End Game Strategy for Audit
for 2017 and 2018
Presentation to ASMC PDI
May 29, 2015
Agenda
•
Background
•
Critical Path and Timeline
•
The Real “Heavy Lift” – Balance Sheet Valuation
•
Consolidated Audit Approach
•
Looking Ahead: Some Global Issues
2
Background
Bottom Line
“ 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
3
Background
At a Critical Stage: The Slope Gets Steeper …
End FY 2017 Statutory Direction
2017
Achieve Full Agency Financial
Statement Audit Readiness and
Proceed to FY 2018 Audit
We missed the SBR
goal, but remain
committed to 2017
2014
FY 2014 Statutory Direction
Achieve Audit Readiness
of General Fund Statement of
Budgetary Resources (SBR)
2009
Pre-2009
Initial Priorities
Established
1994
Initial DoD
Efforts Begin
2005
FIAR Office
Established
Audit emphasis
largely within only the
comptroller organizations
Post-2009
Audit efforts involve
all functional areas
enterprise-wide
4
Background
… But We Have Made Substantial Progress
We missed DoD’s FY 2014 SBR goal, but our related efforts
achieved significant progress toward the FY 2017 goal
•
Senior leaders are committed to achieving audit
•
Clear guidance is available and in use
•
Resource investments have been made
•
Congressional and public visibility is
helping to sustain our focus
5
“I think you should be more explicit here in step two.”
6
The Critical Path Elements
Critical Path Elements
•
Fund Balance with Treasury (FBWT) – Perform complete reconciliations for outlays,
Fund Balance with Treasury, and unobligated balances for all material active/expired
appropriations
•
Universe of Accounting Transactions and Feeder System Reconciliations –
Produce a universe of transactions reconciled to the financial statements and feeder systems
•
Balance Sheet: Existence, Completeness, and Valuation – Identify all historical
property, establish historical property values, and develop sustainable processes to identify
and value property. Identify and value all environmental liabilities.
•
Journal Vouchers (JVs) – Implement corrective actions to address root causes of JVs
and implement processes and controls to review, approve, and support remaining JVs
•
Sub-Allotments – Reduce/Eliminate the use of sub-allotments
•
Systems Readiness – Implement corrective actions to produce effectively designed and
operating IT General and Application Controls for systems critical for audit
•
Service Providers – Identify clearly defined roles, responsibilities, and effective operating
controls
7
The Critical Path Elements
Challenges for Critical Path Elements
Critical Path Elements
Challenges
Fund Balance with Treasury
Difficult to identify and address all the differences
when reconciling FBWT
Universe of Accounting Transactions
and Feeder System Reconciliations
Difficult to collect reconciled data from over 20
accounting systems and reconcile to dozens of
feeder systems
Balance Sheet: Existence,
Completeness, and Valuation
Lack of established process to value existing and
future property and environmental liabilities
Journal Vouchers
Lack of support for journal vouchers made to
accounting records
Sub-Allotments
Inconsistencies between funding, financial reporting,
and chain of command are caused by sub-allotments
Systems Readiness
Daunting number of systems, owners, and lack of
consistent implementation of controls
Service Providers
Daunting number of service providers and lack of
coordination with reporting entities
8
The Critical Path Elements
Mapping the Path with Limited Time Remaining
Key Assumptions or Precepts
•
Move to Audit as Quickly as Possible
•
Focus Efforts on Audit “Dealbreakers”
– Universes of Transactions
– Beginning Balances
– IT Controls
•
Must Balance Audit Sustainment, Remediation, and Future
Statement Requirements
Each Organization and Military Service
Has Developed Individual Timelines
9
The Real “Heavy Lift” – Balance Sheet Valuation
Balance Sheet Valuation: Challenges and Requirements
• Balance Sheet Valuation Challenges & Risks
– Lack of established process to value existing and future property and environmental liabilities
– General PP&E, Inventory & Environmental Liabilities are material line items to the balance sheet and therefore present
high risk areas for material misstatements (e.g., General PP&E and Inventory represent ~40% of total assets)
– Traditionally “historical costs” of property has not been used by the management for decision making (i.e.,
maintenance or new acquisition budget decisions) thus proper valuation of properties has not been a priority
– Successful implementation require cross functional and organizational engagement, strong management internal
control environment and training of workforce
• Balance Sheet Valuation Requirements
– Identify all historical property, establish historical property values, and develop sustainable processes to identify and
value property
– Identify and value all environmental liabilities
Working Group
Representative Focus Issues
General 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 purchase 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”
