success

• Summary & Questions

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Audit Remediation Division

Rem

ed

iati

on

Inte

rnal

Con

trols

• Fix long-standing audit

discrepancies

• Drive efficient & effective

business practices.

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Internal Controls Division

Rem

ed

iati

on

Inte

rnal

Con

trols

• Monitor efficiency &

effectiveness.

• Subject matter expertise,

training, & guidance

• Manage annual statement of

assurance

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Internal Controls - Refresher

Compensating Manual Automated

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Internal Controls - Refresher

Detective Preventative

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Issues

• Duplicate requests/pushbackfrustrated field

• Can’t identify remediated areahindered internal controls work

• Remediation not aware of new gaps

hindered remediation

• No Internal Controls input on remediation

internal control testing failure risk

Rem

ed

iati

on

Inte

rnal

Con

trols

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Inte

rnal

Con

trol

s

Blendtec

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Pivot – New Strategy

• Integrate Remediation & Internal Controls controls ensure sustainment

• “One-stop shop” for audit issueskeep the customer satisfied, engaged, committed

• Eliminate repetitive calls for dataless work for everyone!

• Keeping the OIG Auditors awayreduce “audit fatigue”

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The Internal Controls Cycle1) Determine

Scope

2) Perform Materiality

Assessment

3) Perform Risk

Assessment

4) Document Process and Procedures

5) Develop Testing Plan

6) Perform Test of Design

7) Perform Test of

Effectiveness

8) Evaluate Test Results

9) Report Results to

Management

10) Create Corrective Action Plan

11) Roll Forward and Monitoring

12) Statement of

Assurance

Planning Risk Assessment

- Determine Scope- Perform Materiality

Assessment- Perform Risk Assessment

Evaluate the Controls at the Process Level

Documentation of Interviews and Walkthroughs

- Document Processes and Procedures

- Develop Testing Plan- Perform Tests of

Design

Test Controls at the Transaction Level

Test of Operating Effectiveness

Documentation

- Perform Test of Effectiveness

Conclude, Report and Correct

-Testing Remediation of New Controls

Implemented During the Fiscal Cycle

-Gaining Comfort of Period Not Tested

- Evaluate Test Results- Report Results to Management

- Develop Substantive Testing Plan- Develop and Implement

Corrective Action Plan- Perform Roll Forward & Monitoring

Statement of Assurance

A-123 DHS USCG

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The Internal Controls Cycle1) Determine

Scope

2) Perform Materiality

Assessment

3) Perform Risk

Assessment

4) Document Process and Procedures

5) Develop Testing Plan

6) Perform Test of Design

7) Perform Test of

Effectiveness

8) Evaluate Test Results

9) Report Results to

Management

10) Create Corrective Action Plan

11) Roll Forward and Monitoring

12) Statement of

Assurance

Fails TOE

Fails TOD

High Risk

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The Internal Controls Cycle1) Determine

Scope

2) Perform Materiality

Assessment

3) Perform Risk

Assessment

4) Document Process and Procedures

5) Develop Testing Plan

6) Perform Test of Design

7) Perform Test of

Effectiveness

8) Evaluate Test Results

9) Report Results to

Management

10) Create Corrective Action Plan

11) Roll Forward and Monitoring

12) Statement of

Assurance

Remediated

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US Coast Guard

Process Flow

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Remediation Begins: Workflow Report

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FY2013 Operating Materials and Supplies Workflow Report

FY2013 Ref. No.

Risk Control Objective Control ActivitiesFY2013 Control

StatusWhy Corrective Action is Necessary

16.2 Donations/transfers are received without proper valuation support.

Ensure proper support for donations/transfers is received before recording it in the system.

No control activity identified. Compensating control exists through the execution of the Monthly Valuation Sustainment process.

High Residual Risk

The process for accounting for donated and transferred stock items was presented to the FMAOB in Q1 of FY2013. As an outcome of this meeting, interim policy was issued prescribing the proper accounting treatment for donated and transferred stock items. A procedure defining the proper accounting treatment for donated and transferred in stock items has not yet been promulgated.

35.1 Account balances do not reconcile with the stock ledger and errors are outstanding.

Ensure stock ledger and general ledger reconcile so balances are stated accurately on financial reports.

Quarterly, the Financial Program conducts the Stock Ledger to General Ledger Reconciliation procedure to ensure that account balances are accurately reflected on the financial reports. Reconciling errors are investigated and supporting documentation is retained.

Failed TOD During FY2013 Test of Design, the Internal Control Assessment Team obtained the stock to general ledger reconciliation package for the 1st Quarter of FY2013. The team noted several discrepancies between the two ledgers were identified however, documentation was not available to support the cause and required adjustment for all reconciling errors, including a $425,901 variance between two sub-accounts. This resulted in unsupported adjustments to the general ledger.

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Incorporate control gaps into plan

Develop Training/

Corrective Actions

Draft CBRNE Issue Paper

Review Inventory Held-for-Sale Policy &

Procedures for Fuel Farm

18 Apr

Review Inventory Held-for-Sale Policy and

Procedures - Uniforms

Perform Test of Design

14-14 Inventory and Related Property Mgmt. MAP Milestones for 7 APR – 18 APR 2014

Finalize document repository

Document procedures to periodically monitor WAP

calculations in ALMIS

Perform Risk Assessment

AtoN / ICP Business Process

Alignment

Inve

ntor

y H

eld

for

Sale

Ana

lyti

csPo

licie

s &

Pr

oced

ures

Current Milestone Risks and Related Mitigation

Risks (Yellow) Mitigating Strategy

3.1: Review of fuel inventory and subsequent issue paper detailing findings delayed due to resource constraints and emergent issues.

