Financial Audit Readiness:
The Big Picture – What’s It
Mean to You and Your
Organization
American Society of Military Comptrollers (ASMC) – PDI
May 28, 2015
Alaleh Jenkins
Office of the Under
Secretary of Defense
(Comptroller)
Agenda
• 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
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Audit Readiness Mission
Call to Action
“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
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Audit Readiness Mission
Statutory Direction
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
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Audit Readiness Approach
The Big Picture…and Challenge
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Audit Readiness Approach
Streamlined FIAR Approach
• 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
This approach has created unified support for initiatives and
brought the DoD enterprise together on an audit readiness path
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FIAR Guidance
DoD’s Guide to Audit Readiness
•
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
Provides instructions for implementing a mandated, consistent,
Department-wide plan toward achieving the Department’s FIAR
objectives.
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FIAR Guidance
FIAR Methodology
•
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
Provides a critical path and clearly defined activities for the
Department
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FIAR Guidance
Significant Changes – April 2015
• 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
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Critical Path
Critical Path Task Overview
• 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
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Critical Path
DoD-Wide Initiatives
• 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.
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
•
TI-97 Workstream
Feeder Systems
Reconciliations
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
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Critical Path
DoD-Wide Initiatives: Property Working Groups
• 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
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”
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Critical Path
DoD-Wide Initiatives: Property Working Groups
• Highlighted Accomplishments to Date
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
• 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
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Audit Readiness Critical
Critical
Path
Path
– DoD-Wide Initiatives
DoD-Wide Initiatives: Fund Balance with Treasury
• 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
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Critical Path
DoD-Wide Initiatives: TI-97 Workstreams
• 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
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Roles and Responsibilities
Governance Structure
•
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
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Roles and Responsibilities
Supporting Audit Readiness
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
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Roles and Responsibilities
Supporting Audit Readiness
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
This is simple in concept but difficult in execution.
Success requires discipline, persistence, and consistency.
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Supporting the Audit
What a Successful Audit Requires
• 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
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Supporting the Audit
Critical Success Factors
• 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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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
• 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 [email protected]
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