10
The Real “Heavy Lift” – Balance Sheet Valuation
Balance Sheet Valuation: Working Groups
•
Accomplishments to Date
Working Group
•
Highlighted Accomplishments
General
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 GAO and DoD IG
Real Property
• Developed a GAAP compliant and implementable real property reporting policy and briefed the
GAO and DoD IG
• 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
Path Forward
– Continue working new issues and vetting with GAO, DoD IG, and FASAB
– Codify completed issues in policy memos with implementation guidance
– Update the FMR where appropriate
11
The Real “Heavy Lift” – Balance Sheet Valuation
Balance Sheet Valuation: Getting the Policy Right
•
General Equipment
– Memo describing valuation baseline and sustainment approaches (briefed to GAO and DoD IG) was
drafted on 5/15
– Components are asked to provide their execution plans by 6/30
•
Real Property
– Implementation guide for real property financial reporting will be drafted by 6/10
– Memo directing use of the deflated plant replacement value approach for buildings and structures, as
well as other guidance for completing the baseline, will be drafted by 6/30
•
Internal Use Software
– Memo establishing a baseline valuation strategy and approach was drafted on 5/8
– FIAR and OSD CIO will continue to work issues related to sustainment through May and June
•
Inventory and Related Property
– Memo directing the baseline valuation approach (discussed with FASAB) will be drafted by 6/22
– Sustainment solutions will continue to be worked by FIAR and AT&L / L&MR through May and June
•
Environmental and Disposal Liabilities
– Memo directing the completeness approach (briefed to GAO and DoD IG) was drafted on 5/20
– Memo describing which liabilities meet FASAB’s probable and reasonably estimable criteria and
estimating guidance for those liabilities will be drafted by 6/19
12
The Real “Heavy Lift” – Balance Sheet Valuation
Balance Sheet Valuation: Implementation Requirements
•
Require close coordination and engagement with functional communities
(e.g., acquisition, logistics, civil engineering)
•
Train workforce to understand recording and reporting requirements of asset values
•
Use common terminology between the functional and financial communities
‒ Definition of Internal Use Software and what constitutes that category of assets
‒ Separate “Capitalization” criteria for financial reporting from “Budget / Funding / Color of Money”
requirements
o O&M dollars used for capital improvements
‒ Separate “Property Accountability” requirements from “Financial Reporting” requirements
o Military Departments have administrative accountability over real property assets
o Such assets can be reported on financial statements of Defense Agencies controlling assets’ use
•
Effect changes to business processes and systems
‒ Contracts have to delineate capitalized vs. expensed items
‒ Integrate program management and financial management systems to capture capitalized costs as
incurred (construction in progress) properly and completely
‒ Apply adequate controls and any needed changes to business processes to ensure that cost estimates
associated with environmental liabilities:
o Represent ALL probable events that occurred during the reporting period
o Can be supported
13
Consolidated Audit Approach
Building Blocks to a Consolidated Audit
Categories as Percentage of Total Budgetary Resources
3.6% DoD Designated Examinations
• WHS (Pentagon admin)
• DoDEA (education)
• MDA (missile defense)
• DARPA (R&D)
• DSCA (security cooperation) • Many others
0.9 % Not Material for Audit
21.9% DoD Designated Audits
• Defense Logistics Agency • DHA (healthcare)
• USTRANSCOM (transport) • USSOCOM (special ops)
• DISA (IT / communication) • Others already under audit
73.6% OMB Designated Entity Audits
• Department 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 Fund
U.S. Army Corps of Engineers (USACE)–
Civil Works
Entities in red are under audit
14
Consolidated Audit Approach
The Building Blocks Supporting a Consolidated Audit
•
DoD has developed a strategy to move to full financial statement audit by
FY 2018
•
Strategy assigns each of DoD’s reporting entities to one of four categories:
– OMB Designated Entity Audits (currently defined by OMB policy)
– DoD Designated Audits (size justifies audits)
– DoD Designated Examinations (size justifies independent assessment)
– Remaining Defense Agencies, Organizations, and Funds (not material for audit)
•
Audit Coverage Related to OMB Designated Audit and DoD Designated Audit
Reporting Entities
– Auditing standards allow the auditor of a consolidated reporting entity (e.g., the consolidated
DoD) to place reliance on underlying audit opinions for individual reporting entities that are
being consolidated
•
Audit Coverage Related to DoD Designated Examination and Immaterial
Reporting Entities
– These entities will be audited as a part of DoD’s FY 2018 agency-wide financial statement audit.