Leverage work by Supply Fund Team and engage Kodiak fuel inventory KPOs as time permits.

Issues (Red) Action

5.2.1: Discussions regarding the appropriate system of record for CBRNE enrollment are ongoing. Endorsements to CG-8 memo from CG-4 detailing enrollment costs and issues are in draft.

Moving forward with drafting issue paper, will incorporate cost, resource, and system constraint information once CG-4 endorsements are received.

Key Statistics

Planned ActualTotal OM&S Tasks 67 67

Tasks Completed to Date 10 10

Overall Percentage Complete 15% 15%

Tasks Due Next Period 0 0

Tasks Overdue (Red) 1Tasks in Danger of Missing Due Date (Yellow) 3

Key Accomplishments this Reporting Period

1 Continued work on valuation and enrollment of AtoN, Elex, CBRNE.

2 CBRNE issue paper draft: completion pending CG-4 endorsements to CG-8 CBRNE memo.

3Pulled samples from Q2 ICP data sets for substantive valuation testing: providing samples to the ICPs for support; will coordinate site visits to review folders.

Key Tasks Planned for Next Period

1 Deliver substantive valuation samples; collect support; conduct site visits to review valuation folders.

2 Continue work to enroll AtoN & Elex in NESSS.

3 Based on CG-4 endorsements, complete draft CBRNE issue paper and recommendation for CBRNE items.

Item

Ent

ry

Prop

osal

Q4 ValuationRoll forward

Perform ARC

Annual Update

Observe UDC physical

inventory

Conduct Q4 C/E Testing

at ICPs

Conduct site visits to observe physical

inventory - Kodiak

Report Q4 Roll-forward Results

Report Q3 TOE Results

Report Q1 & Q2 TOE Results

3.2

3.4

4.7

4.6

4.8

3.5

2.72.5 2.8

3.1

3.3

Conduct Q2 C/E Testing at ICPs

4.3

Q2 Valuation Testing at ICPs

4.2

Conduct Q3 C/E Testing at ICPs

4.4 4.5

Conduct Q3 Roll forward &

Valuation at ICPs

5.4.1

Develop controls over the receipt of

donations/transfers

Identify system business requirements 8

Man

agem

ent

Con

trol

s

2.2

Develop Item Enrollment Information

5.1

Conduct Q1 C/E Testing at ICPs

4.1

Enroll Electronics items into NESSS

5.2.1

7.2

5.3.1

2.3

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7.1

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US Coast Guard

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Discuss Control Gaps w/ KPOs

• Capture all policy/procedures?

• Control gaps factually accurate/correctly

captured?

• Policies/procedures been updated?

• Process changed?

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Discuss Control Gaps w/ KPOs

• Process in remediation?

• Cost-benefit of proposed solution?

• Targeted resolution date?

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Code Description

L Long-term Remediation Effort: Do Not Test

S Short-Term Remediation Effort: Do Not Test

U Under Investigation: Need more information to Determine Appropriate Corrective Action

T Remediation completed: Control is recommended for testing

Remediation tracks and monitors efforts until they are

determined to be ready for testing.

Prioritize & Identify

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Build Relationships

• Hit the Road TogetherKey Command Visits

Leadership Forums & Conferences

• Monthly Audit Status Updates

• Limited ‘Marketing’

• Internal CommunicationsMagazine Articles

Command Master Chief Network

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Messaging

• Standard 101 BriefingsField, KPOs, SES/Flags

• MarketingComptroller Newsletter

• “Tone at the top”Commandant Video

Executive Management Council

US Coast Guard

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Roadmap to Success: Controls

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Remediation Internal Controls

Transition: Effort

2014+2010-20132004-2009

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Headquarters Key Process Owners

Transition: Responsibility

2014+2010-20132004-2009

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US Coast Guard

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Audit Readiness Progress

2007 2008 2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% Balance Sheet Supported by Fiscal Year

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Internal Control Progress

2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

Material Weaknesses by Fiscal Year

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Coast Guard Successes

• Enhanced programs

• Unmodified opinion: financial statementsReduction to 2 material weaknesses

• Improved field understanding of benefits

• Improved field responsibility of controls

• Continued dedication & commitment from

the top down to the field

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US Coast Guard

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Focus Areas

• 2003-2012: Balance Sheet

• 2013: Clean opinion: Financial StatementsCongress: clean financial audit by FY 2013

Continue improving internal controls

• 2014+: Sustainment, ICOFRMaintain clean opinion on the financial statements

Unmodified opinion: ICOFR audit

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Summary

• Coordination & Integration

• Tone at the Top

• It’s Not Hard, Just Hard to Do Sometimes.

• CommunicateCollaboration Leads to Compliance

No such thing as remediation for a healthy program

• Pigs and Chickens

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Questions?

CDR Colin CampbellCG-845

(202) 372-3673

John BowerCG-85

(202) 372-3452