– Financial transactions related to any of these individual DoD reporting entities are potentially
subject to being tested as a part of the audit procedures performed by the DoD’s FY 2018
agency-wide financial statement auditor
15
Consolidated Audit Approach
Core Elements for a DoD Agency-Wide Audit
Consolidating
Auditor
Evaluation
and Judgements
Evaluating Risk Areas
and Sample Sizes
Determination
Made By Our
Auditors
Reliance on
Individual Audit Results
Sound Process / Control Environment
to Include IT Foundation and “Service Provider”
Control Audits (SSAE-16)
Management
Responsibility
DoD IG Will Evaluate and Make Judgements on
Individual Audit Results and Strength of Enterprise Elements
16
Consolidated Audit Approach
DoD SSAE-16 Overview
•
Reporting Entities and DoD Service Providers have identified a high level of DoD-wide
business process and system audit readiness interdependency
– Reporting entities’ management is responsible for the internal control over their financial information
and, therefore, must ensure that they understand what financially significant activities are outsourced
to service providers and the effectiveness of the service providers’ related internal controls
– In turn, service providers are responsible for providing a description of their controls that may affect
customer reporting entities
•
SBA assessable units were prioritized based on materiality and Service Provider audit
readiness was accelerated in these areas (e.g., Civilian Pay, Military Pay, Disbursing,
Contract Pay, Financial Reporting)
•
Many Service Organization Controls reports on the design and operating effectiveness
of internal controls (SSAE 16) for common SBA impacting processes and systems were
performed in advance of the 2015 SBA audits
– FIAR is performing a scope / coverage gap analysis of existing Service Organization Control Reports
to identify instances where it would be beneficial to expand scope or perform additional SSAE-16s
– Intent is to maximize use of SSAE-16s to increase efficiency of financial statement audits
•
SSAE-16 readiness efforts are under way for additional Service Organizations that
impact the remaining financial statements (e.g., Acquire to Retire business cycle)
17
Looking Ahead: Some Global Issues
Applying Lessons Learned
• Senior leadership commitment is very important – Tone from the Top
drives action
• Audit readiness is an “All Hands” effort
– Engage process owners early in the process
– Maintain continuous and effective communication across the enterprise
• Infrastructure and dedicated resources necessary to support the
audit must be in place
• Clear roles and responsibilities with Service Providers (i.e., DFAS)
must be established
• Easy access to supporting documentation is essential: where is it
maintained and who is responsible for maintaining it?
• Compliance is critical – continued monitoring of compliance with
policies and procedures and retention of supporting documentation
18
Looking Ahead: Some Global Issues
Global Challenges
• Acquiring and sustaining sufficient resources
•
Providing a reconciled Universe of Transactions in a
timely manner
•
Strengthening and maturing IT and business process
controls across the Department
•
Developing process changes to minimize labor intensive
or unsustainable manual workarounds or compensating
controls (data calls, reconciliations)
19
Looking Ahead: Some Global Issues
Global Sustainment Strategy
The Department intends to achieve sustainment through:
•
Committed Tone from the Top
•
Sustained Audit Infrastructure
•
Engaged commitment to the Manager’s Internal Control
Program (A-123) and ongoing assessments
• Deployed tiger teams to address remediation
requirements
Sustained Auditability Must Be a Part of the
Day-to-Day Operations of the Department
20
Looking Ahead: Some Global Issues
The Future: Wouldn’t it be nice if …
•
Annual financial audits meant fewer inspections and internal compliance audits
•
Annual financial reports, with positive opinions, were as “hi-vis” as the
President’s Budget Submission
•
There were fewer systems enforcing
better data standards – meaning
less rework and fewer exceptions
•
Our Financial management team
obtained the right training within a
structured professional certification
program
•
Reports provided more accurate and timely status of funds – better financial
information for decision making
The Future May Be Closer Than You Think
21
Looking Ahead: Some Global Issues
Three Keys to Audit Success
Understanding of audit expectations
Ownership of total end-to-end business
Accountability for details of execution
We Are Moving from Audit Readiness into the Audit
22
Stay Connected
 Visit the FIAR website
http://comptroller.defense.gov/FIAR.aspx
 Read the FIAR Plan Status Report
http://comptroller.defense.gov/FIAR/plan.aspx
 Subscribe to the DCFO’s
Defense Audit Readiness News
Join the distribution list by emailing
[email protected]
23
Backup
24
The Critical Path Elements
Critical Path Elements and Milestones
Army
Implementation / Remediation
Validation
Critical Path Tasks
GF
WCF
GF
WCF
SBA Audit
(FY 15-17) (SBR);
3/31/2017 (BS)
9/30/2015
SBA Audit
(FY 15-17) (SBR);
9/30/2017 (BS)
6/30/2016
FBWT
3/31/2016
9/30/2015
9/30/2016
6/30/2016
Journal Vouchers
9/30/2017
9/30/2015
9/30/2017
6/30/2016
Open Obligations
9/30/2017
9/30/2015
9/30/2017
6/30/2016
Existence, Completeness,
and Rights
9/30/2016
9/30/2015
3/31/2017
6/30/2016
Valuation
3/31/2017
9/30/2015
9/30/2017
6/30/2016
Environmental Liabilities
12/31/2016
N/A
4/30/2017
N/A
UoT for SBR and Balance
Sheet
25
The Critical Path Elements
Critical Path Elements and Milestones
Navy
Implementation / Remediation
Validation
Critical Path Tasks
GF
WCF
GF
WCF
UoT for SBR and Balance
Sheet
9/30/2015
9/30/2015
3/31/2016 (SBR)
3/31/2017 (BS)
3/31/2017
FBWT
9/30/2016
3/31/2017
3/31/2017
3/31/2017
Journal Vouchers
9/30/2016
3/31/2017
3/31/2017
3/31/2017
Open Obligations
1/1/2016
3/31/2017
3/31/2016
3/31/2017
Existence, Completeness,
and Rights
9/30/2016
9/30/2016
3/31/2017
3/31/2017
Valuation
3/31/2017
3/31/2017
3/31/2017
3/31/2017
Environmental Liabilities
3/31/2017
3/31/2017
3/31/2017
3/31/2017
26
The Critical Path Elements
Critical Path Elements and Milestones
Air Force
Implementation / Remediation
Validation
Critical Path Tasks
GF
WCF
GF
WCF
5/30/2016 (SBR)
3/31/2017 (BS)
5/30/2016 (SBR)
3/31/2017 (BS)
6/30/2017
6/30/2017
FBWT
Complete
9/30/2016
Complete
6/30/2017
Journal Vouchers
3/31/2017
3/31/2017
6/30/2017
6/30/2017
Open Obligations
6/30/2016
6/30/2016
3/31/2017
3/31/2017
Existence, Completeness,
and Rights
9/30/2016
9/30/2016
3/31/2017
3/31/2017
Valuation
3/31/2017
3/31/2017
6/30/2017
6/30/2017
Environmental Liabilities
3/31/2017
N/A
6/30/2017
N/A
UoT for SBR and Balance
Sheet
27
Consolidated Audit Approach
Reconciled Universe of Transactions
• IPA will request a population of items that reconciles to individual
financial statement line items
• The population (or “universe”) will include two different types of
records:
– Accounting Transaction Details for Activity Occurring During the Reporting Period
– Beginning Balance Details for Activity that Occurred Before the Reporting Period
o This activity is shown in the “opening” or “beginning” balances of financial
statement line items and is caused by transactions that have occurred in previous
periods
• Each universe will be reconciled to the reporting entities’ accounting
system(s) and financial statements
• Source transactions, which are recorded in various feeder systems,
will be reconciled to the universe of accounting transactions and
beginning balance details
28
Consolidated Audit Approach
SSAE No. 16 Coverage – Existing
Fiscal 2014
Fiscal 2015
2013
Attestation / Audit
SSAE 16s
DFAS - Civilian Pay
2014
Sept. Oct. Nov. Dec.
Jan.
Feb. Mar. Apr.
May
Jun.
Jul.
2015
Aug. Sept. Oct. Nov. Dec.
Jan.
Feb. Mar. Apr.
UNMODIFIED OPINION
OPINION TBD
DFAS - Military Pay
UNMODIFIED OPINION
OPINION TBD
DFAS - Disbursing
UNMODIFIED OPINION
OPINION TBD
DFAS - Contract Pay
UNMODIFIED OPINION
MODIFIED OPINION
NO SSAE 16
DFAS - FBWT (DRRT)
NO SSAE 16
MODIFIED OPINION
DLA - DAAS
GAP PERIOD
MODIFIED OPINION
DLA - DAI
MODIFIED OPINION
OPINION TBD
MODIFIED OPINION
OPINION TBD
OPINION TBD
DLA - SOIDC
US Bank - SYNCADA
NO SSAE 16
UNMODIFIED OPINION
UNMODIFIED OPINION
DISA - ATAAPS
DISA - ESD
OPINION TBD
OPINION TBD
DLA - DTS
AT&L - DPAS
Aug. Sept.
OPINION TBD
MODIFIED OPINION
DLA - iRAPT (WAWF)
Jul.
OPINION TBD
DFAS - FBWT (DCAS)
DCMA - Contract Pay
Jun.
OPINION TBD
DFAS - Financial Reporting
DCPAS - DCPDS
May
OPINION TBD
OPINION TBD
OPINION TBD
OPINION TBD
UNMODIFIED OPINION
OPINION TBD
29
Consolidated Audit Approach
SSAE No. 16 Coverage – Planned
Fiscal 2017
Fiscal 2018
2016
Attestation / Audit
SSAE 16s
DFAS - Civilian Pay
Oct.
Nov. Dec.
2017
Jan.
Feb. Mar.
Apr.
May
Jun.
2018
Jul.
Aug. Sept. Oct.
Nov. Dec.
Jan.
Feb. Mar.
Apr.
May
Jun.
Jul.
Aug. Sept.
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DFAS - Military Pay
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DFAS - Disbursing
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DFAS - Contract Pay
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DFAS - Financial Reporting
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DFAS - FBWT (DCAS)
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DFAS - FBWT (DRRT)
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DCPAS - DCPDS
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DCMA - Contract Pay
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DLA - iRAPT (WAWF)
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DLA - DAI
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DLA - DAAS
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DLA - DTS
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DLA - SOIDC
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
AT&L - DPAS
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
US Bank - SYNCADA
OPINION TBD
OPINION TBD
DISA - ATAAPS
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
DISA - ESD
OPINION TBD
GAP PERIOD
OPINION TBD
GAP PERIOD
30
Consolidated Audit Approach
SSAE-16 Coverage – Current
Information Services/ Computing Services
31
Consolidated Audit Approach
SSAE-16 Coverage – Future
Future Environment with DoD Implementation of Enterprise Efforts (IPP, Cash Accountability)
Information Services/ Computing Services
32
Consolidated Audit Approach
SSAE-16 Coverage – Future Environment & Scope Expansion
33